FDIC researchers say tech-savvy banks outperformed on PPP loans

Banks that operate more like fintechs are outperforming more traditional competitors on certain financial products, researchers from the Federal Deposit Insurance Corp have found.

The study used a new measure of technology adoption in banks to examine Paycheck Protection Program lending volumes in the second quarter of 2020. Banks in the top 15% for technology adoption tech made more loans than similarly sized competitors by 9 percentage points — and they won customers outside their usual markets more often, the data shows.

The results prove the importance for community banks to adopt technologies used by fintechs, such as cloud computing and online loan applications. In response to the findings, analysts say banks that have not integrated these technologies should devise a strategy to do so.

The authors, senior financial economist Mark Kutzbach and Jonathan Pogach, head of the Financial Modeling and Research Section at the Center for Financial Research, named their measure of technology adoption the Fintech Similarity Score and used a database created by Aberdeen, a marketing intelligence firm headquartered in Massachusetts, to calculate it.

Aberdeen tracks which banks and fintechs are using which technology products – for example, keeping tabs on who is using IBM’s latest line of mainframes, Oracle’s server operating systems and various virtual private network solutions. The authors considered categories of technologies rather than specific products – for example, looking at the use of digital advertising in general rather than the use of Google AdWords specifically.

In their calculations, the authors took into account factors already known to influence a given bank’s ability to distribute PPP loans, including the number of branches, the number of employees, the base deposits, the number of cases of COVID-19 in areas served by the bank and the report’s economic impact of the pandemic in counties where the bank had branches. The adoption of technology has again made a considerable difference.

“We find that these investments in the reach of technology banks have improved borrowers large and small, and especially borrowers outside of their branch network,” the authors wrote. “This expanded reach does not appear to come at the expense of lending to closer borrowers.”

The finding builds on previous research that showed pre-pandemic spending on technology adoption correlated with higher PPP loan volumes and higher growth in deposits and research on which products fintech leaders tend to prefer.

“Community banks with larger technology investments reported larger increases in loan growth in 2020, primarily due to participation in the Paycheck Protection Program,” said a 2021 quarterly report from the FDIC. . “These banks also reported larger increases in deposit growth in 2020 than banks with less investment in technology.”

Tom Andreesen, managing director of technology consultancy Protiviti, said adopting technology can give community banks a “leverage point” and a “competitive edge” because it makes them more responsive to the desires of consumers. clients.

“The challenge will be how these capabilities replace or fit into legacy technology environments, which can be complex,” he said.

Rutger van Faassen, head of product and market strategy for financial services consultancy Curinos, said some technologies create great customer experiences, but only in limited circumstances, and highlighted integration as a key concern. .

Van Faassen identified two key areas where banks could focus their investments in new technologies: financial planning and point-of-sale.

With POS, van Faassen said banks need to look at ways to get their products in front of customers as and when they need them, like offering someone a car loan when they buy a car. car rather than relying on a customer to remember the bank. ad about auto loans.

With financial planning, van Faassen said, community banks need to ask themselves, “How can I be sure I’m there for a customer when they’re planning financial decisions?” He cited tools like Mint and Credit Karma as examples of products that collect information about customers and turn that data into insights that help them plan.

“It aligns pretty well with small and medium banks because that’s usually where they excel – they usually still have those personal relationships because they’re part of the community,” he said.

The authors said they identified 42 product classes used by fintechs. However, the Aberdeen data used in the study is proprietary and the authors did not cite any particular product categories correlated with higher loan volumes.

Regarding examples of community banks successfully leveraging technology, van Fassen highlighted the Citizen Bank of Edmondwho teamed up with Mark Cuban to build an online application for the Paycheck Protection Program loan forgiveness, as the “poster child” of a community bank successfully leveraging technology to reach a broader market.

Some technologies offer banks a more guaranteed return. Both Andreesen and van Faassen said that cloud computing and storage are vastly preferable to on-premises and hosted solutions for community banks. Van Faassen said even “laggards” now recognize the superiority of cloud computing over hosted computing.

Kutzbach and Pogach said they could not assess whether having a stronger tech portfolio caused some banks to disperse more loans or if the effect was simply correlation, although they said many Future research could examine whether banks can “catch up” to industry leaders with technology adoption. .

“Although we do not claim causal identification, our results demonstrate a significant relationship between pre-existing technology investments and outcomes in banking during the COVID-19 pandemic,” they wrote.