What Innovation Means for the Future of Bank Lending
Banks have been losing small business market share for 40 years. And somehow they still act surprised when another piece gets taken away.
Chapter 11 of Charles H. Green’s book looks at what innovation actually means for banks. Not the buzzword version. The real version. Where money moves, who takes it, and what banks should do about it.
The short answer: banks still hold the best cards. They’re just terrible at playing them.
Nine Ways Innovation Moved Money Away From Banks
Green counts nine different channels that pulled small business capital out of the banking system. Each one found a gap banks refused to fill.
Credit card processors started offering advances based on card receipts. Tech platforms like Amazon and PayPal began lending to their own merchants using transaction data banks never bothered to collect. Crowdfunding let businesses raise money from hundreds of small backers instead of one banker.
Invoice marketplaces let businesses sell their receivables to investors. Factoring companies went digital and got faster. Working capital management tools helped businesses squeeze cash out of operations without borrowing at all. 401(k) funding let entrepreneurs tap their retirement savings through legal structures.
Virtual merchant lenders built entirely online lending operations. Revenue-based financing tied repayment to actual business income instead of fixed monthly payments.
That’s nine separate innovations. Nine different groups of people who looked at small business lending and said, “We can do this better than banks.”
But Let’s Keep This in Perspective
All of this alternative lending combined? About $100 billion. That sounds massive. It’s not. Not compared to the total bank business lending market.
And a big chunk of that $100 billion would never have been bank-funded anyway. Many of these borrowers were too small, too new, or too risky for any bank to touch. The innovative lenders didn’t steal those customers. They created them.
Banks Are Already Funding the Competition
Here’s the part that most people miss.
Major banks are already backing innovative capital providers. Bank of America. BB&T. Fifth Third. JPMorgan Chase. Wells Fargo. U.S. Bank. They’re all providing credit facilities to alternative lenders.
One merchant cash advance company sold portions of a $300 million credit facility in $10 to $50 million shares. Guess who bought those shares? Banks.
So banks won’t lend $40,000 to a pizza shop. But they’ll lend $50 million to the company that lends $40,000 to pizza shops. Same irony we’ve seen throughout this entire book.
The Ugly Truth About Indirect Funding
Banks love to talk about responsible lending. Meanwhile, their money flows downstream into some ugly places.
Payday lenders. Merchant cash advances. Title advance companies. Pawnshops. These businesses charge anywhere from 100% to over 1,000% APR. There are more than 22,000 payday lending offices across the country. That’s more than all the McDonald’s and Starbucks locations combined in some states.
The numbers are grim. Payday lenders collect $3.5 billion per year just in repeat loan fees. Ninety percent of their business comes from borrowers who take five or more loans per year. That’s not lending. That’s a subscription to debt.
Banks fund the credit lines that make this possible. They just keep their names off the storefronts.
What Banks Should Actually Do
Green has a practical suggestion. Instead of trying to build their own alternative lending platforms from scratch, banks should buy performing assets from innovative lenders.
Think about it. No golf rounds with borrowers needed. No paying for credit reports. Someone else already did the underwriting. The loan is already performing. The bank just buys it.
The playbook looks like this. Develop criteria for what qualifies as a good loan. Vet innovative lenders the same way you’d vet any other counterparty. Create policy around purchasing these assets. Then buy loans in real time as they prove themselves.
Banks get small business exposure without the overhead. Innovative lenders get liquidity. Borrowers get funded. Everyone wins.
Business Plans? Let’s End This Charade
Green doesn’t hold back here. His exact words: “A majority of bankers rarely read business plans.”
Everyone knows this. Borrowers spend weeks writing 30-page business plans. Bankers flip to the financial projections, glance at the numbers, and move on. The rest is theater.
Innovation has already killed this ritual for alternative lenders. They look at actual data. Bank statements. Transaction history. Real revenue. Not projections written to impress someone who won’t read them.
Banks could learn something here.
Banks Still Hold Two Massive Advantages
Despite everything, banks have two advantages that no innovative lender can match.
Advantage one: the cheapest money on the planet. Banks fund themselves with FDIC-insured deposits. Savings accounts. Checking accounts. CDs. The cost of this funding is absurdly low. Every alternative lender has to borrow money from investors or capital markets at much higher rates. Banks pay depositors practically nothing. That’s a structural advantage no startup can replicate.
Advantage two: millions of trained customers. A Pepperdine University study found that two-thirds of small business owners still go to a bank first when they need money. Even when they expect to get rejected. And the rejection rate? Seventy-three percent.
Read that again. Business owners walk into banks expecting a 73% chance of hearing “no,” and they still go. That’s how deep the banking habit runs.
Turn Rejections Into Revenue
Here’s where Green gets genuinely excited. Banks decline 73% of small business loan applicants. That’s not a failure. That’s an opportunity sitting in a pile on someone’s desk.
What if banks referred those rejected applicants to vetted innovative lenders? The bank earns a referral fee. The borrower gets funded. The innovative lender gets a customer. The bank could even buy the resulting loan later if it performs well.
Every rejection letter could include a warm referral instead of a cold “no.” Banks would monetize the customers they currently send away empty-handed.
Behavioral Analytics Are Coming
The future of lending decisions isn’t just financial data. It’s behavioral data.
Companies already collect more than 1,600 data points on individuals. Not just credit history. Behavioral patterns. How you interact online. What your habits reveal about reliability.
The Entrepreneurial Finance Lab has been running psychometric tests in 16 countries. They test personality traits and correlate them with repayment behavior. Some findings are counterintuitive.
Optimism and self-confidence are good predictors of repayment in seasoned entrepreneurs. The same traits in younger, less experienced entrepreneurs? Bad sign. Turns out overconfidence in someone who hasn’t failed yet is a red flag, not a green one.
This kind of data will reshape lending decisions. Banks that figure out how to use behavioral analytics alongside financial data will have a serious edge.
Cash Is Getting Weird
PayPal was sitting on billions in stored customer funds. Without FDIC insurance. People trusted a tech company with their money the same way they trusted a bank. That should terrify bankers.
Then there’s Bitcoin. An anonymous digital currency with no central authority. The supply is capped at 21 million coins. Once they’re all mined, that’s it. No more get created.
Green wrote about this when Bitcoin was still relatively niche. The broader point holds. Cash substitutes are multiplying. Every one of them chips away at the role banks play as the place where money lives.
What Comes Next?
Green ends the chapter with some provocations.
An eBay for commercial real estate lending? Pre-approved SBA loan guarantees that borrowers carry with them like a credit score? Google analyzing your email and sending you a loan offer based on what it finds?
Some of these sound wild. Some of them are basically already happening. The common thread is that data, speed, and convenience will keep winning. Banks that adapt will survive. Banks that insist on 60-day approval processes and 30-page business plans will keep losing market share.
The money is still there. The customers are still walking through the door. Banks just need to stop saying no to everyone and start figuring out how to say yes in new ways.
This post is part of a series retelling “The Banker’s Guide to New Small Business Finance” by Charles H. Green (Wiley, 2014), ISBN: 978-1-118-83787-0. It’s a book written for bankers, but the lessons are gold for any business owner trying to understand how lending really works.