Lend, Don’t Break: How Mid-Size Banks Can Overcome Digital Lending Growing Pains

Throughout their history, mid-sized banks have served as a lifeline for local businesses across America.

These financial institutions (FIs) — including community banks, regional banks, digital-only banks and credit unions — foster deep customer-banker relationships with the small- to medium-sized businesses (SMBs) they know best, allowing them to win relationships that larger FIs have historically struggled to prioritize and service effectively.

However, as key financial services like lending become increasingly digital, many of these same banks now face formidable challenges. And while the need for digitization is clear, the journey to seamless, automated lending is proving to be a complex one.

Unlike their larger peers that are increasingly reliant on scale and digital sophistication to reach the masses, many community banks and credit unions continue to emphasize personal, high-touch relationships. This cultural reality can lead to a reluctance to pivot toward digital automation, particularly in SMB lending, where personalized advice and support are highly valued by small businesses.

At the same time, many banks simply lack the capital required to overhaul legacy systems, build new digital platforms and onboard specialized staff to manage automated processes.

For SMBs, the impact of these challenges can be profound. Manual loan processing is often rife with repetitive data entry, frequent follow-ups and extensive documentation requirements, all of which prolongs approval times. In a world where FinTechs and digitally fluent FIs can deliver SMB loan decisions instantly, traditional banks operating on manual systems often take much, much longer.

This inefficiency isn’t lost on customers. And the need to digitize shouldn’t be lost on mid-size banks.

Read more: Why So Many Mid-Sized Banks Fail the Digital Lending Readiness Test

The Competitive Implications of Digital Gaps

As large FIs and FinTech disruptors set new standards for speed and convenience in lending, mid-sized institutions risk losing ground.

“Eighty percent of small business owners say that having world-class, digital capabilities is extremely important and, frankly, expected from their bank,” Adam Hughes, CEO of Amount, told PYMNTS, noting that when small businesses start looking for the right lending experience, digital is “table stakes at this point.”

And PYMNTS Intelligence finds that while most FIs rate their lending processes as very good or excellent, three in four are unable to fulfill the loan process — from application through approval to disburse funds — for both consumers and SMBs in the same day. Just 7% of FIs have an average application-to-fulfillment time frame of a few minutes for consumer loans, and even fewer can do so for SMB loans.

Without more streamlined processes for small business loans, mid-sized banks can find themselves bogged down by manual workflows and slower turnaround times, areas that can lead to operational bottlenecks and preclude the benefits of efficiency.

Despite those benefits, for many mid-sized financial institutions, particularly those with strong roots in the community, digital transformation can feel like a threat to a carefully cultivated culture. PYMNTS intelligence revealed that there’s a prevailing fear that embracing a shift toward automation will create a transactional experience for borrowers, eroding the personal connection that’s at the core of their customer relationships. Nearly eight in 10 (79%) of FIs feel this way, reporting worries around automation’s impacts on customer-banker relationships.

With limited budgets, these institutions may delay automation initiatives or attempt to implement partial solutions that fail to deliver the desired improvements in efficiency.

Read more: The State of Digital Lending Readiness

The Reluctance to Digitize: ‘Old School’ Meets New Necessities

Implementing digital lending solutions is not a simple matter of flipping a switch. Mid-sized banks often contend with budgetary constraints that larger institutions are better positioned to absorb. With limited resources, many mid-sized FIs struggle to afford the technological investments required to develop robust digital lending capabilities. Additionally, they face the challenge of overhauling legacy systems that were not designed to support the automated workflows essential for digital lending.

For many smaller banks and credit unions, hiring and retaining top-tier tech talent is an uphill battle, particularly as competition for such skills intensifies across industries.

Despite the challenges, the momentum toward automation in lending is gaining traction within the mid-sized banking sector. The same PYMNTS Intelligence data cited earlier shows that 61% of FIs are planning to fully automate lending processes within the next two years, signaling a recognition of the need to catch up with larger and more digitally adept competitors.

“Lenders that typically have relied on in-person relationships and the more traditional modes of application intake, verification and contract signing are also increasingly leaning into digital and automation,”Andrea Moe, vice president of customer success at Amount, told PYMNTS. “Lenders can expand their reach, they can add new households, they can also deepen that wallet share within their existing base of customers.”

The next few years will be pivotal for mid-sized banks and credit unions. Those that successfully embrace automation will not only enhance their operational efficiency but also position themselves to better meet the evolving needs of SMBs. For these institutions, the challenge lies in finding a balance — leveraging technology to deliver speed and convenience while preserving the personal relationships that define their value.

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