We have said a number of times that 2017 is going to be the year of the Fintech/Bank partnership. This announcement today from the American Bankers Association (ABA) fits in very well with that premise.
The ABA announced that they have endorsed the digital lending solution provided by Akouba, a software provider that helps banks deliver small business loans in an efficient manner. This is a coup for Akouba, a startup with 11 employees (according to LinkedIn) that was founded in 2014.
Akouba first came on my radar about a year ago when they applied to PitchIt @ LendIt. They were chosen as one of the eight finalists and they presented to the judges and audience at LendIt USA 2016 this past April. They did not win and I have not heard much from them since that time but clearly they have been getting traction.
A More Efficient Way to Underwrite Small Business Loans
Akouba was conceived because most community banks do not have the capability to underwrite small business loans efficiently. They use old, paper-based methods that make it difficult to underwrite small dollar loans profitably, particularly the sub-$250,000 loans. Akouba provides the technology that converts this paper work flow into an online process from application all the way through funding. They are able to work with the banks underwriting model and incorporate it into this online process.
I reached out to the CEO of Akouba, Chris Rentner, this morning to get his take on this news. Obviously, he was very excited by the ABA endorsement and saw it as a validation of the hard work they had been doing. He said that while they are still a young company they now have “dozens of clients” and are working with a number of community banks in the $500 million to $25 billion (in assets) range.
He said one of the keys to the ABA endorsement was education. It is an opportunity for ABA member banks to learn about technology and have the confidence that the supplier chosen has gone through an extension vetting process by the ABA.
Behind the ABA Endorsement
Speaking of the ABA’s process I also spoke with Helen Sullivan and Debbie Whiteside today, both of whom are senior vice presidents at the ABA. They led the diligence process into Akouba and were both impressed with the team there. They felt that the company understood small business banking and the unique challenges that community banks face today.
By providing this endorsement this will allow ABA members banks to enter or perhaps reenter the small business lending market. And for those who are currently offering small business loans it will be an opportunity to make this process more efficient. This has been a pain point for many of their members – community banks would like to be lending more to small business but they find it difficult to do so in a profitable way.
How to work with fintech companies is one of the main questions they were hearing at the ABA so they see this endorsement as a real win for the banking industry. They wanted a company that could hit the ground running and have a big impact in a relatively short time period. They liked that Akouba was already integrated with many of the core banking providers, something that will help reduce the amount of time and effort for onboarding this new technology.
The ABA began the due diligence process in earnest last summer. They spent a lot of time with the Akouba team and also contacted many of their existing clients all of whom provided great reviews. They were excited to announce this endorsement today.
They also said that there will likely be other fintech endorsements coming down the road as they look at other areas of lending. While they would not elaborate I think it is not difficult to surmise that a consumer-lending provider will also get an endorsement some time down the road.
When I asked Chris Rentner about the immediate impact on his business he said that they are likely to get a healthy pipeline of banks coming to them from the ABA. He said that they would get some early adopters this year but the biggest impact on their business will be in 2018 and 2019.
He said the key is going to be education. With that in mind they have setup a free webinar on March 8 to teach bankers how to digitize the small business lending process. Also, the ABA will be releasing its report on Akouba ahead of this webinar.
Conclusion
I have said before that one of the biggest challenges for small banks is to stay relevant in today’s rapidly changing world. The millennial small business owner simply won’t accept a detailed paper based loan application and the long wait for an approval.
The difference today is that most banks realize this need for change. They know what worked 10 years ago will simply be irrelevant and antiquated in 10 years time. If they want to stay in business they have to get more efficient. This endorsement by the ABA is not a panacea but it is a step in the right direction. Companies like Akouba are going to become much more important for banks as they shed their legacy systems and build for the future.
