Change or Vanish: The Financial Impacts of Covid-19

By Bryan Reilly, Chief Financial Officer, Pond Lehocky Giordano, LLP

The deterioration of brick-and-mortal retail has been documented for some time now.  The coronavirus pandemic has accelerated this process, and in the past three months, we have seen retail giants such as Neiman Marcus, JC Penney, and J Crew, amongst others, declare Chapter 11 Bankruptcy.  At the same time, we have seen the online retail behemoth that is Amazon, report revenue of $75 billion last quarter, growth of more than 25% from the same period in 2019, and beating Wall Street expectations [1] (profit did decrease in light of increased expenses which have been attributed largely to COVID-19 effects). I bring up retail, because what I have come to believe during this pandemic is that brick-and-mortar banking will also slowly experience the same fate.  My firm and my team have utilized and accomplished much during this time, and all has been done electronically which has demonstrated not only lack of need for brick-and-mortar banking, but also the benefits in not doing so.

Banks, in the most traditional sense, are institutions that accept deposits, serve as a safe (and federally insured) place to maintain cash balances, and honor payments from those cash balances.  Until several years ago, our firm would use a “runner” whom would go to our local branch to deposit all checks received that day, requesting deposits to several bank accounts, and at one point, even going to multiple banks.  I assume that many small- and mid-sized businesses have used a similar process.  Since changing to a non-traditional bank, we have been using remote deposit scanners, which pending the model of scanner, allows for depositing up to hundreds of checks at one time.  In addition, and especially true during the pandemic, we have been requesting that payers submit payment via Electronic Funds Transfers (EFT).  While this might not make sense for all customers, and some may not have the ability to do so, it certainly makes sense to request for those with larger balances or those with recurring payments.  This not only decreases the chance of fraud, as there is no exchange of custody with checks, but also accelerates cash flow.  We currently receive about 35% of our payments via EFT, and our goal is to increase this to at least 50% in the next 1-3 years.  I would love for this to occur even faster, but in our business, dealing with thousands of clients, and hundreds of payers, this is big lift requiring much cooperation.

One can also look at lock boxes as an option with certain banks as a method in which the bank will receive checks via mail, and deposit into an account designated by the business.  Conversely, we also often use EFTs for paying vendors, all of which can be submitted via online banking.  Again, the lack of checks in exchange decreases the chance of fraud, which we have unfortunately seen attempted instances increase during this pandemic, but which fortunately was caught through Positive Pay.  If we do use checks, our inventory of checks is managed electronically, and we order online when needed.  And so, through these tools and methods, we have been able to do all the essential banking activities without the need for a branch, or even a designated banking relationship manager.

Banks accept deposits, and then loan money to individual consumers and businesses.  During this unprecedented time, our firm has successfully received a loan and is working towards re-financing our existing credit facilities.  The Small Business Administration (SBA) introduced the Payroll Protection Program (PPP) in April 2020, as part of the stimulus program and to aid small businesses.  Overall, 1.5 million businesses throughout the country received such a loan, and much of these were done with limited-to-no personal interaction with a banker due to circumstances of stay-at-home orders and allowances only for essential businesses[2].  When first announced, our bank was not a SBA-approved lender, and so not only did our firm navigate this process without inter-personal communication, we did so via a totally new relationship (credit is also due to this bank for doing so).  I would venture to say that we were not the only business required to do this and be successful.  While the PPP loans were unique, requiring much less underwriting than a typical loan or line of credit, it is evident that loans can be issued without the typical hours of meetings with a host of bankers, either in office or at a branch.  While these loans did ultimately require a wet signature and mailing to the bank, I think that this process can be even further improved with approval and adoption of e-signature or docu-sign.

As another example, considering the current interest rate environment (prime is currently just 3.25% [3]), our firm thought it prudent to approach our bank about re-financing. With the use of current technology, such as Zoom, Cisco Webex, Skype, and others, a business and a bank can have meaningful conversations while not in the same physical space.  Again, these conversations typically happen in an office or bank branch.  I was able to speak with several bank representatives, often at the same time, with locations from Florida to New York.  At this point, we have agreed to a Term Sheet, and are in the process of new Loan Docs.  Not all businesses elect to utilize credit, but these two examples demonstrate that important financing decisions and documentation can largely be accomplished without the need for a branch.

In addition to the above, I think that the banking “ecosystem” is changing.  I’ve discussed several pieces of technology throughout this piece, and some are specific to banking, and some are more universal to impact all businesses.  Hardware such as remote deposit scanners or Square Cash, allow businesses to accept and process payments much quicker and easier.  Software such as DropBox and Docu-Sign allow private and secure sharing of documents and information, as well as authorization of those documents.  Other software like Zoom allow for easy communication and offers a “face-to-face” approach. Do not fear technology, but rather learn to use it to your benefit.

There are also many new vendors in this “ecosystem”, particularly in lending.  We have seen the rise of online Business Loan Brokers/Agents, such as Fundera, Smartz Biz, and Lendio, which through a simple online form submission can connect small businesses with banks throughout the country that are interested in providing loans (many of which are SBA loans and governed by those terms), and can even compare terms if multiple banks are interested.  In conversations with one of these companies, I have been told that in as little as seven to 10 days, an interested business can go from form submission to closed loan and receipt of funds.  With a wide network of banks and institutions, they may also be able to connect an interested business with deposit relationships or other services.   Another growing area is Alternative Lenders; these are not banks, but in the Legal Industry, companies such as Yield Street or Law Street Capital may provide loans for specific areas of the business, such as litigation costs or advertising.   My very limited exposure with these lenders is that they generally assess above-market interest rates, but that may still be appropriate in certain situations.  The point of me identifying all these industry changes, and what I would consider improvements, is that banking has become easier, and the significance and purpose of brick-and-mortar banks has been eroding and will continue to do so.

Consumers, individuals and businesses alike, have prioritized convenience.  They have emphasized accessibility, speed and transparency.   A brick-and-mortar bank does nothing to improve any of these desirable characteristics and may impede them in some ways.  I have heard many peers describe their perceived importance of a banker or relationship manager, and the peace of mind associated with the ability to walk into a nearby branch if any problems arise.  In my opinion, I am more interested in developing a relationship with the institution, and that exists with or without such space.  Our firm has had the pleasure of working with Esquire Bank, a publicly traded bank that specializes (but not limited to) in servicing law firms.  I can tell you that we have received the highest level of service from this bank, which has zero brick-and-mortar locations, probably more than any other bank that I have previously worked with (a total number of five ranging from regional banks to national banks).  Further, because these banks do not carry the overheard of branches, they can pass along this savings to consumers via increased yields, lower interest rates, or unique products.  In my experience, because these banks tend to be leaner, they also lack the many layers of staff which makes access to key decision-makers more possible.  And last, for this same reason, I have found, again in my experience, a bank like this tends to be nimbler and more dynamic.

We have a saying at our firm, which is, “change or die”.  This pandemic has forced many businesses to change out of necessity.  I think that many have seen positive results from this change and are making many of their COVID-required changes permanent or semi-permanent (Work from Home policy evaluation probably the most common).  The bottom line is that change can often be a good thing- embrace it!  And as I have described in this article, banking is changing; brick-and-mortar banking is dying.  There is no need that I can think of at this point which would require visiting a branch.  So, I suggest to all reading that they become familiar with the products, services, and technologies that are being utilized by these non-traditional banks.

[1] https://www.cnbc.com/2020/04/30/amazon-amzn-q1-2020-earnings.html

[2] https://usafacts.org/articles/these-are-states-receiving-most-350-billion-small-business-loans/

[3] https://www.bankrate.com/rates/interest-rates/prime-rate.aspx