By Joseph Lowe, Sageworks
Millennials are expected to dominate 44 percent of the workforce in the next four years, and they’re aiming to take their careers in a new direction: entrepreneurship.
According to the 2016 BNP Paribas Global Entrepreneur Report, millennials around 27 years old are setting out for entrepreneurship in droves, rather than settling into jobs at Fortune 500 companies. To capitalize on this trend, it’s important for community banks and credit unions to consider:
- How entrepreneurs are building the revenue to start companies, and
- What advantages community banks have over large banks and online lenders within the small business lending (SMB) sector.
The U.S. small business lending industry is a $700 billion business serving more than 58 million employees working in 29 million small businesses. Despite numerous reports, startups are steadily declining overall. In fact, from the late 1970s to the early 2000s, around 500,000 to 600,000 new U.S. startups formed each year. In 2014, only 452,835originated, marking a nearly 40-year low. The reasons for this are abundant, though some point to two main reasons the state of small business is struggling: access to consistent cash flow is limited and small banks are reluctant to invest in small business lending.
Millennials have been touted by some as the entrepreneurship generation. Unfortunately, most millennialsare lacking the most important factors involved in forming a company: money, reliable employment and limited debt.
MILLENNIALS LACK A CONSISTENT CASH FLOW
According to data compiled by Fundable, 57 percent of startups were funded largely in part by an entrepreneur’s personal savings or credit and 38 percent involved heavy investments from friends or family. While the latter may not be available, the majority of millennials don’t earn enough funds to start a business solo. For those who were gainfully employed from 2009-2013, the median earnings for full-time workers between 18 and 34 was $33,883.
While the job market has continued to grow, employment is still not easy to come by for millennials. In 2015, young adults aged 20-34years old accounted for more than 40 percent of the unemployed. For millennials without a college degree, those statistics worsen. A Georgetown University report states the economy has added 11.6 millionjobs, and only 80,000 of those jobs went to individuals without at least some college education. Despite the gig economy, offering self-employment services such as Uber or Lyft for extra funds, millennials are settling for moving back home with parents to save funds and avoid high apartment costs or working multiple jobs to make ends meet. For those millennials who cannot move back home, they face a mounting burden of college debt coupled with rising costs of living. Graduates from the class of 2016 are burdened with $37,172 in student loan debt, on average, and struggle to afford basic necessities such as healthcare. While millennials can stay on healthcare until 26 years old, nearly 3 in 4 millennials failed to pay their medical expenses in full when first billed in 2016 according to a CNBC report.
COMMUNITY BANKS ARE REGULATED AT A HIGH RATE
Today, three major lending groups serve small businesses: large banks, community banks and online alternative lenders. Community banks can often lack the technology and resources needed to handle loan origination, loan administration and loan decisioning as quickly as big banks and alternative lenders. Another hindrance for small banks is an increased regulatory burden in response to the 2008 Recession. Between the Financial Accounting Standards Board’s (FASB)current expedited credit loss (CECL) model, the Dodd-Frank Act and the Federal Reserve’s interest rate policies, it is difficult for small banks to keep up. The average ratio of compliance expenses to noninterest expenses can be as low as 2.9 percent for banks with assets of $1 billion to $10 billion yet as high as 8.9 percent for banks with assets of less than $100 million. According to the Institute for Self Reliance, one in four local banks has shut its doors since 2008 in part due to strict regulations and net interest income. Community banks derive nearly 80 percent of revenue from interest income, which can become a problem if interest rates are extremely low in a competitive environment. Large banks account for low interest rates by charging additional costs, such as checking account fees.
However, community banks have a unique opportunity to lead the resurgance of small businesses and millennial entrepreneurship across the United States. Traditionally, community banks have led both large financial institutions and independent lenders in relationship lending, which is a driving factor for small business lending and millennials. Building personal relationships and local ties to small communities are benefits that the competition cannot parallel. However, loan origination and loan decisioning, processes that used to take weeks, are expected to be completed in hours thanks to new lending technology. Large banks and alternative lenders adopted technology quickly and gained a large share of the small business loan market, but it’s not too late for community banks to tap into technology advancements.
Millennials expect a quick and convenient loan application process, which can be provided with an online loan application and electronic tax return reader, eliminating time sucked up by manual data entry for both banker and borrower. Some online loan applications allow borrowers to import asset account information from third-party financial institutions with login credentials, which allows for a fast loan application process for all parties involved. Not only does this save time for the borrower, but the lender can devote less time to gathering paper documentation that can take days to compile. This is particularly important for borrowers with low earnings or poor credit scores that may need guarantors to get a loan approved.
After gathering documentation, spreading software can automatically build a personal financial statement for the lender with asset account and credit report information. This also increases efficiency, lessens the rate of error for lenders and ensures sound decision-making based on consistent rules.
Once approved, customized loan documents can be sent to the client through an easy-to-use client portal, and all other client communications can be handled through a relationship manager. Millennials prefer speedy automated processes and can be sent approval or follow-up messages instantly once the loan has been evaluated.
It’s no secret that millennials are digital consumers. Banks—of all sizes—continue to seek opportunities to appeal to the millennial generation, and technology continues to be a primary enabler. Community banks, in particular, have a unique opportunity to combine their advantages in relationship-based lending while tapping into new lending technology to provide the ultimate lending experience for millennial entrepreneurs, and make small business lending a profitable growth area for their institution.
Joseph Lowe is lending marketing manager at Sageworks, where he produces educational content to lead banks and credit unions in transforming their credit and lending processes to optimize for efficiency and a better borrower experience. He can be reached at [email protected]
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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