Magazine article American Banker

Small-Business Could Be Next Problem Area

Magazine article American Banker

Small-Business Could Be Next Problem Area

Article excerpt

Small-business lenders are not adequately factoring risk into their underwriting, a Wells Fargo & Co. executive warned.

"If they don't get smart about small-business lending, this could be the next problem area," said Michael R. James, executive vice president of Wells' business banking group.

Mr. James, who addressed American Banker's small-business banking conference here Thursday, said many lenders do not understand the market and have done a poor job of segmenting customers according to risk.

The result, he said, is a "one-price-fits-all model." Lenders risk losing good customers to competitors and may attract less-desirable customers with low rates, he said.

"If you don't understand it how do you properly price your product?" he asked.

About 600 offers have been mailed by various lenders to small businesses over the past six months, Mr. James said. Many of those offers have loose credit standards and are priced at very low interest rates, he added.

Mr. James encouraged lenders to price according to the individual risk of each customer. The customers with the lowest risk should get the best interest rates, he said.

He also warned that if the economy takes a turn for the worse, some lenders could face losses in their small-business portfolios.

"The economy has been awfully good for an awfully long time," Mr. James said. "When you see the types of offers, you've just got to wonder."

In addition, Mr. James stressed that banks should buy the technology necessary to understand small-business customers and their potential risk. …

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