By Peter Rudegeair
In Pavia Rosati's hour of financial need, her bank ghosted her.
It was April, and the coronavirus pandemic was taking a toll on Ms. Rosati's New York-based travel-writing website and consulting firm, Fathom Unlimited Inc. She went to Capital One Financial Corp., Fathom's bank for nearly 10 years, for a Paycheck Protection Program loan.
But Capital One wasn't ready to accept applications for the government-loan program when it launched, and no one there could tell her when it would, she said. A branch banker took days to respond to emails, she said, and referred her to Capital One's customer-service hotline.
Ms. Rosati decided to switch banks. "Why would I work with a bank that was so unhelpful to me at the moment I needed it?" she said.
Conceived in March as a government lifeline to keep employees paid during the coronavirus lockdowns, the PPP soon evolved into an acid test for business owners' banking relationships. Rather than lend directly to businesses, the Small Business Administration empowered banks to make more than $650 billion in forgivable loans to small businesses to cover payroll and certain other expenses.
But banks weren't prepared for the flood of applications when the program launched on April 3. Some delayed accepting paperwork until they could build new systems. Others favored certain customers by giving preference to those with outstanding loans or those that had closer ties to bankers that could speed applications through.
Many business owners who felt unserved by their banks voiced their displeasure by moving their money elsewhere. Of businesses that secured PPP funding, about 28% received their loan from a lender with whom they had no prior relationship or a bank that wasn't their primary one, according to a July survey of 931 firms conducted by Barlow Research Associates. About 44% of those borrowers said they would move at least some of their accounts and loans to the bank that came through for them during PPP, the survey found.
Ms. Rosati eventually got a roughly $30,000 PPP loan from a financial-technology company, and she transferred the funds to Grasshopper Bancorp Inc., a $100 million startup bank that debuted last May. She liked that Grasshopper's female chief executive sent her a personal welcome note when she opened an account. She plans to move the rest of Fathom's money to Grasshopper by the end of the summer, she said.
A Capital One spokeswoman said the bank historically had a modest SBA lending portfolio but that it "worked around the clock to stand up our digital PPP application." The bank funded more than 14,000 PPP loans as of July 1.
Business owners that struck out with big lenders often had luck with smaller ones that were less deluged with applications and less centralized in their decision-making. Banks with less than $10 billion of assets account for just 14% of the industry total, according to the Federal Deposit Insurance Corp., but they punched above their weight when it came to the PPP. About 52% of the loans and 44% of the program's dollars were approved by banks of that size and other small specialty lenders, according to the Small Business Administration.
Most of the time, the pain of transferring balances and syncing incoming and outgoing payments to new account numbers dissuades business owners from switching banks. But many were willing to endure the hassle as a thank-you for PPP help.
Stan Doida, managing attorney at Doida Law Group LLC in Greenwood Village, Colo., moved hundreds of thousands of dollars of business and personal deposits from Wells Fargo & Co. to Denver-based InBankshares Corp. after the smaller lender secured his law firm a roughly $90,000 PPP loan.
Wells Fargo didn't immediately accept PPP applications; Mr. Doida could only fill out a form on its website to express interest. He received six emails over the following nine days telling him he was in the PPP queue but that no Wells Fargo employee could answer questions about it.
On April 15, Mr. Doida panicked when he read a Wall Street Journal story that reported that the initial $350 billion in PPP funds was nearly exhausted. A friend introduced him to a banker at InBank, whom he promised that he would move his accounts there if they could help secure him a loan. Five hours later, he received confirmation that his PPP application was submitted to the government.
Mr. Doida waited until Colorado's lockdown eased to go into a Wells Fargo branch to close his accounts. "Bottom line is I needed you and I got no response," Mr. Doida remembers telling the branch manager when asked why he was leaving. "I'm voting with my dollars at this point."
A Wells Fargo spokesman said in an email that its volume of requests and evolving government requirements sometimes created delays, but the bank funded PPP loans to more than 185,000 businesses. "While we regret losing even one customer, we understand the challenges small businesses are facing and are glad for every one that received assistance through the PPP," the spokesman said.
InBank added 350 new customers because of PPP, mostly from large banks, said Chairman and CEO Ed Francis. It would normally take the bank, which had $423 million in assets as of March 31, as long as two years to bring that many aboard.
"We call it the gift that keeps on giving in this market," Mr. Francis said. PPP, he said, was "the most unique opportunity that I've ever seen in my 32-year career."
There are trade-offs for small business owners in choosing smaller banks, which often have fewer digital tools and skimpier technology budgets than their larger rivals. Ms. Rosati said that unlike Capital One, Grasshopper didn't seamlessly integrate with her Quickbooks accounting software.
"What a Marriott hotel can do for you is perhaps more sophisticated than what a 10-room family inn can do for you, but you're much more anonymous at the Marriott," she said.
But PPP demonstrated for many businesses that better technology isn't everything. Company Folders Inc., a commercial printer based in Pontiac, Mich., initially applied for a roughly $115,000 PPP loan with its longtime bank, JPMorgan Chase & Co. CEO Vladimir Gendelman gave high marks to JPMorgan's online banking and mobile apps.
Still, Company Folders was left empty-handed when the first round of PPP funds ran out in April. After reading that big banks were favoring certain customers and fearful of being shut out in round two, Mr. Gendelman filled out a new application at Waterford Bancorp Inc., a $1.3 billion bank based in Toledo, Ohio, and asked JPMorgan to cancel the one he had filed with them.
Company Folders received about $115,000 from Waterford on May 1. The next day, JPMorgan deposited a similar amount in the company's account, even though the bank said it withdrew the application and never sent paperwork to close the loan. It was against PPP rules to take out multiple loans, so Mr. Gendelman contacted a JPMorgan banker to fix it.
When the bank clawed back its funds, it accidentally removed about $10 more than it put in. Mr. Gendelman again complained, but JPMorgan only restored about $9. The experience convinced him to leave the bank and move over to Waterford, which he plans to complete soon.
"Everybody makes a mistake. That doesn't bother me," Mr. Gendelman said. "It's just how you take care of it."
A JPMorgan spokeswoman declined to comment. Through July 24, JPMorgan was the top PPP lender, approving more than 274,000 loans for about $29 billion, according to the SBA.
Waterford handled PPP loans for 180 businesses that weren't existing customers and is expecting to convert more than 100 of them into full-time relationships. Every Monday, Executive Vice President and Senior Lending Officer Larry Boyer asks his staff of commercial bankers for a status update on how those transitions are going.
Through late July, these new customers had transferred more than $25 million in new deposits, on top of PPP funds, to Waterford, Mr. Boyer said. Bankers there had courted many of those prospects for years, but it wasn't until PPP that they listened more to what the bank had to offer.
"Because we've helped them, they opened the door more than they did previously," said Jeremy Zeisloft, a Waterford vice president for commercial lending. "It was a 15-minute phone call versus now an hour conversation."
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com