As online lending grows up, banks work to strengthen partnerships
- The online lending industry’s relationship dynamics have evolved in the past decade; the partnership model with banks has been successful but there’s also room for online lenders to exist on their own
- Banks need to start strengthening ties with their online lending partners; at any time, fintech client could become banks' competitors and vice versa
Marketplace lending as an industry is hitting its stride. Some platforms are becoming profitable, some are diversifying, new players are entering the market with new business models and the competition is heating up. But that means banks need to start strengthening ties with their online lending partners.
As more consumer-facing fintech companies are learning, that’s best done by building products that make people’s lives easier.
At Cross River Bank, the goal is to build and improve its banking-as-a-service platform in order to improve the consumer experience of its online lending and other fintech partners, and at a time when such fintech companies are considering filing for ILC charters (like Square and SoFi, for example). A partnership it formed last week with PeerIQ, which will allow the bank to provide better risk management and transparency tools to the online lending partners, is part of that strategy.
“It remains to be seen if the FDIC will grant a lot of those [ILCs], in which case they will become competitors or have no reason to use us anymore,”said Gilles Gade, CEO at the New Jersey-based bank to fintech companies. “That’s where we come with a ton of value-add, to increase stickiness and to render that decision easy for them in moving away from filing for an ILC, filing for state licenses or switching banks.”
The BaaS offering, which includes a suite of API-based products for automated wires, global KYC and an ACH manager, is the “key” to CRB’s partner relationships.
“We can never take anything for granted,” Gade said. “At any time, our client could become our competitor and our competitor can become our client.”
Goldman Sachs helps fund loans by Prosper, but also offers personal loans through its sub-branded consumer arm Marcus, for example.
Online lending companies match borrowers with investors and tout faster approvals and access to credit for people who have difficulty getting it from traditional financial institutions. Startups and banks have complementary capabilities that make partnerships mutually beneficial, said Kathy Boden Holland, evp of bank products at online lender Elevate. Banks bring long-standing institutional brand names, regulatory prowess, and customer relationships and fintechs bring non-prime underwriting technology that makes lending to riskier customers possible and geographical reach via marketing.
“Regulators seem to be encouraging banks to get into non-prime lending, which supports our view that partnerships are the way to go,” she said.
The industry’s relationship dynamics have evolved in the past decade, however, and while the partnership model with banks has been successful, there’s also room for online lenders to exist on their own, said Rashmi Singh, senior manager of EY’s wealth management practice.
Now that — a whole decade after Lending Club and other first movers went to market — banks are more comfortable embracing “partnerships” with lending startups, the opportunity for banks to reach more customers is getting bigger, she added.
“When the banks partner with the marketplace lenders, they have access to a digital lending experience for their client base, which has all the regulations integrated — and updated as new regulations get introduced — all while delivering an exceptional experience to meet the client needs,” Singh said.
The market is becoming more mature, Gade said. Beyond its natural evolution, there’s a real concern about competition now thanks to Marcus by Goldman Sachs, which “has the wherewithal to make a big splash in the market” with the backing of a major investment bank, plus Goldman’s consumer deposits, and a compelling product.
“We don’t know much about the performance of those loans, but people are feeling the competitive pressure and have to align themselves,” Gade said. “That’s how you see a market maturing: when people have to start worrying about competition. They feel that the pot is the same but there are more players sharing it, which will ultimately lead to consolidation.”