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Build, Buy, Partner, or Ignore: Banking’s response to online lending

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Build, Buy, Partner, or Ignore: Banking’s response to online lending

Much attention is given to the startups in the online lending space. Companies like Propser are raising huge rounds. Acquisitions in the online lending space are beginning to become more frequent. With new investments and new companies being formed weekly, we almost never read about how banks are responding to some of the competitive pressures fintech startups are bringing to bear.

online lending and banking competition

There are basically 4 ways banks are addressing fintech competition in online lending:

  1. Build their own offerings:[x_pullquote type=”right”]Lending.com is the latest entrant into an online consumer and small-business loan market that Morgan Stanley MS -0.22% analysts estimate could grow to $122 billion in 2020 from $12 billion in 2014.[/x_pullquote]The Blackstone Group recently announced it would be setting up its own competitive offering to provide loans for consumer purchases of big-ticket items as well as small-businesses loans. Blackstone’s new platform, which will launch as Lending.com, comes shortly after news that Goldman Sachs would be doing something very similar. As lead underwriter for LendingClub’s IPO, the growth potential of online lending wasn’t lost on Goldman. When LendingClub’s founder and CEO appeared on the Tradestreaming podcast, it was clear that LC had its sights on disrupting the credit card business — it may be that online lending its an expansive move for banks and financial services firms like Goldman and Blackstone.
  2. Buy startups in the space: While we’re starting to see some of the startups consolidate and purchase other online lenders to capture market share, there haven’t been a whole lot of examples of incumbents acquiring upstart marketplace lenders. BFS Capital, a firm that’s been in business since 2002 and has leant out over $1 billion to small businesses, did make a recent acquisition as it welcomed Entrust Merchant Solutions to its growing family. As the parent company to the UK’s Boost Capital, BFS doesn’t appear to have a lot peers acquiring growth. Regulation may play a key structural role, preventing traditional banks from getting into the online lending business.[x_pullquote type=”right”]“We do practically no auto loans, no student loans, no unsecured personal loans. So as long as I have my name on those Lending Club mailers, the materials and the loans, that’s key to me.”[/x_pullquote]. Regions Bank recently disclosed a relationship with Fundation Capital
  3. Partner with the online lending startups: LendingClub has found some success in partnering with small, regional banks, with more than 200 of these players on the LendingClub platform. Small banks have, by and large, strayed away from unsecured lending, favoring mortgages instead. Partnering with online lenders enables the banks to quickly relaunch their offerings and provides the online marketplaces with partners that have deep, local roots and great direct mail lists.
  4. Ignore the future: It’s not easy to be a bank today. Regulation limits their decision sets. Competition from the bottom up is happening in fintech, where everyday, new, freshly-minted startups with sometimes hundreds of millions of dollars in backing are taking aim at the banks. Competition is happening laterally, as well as speciality financial service providers are expanding into core banking offerings. For the most part, banks struggle to keep up with the technological requirements today’s digital generation demands. While some banks may decide to “partner with the enemy”, many lack the wherewithal to rebuild their businesses within their regulatory parameters to compete against largely-unregulated competition.

While the future of banking is uncertain, one thing actually is: tomorrow’s banks won’t resemble today’s banks. Regulation will play a key role in determining in which ponds tomorrow’s banks actually fish. Meanwhile, fintech is enjoying a cold glass of white while chowing down at the fish fry.

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