Editor's Note: This is the first of a two-part series on online lenders partnering with banks..
Necessity makes strange bedfellows. Just a few years ago online lenders didn’t even want to be in the same room with traditional bankers who they looked as old fashioned, out of step and everything they didn’t want to be. The banking industry had its nose in the air thinking online lending would make some noise but didn’t anticipate the disruption they would cause.
But reality bites. Suddenly they’re looking at each other and deciding maybe marriage is a good idea. Partnerships between online lenders and bankers are making headlines. "BBVA Compass has teamed up with OnDeck. Regions Bank recently partnered with Fundation. CIBC, which is a big Canadian Bank, teamed up with online lender Thinking Capital," says Priyanka Prakash, small business loans specialist for FitBizLoans.com.
In April, Lending Club and Citi announced they were teaming up on community lending. "Many banks across the country are looking for opportunities to enhance their community lending efforts for low- and moderate-income families. We’re excited to expand the use of the Lending Club platform to make this process easier for Citi and other banks, and help lower the cost of credit for borrowers," said Renaud Laplanche, founder and CEO of Lending Club at the time of the announcement. Citi’s John Heppolette, co-head and managing director of Citi Community Capital said the partnership is a direct response to that need and will help provide a viable source of responsible credit.
Prosper Marketplace recently announced that Radius Bank, through a virtual banking platform, will now offer a new personal loan option through the Prosper platform. There will be easy access to apply for loans anywhere, anytime, from any device at radiusbank.com. Investors commit to fund loans through the Prosper platform, and the loans are issued by a FDIC-member bank at a fixed interest rate, providing people an alternative to traditional bank loans.
What’s driving the hook ups? "Online lenders have been a little quicker to innovate with technology in this space, in their processes, in their operations, just generally. They have been way ahead of the curve of banks. Banks, instead of trying to copy them or rebuilding, it makes sense to partner," explains Aryea Aranoff, business and strategy lead at DRB, an online lender.
Digital technology is a rather significant investment and it is ongoing. "Partnering with an online lender saves the banks from having to build a system from scratch, which takes time and a lot of money. Banks can focus on providing credit, while through the partnership, they get speed and transparency," says Rohit Arora, CEO of Biz2Credit. The online lender gets the benefit of banks typically having a lower cost of lending than other lenders. Banks can get a good volume of deals. Banks have good branding, are better known and have credibility," adds Arora.
It’s about the numbers. Do the math. Online lending is about a $10 billion industry, which is dwarfed by the over $700 billion in bank loans to small businesses, points out Prakash. "But it’s a rapidly growing industry that’s tapping into a key market, so banks can’t afford to ignore it. Currently, banks and online lenders are frenemies. Banks are realizing they need to partner with online lenders if they don’t want to go out of business long-term. And online lenders like the partnerships because it helps them get leads that don’t qualify for bank loans."
In the UK, Funding Circle was the first fintech company to announce a formal referral partnership with Santander Bank and has since announced a similar one with The Royal Bank of Scotland. "Partnerships with banks will be an important way for our industry to reach its full potential," says Sam Hodges, Funding Circle co-founder and U.S. managing director. "While we haven’t announced any formal partnerships in the U.S. just yet, we are in active talks with a number of banks on how we can collaborate to extend financing to even more small businesses at the lowest rates possible. Looking forward, we’ll no doubt see even more banks partner with marketplace lenders like us."
Editor's Note: Part 2 will look at what the online lending and banking partnership trend means for consumers