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The Three Best Options for Banks to Enter Online Lending

This post is part of The Marketplace Lending Thought Leadership Series on the Orchard blog. This post below is by Peter Renton, Founder of Lend Academy & Co-Founder of LendIt Conference. We encourage other thought leaders to share their industry insights with us and participate in the series. Please reach out if you’re interested.

Back in the early days of P2P lending the platforms talked about disrupting and disintermediating the banks. Banks were seen as the enemy and this new online lending industry was going to make banks obsolete. At the same time banks dismissed the industry as too small and unimportant to matter and didn’t give it a second thought.

As the industry has grown, with few exceptions, today that narrative and attitude has changed completely. Platforms realize they can, not only coexist with banks, but that banks make great partners. And every bank in the country is thinking about a strategy of dealing with this innovative new industry.

A Brief History of Bank Partnerships

Consumer Lending Partnerships
The very first bank partnership was between Lending Club and WebBank, an industrial bank based in Utah, which began way back in 2007, not long after Lending Club began operations. This partnership continues to this day where WebBank originates each Lending Club loan and then sells that loan back to Lending Club just a few days later. Prosper has also been using WebBank in a similar way for many years.

The first partnership that involved banks deploying capital on marketplace lending platforms began in June 2013. Announced at the very first LendIt conference Lending Club teamed up with two small community banks, Titan Bank and Congressional Bank. Both banks began buying unsecured consumer loans on Lending Club and Titan Bank also began offering personal loans to their own customers through the Lending Club platform.

Since then Lending Club has announced several new bank partnerships. Union Bank has been purchasing loans since May 2014 and we had the famous announcement at LendIt last year of the partnership between Citi and Lending Club providing loans to underserved borrowers.

Prosper has also announced several bank partnerships. Early last year Prosper inked a deal with Western Independent Bankers, a consortium of community banks. They followed that up a few months later with a deal with Radius Bank. Both partnerships are referral-type programs where these banks can offer personal loans to their customers via the Prosper platform.

Small Business Lending Partnerships
Small business lending platforms have also been active in establishing bank partnerships although I think it is fair to say they have lagged behind their consumer lending brethren. OnDeck has had a referral deal in place with BBVA Compass for a couple of years now but it is only recently that deeper partnerships have emerged on the small business side.

The OnDeck-JP Morgan Chase partnership announced last November is probably the most significant partnership in the history of online lending. OnDeck will be managing the underwriting and servicing of small dollar business loans for JPMorgan Chase and it is a white label solution – meaning that the entire deal will be run under Chase’s brand. The fact that the largest bank in the US decided to go this route instead of building a solution themselves speaks volumes for how far online lending has come.

Another significant partnership announced just a few weeks before the OnDeck-Chase deal was between Regions Bank and Fundation. This is another deep partnership but is a co-branded effort between the bank and the lending platform. Fundation also has a new partnership with BancAlliance. And earlier this month BizFi announced a partnership with Western Independent Bankers.

The Best Ways for Banks to Partner Today
It has been written many times that banks have three main options today when it comes to dealing with the changing world of online lending: build, buy or partner. In this article I am focusing on partnerships because I think that will be the best way forward for most banks.

In my opinion these are the three best ways for banks to partner with online lending platforms today:

  1. Referrals
    Providing referrals is probably the easiest way for banks to get started in an online lending partnership. One of the challenges for many banks is the high fixed cost for underwriting any loan. We have heard many times that it costs just as much to underwrite a $25,000 loan as it does a $1 million loan. With a referral system in place with an online lending platform the bank can satisfy their customers needs without having to go the expense of building much infrastructure. There is a reason that this is the most popular type of partnership in place today.
  1. Investments
    Banks have had access to very cheap capital for many years now. By deploying some of this capital on online lending platforms as Union Bank and many other banks have done banks can earn their investors a significant return on their money. Now, banks certainly have to do their due diligence but given that this trail has been blazed by others this is not an insurmountable challenge. When investing most banks will stick to the very lowest risk super prime borrowers to provide for a more stable return during an economic downturn.
  1. Lending as a Service
    This is the most interesting option in my opinion. One of the true innovations of online lending is this “underwriting in a box” concept. Because the underwriting process is done substantially online platforms can package up this service and make it available to any lender.

Banks can plug in these services into their existing infrastructure and extend their product offerings. No longer do small community banks need to be limited by their geography. No longer do they have to be limited to offering just one type of loan. Not only that but the platforms can also take on the servicing burden as OnDeck is doing for Chase.

Some of the leading players in this new Lending-as-a-Service concept are LendKey, Insikt, Kabbage and Biz2Credit. These companies are white labeling their solutions today to banks all around the country. The truly exciting thing about Lending-as-a-Service is that it has the potential to allow any business to become a lender. But that is a discussion for another time.

Now, I should point out banks have other options when it comes to partnering with online lending platforms. Some banks have bought equity in lending platforms. Prosper’s $165 million funding round in April 2015 had no less than five banks participating. The venture capital arm of Wells Fargo, Norwest Ventures was an early investor in Lending Club and was one of the largest shareholders during their IPO.

I think it is fair to say that banks and online lending platforms can work together to benefit each other. There is no need for major disruption or disintermediation to the banking system. But this industry is making lending money more efficient. That is the promise that is being delivered on a daily basis by online lending platforms. Banks can and should join this party.

Peter Renton is the founder of Lend Academy and the co-founder of LendIt, the largest conference series dedicated to online lending. LendIt USA 2016 will be in San Francisco on April 11-12 where bank partnerships will be one of the hot topics. Use code OrchardVIP when registering for a 15% discount.