By Evan SparksBankers who think they aren’t facing competition from nonbank marketplace lenders should take a closer look, according to bank technology leaders speaking at ABA’s National Conference for Community Bankers in Palm Desert, Calif.
At Boston-based Eastern Bank, chief digital officer Dan O’Malley led an effort to review transaction data from across the bank’s deposit accounts and extract intelligence. “It’s eye-opening to see how many of your customers—both consumers and small businesses—are taking loans from alternative providers” like Lending Club, he says, noting that 5 percent of Eastern’s business customers are making payments to a nonbank marketplace lender and that the rate has been doubling annually.
Ben Wallace, EVP for operations and technology at Orrstown Bank, Shippensburg, Pa., urged bankers to go home and ask their data team to review outgoing ACH transactions from customers’ deposit accounts. “Look at how many recurring payments are to the folks about which you would say, ‘My customers would never go to a Quicken Loans or a Ditech. You’d be shocked at how many tens of millions of dollars are leaving your bank.”
So why are good community bank customers taking their business to alternative lenders, and how can banks stem the flow?
O’Malley offers three reasons: the long-term low-rate environment driving investors in search of higher-yielding financial services investments; the credit pullback by banks in the wake of the 2008 financial crisis; and a completely reengineered digital customer experience.
The first two reasons will pass, he says. But Eastern recognized a need to leapfrog the marketplace lenders in streamlining the online loan application process, he says. To that end, in 2014, the bank created Eastern Labs to incubate innovative new fintech approaches. “At Eastern, we’ve looked at that change, and at the data. We’re not willing to lose small business” to nonbank competitors, he says.
Some banks are engaging in referral agreements, with the bank referring customers to online lenders when they don’t offer a particular product and vice versa. O’Malley says that Eastern shies away from referrals, however, since they want to keep good customers in the bank.
Banks can also respond by developing deeper partnerships with online lenders. Mary Dent, a former banker and current general counsel at marketplace lending platform Insikt, offers an example of how. Insikt focuses on lending to customers with low FICO scores who might not otherwise have access to bank credit, but the company works with banks to drive the loans and ensure banks can use Insikt’s offerings to better serve their own customers. “We are designed to be invisible to consumers on the public side,” she says. “We brand using our [bank] customers’ brands and integrate into what they are doing.”
This “white label” approach to partnership preserves customers’ primary relationship with the bank and limits the risk that the alternative lender will ultimately compete with its partnering bank, Dent points out. “The customer walks into your branch, and you feel like you’re serving them because your tellers can help customer get a loan,” she explains. “Meanwhile, you get [Community Reinvestment Act] credit, but you have no credit risk in the traditional sense.”
When considering a partnership with a marketplace lender, “different banks really need different things,” says ABA VP Rob Morgan. Five key issues to keep in mind include the customer experience, the financial trade-offs, the operational process, reputational effects and the regulatory response—and the process needs to complemented by robust due diligence.
Dent challenges banks to “be clear about what you want.” For example, one might focus on fee and origination income and avoid some credit risk; a partnership that generates more interest income might mean retaining more of the credit risk, she points out.
Regardless of whether banks partner or compete with nonbank lenders, Paul Walker, SVP at Q2—a firm endorsed by ABA for virtual banking—argues that online lenders have permanently “changed the ways that consumers and small businesses expect to interact and get a loan.”
Banks need to understand the novel underwriting models and adapt to the speed and ease with which the nonbank alternative lenders are already attracting community banks’ current customers. As Dent puts it, community banks can keep up by dropping a “no, because” mentality and embracing a “yes, if” approach.