Findings from ABA Research
To learn more about how banks are moving away from paper-based lending processes, the American Bankers Association conducted a survey, drawing responses from nearly 200 banks. The resulting report, The State of Digital Lending, provides a new window into the current landscape in digital lending—and how banks can adapt to the growing need for financial technology.
Banks don’t necessarily have to compete with fintech companies. By partnering instead, banks and fintech lending companies both benefit from a powerful synergy:
- Banks gain the ability to provide a better customer experience, increase loan originations in various asset classes, increase revenue, provide more loans with no additional risk or staff, and reduce their cost per loan.
- Fintechs gain much-needed access to the banks’ loyal customer base, deep financial services experience, and familiarity with the regulatory environment.
Here are the three main ways that banks can approach a fintech partnership with little upfront investment:
- Take advantage of third-party software-as-a-service (SaaS) digital lending solutions.
- Make referrals to digital lending partners.
- Purchase assets originated by non-bank lenders.
The software-as-a-service approach.
When banks opt for a SaaS approach, it’s typically a white label solution, which allows banks to offer branded end-to-end digital lending solutions to their customers without investing in dedicated infrastructure or technology. And the banks maintain full control over the origination process. This approach has several benefits:
- Implementation cost is quite low compared to having the bank develop a solution in-house, even if it had the resources to do it.
- Banks can readily offer new products and services online under their own brand, thereby increasing their brand value with current and potential customers.
- Modern, agile software technology enables the banks to quickly customize the platform to fit their lending practices and adapt to future changes.
Since loans remain on the bank’s books, there is strong interest in collaborating with fintechs in this manner.
In the ABA survey, 71% of respondents said their bank was interested in using a third-party digital platform for consumer loan origination. That figure was even higher (79%) for larger banks, those with assets above $1 billion. For all banks, the strongest interest was in partnering for auto loans (71%) and unsecured personal loans (71%), as well as home improvement loans (56%) and student loans (44%). Regardless the type of partnership, it is essential that banks understand the fintech’s cybersecurity and data protection processes.
White label digital lending in action.
Early adopters of white label digital lending solutions include:
- Burling Bank of Chicago uses the ABA-endorsed Akouba digital loan origination platform to digitize small business loans, thereby reducing cost per loan, increasing loan volume, and creating a better customer experience within its current brand, loan policies and underwriting criteria.
- WSFS Bank in the Delaware Valley uses LendKey’s ABA-endorsed student loan lending platform and online marketplace to develop the bank’s own private student loan and refinancing programs, as well as to participate in the LendKey open marketplace.
- Using technology from On Deck Capital, a U.S. online small business lending company, JPMorgan Chase & Co., is building a digital platform for its own small and medium-sized enterprise lenders. Under the partnership, all the credit parameters and underwriting are provided by the bank, while OnDeck provides the technology for digitization and automation.
“Even large banks realize that the cost to build digital lending technology themselves might be very high, and only the big banks can do it. Small community banks have to come up with these partnerships to help us evolve,” said Kevin Murphy, chief lending officer at Burling Bank.
Referral partnerships with fintech.
Referrals enable banks to fill product gaps, strengthen existing customer relationships, and generate income. For digital lenders who often struggle with stable funding, referral relationships lead to higher loan originations.
There are two types of referral models, both of which are gaining traction:
- Outbound referrals – Banks refer customers who fall outside their product offerings or credit parameters to a digital, non-bank lender to provide a possible alternative lending product that fits the customer’s need.
- Inbound referrals – Non-bank lenders originate assets and sell them to banks.
Referring banks in an outbound referral can typically place parameters on the types of loans and the pricing a non-bank referral partner can charge their customers. Likewise, if purchasing assets from a non-bank lender, banks can specifically define the types of loans and the credit profiles they are willing to buy.
Some referral models also offer co-branded loans, where banks or fintechs offer customers each other’s products.
The advantage for banks is that outbound referral models bring additional revenue from referral fees, with very low up-front investment. For customers the bank cannot service, a referral allows that bank to meet the customer’s need by offering an alternative option while maintaining its existing customer relationship (deposits, accounts, etc.).
Interest in a referral model to augment a bank’s product offerings is mixed. ABA research showed interest in considering a referral model relationship with digital lending partners for consumer loans (53%), small business loans (57%), and mortgages (53%), with interest somewhat higher among smaller banks.
Within the consumer loan category, there was strong interest in exploring a referral relationship for all four types of loans listed:
- Auto finance (78%)
- Unsecured personal loans (77%)
- Home improvement (58%)
- Student loans (48%)
Of ABA members surveyed, 82% said they would be interested in partnering with another lender to serve customers that it could not qualify under the bank’s underwriting criteria. This was particularly true for automobile and unsecured personal loans, if the referral were automated (93%), and as long as the interest rate set by the digital non-bank lender wasn’t punitive.
Of utmost importance to respondents was that the interest rate comply with applicable laws and regulations.
Chicago-based Burling Bank is exploring a slightly different approach to referrals. “If we are unable to work with a client, we may refer them to a non-profit financial institution that offers lending products as well as financial coaching that can help a small business open its doors, grow, and mature—and ultimately become bankable,” said Burling Bank Chairman Andy Goldberg. “These types of organizations tend to offer credit for less than some online lenders do, with the mission to help developing businesses generate employment and economic benefits in the community.”
Next month we’ll take a closer look at some of the banks that have partnered with fintechs to upgrade their digital lending offerings.