Marketplace lenders have sold themselves as both disruptors and saviors of banks in their quick rise to prominence.
Two recent deals between community bank groups and marketplace lenders will put their inherently complicated relationship to the test.
BancAlliance, a consortium of small and regional banks, and Lending Club, the largest online marketplace for consumer loan originations, in early February announced a co-branded partnership. It allows BancAlliance's approximately 200 members to provide loans at lower rates to customers that they might typically turn away.
About two weeks later the second-largest originator of marketplace consumer loans, Prosper, partnered with the Western Independent Bankers, a San Francisco-based community banking group with about 160 member banks, to provide discounted lending rates to customers of WIB's members.
The two deals raise the question: are community banks building up potential competitors (in other words handing over potential customers) in return for short-term gains?
Losing customers is a "concern," said Betty House, the senior vice president and chief technology officer for WIB.
"But community banks are all about being customer-centric," House said, and WIB's deal with Prosper is a way for them to help customers with loans the banks might not be able or willing to provide in return for some public goodwill. The hope is that "then they'll go back and say this bank is loyal to me," House said.
The Prosper-WIB deal is fairly straightforward participating WIB members direct certain consumers to Prosper's platform, though a joint website to educate customers will be established. Prosper will work out revenue-sharing agreements with each participating bank; it's a relatively loose framework compared with the more complex mechanics of Lending Club's deal with BancAlliance.
Lending Club will provide competitively priced unsecured consumer loans, using data-centric underwriting methods, for BancAlliance members. Banks within the consortium will also be able to purchase Lending Club loans nationwide.
Participating BancAlliance members will send lists of customer information to the credit bureau TransUnion, which will then search for all credit information on the customers. TransUnion then strips identifiable customer data from the credit profiles and sends the anonymous files to Lending Club, which use that data to evaluate which loans the customers would qualify for, if any. (This is in addition to data TransUnion had already supplied Lending Club.) Once customers have been pre-approved, Lending Club receives enough information to send them a solicitation via direct mail or other means. The companies must pre-approve and handle customer data in this manner to comply with privacy and other rules.
There is a lot for everyone involved in the transaction to like. Banks can offer lower rates than before to customers, co-branding the service as powered by Lending Club, at less cost to themselves thanks to the online lending marketplace's automation, which speeds up the loan-application process and makes risk analysis far less labor intensive. The banks also will receive referral payments from Lending Club for customers who sign up; they can retain loans that fit the banks' credit criteria, or purchase other loans from the platform to earn interest income without the costs associated with direct underwriting.
Consumers would benefit if they get access to lower interest loans that are easier to pay back and have fewer, if any, fees associated with them as opposed to, say, credit cards. Lending Club could win, also, because it will earn income from servicing fees paid by more customers and investors, and it is expected to gain exposure to potentially thousands of more customers.
Lending Club is contractually prohibited from trying to sell other types of loans to the customers that its BancAlliance partners refer to it. If Lending Club violates this requirement, or even if BancAlliance thinks it can obtain a better deal elsewhere, the consortium of community banks can terminate the deal.
Lending Club can also terminate the deal anytime, though partnerships in general "expand our reach to customers who wouldn't have necessarily heard of us if not for that institutional partner," Chief Executive Renaud Laplanche said. "If we do a good job [for the partner's customers] we may develop a Lending Club customer."
Indeed, there is nothing stopping customers from seeking other loans through Lending Club on their own, and the deal means thousands more will be exposed to, and potentially become comfortable with, the platform that already offers lower loan rates than most banks. The co-branded nature of the partnership ensures that customers know who is lowering the rate for them.
BancAlliance officials characterized the co-branding as necessary for transparency in the origination process, a concern following the 2008 financial crisis.
"Given the imperative to ensure our member banks retain their customer relationship, the best approach balancing strategic objectives and compliance requirements was to do a co-branded solution," Brian Graham, CEO of Alliance Partners, the managing firm of BancAlliance, said in an email.
Sameer Gokhale, managing director for bank and consumer finance analysis for Janney Capital Markets, and Brian Korn, partner at Manatt, Phelps & Phillips who has advised several marketplace lending clients, each said that the disclosure of Lending Club's involvement in these loans could be made in fine print rather than co-branded to comply with transparency requirements. (Lending Club does not technically even originate its own loans; WebBank in Utah does, and Lending Club purchases them after a waiting period usually lasting two or three days. )
Marketplace lender LendKey provides similar back-end services to bring pricing down for makers of student loans, mainly credit unions but also some community banks, CEO Vince Passione said. LendKey, formerly known as Fynanz, has serviced $750 million in loans for approximately 300 local lending institutions, but it keeps partners' brands front and center./P>
"They get to keep their brands and most importantly they get to keep their customers," Passione said.
Passione insisted that Lending Club's approach to partnerships could be a long-term strategic mistake for bankers. "What guarantees are you going to give me that you're not going to turn around and compete against me," Passione said, speaking from the perspective of a banker.
So what of those banks that have already begun participation? Mark Pitkin, president and CEO of Sugar River Bank in Newport, N.H., a 120-year-old mutual savings bank with $262 million in assets, is a fan.
"It's allowing us to level the playing field," Pitkin said. "To be able to increase that consumer-lending with very little backroom cost, it's an incredible opportunity." The ability to purchase loans from across the country added to the program's appeal. "Many banks are in rural markets where they just don't have the demand" for consumer loans, Pitkin said.
When asked if he was concerned about losing customers to the platform, Pitkin made clear that he literally has his money on the customer relationships community banks have built.
"What's stronger than that?" he asked.