Fintech's small-business lending plan will rely on banks, credit unions
Community banks and credit unions will soon have another option for making unsecured loans.
StreetShares, a Reston, Va., peer-to-peer lender that has moved into small business lending, is set to debut a platform to allow lenders to make small-dollar loans without collateral. The company will demonstrate the technology Monday at the Finovate conference in New York.
While banks and credit unions continue to act as the loan originators, the Lending as a Service platform provides software that handles risk-management, underwriting and funding.
“It makes much more sense for us to enable them to do what they’ve always done,” said StreetShares co-founder and president Mickey Konson said Tuesday in an interview.
StreetShares' strategy is to have lenders funnel business to its platform. It plans to target small banks and credit unions with assets of at least $300 million. The platform can serve smaller institutions, too, since its technology is relatively inexpensive and easy to install, Konson said.
Clients can use the platform to make unsecured small business loans between $3,000 and $250,000. StreetShares' algorithmic underwriting provides a decision in minutes. Funding follows a day or two later.
Small institutions "can't to it themselves," said StreetShares CEO Mark Rockefeller. "They need help ... particularly because making small loans is inefficient without technology."
Banks and credit unions are "at a disadvantage to the big guys when it comes to tech,” Rockefeller added. “They’re losing business because for [younger clients] if you don’t have a compelling digital experience, forget it. … Customers love local service. They’ve proven their loyalty [but] technology is what bigger banks are going to win on.”
Rockefeller and Konson designed their product to be as frictionless as possible to adopt. Since StreetShares also acts as a portfolio lender, it funds loans that don’t meet a sponsor’s underwriting standards. As a peer-to-peer lender, the company has funded $200 million of loans "with a really strong credit performance," Rockefeller said. "We've never struggled for investors because our portfolio has performed well."
Community bank and credit union partners “can fund zero or 100% or anywhere in between” of the loans they originate, he added.
Just as importantly, the platform doesn’t require integration into a lender’s core operating system.
“Integration is a dirty word” to small financial institutions, Rockefeller said, adding that StreetShares can be up and running for a client in 30 days.
After conducting a pilot program with USAA in October, StreetShares soft-launched the platform in July. Konson said four participating lenders — two banks and two credit unions — have booked about $8 million of loans date.
Freedom Bank of Virginia in Fairfax is one of the participating lenders.
The StreetShares platform has helped the $500 million-asset Freedom serve companies whose funding needs “require too quick a turnaround for our normal underwriting process,” CEO Joseph Thomas said. It has also helped companies “too early in their life stage and not quite ready” for a traditional bank loan.
Freedom has opted to let StreetShares fund all the loans it’s brought to the platform so far, but the bank aims to establish deposit relationships with each new client. “The value of our bank is driven by the strength of the client deposit relationships,” Thomas said. “We desire to own the relationship. We don’t have to own every product provided to the client.”
The partnership is in its early stages, but Thomas said he’s encouraged by the number of applications and approvals, as well as the feedback from clients.
Rockefeller and Konson, who both served in the Air Force, unveiled StreetShares in 2014 as a peer-to-peer lending site to benefit veteran entrepreneurs. In March, they introduced a credit card tailored specifically for veteran business owners. After three years, and millions of dollars of loans, they realized their software could be adapted to serve a wider market.
They also sensed that small banks and credit unions comprised an underserved market niche.
“Nobody is focusing on the smaller institutions,” Rockefeller said. “Unfortunately for them, online lenders and technology companies have stolen their market share.”
Most fintechs target larger institutions “because they have the money," said Greg Ott, president and CEO at Nav.com, a fintech that helps small businesses manage credit and access funding.
Community banks and credit unions could grab the fintech industry’s attention if more entered the marketplace as buyers, but Ott said that hasn’t happened because most lenders have yet to be significantly harmed by an ongoing shift to digital channels.
“The vast majority are still hoping business-as-usual will still work,” Ott said. “They still aren’t feeling a burning desire for change. It’s a classic lobster-in-the-pot scenario. It’s hard for them to tell the water is getting warmer and warmer.”
Nav offers small businesses a range of personal and small business credit reports and scores to help them research financing options. It also provides links to a number of lender partners, including JPMorgan Chase.
But Mike Dionne, managing director of North America for London-based Finastra, which provides core banking software, said offerings like StreetShares’ and Nav’s represent a growing trend, as lending platforms make it increasingly easy for small banks to consider fintech partnerships.
At the same time, fintechs have grown more sophisticated in their ability to underwrite loans. "There's data available today that 10 years ago you couldn't access," Dionne said.
“There’s no reason a $400 million-asset community bank or credit union can’t have that capability,” Dionne said. “Small banks and credit unions are thinking about being part of a platform, and that’s opening up solutions There’s quite an opportunity out there, and its only getting better.”