Marketplace Lending Was Just What Banks Needed

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Despite all their recent woes and growing pains, marketplace lenders have succeeded in one major way: pushing banks to up their game.

Commercial lending, specifically to small and midsize businesses, is an area ripe for disruption because it has historically been one involving a lot of human interaction and paperwork. Customers don't necessarily want that anymore; instead, they crave the convenience of being able to apply digitally and get a loan quickly.

"Commercial banking is the least automated area. If you walk into the back offices, you're going to see spreadsheets, sticky notes and folders," said Sam Kilmer, senior director of Cornerstone Advisors. "If nothing else, marketplace lending's focus on automation, on a faster experience, on the way they approach the sales process, has pressured banks to respond by prioritizing engineering over [human] energy."

Indeed, nonbank lenders focused on small businesses have succeeded in doubling their outstanding portfolio balances every year since the mid-2000s, according to Aite Group. Marketplace lending's growth wasn't wholly driven by the ease of its products — during much of its early run-up, banks were grappling with the fallout of the 2008 financial crisis and the spigot for small-business lending was tight.

Meanwhile 26% of businesses surveyed by Aite in a study released earlier this year stated they "probably or definitely" would consider using an alternative lender the next time they need credit, in part because online lenders often offer quicker decisions, faster funding and easier processes.

But banks have begun adopting technology to get their edge back. This week, Wells Fargo became the latest bank to roll out a small-business loan-focused product. FastFlex is a digital, fast-decision loan aimed at small businesses, with funding available as soon as the next day, the bank said. The service, which has been piloted since August and will be offered to all customers at the end of May, is also available to meet short-term credit needs, with one-year terms available at amounts ranging from $10,000 to $35,000. Customers can also choose a weekly payment plan.

"It's an option for our small-business customers that have a need for short-term financing or just a different credit option," said Lisa Stevens, Wells Fargo's head of small business.

In his annual letter to shareholders in April, JPMorgan Chase CEO Jamie Dimon also highlighted innovation in small-business lending as a priority. He said the bank this year will begin offering a product called Chase for Business, which will include a digital application process allowing business customers to sign up for what Dimon termed the "triple play" — a deposit account, business credit card and Chase merchant processing — with one signature and in one day. Historically, that process has taken longer and has involved a lot of repetitive paperwork.

He also touted a partnership with the online lender OnDeck Capital, under which Chase will use OnDeck's technology to quickly process loan requests.

FastFlex, however, was developed in-house by Wells Fargo technologists. Stevens would not say whether the product was developed directly because of the competition in small-business lending created by online lenders, but said it was part of an overall commitment it set in 2014 to lend $100 billion in five years to small businesses. So far, it has reached a little more than $40 billion of that goal, Stevens said.

"We are always looking at more innovation and technology that can help our small-business customers," she said.

And it seems the time may be ripe for banks to win back small-business customers lost to online lenders. In April 2016, small-business loan approval rates at banks of all sizes thrived while dropping at alternative lenders, according to data from Biz2Credit, a platform that connects small businesses with financing options. The data is based on the firm's analysis of more than 1,000 small-business loan applications on its website in April.

Marketplace lending, along with payments, has perhaps been the shining star of the fintech, but it has taken a few hits recently. Last week Lending Club CEO Renaud Laplanche resigned abruptly amid accusations of impropriety among senior officials. That came on the heels of Prosper Marketplace announcing mass layoffs and OnDeck Capital sounding warnings of slowing loan growth.

Regulators are paying increased attention to the sector, too. The Treasury Department this week released the findings of a yearlong study into marketplace lending, calling for tighter controls. And the California Department of Business Oversight has sent letters to 14 online lenders that do business in the state asking a series of probing questions regarding their compliance with laws and regulations dealing with referral fees, bank partnerships, fair lending and other sensitive issues.

Those issues could be well timed for banks as they seek to catch up. If they are able to address the speed and convenience issues, they have the embedded confidence of incumbency on their side. They also have a cheaper cost of capital.

"Customers have two questions: am I approved and when can I get the money?" said Pierre Naude, chief executive of nCino, a vendor that helps banks expedite the origination of small-business loans. The company has more than 100 bank customers in the U.S., up nearly 50% from a year ago. Its clients range from small banks to the $194 billion-asset SunTrust Banks. "The industry will be fantastically successful" if it is able to increase the loan approval process "because the banks still have the trusted branding and positioning in the market," Naude said.

If banks are able to regain any lost ground, what will that mean to the slew of marketplace lenders? Many will disappear, observers say. And others may recast themselves as vendors — rather than be lenders themselves, they'll provide banks with their technology. Banks could work with them to stay current with digital expectations, says Rohit Arora, chief executive of Biz2Credit, since they are nimble and can respond quickly to things like frequent updates to mobile operating systems.

Arora said he expects that in the next two years that the majority of small-business lending will be a fully digital process. Right now that is close to 100% for marketplace lenders, and close to zero for banks, he said. That transition will largely be driven by banks and marketplace lenders collaborating.

"There is going to be a convergence of fintech and banks. A year or 18 months ago, banks were dismissive — they didn't need this. That changed when the loans started getting bigger," Arora said. "At the same time, fintech has a disadvantage with the permanent capital. It is forcing the hand of both to partner."

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