Line Between Banks and Marketplace Lenders Thinner than You Think
Darien Rowayton Bank used funds from a 2010 recapitalization to start refinancing student loans in a move that, so far, has been lucrative for the institution.November 30
The Consumer Financial Protection Bureau's move to collect complaints about online marketplace lenders is a sure sign it is laying the groundwork for rules or enforcement actions against the industry.March 7
In our current age of fintech startups, banks are often seen as the adversary of newer companies. The story goes that banking is outdated and slow and needs to be disrupted by marketplace lending innovators.
A perception has spread that banks are in one box, and alternative online lenders are in another. It suggests that a bank cannot be one of these newer disruptors, and vice versa. But there's no good rationale backing this up. The line between banks and marketplace lenders is a myth.
Alternative lending is widely regarded as one of the more innovative developments since the financial crisis — and ensuing slowdown — created a mammoth shift in banks' ability to provide credit.
With credit from traditional sources harder to find, more and more borrowers are turning to alternative lenders, and interest in the sector is booming. Alternative lenders now account for nearly $10 billion of the $600 billion small business lending market. The $1 trillion student loan market, which has traditionally offered few options for people to refinance their educational debt, is starting to open up to alternative lending. Next-generation lenders are now offering data-driven, flexible and lower-cost refinancing options for student loan debt.
But traditional financial institutions are increasingly doing more than just partnering with marketplace and other alternative lenders; they are the alternative. While it is true that this phenomenon is a response to the emergence of nonbanks offering bank-like services, depository institutions are increasingly entering the alternative lending space, as both collaborators and direct providers.
Institutions like Darien Rowayton Bank and Discover Financial Services in Illinois provide similar services, benefits and innovations that are the signature of next-generation lenders. Banks will underwrite and service marketplace loans themselves, as well as sell loans through securitizations. At DRB, for example, we branched out of our community bank origins in Connecticut to begin offering student loan refinancing and personal loan products that fall into the same category as marketplace lending products. Discover has rolled out personal loans offered via their website, not out of bank locations or through card services.
Meanwhile, depository institutions of all sizes have engaged in partnerships with marketplace lending startups that can make it hard to distinguish between the different parties collaborating. On a large scale there is the well-publicized deal between JPMorgan Chase and OnDeck. But even some credit unions are increasingly looking like marketplace lenders. For example, Cornerstone Community Credit Union in Des Moines, Iowa, announced earlier this year that they had partnered with the online marketplace lender LendingPoint to provide loan products for members who struggle to qualify for traditional financing.
As the alternative lending space matures, sources of capital — once a defining factor as most players in the space were peer-to-peer lenders — is no longer a differentiator between traditional institutions and startups. In its infancy, marketplace lending meant matching individual borrowers with individual lenders through online platforms, typically on a peer-to-peer basis. But even those early players have started to shift away from a peer-to-peer model toward an institutional model.
More institutional investors are now chasing the higher return potential offered by marketplace lending and have started to allocate capital to this sector. Currently, according to a recent survey cited by Barron's, 29% of institutional investors have already allocated capital to this space, and 85% say they are interested in investing in this type of lending in the future.
As more institutional investors and even traditional banks get into the alternative lending business, it no longer makes sense to think of the sector as divided between banks and marketplace lenders, or between banks and nonbanks. Technology and innovation, which are the differentiators, are just as available to banks as any other type of institution.
Aryea Aranoff currently serves as chief strategy officer of Darien Rowayton Bank in Connecticut. Prior to joining DRB, he worked as a strategic consultant at McKinsey & Co.