There's a new, uneasy truce in the ongoing standoff between banks and marketplace lenders. But there are plenty of reasons to be wary of any partnership.
In October, Regions Bank announced a deal to let small-business owners access Fundation's online application directly from the bank's website. In April, JPMorgan Chase partnered with OnDeck to offer loans to the bank's existing small-business customers. And most recently, Kabbage teamed up with Scotiabank to make small-business loans in Canada and Mexico.
The deals seem simple: the marketplace lender provides the backend technology and the bank provides the brand name. However, the reality for smaller banks is that making similar partnerships could be very dire to their business models.
Despite more banks embracing fintech companies, marketplace lenders should be seen as competitors, not potential partners. Marketplace lenders have clear and irreconcilable conflicts of interest with banks.
The first conflict involves customer acquisition and retention. According to a Forbes blog, acquiring a new small-business customer costs an alternative lender between $2,000 and $3,000. Banks that partner with alternative lenders are essentially providing them free referrals, and marketplace lenders won't want to let these new customers go.
Not only do marketplace lenders likely not want to lose that steady stream of interest income, but each new customer adds a data source that ultimately helps make their underwriting more efficient and more profitable. Banks that partner with marketplace lenders are essentially handing profit and big data insights over to their competitors. Why would alternative lenders be interested in sharing those spoils with their bank "partners" in kind?
The second potential conflict these partnerships pose involves regulatory issues. Currently, marketplace lenders operate outside the strict regulatory system for banks. Banks, which have spent decades carefully guarding their reputations, are now entrusting their reputations to unregulated partners. Regulators are very likely to view any loan that goes through a bank in any way as being a loan from that bank, and yet, the loans will not be up to the bank's standards.
Marketplace lenders charge very high interest rates with opaque – and some say – exploitative lending terms. Regulators are starting to look into their lending practices and banks that partner with these firms could get caught in the crossfire.
For large institutions like Chase or Regions, the conflicts may not matter so much. Big banks, which dwarf their digital partners in size, don't need the small loans that are marketplace lenders' specialty.
But a smaller community bank can't afford to take on the reputational risk of partnering with an unregulated lender or let their customers go to a competitor. Relationships are the lifeblood of local banks, and small-business loans very often lead to other profitable banking activity, like mortgages. A deal with a business that's actively competing for some of a community bank's key customers can never be a true partnership.
Trevor Dryer is CEO and co-founder of Mirador. He can be reached on Twitter @mirador.