Online lenders generally can’t match banks’ rates or loan terms, but they do have banks beat in one key area of small-business lending: speed of decision-making.
So when Popular Bank in New York decided it wanted to ramp up its small-business lending, it didn’t go out and hire a bunch of new loan officers, it
HSBC Bank Canada struck a similar partnership with Biz2Credit as part of its effort to launch a digital loan for small businesses across all of Canada.
With customizable lending software becoming more widely available, expect these types of arrangements to accelerate in 2019 as banks look to better compete with the likes of Kabbage, OnDeck Capital and other upstarts, said David O’Connell, a senior analyst at Aite Group.
O’Connell said that while banks don’t worry too much about losing less-creditworthy borrowers to fintechs, they are very concerned about losing creditworthy customers who have “been seduced by the speed and ease that the alternative lenders are pitching.”
As a result, he added, “they are fielding an alternative lender-feeling borrower experience to make sure they don’t lose the ones that are creditworthy enough for them to lend to.”
He pointed to the emergence of Numerated Growth Technologies and other firms like it. Originally a spinoff from the in-house tech lab at Eastern Bank in Boston,
That stands in contrast to referral partnerships with fintech lenders, which once seemed like a solid way to keep small-business deposit customers happy. Under that model, a bank could give hopeful borrowers a soft no by referring them to a fintech partner with less-stringent underwriting standards.
Still others have licensed lending technology from fintech lenders to make small business loans, while also referring some of those borrowers to the online lender.
Citizens Financial Group refers some small-business borrowers to Fundation under one such arrangement it announced in 2016. It’s not a pure referral relationship, as Fundation does provide the bank with a small-business lending platform, but some borrowers who don’t meet Citizens’ criteria are referred to the fintech for a loan or line of credit.
Such arrangements are unlikely to disappear, but the emergence of more turnkey solutions is giving more banks the option of going it alone, said O’Connell, who recently wrote a report in which he said that a preference for off-the-shelf software over referral partnerships would be one of the 10 trends of online small-business lending in 2019.
“It’s not that partnerships are dead,” O’Connell said. “It’s just that the option of entering the market on your own has become more attractive and affordable.”
Perhaps because banks offer more attractive rates, small-business borrowers tend to be more satisfied when they borrow from banks, according to research by the regional Federal Reserve banks. However,
Borrowers who applied to online lenders said they did so because of faster decision times and a better chance of being approved. They also cited high interest rates and unfavorable repayment terms among the challenges of working with those lenders.
Jorge Sun, CEO of the fintech firm LendingFront, said he is also counting on more demand from banks for lending software like his. LendingFront makes no actual loans itself, but offers a cloud-based lending platform that ultimately gives smaller banks a faster and cheaper way to make and manage small-business loans.
“Banks are really good at what they do. They have the customers, the cost of funds and the marketing. What they’re lacking is the technology,” said Sun, who was previously the chief credit officer for OnDeck.
The company recently raised $4 million in its Series A funding round and wants to add staff in sales, marketing and engineering roles.
Currently, LendingFront works with nonbank lenders, such as community development financial institutions and equipment leasing companies, but Sun hopes to reach more banks and credit unions, especially those with assets of $500 million to $5 billion.
“There will be some banks that want to partner" with fintechs," he said, "but we believe most banks will want to control" the customer experience, "and we’re giving them a platform to do that.”
