Why BBVA Compass Is Sending Customers to an Online Rival

Banks can view disruptors as foes or ignore them altogether. BBVA Compass is increasingly treating alternative fintech firms as allies in its efforts to become a digital titan.

Early this year its parent company bought digital banking interface Simple, and this week the Birmingham, Ala., bank announced a partnership with OnDeck in which it will refer small-business customers who might not qualify for a bank loan to the online lender.

The move is seen as a way for BBVA Compass to maintain deposit and other relationships with clients it might otherwise lose. As those clients build their businesses — and credit histories-- they could eventually become borrowers. Customers, meanwhile, benefit by getting loans more quickly than they would from a bank — though at a higher interest rate.

The partnership is the latest example of banks finding new, tech-driven ways to say "yes" to the smallest of small businesses whose needs often don't mesh with what banks offer. Indeed, in many cases, these banks are teaming with alternative firms that were established precisely to fill what they perceived as a void in the marketplace.

BBVA Compass, a unit of Spanish banking giant Banco Bilbao Vizcaya Argentaria, views its latest partnership as a way to help its clients access short-term capital for projects that it may not have been able to finance in the past.

"We see [OnDeck] as good allies. They allow us to satisfy a need," says Lonnie Hayes, small business segment director for BBVA Compass. "It allows us to say yes to entrepreneurs more."

OnDeck, which crunches social media data among many other data to make credit decisions, will make loans of up to $250,000 and can fund them in as little as 24 hours online.

The New York company, which has been considered a threat by some bankers, has originated more than $1 billion worth of loans since its launch in 2007.

BBVA Compass will help feed OnDeck more leads by promoting OnDeck loans to certain small-business customers.

The average OnDeck loan is $43,000, an amount that is often too low to be worth banks' while. The costs to make such a loan can outweigh any potential profit. Moreover, mainstream banks often can't extend lines of credit as fast as most digital-only upstarts. Indeed, OnDeck and its competitors like Kabbage are able to fund smaller business loans more efficiently than banks as they automate the underwriting processes. Their algorithms can make fast credit decisions, while banks' loan officers could take days or weeks to complete their assessment.

The bank did not disclose how it plans to market OnDeck services except to say it will be a co-branded endeavor.

BBVA Compass, though not underwriting the loans, hopes to improve customer retention by helping the customer find another credit option. BBVA Compass said it does not provide its small-business customer count for competitive reasons, nor will it share referral goals from the new partnership.

To be sure, data-driven referrals are not a new concept. Young companies like Intuit's Mint or Credit Karma make money off lenders advertising their products on the consumer-facing sites, for example. Then there are matchmaking services such as Lendio that feed small business borrower leads to banks. A bank could also refer a want-to-be borrower to another lender who could extend capital when it could not.

"More progressive financial institutions are starting to realize there are other loan products that can help their customers," says Brock Blake, co-founder and chief executive officer of Lendio. "I think this is a start of what will become a great relationship between traditional banks and alternative lenders."

A key benefit for banks in such partnerships is that they will often gain deposits. After all, the funds have to be deposited somewhere.

About a dozen banks and processors already refer business to OnDeck. Some referrals come from loan officers, some from crunching bank data and targeting individuals who pre-qualify for the OnDeck loans with direct mail or emails. OnDeck generally pays a referral fee to its partner institutions.

The latest deal is a coup for OnDeck. Apart from being a new source for leads, the partnership with BBVA Compass essentially gives the upstart a stamp of approval from an established bank brand, says Jacob Jegher, a senior analyst with Celent.

He adds that the bank is building goodwill with clients by not outright rejecting them.

"The worst thing is being turned down," says Jegher, adding a customer could become happier in knowing there's someplace else to get capital. He compares it to going to a Walmart and the store not having what a person wants in stock. A friendly sales clerk could refer someone to try the K-Mart next door, and in turn, improve the customer experience.

BBVA Compass joins a handful of banks that have been working with alternative financing companies to find ways to better serve small businesses.

Golden Pacific Bancorp in Sacramento, Calif., for example, is partnering with Better Finance (formerly BillFloat) to launch an online microlending platform that it says will make it more cost effective to originate very small business loans. Its goal is to eventually license the technology to other banks.

Union Bank in San Francisco is buying personal loans from Lending Club and plans to co-create new credit products. The peer-to-peer lender expanded its platform to include small- business loans earlier this year.

BBVA Compass, meanwhile, chose to partner with OnDeck because of the high marks it gets from customers. The average OnDeck customer takes out 2.3 loans with the lender.

"This was all about the customer experience," says BBVA Compass' Hayes. "There are a lot of people who had a tech platform but it didn't always show the evidence of positive experience OnDeck offered. It's very important to us."

Still, borrowers pay more for an OnDeck loan than they would for a bank loan. OnDeck charges on average between 17 cents and 33 cents per dollar borrowed on short-term loans ranging from $25,000 to $57,000. For larger loans with longer terms, the annual percentage rate can range from 19.99% to 39.99%, according to a chart on OnDeck's website.

For BBVA Compass, the partnership with OnDeck is the latest of a series of investments the bank has made to better transform it into a tech-driven company. In the small-business space specifically, the bank recently introduced a mobile reader for small businesses that allows customers to accept payments on mobile devices, as well as a payroll service powered by Execupay.

"The pace of innovation is accelerating in all [bank] areas," says Hayes. "It's a strategic objective to be at the forefront of digital."