Banks that partner with online lending platforms can find new opportunities to expand their markets, but key challenges also need to be addressed.
A panel of marketplace lenders discussed those opportunities and challenges during a recent webinar co-hosted by Goodwin Procter LLP, a law firm, and Lendit, which provides forums on marketplace lending. Goodwin and Lendit project that online lending will quadruple in the next four years.
Bank partners wanted
Online lender Avant seeks financial-driven bank partnerships, according to Kevin Lewis, head of business development. Avant partners with banks to provide a bank-branded product for both existing customers and new online customers.
“We’re focused on an integrated platform solution with a bank-branded product,” Lewis said, noting that the company seeks both financial growth and franchise value for the bank. Avant has facilitated more than 500,000 loans worldwide through its online platform since 2013. In mid-October Regions Bank began offering unsecured online loans as “Regions Bank Powered by Avant.”
Manny Alvarez, general counsel and chief compliance officer for online lender Affirm, says his company seeks customers who either don’t have or don’t use a credit card for big ticket purchases.
Affirm—started by Max Levchin, co-founder of PayPal—works with web-based merchant verticals in segments such as home goods, automotive parts, and luxury apparel.
“Our sales force integrates with online merchants and provides the financing channel as part of the checkout flow, creating a pleasant streamlined customer experience,” said Alvarez. [Read “PayPal founder’s Affirm tackles consumer lending”]
The experience and culture of the bank’s compliance team are important considerations for Alvarez.
“Affirm is a technology-forward company and we want to make sure as many of our integrations as possible can be streamlined, as well as third-party integrations,” said Alvarez. He prefers the relationship to be collaborative. “When issues come up, we like to be able to get on the phone quickly with our partner.”
Lending Club making industry inroads
Richard Neiman, head of regulatory and government affairs at Lending Club, said his company has over 30 bank partners on its platform. He says the banks find these partnerships “attractive and a strong value proposition” because it provides them with the ability to:
1. Acquire attractive assets (consumer credits)
2. Offer a digital system without having to build a new system or adapt a legacy system
3. Fill a product gap
4. Say “yes” to more customers because loans the bank doesn’t want to hold on its balance sheet could be funded by the other investors on its platform.
Aligning compliance standards
Lending Club partners with banks to originate and issue its loans. It also partners with large and small banks that invest in loans on its platform or originate loans through white label programs on its platform. “We have long recognized that we must hold ourselves to the highest regulatory and compliance standards that align with our bank partners in order to have strong relationships,” Neiman said.
The compliance model used by Lending Club and its bank partners has three fundamental elements:
1. Loans are issued through a bank.
Lending Club acts as a third-party vendor under the direct oversight and control of the bank that originates and issues loans to the borrowers. As a result, it is subject to daily periodic reviews of all aspects of its business by the bank and its risk and compliance departments. In addition, outside auditors and independent compliance consultants monitor the level of compliance on Lending Club’s platform.
2. As a public company, Lending Club is required to maintain strong legal and compliance audit functions.
Lending Club also maintains a risk and compliance monitoring system of its own.
3. Lending Club’s bank partners serve as validators of its compliance systems.
Partner banks have performed extensive due diligence on Lending Club’s risk compliance programs and they maintain ongoing monitoring. Lending Club is also subject to third-party vendor management oversight by its partners and their federal and state regulators.
Risks bank partners face
While compliance is critical, two of the biggest areas of concern include credit risk and operational risk.
On the credit risk side, Avant’s Lewis says banks want to be able to tell their regulators that they’re taking balance sheet risk, but in a measured fashion.
“The key has been allowing the banks to control and own the credit policy just like it’s a loan they’re originating in their branch,” Lewis explains.
Although Avant can issue the loan based on its prime credit model, most banks want Avant to replicate the bank’s own credit policy within Avant’s platform. Avant customers can choose white label servicing or have Avant integrate the loan into the bank’s platform so the bank can maintain the servicing relationship with the customer.
Lewis sees a bright future for bank partnerships because it’s difficult for banks to build their own platforms when they are dealing with regulatory constraints and legacy technology systems. He says Avant’s customers like that Avant is a credit-focused shop built from the ground up. It has a hybrid funding model so it has “skin the game.”