Platform Innovation // Blog

How Bank-owned Lending Platforms Can Boost the Bottom Line

Big banks are missing a big opportunity. Global digital lending is expected to grow to $12.1 billion by 2023, up from $5.1 billion in 2018, at a growth rate of 18.7%. Digital lending is growing quickly even in the highly fragmented and competitive mortgage market. According to the Washington Post, “In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States… by September 2016, the share of loans by these three big banks dropped to 21 percent.”

Banks don’t have to miss out on the digital lending growth and multi-billion dollar business. In fact, they are well poised to enter the market with a head start. Most traditional banks turn away a majority of loan applicants, as high as 60% to 80%. Rejected applicants often turn to competitors or lending marketplaces online. Alternative lending and fintech lending companies such as Bond Street, Lending Club, Prosper, and others are on the rise. Non-bank lenders such as these (whether they’re platform or linear) benefit from lower requirements that allow them to issue riskier loans. Put simply, alternative and fintech lenders are capitalizing on the business that banks turn away.

However, these types of lenders also face challenges that banks can readily solve, such as customer acquisition and collections. In fact, if a bank were to create a lending platform of its own and embrace alternative and fintech lenders, it could increase its revenue and complement its core business with a new high-growth line of business. Notably, the alternative lenders on the bank’s loan platform would benefit from the arrangement as well, providing a rare win-win.

Lending platform advantages and challenges for non-bank lenders

Alternative and fintech lenders have a customer acquisition and retention problem, especially when compared to banks. Banks offer a wide variety of high-demand products, such as savings, which provide multiple touchpoints with customers. In addition, many bank products are recurrent. Fintech lenders are offering a high-demand, but non-recurring financial product: loans. Once a customer has paid, their business ends until the next time they need a loan, and only if they return to the same lender.

In contrast, banks have a huge customer base that will often turn to them first when shopping for loans. However, due to banks’ regulatory requirements, many loan applicants are turned away. There’s an opportunity here for banks to redirect rejected loan applicants to a lending platform owned by the bank, one that is serviced by a marketplace of fintech and alternative lenders.

Furthermore, loan originators need well-oiled collection units to lower delinquency and default rates and keep their rates as low as possible, while still turning a profit. Most fintech lenders’ collection units are either outsourced or pale in comparison to banks’ collection departments. Banks could offer their collection services for a fee, adding an additional layer of service and benefit for fintech lenders. Lending marketplaces such as Lending Club already hire third-party collections agencies.

Lending platforms improve bank’s customer growth, retention, and satisfaction

The genius of a bank-owned lending platform is in its focus on the customer. Instead of rejecting a large number of loan applicants, the bank can now offer them a bank-branded alternative: the lending marketplace. While the bank cannot originate risky loans due to regulatory limits, the would-be rejected customer hears a ‘yes, we can help you.’

In addition, the online-only platform can use a wide variety of data to grow aggressively the way fintech companies have grown in the past decade. Any new customers who reach the bank via this lending platform first can then be cross-sold on other financial products offered by the bank. Thus, the bank benefits from the high-growth nature of platform business models due to network effects.

Meanwhile the bank is collecting a fee for every loan sourced on the loan platform. It’s important to note that the bank only collects a fee for every successfully placed loan. Charging a fee for the right to sell services on the platform would drive up costs (and thus interest rates) for fintech lenders, and would make it difficult for startup lenders who offer lower rates to join the marketplace, thereby depriving customers of options. To the bank, it makes no difference which lender the customer chooses, only that the customer always finds the best rate.

A final point to consider is that this type of lending platform will exist whether it’s bank-led or fintech-led. LendingClub is already building this type of platform by offering banks the opportunity to redirect their rejected loan applicants to LendingClub. Of course, the ultimate beneficiary in this case is LendingClub. Lending Club owns most of the data and it owns the primary customer relationship. If banks want to collect on the growth and revenue of a platform business, they’ll have to build or buy one themselves.

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