September 17, 2015

Full-service bank takes partnership with marketplace lender to new level

Brick-and-mortar banks have been striking uneasy partnerships with marketplace lenders. Now a small Boston bank has taken such deals a step further by co-branding with a peer-to-peer upstart.

Radius Bank announced on Sept. 16 that it would offer personal loans on its own website via Prosper Marketplace.

Chris Tremont, Radius' executive vice president for virtual banking, explained to American Banker how it will work: Radius customers seeking personal loans will be directed from to a joint Radius/Prosper website. Loan amounts range up to $35,000.

American Banker wrote that it's an experiment industry observers expect to see replicated widely.

Skepticism about new partnerships
For banks, partnerships with marketplace lenders have some risk. Executives from BankNewport, a Rhode Island bank founded two centuries ago, described why they partnered with Lending Club, which started in 2006. The pairing allows BankNewport to re-enter the local market for unsecured personal loans.

"We have to make sure we remain relevant," the bank's CEO, Sandra Pattie, told the Wall Street Journal. "We've been trying for years, six years or so, to get away from our strong reliance on the residential mortgage market. This seemed like it does that for us."

Symbiotic or parasitic relationships?
BankNewport is sticking its neck out by funneling information about their customers to a relatively untested partner, at least by brick-and-mortar bank standards. An executive from the Credit Union National Association said he is not working with members of his trade group to emulate deals like that between BankNewport and Lending Club.

"Cooperation is good," said Mike Schenk, vice president of economics and statistics for the trade group, "but it depends on who you cooperate with ... I would say tread lightly."

The wave of partnerships between insurgent marketplace lenders and established banks may seem to cut against self-interest on both sides. After all, aren't peer-to-peer networks out to drink the metaphorical milkshakes of established financial institutions? Despite any dangers, big banks have been jumping in, forming what the New York Times called a "new class of investors" from the original marketplace lending vision of normal folks borrowing from one another.

Marketplace lenders have an advantage in that their costs of operation are much lower than those of established banks. Where traditional banks expend about 7 percent of a loan's value on administration, that figure for Lending Club is just 2.7 percent. However, banks have the advantage of offering a much wider range of products than peer-to-peer networks, so they have more ways to monetize each customer.

Interest rate environment changing
A major challenge facing peer-to-peer lenders is the end of ZIRP, or zero interest-rate policy. While the Federal Reserve held off raising benchmark rates in September, observers expect credit tightening to begin before the end of the year. Those low, low interest rates helped make yields from securitized peer-to-peer loans attractive to investors given the options available. As interest rates return to something more like normalcy, this new banking sector will have to adapt.

If financial institutions are thinking about partnerships with marketplace lenders, Garnet Capital Advisors, an experienced loan sale advisory firm, can help craft deals that work for both parties.