Banks and credit unions are increasingly partnering with digital financial startups and other origination sources to put profitable loans on the books.
The financial crisis of 2008 may have occurred eight years ago, but the effects are still being felt across the financial industry. Banks and credit unions are still dealing with regulatory and financial obstacles, and are continuing to shrink their overhead costs in a valiant effort to obliterate these revenue hurdles in 2016.
But that's only part of the story.
While slashing costs, they are also looking to test the waters of acquisitions, including non-bank institutions and small consumer loans that they otherwise would have just left to marketplace lenders.
We're no longer in an environment where banks and credit unions will enjoy handsome profits from commercial loans and a have a strong influence on consumers. With the commercial sector experiencing revenue weakness as of late, and alternative lenders springing up at a lightening-fast pace, institutions have no choice but to start thinking outside the box and getting out of their comfort zone in order to ensure they remain relevant and profitable into the foreseeable future.
Consumer Loans - A Viable Option For Banks to Embrace
When it comes to acquisitions that could potentially have a major effect on the bottom line, perhaps it's the consumer lending sector that warrants serious attention. From auto loans, to student loans, to small business loans, and everything in between, consumer loans can help boost loan portfolio profitability.
The average person today is less and less the cash-strapped, highly indebted consumer from nearly a decade ago. These days, consumers are watching their spending, minimizing leverage and focusing on paying off any existing debt they already have. And with the improving labor market and strengthening consumer sentiment, perhaps consumer lending is one area where banks should be placing their focus.
The shift toward consumer lending is real, and lenders are beginning to look at it more as a prime opportunity compared to the years immediately following the financial crisis. Such a change in attitude is more evident following a tough year for the corporate world. Profits in 2015 were even worse than anticipated.
In the meantime, consumers have enjoyed healthy job and income growth, with credit cards and other revolving loans showing signs of an upswing.
One way for banks and credit unions to re-commit to consumer lending is through small loans, such as auto or small-business loans.
Banks like Dallas-based Santander Consumer and Atlanta-based SunTrust have been adopting this strategy. Santander is an active originator of auto loans, while SunTrust has been boosting its consumer lending via its LightStream subsidiary, which makes loans for a variety of smaller-scale purchases, including auto loans.
Buying Loans Originated By Others
Ever since the financial industry was hit by the economic crisis of 2008, innovative alternative startups have sprouted in an effort to serve markets that otherwise weren't being served effectively by traditional sources.
One type of alternative lender - now referred to as "marketplace lender" - has been playing a key role in facilitating smaller-scale loans for the average consumer. Such non-banking lenders have become increasingly innovative in their products and services, and are now making loans in a myriad of asset classes and selling them to investors. The majority of these lenders depend on technology in their underwriting and closing of these loans, and operate almost exclusively online.
With an increasing number of consumers turning to these fintech companies to do their banking and obtain loans, and over $25 billion invested in about 4,000 fintech firms over the past five years, this new and innovative realm definitely warrants a second look.
For a while now, banks have been on the fence about whether or not they should compete with these potentially disruptive start-ups, or go so far as to partner up with them or acquire them altogether. But for an increasing number of banks, it seems that the latter options are becoming the favored choice.
Auto loans are viable options for banks to look at to add to their loan portfolios.
Both fintech companies and traditional banks are starting to realize the benefits of partnering up to provide cutting-edge financial solutions and excellent client experiences to consumers who have more frequently become accustomed to digital life.
On the one hand, fintech firms can tap into banks' large and established client base, as well as its experience with financial regulations. But banks potentially stand to benefit even more. By partnering with fintech companies, conventional banks have the unique opportunity to gain a better understanding of the financial technologies of today without having to rely solely on old operating systems that today's digitally-savvy consumer is no longer satisfied with. They're better able to provide the convenience and service that today's consumers want, and have come to expect.
At the end of the day, fintech firms and banks need each other, so the only logical solution is to team up. For smaller banks, teaming up with marketplace lenders has become a popular alternative, allowing them to offer customers another product while letting the digital platform handle pricing and underwriting.
Lending Club is now worth an estimated $7.2 billion, and On Deck Capital is worth $1.5 billion. With impressive numbers like these - considering the fact that they started only within the last decade - it's impossible to ignore the impact they have in today's leading environment.
Banks absolutely need to be studying this industry with a magnifying glass and find ways to partner with these market lenders effectively. And one way to do just that is to purchase whole loans that such marketplace lenders originate.
Of course, it's important to understand the inherent risks associated with these loans, as these marketplace lenders typically make the majority of their money from origination fees. They thus have great incentive to close out as many loans as possible, so while these loan acquisitions could be a viable profit-generating source for banks, care must be taken to make the partnership viable for both parties.
Outright purchasing loan originations and taking on the whole operation is also a potential option for banks, particularly larger-scale institutions. But like any other type of acquisition, a solid understanding of the risks associated with these purchases and an in-depth analysis of their profit potential is critical.
One thing is for certain: ignoring these opportunities and the changes taking place in the world of banking is a sure-fire way to lose footing and competitive edge. Banks have little choice other than to be tuned in with marketplace lending and consumer banking, and partner with industry experts who can lead them in the right direction.
It's not easy to find the right partner or loan source in this market. But with Garnet Capital, the principals we've embraced have been working with the financial institutions we've been assisting for over 30 years.
At Garnet Capital, we are constantly searching for good counterparties for our banking clients to partner with. Garnet understands the quality and compliance levels that a bank or credit union requires and we have screened hundreds of potential counterparties to be able to introduce a few qualified prospects.
Sign up for our newsletter today and learn more about how Garnet Capital can help your bank build up a profitable loan protfolio.
