Online lenders talk about partnerships – Banking Exchange
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 these opportunities and challenges in a recent webinar co-hosted by Goodwin Procter LLP, a law firm, and Lendit, which offers Marketplace Lending Forums. Goodwin and Lendit predict that online lending will quadruple over the next four years.
Banking partners sought
Online lender Avant is looking for finance-focused banking partnerships, according to business development manager Kevin Lewis. Avant partners with banks to provide a bank-branded product to existing and new online customers.
“We’re focused on an integrated platform solution with a bank-branded product,” Lewis said, noting that the company is looking for 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 under the name “Regions Bank Powered by Avant”.
Manny Alvarez, general counsel and chief compliance officer for online lender Affirm, says his company is looking for customers who don’t have or don’t use a credit card for major purchases.
Affirm, launched by Max Levchin, co-founder of PayPal, works with web-based vertical merchants in segments such as home goods, auto parts and luxury apparel.
“Our sales force integrates with online merchants and provides the funding channel as part of the checkout flow, creating a pleasant and streamlined customer experience,” Alvarez said. [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 tech-savvy company and we want to make sure that as many of our integrations as possible can be streamlined, as well as third-party integrations,” Alvarez said. He prefers the relationship to be collaborative. “When problems arise, we like to be able to communicate quickly with our partner on the phone. »
Lending Club makes inroads in the industry
Richard Neiman, head of regulatory and government affairs at Lending Club, said his company has more than 30 banking partners on its platform. He says banks find these partnerships “attractive and a strong value proposition” because they allow them to:
1. Acquire attractive assets (consumer loans)
2. Offer a digital system without having to build a new system or adapt an existing system
3. Fill a product gap
4. Say “yes” to more customers, because the loans that the bank does not want to keep on its balance sheet could be financed by the other investors on its platform.
Compliance Standards Alignment
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 provide 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 banking partners in order to have strong relationships,” Neiman said.
The compliance model used by Lending Club and its banking partners has three fundamental elements:
1. Loans are issued through a bank.
Lending Club acts as a third-party provider under the direct supervision and control of the bank that originates and grants loans to borrowers. Accordingly, it is subject to periodic daily reviews of all aspects of its business by the bank and its risk and compliance departments. Additionally, external auditors and independent compliance consultants monitor the level of compliance on the Lending Club platform.
2. As a public company, Lending Club is required to maintain strong legal audit and compliance functions.
Lending Club also maintains its own risk and compliance monitoring system.
3. Lending Club’s banking partners serve as validators of its compliance systems.
Partner banks have performed extensive due diligence on Lending Club’s risk compliance programs and maintain ongoing monitoring. Lending Club is also subject to third-party vendor management oversight by its partners and their federal and state regulators.
Risks Facing Banking Partners
While compliance is essential, two of the main areas of concern are 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 are taking on balance sheet risk, but in a measured way.
“The key has been to allow banks to control and take ownership of credit policy as if it were a loan they take out in their branch,” says Lewis.
Although Avant can issue the loan based on its prime credit model, most banks want Avant to replicate its own credit policy within Avant’s platform. Avant customers can opt for a white label service or ask Avant to integrate the loan into the bank’s platform so that the bank can maintain the service relationship with the customer.
Lewis sees a bright future for banking partnerships because it’s difficult for banks to build their own platforms when faced with regulatory constraints and legacy technology systems. He says Avant customers love it Avant is a credit-focused store built from the ground up. It has a hybrid funding model, so it “skin the game”.