Fintech is often viewed as an industry disrupter, but its greatest influence may be as a collaborator, benefiting both banks and themselves, especially in the lending space. Conceptually, partnering makes sense. For community banks, the cost of building or buying their own online origination platform is prohibitive. By collaborating, banks can achieve more with less risk: They can get improved services for significantly lower capital expenditure; a reduced cost of doing business; and, more importantly, access to market segments that would otherwise not meet their credit criteria. Collectively, this advances not only the business of community banks but also the mission.
In turn, by partnering with banks, fintech firms can gain brand exposure, more quickly scale their businesses, and increase their access to capital and liquidity, which translates to better company returns.
Bank and Fintech Partnership Models
Initially, bank-fintech partnerships followed consumer demand for digital services, especially mobile access. Lending partnerships soon followed, first focusing on retail consumers, and more recently, on SMEs. Partnership structures vary depending on which party sources the borrower, underwrites and funds each loan, and whether the product is white labeled under the bank’s name or co-branded. Below is an expanded chart of most common structures and selected partnerships, published by Lend Academy.
|Borrower Source||Underwriter||Lender||Abbrev.||Customer||Style||Year||Example (Bank/fintech)|
|Fintech||Fintech||Bank||FFB||Retail||N/A||2014||Union Bank / Lending Club|
|Fintech||Fintech||Bank||FFB||SME||Co-brand||2015||BancAlliance / Lending Club|
|Fintech||Fintech||Bank||FFB||Retail||N/A||2016||Credigy / Lending Club|
|Fintech||Fintech||Bank||BFB||SME||White label||2015||ING / Kabbage|
|Bank||Fintech||Bank||BFB||SME||White label||2016||JPMorgan / OnDeck|
|Bank||Fintech||Bank||BFB||SME||White label||2016||Santander / Kabbage|
|Bank||Fintech||Bank||BFF||Retail||Co-brand||2015||Radius Bank / Prosper|
|Bank||Fintech||Fintech||BFF||SME||Co-brand||2015||Regions Bank / Fundation|
|Bank||Fintech||Fintech||BFF||Retail||Co-brand||2016||Regions Bank / Avant|
|Bank||Fintech||Bank/Fintech||BF-BF||SME||Co-brand||2017||New Resource Bank / P2Binvestor|
Partnership Model Breakdown
Lending Club, one of the industry’s largest online consumer lenders, partnered with a series of banks via the FFB model. In their case, the banks provided lending capital as part of Lending Club’s P2P investor base. This partnership type expands the bank’s loan portfolio and enhances the online lender’s access to capital.
JP Morgan’s partnership with OnDeck (BFB) improved the “difficult customer experience” of securing a small business loan by combining existing customer data with a streamlined underwriting platform to fund loans more quickly.
The BFF model uses the bank’s customer base to source borrowers while the fintech firm underwrites and funds the loan. Banks generally receive referral fees when their customers borrow via the fintech portal. With the Regions Bank and Fundation partnership, Fundation funds loans up to $1 million while Regions handles larger loans.
P2Binvestor and New Resource Bank advanced the bank-fintech partnership into new territory with a co-lending, asset-based financing product. Together, the bank and P2Bi provide the capital, and the bank sits in a senior lien position. P2Bi underwrites and manages each facility, essentially acting as an ABL service provider. In turn, borrowers receive a blended interest rate that reflects the risk profiles of both the bank and the fintech firm.
This model (BF-BF) offers several unique benefits for banks and borrowers. For banks, it provides the opportunity to support small businesses that would otherwise not meet their credit criteria and allows them to generate additional lending revenue with less risk. In addition, the co-lending structure acts as a potential onboarding mechanism to traditional bank lending as once the borrower qualifies it can graduate to the bank’s regular lending products. Since P2Binvestor’s technology is already integrated with the bank partner, the transition from bank-fintech partnership to bank is seamless, also a significant borrower benefit.
There can, however, be challenges. In a recent Manatt survey on bank-fintech partnerships, bank respondents cited overall preparedness as a point of concern when considering a fintech collaboration. Per mandates from the Office of the Comptroller of the Currency (OCC) and Consumer Financial Protection Bureau (CFPB), banks must implement appropriate oversight and risk management processes for third-party relationships and service providers. Other issues for community banks include data security and staff training, and technology integration with legacy systems. Due to these concerns, it’s imperative that when in conversations with a fintech firm, community banks are clear about the responsibilities, requirements, and protections that will contribute toward a successful partnership.
As seen above, there are numerous ways that banks and fintechs can partner together in order to meet the needs of the consumer involved. Although challenges can be present, it’s important to address these issues before they surface in order to prevent them from happening. Overall, the ROI from these partnerships can ultimately change the success of a business.
Krista Morgan is CEO of P2Binvestors.
For more on community bank and fintech partnerships, check out P2Binvestor’s white paper on the topic.