Community Banking
Are Marketplace Loans a Threat or Opportunity?
Fintech companies are becoming a disruptive force in the financial services industry. Nowhere is this more apparent than in small business lending, where marketplace lenders have exploded onto the scene over the past few years. Today, there are more than 2,000 marketplace lenders worldwide who specialize in lending money to small businesses that need cash quickly. OnDeck, CAN Capital and Kabbage are three of the biggest marketplace lenders currently in operation.
Exponential Loan Growth
An article recently published in American Banker noted that 13 of the biggest U.S. marketplace lenders made $15.91 billion in loans in 2014. This represents an increase of 700 percent over loan volume in 2010. And during the first six months of 2015, marketplace lenders made $12.47 billion in loans. Marketplace lenders offer a simple value proposition to small businesses: a quick and easy online application process and fast approval and funding. The tradeoff is higher cost. Most marketplace small business loans are for amounts under $100,000, and firms can use the money to fund growth initiatives, boost working capital, and purchase machinery and equipment, among other objectives. By using streamlined underwriting processes and proprietary credit scoring models, marketplace lenders can make loan decisions in minutes based on minimal business information. Instead of analyzing business financials, these models consider criteria such as online transaction history, credit card payment records and social media presence — including online reviews and Facebook “likes.”
A True Threat?
So are marketplace lenders a true competitive threat that community banks should take seriously? Only time will tell for sure, but it would be wise to start formulating a strategy now for how your bank will compete with them in the future. The first step in your strategy should be to recognize the areas where you can and cannot compete with marketplace lenders. In reality, community banks will probably never be able to approve small business loans in minutes and without detailed financial information. So don’t waste your time and resources trying to compete for borrowers who are looking for this. Instead, focus on borrowers who value the personalized service and expertise offered by a community bank.
This is how community banks have traditionally competed against big banks, and the same concepts hold true when competing against marketplace lenders. For example, use the financial information borrowers supply with their loan applications to demonstrate how they can increase efficiency and boost profitability. Similarly, you can provide industry and competitive information to help borrowers benchmark their performance against competitors, or offer guidance to help borrowers determine the right type of loan for their specific financing need. In short, you should position your bank as a trusted advisor who wants to help business borrowers grow and prosper. Small businesses won’t get this kind of value-added service from a marketplace lender.
Partnering Together
Another competitive strategy is to partner with marketplace lenders by purchasing small business loans from them. Some marketplace lenders are starting to experience funding issues. Serving as a funding source for marketplace loans can help your bank build loan volume while diversifying your portfolio. The volume of marketplace loans is still small compared to the trillions of dollars in business loans made by banks. However, the rapid growth of marketplace lending is worth noting if you want to retain your competitive edge in the future. Contact us if you have any questions about marketplace lending 417-881-0145.
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