Engage with Marketplace Lenders06.20.2016
Financial institutions have bristled at the success of online “marketplace lenders” for some time.
These firms have built high profiles and even higher valuations by encroaching on what has long been considered financial institutions’ turf: extending moderate-sized personal and small business loans.
So when marketplace lenders encountered difficulty recently in reselling loans to the secondary market to free up capital—an obstacle that sent valuations tumbling, and led to executives getting fired—credit unions understandably could be tempted to say, “I told you so.”
That would be a missed opportunity.
Notwithstanding the shortcomings of their business model, marketplace lenders have clearly demonstrated that consumer and small business demand exists for a new credit delivery vehicle.
Complaints that nonbank disruptors had an unfair advantage in building these front-end solutions (less regulatory oversight, unconstrained capital) are largely moot at this point.
Could financial institutions replicate the interfaces built by these startups? Probably. But would it be a wise use of resources?
The lead time necessary would mean forgoing a ready market opportunity, the required design/development skills would be diverted from other projects (if they exist within the financial institution at all), and there’s no guarantee the resulting solutions would be as elegant as those already in market.
The potential synergies are obvious. Credit unions have struggled to generate sufficient loan demand in recent years. Marketplace lenders seem to have solved this problem, but can’t match financial institutions’ prowess on the funding side of the equation—not to mention the compliance infrastructure they’re certain to need in the near future.
This isn’t to say a meeting of the minds will be simple. First, there’s the annoying detail of finding an economic model that works to all parties’ satisfaction, not to mention avoiding incentives to churn out the type of low-quality originations that fueled the 2008 financial crisis.
Some of these disruptors showed disdain for traditional banking models during their high-flying days and assumed any collaboration would come on their terms.
Now that the dynamic has shifted, credit unions should resist the urge to retaliate, instead taking the high road and working toward constructive terms of engagement.
GLEN SARVADY is managing principal at 154 Advisors and an analyst with Best Innovation Group, a CUNA consulting partner.