A partnership between Lending Club Corp. and a consortium of small U.S. banks is expected to be announced later this morning (February 9) in a joint effort to reverse a trend where banks have the market nearly cornered when it comes to making loans to U.S. consumers.
The new network, which will see Lending Club partnered with 200 or so small community banks, will reportedly be called BancAlliance. Banks in the alliance are agreeing to buy a certain number of loans from Lending Club, which will vet borrowers for their ability to repay. Borrowers may either come from LendingClub directly or may be referred to the LendingClub site by their banks. Loans of less than $35K will not require collateral.
Big banks, with mass marketed credit cards and greater efficiencies due to size, will see some of their competitive advantage drain to smaller players who no longer need to analyze the loans on their own. Lending Club’s software, which uses publicly available data to build a customer’s credit and risk profile, will take over the loan analysis. That will help small banks extend credit to borrowers with lower credit scores than they previously served and build a pool of those loans big enough that a few bad apples won’t bring down the whole portfolio.
In 1994, banks and thrifts with asset totaling less than $10 billion held the vast majority of U.S. consumer loans at about 69 percent, a share that share had dropped to 19 percent in 2004 and 9% in 2014.
“Big banks have eaten the small banks’ lunch with regards to these types of credits,” said Mark Pitkin, chief executive officer of Sugar River Bank of Newport, N.H., one member of the consortium of banks participating in the program. “We understand consumer lending. We just want more of it.”
Sugar River Bank makes mostly real-estate and small-business loans.
“Community banks particularly have pulled back from the one-off, customized lending that they might have done 25 years ago because of all the regulatory risks and hassles associated with it,” said Bert Ely, a banking consultant, referring to scrutiny regarding lending discrimination, consumer protection and a bank’s exposure to credit risk, among other things. “Big banks, meanwhile, have built sophisticated software systems to accommodate individual borrowers.”