Alternative Finances

Why Small Banks Partner With Lending Club

The FinTech shift has disrupted nearly every angle of the financial industry — from the major lenders to the small banks.

But it’s also created a set of unique partnerships between the two ventures that’s becoming a growing sector of its own in the banking world. A Wall Street Journal report yesterday (June 23) profiled how traditional community banks are pairing up with the Lending Club for assistance in the consumer loan department to help them scale their business.

For small community banks like BankNewport, this has become the reality of the modern financial world. But it’s also given those small banks access to more customers through direct mailings, with the help of the online lender Lending Club. The small bank will also receive more revenue from loans that Lending Club secures as a result of the partnership.

As the WSJ article points out, there are more than 200 community banks that have partnered with Lending Club, but some in the industry warn about the risks associated with such a pairing.

“Cooperation is good but it depends on who you cooperate with,” Mike Schenk, vice president of economics and statistics at the Credit Union National Association, told WSJ. “I would say tread lightly.”

Pairing with Lending Club is an attractive concept for community banks since they can leverage the Lending Club’s relationships to broaden its reach when it comes to pitching consumer loans. Because small banks often face challenges in connecting to as many customers, having a bigger player in their back pocket can help achieve their goals.

But it isn’t the “magic bullet,” Schenk said in the interview.

Still, small banks seem to understand the risks but also know that they must work to keep connected with consumers who have a myriad of online options to turn toward.

“We have to make sure we remain relevant,” Sandra Pattie, BankNewport’s CEO, told WSJ. She said that Lending Club seemed to be that route to get further into the consumer lending side.

Christopher Marinac, a community-bank analyst at FIG Partners, was another analyst who spoke in favor of options like partnering with Lending Club. Because small banks are already facing immense challenges, the partnership may be the best option to helping community banks gain more stake in the consumer lending realm.

“It’s already happening,” Marinac told WSJ. “Other companies are taking their business every day. It’s open season. What’s key is these banks make themselves relevant or irrelevant, and irrelevant is not offering a range of choices for their customers.”

Of course, the community banking leaders have recognized that there are risks associated with opening up its customer bases to online lenders, but there’s not much of a choice for some who’ve seen their consumer loan base dwindle. Stats from SNL Financial show that in 1990, community banks captured 75 percent of the consumer loan market. Twenty-five years later the tables have turned and that’s now down to about 9 percent — as big banks have swallowed up the business.

“We can’t compete. …As long as I have my name on those Lending Club mailers, the materials and the loans, that’s key to me,” BankNewport’s Chief Lending Officer Leland Merrill Jr. told WSJ.

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