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Digital Lending

The straw that broke the camel’s back for me was the OnDeck-Chase partnership.  It brought about the “aha” moment:  “If JPMorgan Chase isn’t large enough to develop their own digital business lending platform, with $9B+ technology innovation spend, then who is?”.  Or, better put, why should a bank reinvent a perfectly good wheel?

The question before all of us bankers is not when to partner with fintechs but how and for what purpose.  

Brian Geary, VP of Partnerships for OnDeck, spoke at our CEO Forum a couple of weeks ago, where I learned even more about the unique opportunities such partnerships offer.  

Banks are struggling to digitize, automate and streamline business loan originations.  We have unwieldy legacy systems that are inflexible and complicated.  Our product development and time-to-market are expensive and slow, as are our data sources and customer experience management initiatives.  Tech support, while possibly world-class in many areas, is inconsistent due to competing priorities and the different development mindset in today’s “bolt-on” and best-of-breed environment.

Here are some of the facts Brian shared with us about small business (loans >$500,000):

40% sought funding during 2016*

54% considered an online lender*

Online lender awareness and trust continue to increase YoY

Transparency and online reviews are the two most important factors in online lender selection*

99% of online borrowers are at least somewhat satisfied; 59% were very satisfied*

91% of online borrowers would borrow again from an online lender*

*(From OnDeck’s 2016 Brand Baseline Report)

Simply put, the market requires digital-only, fully automated B2B loan offering.  And not enough of us have that arrow in our quiver.

The digital lending space is already quite crowded. Three major types of competitors prevail:

Application-only providers.  Their goal is to improve the application experience, but they lack a robust workflow for efficiencies and mass-customization; they also are not as effective for scaling relationships and have difficulty meeting bank security requirements. (Mirador is the largest vendor in this space)

Workflow-only providers.  These vendors move legacy workflow into the cloud and streamline loan processing activities.  They do not automate manual interaction, thereby missing mining more efficiency opportunities. (nCino)

Non-bank lenders.  They improve the external and internal customer experiences and increase transaction speed, but do not offer a scalable, enterprise-ready, multi-tenant platform. (Kabbage)

Legacy loan origination systems.  Those offer monolithic architecture that is stale and does not offer the numerous benefits of the new systems. (FIS)

There are many partnership models for digital originations.  The three most common models are:

1. Referral.

a. The Bank generate the lead and owns the marketing end

b. The partner does everything else

c. The revenue model:  the bank gets a referral fee

2. “Tech platform only”

a. The bank does everything, using the partner’s platform: marketing, sales, underwriting, fraud prevention, funding, servicing, etc.

b. The partner provides the platform – a workflow tool

c. The revenue model:  bank pays the platform vendor a licensing fee or a per-seat fee.

3. “Platform as a service”

a. The bank does the marketing (customer sourcing), credit policy, funding and servicing.

b. The platform vendor facilitated all activities including reporting

c. The bank pays a “per usage” origination fee.

True digital partnership between banks and Fintechs can go well beyond these models to generate value-added in implementation and configuration of both back and front office for improved marketing and customer experience; the development and maintenance of a credit model; and other activities that can be applied across the board or to selected customer segments such as customer nurturing (such as capturing abandoned customers or pursuing them intermittently digitally); industry determination; document processing and collection; fraud handing; know-your-customer compliance activities; credit policy and execution testing; and report packages.

Brian recommends you look for ten things in a partner:

1. Focus on the customer experience. There are countless benefits to effective use of technology, and none more important than the customer experience and how they interact with your bank.  The easier and more satisfying the experience, the more likely the customer will retain and deepen their relationship with you, which is the foundation to capital appreciation, franchise value and earnings stability.

2. E2E (AB:  end-to-end) – links the user experience with the workflow.  Capitalize upon technology to simplify your processes, which got entangled and prolonged over the years beyond rationality or necessity.  Use this opportunity to simplify, reduce steps and make processes more efficient for your internal customers as well as your external ones.

3. Configurable, modular platform. Flexibility and modularity are essential in the days where both technology and customer preferences evolve and morph so quickly.  Remember My Space?  It’s long gone, and other platforms of social media continue to rise and fall like the tides.  Look for platforms that can enable you to move with the customer and continue to innovate.

4. Omni-channel.  While I’m convinced this buzz word is over-used and under-executed, it does connote a consistency of experience that is helpful to all customer audiences, both internal and external. 

5. Automation where possible and where no other value-add but efficiency can be gained.  Examine every element of the process, every step, no matter how small, and apply automation, elimination and efficiency wherever possible without detracting from your value-add approach.

6. Meet bank’s regulatory compliance and data security needs.  When your origins are in the technology world, you often lack the necessary sensitivity to our over-regulated world.  Making sure that your partner can and will keep you in compliance and keep your data safe is of paramount importance.

7. Agile technology development (AB:  Think ready, aim, shoot, aim, shoot, aim shoot vs. ready, aim, aim, aim, aim, aim, aim, shoot).  Banks are accustomed to development and testing until the output is perfect in every way.  Only when it is marketing-worthy.  It’s an excellent principle, but the issue is, by the time the product is ready for prime time, its utility is long gone.  Agile processes assume that it’s OK to try things out even when they are not perfect, and then to continue improving the output based upon market and other feedback.  It is the wave of the future.

8. Proven credit expertise (AB:  credit history over a cycle).  One of the prime objections to Fintech loan origination is the assertion that most originators have not lived through an entire cycle.  Those providers who have been in business longer have better credit stories to tell and are more credible than those who have started originating well after the 2008 crisis.

9. Financial stability and depth.  It is obvious that the more financially sound a company is, the better it is.  However, our vendor management practices will have to evolve to the point that we can accept newer companies to partner with, even if they might not withstand the test of time.  Our industry can’t afford to sit the digital cycle out, and many of the most innovative solutions do not have the requisite financials to pass a vendor management compliance test.

10. Roadmap to innovation (AB:  a company that is committed to innovation as a core competency).  I personally believe that it is critical to partner with companies which have a vision for the future, and which are committed to on-going technological innovation rather than to milking legacy products.  Such partners not only challenge the banks to think differently but are also more likely to morph as the marketplace evolves.

There are numerous tactical and strategic decisions that need to be made along the way.  A strong partner will facilitate your decision making and then execute effectively on your preferences.  A good partner will generate benefits to your business well beyond the specifics of the task, yielding both cultural and knowledge benefits along the way as well as unexpected efficiencies and customer experience improvements.

Digital banking is here, and it is growing rapidly.   Selecting the right partners to optimize your value proposition while staying true to your culture is key to enhancing your brand and your franchise value.  In the Eagles’ immortal words from Hotel California:  “You can check out any time you like, but you can never leave”.  Technology partnerships remind me of these wise words, so make your choice with long-term thinking in mind.

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