alternative lending competition
By Brad Powell

I recently wrote a post looking at the relatively new phenomenon of alternative lending. Today's post looks at how banks are responding as alternative lenders start to see success.

In a recent survey, just seven percent of banks said they felt alternative lenders posed the greatest threat to their business. But that doesn't mean some traditional lenders aren't responding.

The responses banks and credit unions have come up with fall into two broad categories: competing with alternative lenders head-on, and investing in them.

And some traditional lenders are doing nothing. So far.

The highest-profile institution that has decided to go toe to toe with alternative lenders is Goldman Sachs, which announced the creation of a consumer lending unit earlier this year. As the New York Times wrote, "In devising its new strategy, Goldman is putting itself in league with start-ups that are similarly trying to use technology to disrupt the traditional business of finance."

Goldman Sachs hired Harit Talwar away from credit card giant Discover to head the initiative. A hint as to why Goldman stepped into this space might be found in the memo announcing Talwar's hire, in which CEO Lloyd C. Blankfein and president Gary D. Cohn wrote, "The traditional means by which financial services are delivered to consumers and small businesses is being fundamentally reshaped by advances in technology, maturity of digital channels, use of data and analytics, and a focus on customer experience."

And, as pointed out by Quartz, "It's also a way for Goldman to expand its banking business without going to the trouble of opening up actual branches."

JP Morgan, meantime, is one of the traditional players investing in alternative lenders. Along with Credit Suisse and BBVA, for instance, JP Morgan shares a large stake in Prosper.

Public statements by JP Morgan CEO Jamie Dimon make it clear that he takes alternative lending seriously. In his annual letter to shareholders in April, Dimon wrote, "Silicon Valley is coming."

"There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking," Dimon continued. "The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting."

Other recent developments underline the trend of traditional financial players getting more involved with alternative lending. A June piece on flagged three notable developments:

  • Alternative lender Kabbage said it had partnered with UPS Capital – a subsidiary of package delivery behemoth UPS -- that would give UPS customers access to Kabbage funds.
  • Bond Street, which like Kabbage specializes in small business loans, announced that investors led by Spark Capital and investment bank Jefferies would be investing $110 million in equity and debt financing in the startup.
  • Lending Club said it would be partnering with Opportunity Fund, a nonprofit small-business loan company. The partnership aims to make $10 million in loans available to "underserved areas" in California.

But there are other traditional lenders who have not yet acted. Rohit Arora of alternative lender Biz2Credit talked about the risk those institutions face in a recent interview in Bankless Times (although, I must admit, you would expect the CEO of an alternative lender to say something like this):

"While technology is changing underwriting models, [banks] are stuck 10 years back. They haven't deployed technology and still expect people to come into a branch and fill out a bunch of paperwork."

The bottom line for the traditional lenders who are not adapting, Arora says: they are losing business.


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