While finding a niche market can be a revenue boon for a small bank, consumer lending has long been the bread and butter of most community banks. Selling mortgages, auto loans, credit cards and other consumer products is a natural fit for smaller financial institutions that emphasize the importance of personalized bank-customer relationships in a way the mega-banks just can’t match. However, community banks that held their ground against mega-bank competition in the consumer lending marketplace are finding themselves less successful at fighting off competition from marketplace lenders.
It’s telling that non-bank lenders, Quicken Loans and LendingTree, have appeared on lists of top mortgage lenders in 2015; Quicken was the third-largest originator of mortgages last year, according to Bankrate. What’s more, according to a Loan.com report, data from Inside Mortgage Finance indicates that for the first time in three decades, non-bank lenders did more mortgage business in the third quarter of 2016 than traditional banks did. Non-banks such as Quicken and PennyMac Financial Services Inc. generated 51.4 percent of all home loans underwritten by the top 50 mortgage lenders in Q3, and six of the top 10 mortgage lenders by loan volume were non-banks, Loan.com reported.
While non-bank mortgage lenders present one challenge to the traditional bank and credit union community, another comes in the form of the Marketplace Lenders. Firms like Lending Club, Prosper, SoFi, GreenSky, and Avant have sprung up from the FinTech space to take a strong position in the lucrative unsecured lending business. These companies come to the market with a different strategy and approach that seems to be popular among those looking for credit so I wanted to dive into what they are doing differently to help banks and credit unions adjust their strategies to compete.
What marketplace lenders are doing right
Marketplace lenders are doing a lot right, but the single most important factor in the industry’s growth and success — 700 percent between 2010 and 2014, the California Office of Business Oversight (COBO) says — is customer experience. Small banks have always counted customer service that creates superior customer experience as one of their greatest strengths. However, marketplace lenders are beating community banks at their own game. They’re snagging a growing share of the consumer lending market by delivering customers with fast, convenient and positive experiences.
A streamlined business model allows marketplace lenders to reap the benefits of lower operating costs. They’re also expert at gathering, analyzing and applying vast quantities of consumer data to assess applicants’ level of credit risk. Marketplace lenders also excel at providing consumers with tech-based communication channels, an aspect of their business model that’s especially appealing to tech-savvy millennials. From a consumer perspective, the application and approval process is easier and moves far more quickly than the experience they would get from a traditional bank.
How community banks can regain ground
The “secret” about marketplace lenders that consumers don’t know, but which community banks should eagerly broadcast, is that peer-to-peer, marketplace, online and non-bank lenders largely draw their funding from institutional sources, not retail investors. Consumers seem largely unaware that the money they get from a marketplace lender is actually coming from a traditional bank by way of a middle man.
Because marketplace lenders are finance companies at their core, banks and credit unions have structural advantages they can exploit to reclaim consumer lending market share. Community banks and credit unions have access to cheaper funds and can better afford to pass those savings on to their customers. Since marketplace lenders merely arrange loans, rather than actually make them, their revenue stream relies on an acquisition. Community banks can build revenue through cross-selling and deepening customer relationships. Smaller financial institutions are also better equipped to create superior in-person experiences — a critical skill when multiple studies indicate that even the most tech-savvy consumers still wants the personal touch from their banks.
Smaller financial institutions should leverage these advantages to elevate customer experience to a level that better competes with marketplace lenders. While exploiting their own strengths, community banks should also borrow a few pages from the playbooks of marketplace lenders, including:
- Make the application process easier for consumers. One of the qualities consumers find most attractive about marketplace lenders is that these non-banks make it simple for consumers to apply for loans online. Many also have mobile application tools that allow customers to literally apply from their smartphones. Community banks have been lagging in technology adoption. If they want to compete more effectively with marketplace lenders, they will have to begin offering the same tech tools that make marketplace lenders so appealing to tech-savvy consumers.
- Learn from their obsession with risk and underwriting. Aside from the marketplace lenders that specialize in the subprime segment, marketplace lenders tend to have lower delinquency and default rates. According to the COBO report, in the first half of 2015, marketplace lenders had delinquency rates of 0.03 percent to 17.94 percent. Marketplace lenders draw on vast quantities of consumer data — both information readily available in the public domain and data gathered through consumer applications — to verify income and assess creditworthiness. Community banks need to learn to better use data to identify and serve optimal customers.
- Adopt their diversified marketing operations approach. Although marketplace lenders have proven themselves, deft manipulators of digital marketing channels, it is simplistic to think that they confine their marketing efforts to the digital world in which they do business. Marketplace lenders employ diverse channels to raise public awareness of their products and services. In fact, research by Deloitte found 60 percent of United Kingdom consumers who were aware of marketplace lenders had heard about the non-banks through traditional media such as TV, radio, magazines and newspapers. Just 26 percent learned of marketplace lenders through digital channels such as social media or online advertising, and 8 percent heard about them through personal recommendations.
To compete with marketplace lenders for consumer credit business, community banks need to offer consumers something they can’t get from online lenders, including:
- Diverse products. Marketplace lenders are monoline; an online non-bank lender who arranges mortgages for customers probably won’t be selling them an auto loan down the road, no matter how positive the customers feel about their experience. Growing their books with attractive loan products offers consumers access to a range of products they can’t get from marketplace lenders.
- Timely cross-sell. By monitoring their current book of business, community banks can be poised to get in front of customers with a better offer when credit inquiries on their reports make it clear they’re loan shopping.