LendIt predicts that partnerships between marketplace lending platform innovators and banks will be a must-have focus for both types of organizations throughout 2017. Recently, LendIt co-founder Jason Jones mapped out several strategic approaches to how such a relationship can be structured. Now, LendIt has presented a webinar with experts from Affirm, Avant, Lending Club, and co-host Goodwin that looks at platform/bank partnerships in practice.
The panel experts were:
- Manny Alvarez, General Counsel and CCO for Affirm
- Kevin Lewis, Head of Business Development, at Avant
- Richard Neiman, Head of Regulatory and Government Affairs at Lending Club
- Michael Whalen, Partner and Head of the Fintech Practice at Goodwin
Top insights from the discussion are:
- Top Partnering Considerations for Marketplace Lending Platforms Include Regulatory Robustness, Operational Efficiency and Strategic Collaboration
Manny Alvarez of Affirm lists compliance, operational efficiency, and collaboration on product innovation as the top characteristics that platform companies look for in a bank partnership. Regulatory compliance includes not only the bank’s internal controls, but also its strong relationship with regulatory agencies. Operational efficiency requires data-exchange automation and technical development resources, as well as senior business oversight. Affirm values open discussion channels with partners to brainstorm product innovations, as well as address issues, and finds such discussion works well in its partnership with Cross River Bank.
- Top Concerns for Banks When Partnering are Operational and Credit Risk
Avant’s Kevin Lewis sees operational risk and credit risk of the lending partner to be a bank’s most pressing concerns. In Avant’s partnerships, each bank controls the credit policies applied to loans. He adds, as a given, that the platform must have the operational scale, technical/marketing bandwidth and regulatory compliance controls to make partnering acceptable.
Richard Neiman of Lending Club emphasizes the degree of controls and oversight a bank demands, not just by bank’s internal function, but also by the bank’s external auditors and its regulators (contingent on the type of partnership formed).
- Partnerships Are About Long-Term Strengths and New Opportunities
The group agreed that online lending strategy has evolved from the early view that platforms would disintermediate traditional banks, to now recognizing that the banks’ customer relationships and low cost-of-capital are to be leveraged.
Lewis envisions that lending platform technology will become commoditized to a degree over time, therefore Avant’s objective is to partner closely with a “handful of long-term strategic partners” to expand into multiple markets and products. Alvarez shared a similar perspective, that collaborative innovation is key, because once the relationship with the borrower is formed, “there are any number of ways to service that customer’s needs, wherever they are [located],” citing Affirm’s acquisition of Sweep and its personal financial management tools. Neiman highlighted how even the largest banks benefit from a wider footprint, such as through Lending Club’s partnership with Citibank, which focuses on community development and outreach to low & moderate income neighborhoods.
- Partnering will become easier, especially with community banks
Community banks are behind-the-curve when it comes to fintech adoption, so partnering is “most critical” for them, according to Neiman. Lending Club points to BancAlliance, a consortia of 200 community banks, as a means to make the due diligence, ongoing monitoring and negotiation of partnership arrangements less burdensome for any single community bank.
Avant’s Lewis described how the company’s first integrated partnership, with Regions Bank – a nationwide financial services firm with $125 billion in assets – has created a template for them to deliver the loan and operational information, integration points and documentation that fulfills a bank’s obligations for participating in, monitoring and reporting on partnership activities. They believe that their next major partnership, to be announced shortly, will go live as early as Q1, due to their previous experience.
A caution about speed of integration between platforms and larger banks is that there is usually significant technical customization and operational coordination involved. As Lewis notes, this is not simply “throwing a logo on a direct mail.”
- Madden vs. Midland is not a roadblock for most marketplace lenders and their bank partners.
The lawsuit, which was decided in the US Court of Appeals for the Second Circuit (NY, CT, VT), determined that the National Bank Act does not preempt the application of state usury laws to non-bank debt buyers. Neiman noted that the facts in the Madden case are very different from the facts and relationship that Lending Club has with its primary issuing bank, WebBank. Madden involved a bank subject to the National Bank Act selling bad debts for collection and maintaining no ongoing relationship and no economic incentive in the performance of the debt. In contrast, in the Lending Club arrangement the bank maintains an ongoing relationship with the borrower and the platform as well as an alignment of economic interests in the performance of the loans. Neiman also pointed out that the Solicitor General and the OCC called the decision “incorrect” by not recognizing the long-standing doctrine that a loan originated by a bank that was “valid when made” does not lose its preemption status when the loan is sold to a non-bank entity. He also noted the final outcome in Madden is still pending as the defendant’s choice of law argument was remanded to the district court
Affirm’s Alvarez adds that, when it comes to “true lender” determination, the bank invariably performs all the activities expected of a lender and that the economic interest consideration is a matter of degree that can be dialed up or down if definitive guidance is ever given. Alvarez went on to say that the true measure of platform/bank partnerships should be borrower satisfaction.
The full Bank Partnership webinar can be re-played on demand.
LendIt’s next Marketplace Investing Forum covers risk retention considerations in marketplace loan securitization, a crucial securitization topic for platforms, sponsors and investors alike, as clearer regulations take effect at the end of December, 2016. The webinar takes place on January 11, 2017 at 2pm eastern US time; register here.