For Lenders

Banks and Marketplace Lenders: An Unlikely Match

May. 14 2016

With the growing popularity of marketplace lenders, traditional banks are taking notice of the emerging competition. Meanwhile, marketplace lenders are looking to grow their currently niche client base. Instead of stoking a rivalry, however, some financial institutions from both groups have decided to team up. Such partnerships promise the convenience of marketplace lending with the familiarity and performance of a brick-and-mortar bank.

Mapping two different financial worlds

If you aren’t sure what marketplace lenders are, they’re non-banking financial institutions that facilitate interactions between large numbers of borrowers and lenders with the aid of technology. That’s a mouthful, but it’s essentially the same model we have here at Marketplace lenders operate entirely online through high-tech platforms, serving up convenience while eliminating a lot of the costs associated with traditional banks. This often translates into a speedy, high-quality customer experience.

(Keep in mind that, as a newer term, there’s still some debate about its exact definition. For example, while marketplace lending and peer-to-peer lending are often considered synonymous, some assert that this isn’t necessarily so, pointing out that many marketplace platforms are actually dominated by institutional lenders rather than individuals.)

Marketplace lenders often fill in the service gap left by traditional brick-and-mortar financial institutions. Through these platforms, a diversified set of lenders offer loans at reasonable interest rates to consumers who have trouble getting a loan from a bank. This group ranges from people with less-than-optimal credit trying to build it back up to small business owners who may be successful, but not to the degree that they’re considered “safe” borrowers.

While many analysts have asserted that marketplace lenders don’t pose a true threat to traditional banks, they’re still attracting a large number of people who could easily qualify for a conventional loan from a major bank. And why? Because these platforms are much easier to use. Brick-and-mortar banks are known for clunky websites and difficult personal loan processes. Even those that have gotten with the times and do offer online lending services usually still require borrowers to finalize the transaction at a physical branch.

However, despite these inconveniences, most customers are still sticking with their traditional bank when they need a loan. These are people who have usually done business with the same bank for years, sometimes decades. They may not consider marketplace lenders to be a safe choice because brick-and-mortar banks are often viewed by consumers as far more trustworthy. Plus, many have never even heard of lending marketplaces, while traditional banks have that coveted brand name appeal.

Complementing services

Both traditional banks and marketplace lenders know each other’s strengths and weaknesses. That’s why many are considering ways of incorporating the two. Meanwhile, others have already gotten the ball rolling by working together.

Recently, Regions Bank — a major institution that’s been serving people in the South and Midwest for over four decades — announced a partnership with Avant — a tech-savvy newcomer founded in 2012 — that is poised to be the biggest of its kind to date. Once the co-branded program launches later this year, borrowers will be able to apply for unsecured loans from $1,000 to $3,500 that may be available as soon as the next business day.

Streamlining the lending experience

A major part of marketplace lenders’ appeal is that they eliminate most of the paperwork associated with traditional bank loans. When combined with specialized underwriting software, transactions can happen in as little as a few minutes, compared to the traditional process that can take days to weeks. With such a strong focus on modern technology, these websites often employ communication methods that make for a more enjoyable user experience, such as 24/7 live chat and text messaging. In contrast, banks usually offer email and phone calls (at best) only during normal business hours.

That’s why brick-and-mortar banks are considering incorporating the same digital platforms and underwriting technology into their online services. It’s this model that Regions and Avant have developed: a hybrid that will offer quick, headache-free decisions. Applicants will still be screened by the stricter Regions criteria — the average Avant borrower has a lower FICO score than those at Regions — but with a much faster underwriting process. For even more convenience, consumers who are denied a bank loan will be quickly referred to another lender through that same marketplace.

Making loans more accessible

With many banks having left the personal loan business entirely, it’s gotten much more difficult for the average American to borrow at reasonable rates. Meanwhile, marketplace lenders have been empowering traditionally underserved populations by offering access to capital that was previously out of reach. By breaking down the physical barrier of distance, digital marketplaces are able to reach consumers who live in rural regions, who have physical disabilities, or who have limited transportation options. Partnerships between brick-and-mortar banks and marketplace lenders now have the potential to give these underserved populations access to the same brand name loans as typical borrowers.

In this way, digital hybrid platforms promise to benefit many different groups — traditional banks attract new consumers while making existing ones happier, lending marketplaces can access a larger, more mainstream customer base, and a wide range of borrowers from vastly different demographics can obtain quick, hassle-free loans.*

This article is for general informational purposes only. It is not professional financial or legal advice, may contain errors or be outdated due to recent developments, and may not relate directly to the products or services offered by this website.


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