Thursday, February 4, 2016

As More Alternative Lenders Partner With Big Banks, What Will Happen?

As interest rates rise, big banks have become more willing to lend money across the board—and that includes the small business market they’ve traditionally avoided. To tap into this market and make small business loans more profitable, big banks are partnering with alternative lenders. JPMorgan Chase, the largest bank in the U.S., recently announced a partnership with alternative lender OnDeck, while Canadian bank CIBC and  Fintech company Thinking Capital teamed up to capitalize on the online business loan market.

Why are these unlikely couples pairing up, and what will happen in the world of business borrowing? Here are a few thoughts.

What They Gain

Easier Access to Online Business Loans

When big banks partner with alternative lenders to offer loans to small businesses, business owners will nab greater access to credit. While this is partly due to the higher interest rates they can charge—the banks are willing to increase their risk tolerance when they can make more money—it’s also because alternative lenders already have modern and efficient systems in place for qualifying and processing small business loans.

Not to mention, applying for an online business loan will be greatly simplified if it’s offered through a financial institution already familiar to the business owner.

Borrow Money Faster

The whole bank loan application, approval, and funding process will become much quicker. One perk of the alternative lending service is how fast borrowers can get their hands on the money they need: often in days compared to the weeks that bank business loans might take.

Here’s how the JPMorgan Chase and OnDeck partnership will probably work: using OnDeck’s technology platform to efficiently underwrite business loans, Chase will greatly cut down the approval and funding time for loans to existing clients. These clients will be able to log into their online Chase banking and see business loan pre-approvals. Until this partnership, Chase clients could only apply for a business loan in-branch.

Lower Borrowing Rates for Business Owners

Lower borrowing rates are one of the biggest benefits small business borrowers will enjoy as a result of partnerships between alternative lenders and the big banks. Alternative lenders have competed for lending business, with their fast and easy approval processes, for clients who have difficulty getting a traditional bank loan. However, these rates are often significantly higher than business owners would get through a bank. If the JPMorgan Chase and OnDeck partnership is anything to go by, rates for online business loans will come down. OnDeck’s CEO Noah Breslow recently said in an interview that rates will likely be capped.

Second Chance at Business Credit

Another perk to these big bank/alternative lender partnerships? They’ll give business borrowers, whose loan applications have been declined due to credit scores, a second chance to apply for business bank loans. While qualifying for a bank loan often depends heavily on personal credit scores, business credit scores, and cash flow, alternative lenders use different underwriting algorithms to make lending decisions. Through the use of sophisticated Fintech applications, alternative lenders have figured out how to automate the analysis of big data for speedy credit approvals.

What To Expect

More Attention From Regulators

While alternative lenders have already been on the radar of financial regulators, they’ll be even more closely scrutinized as they chum up with big banks (especially in the underwriting department) in the name of consumer protection. This isn’t necessarily a bad thing, since it should lead to greater transparency—so borrowers can better understand the true costs and benefits of borrowing money through the new alternative lending bank programs.

Alternative Lenders Will Have to Get Creative

As the online business loan market grows through new partnerships between traditional big banks and alternative lenders, those alternative lenders who remain independent will have to find ways to attract new customers.

And as banks leverage alternative lending technology to become increasingly competitive on pricing, approvals, and turnaround times, the “little guy” alternative lenders will have to find ways to really stand out. This might mean focusing on a niche target market and developing customized or bespoke lending products for certain industries or sectors. Or it could mean rebranding to appeal to customers looking for an independent alternative to dealing with the big banks. In any case, these lending marriages between big banks and alternative lenders are actually pretty good news for businesses looking to borrow money.

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