Opening the Consumer Lending Market for Community Banks

As recently as 1990, community banks had a 79 percent market share in consumer lending. Today, that share has dropped to just 8 percent as the biggest banks have capitalized on economies of scale to displace community banks. As a result, many community banks no longer have viable independent consumer lending businesses. Brian Graham, chief executive officer of Alliance Partners, an SEC-registered investment adviser that provides administrative services to BancAlliance and advisory services to BancAlliance members, explains how BancAlliance has partnered with Lending Club to offer community banks the chance to participate in this $3.2 trillion market.

Why did BancAlliance get into consumer lending?
BancAlliance exists to serve the goals of our member community banks, and those members have been asking us to explore approaches that would let them compete with the biggest banks for consumer loans. Based on extensive diligence and audits of potential partners, we have joined with Lending Club due to the scale and quality of its consumer finance business. 

How can community banks compete with large national banks in consumer lending?
BancAlliance allows community banks to collaborate, pooling their individual capabilities. Collectively, we are taking advantage of Lending Club’s highly efficient and advanced servicing and origination functions in order to provide our member banks a “plug and play” consumer finance platform. BancAlliance members can mimic the economies of scale that larger national banks experience by utilizing the tools Lending Club has had in place for years. Recent OCC guidance has encouraged community banks to “achieve economies of scale and other potential benefits of collaboration” in a January 2015 paper, and BancAlliance offers banks an opportunity to join together with a premier name in consumer lending.

Why Lending Club?
Lending Club is the market leader among lenders in unsecured consumer installment credit. Lending Club, which recently went public, is very focused on regulatory compliance matters, given that it works with several bank partners in addition to BancAlliance. Lending Club has well-defined policies and procedures that BancAlliance has validated through several outside reviews. BancAlliance believes Lending Club is a strong partner and is well-positioned to work with us and our members to help them return to their consumer lending roots. Additionally, Lending Club has stated that forming partnerships with community banks is a critical strategic activity, and is focused on fully developing the BancAlliance relationship.

What does this partnership entail?
BancAlliance partnered with Lending Club to allow community banks to offer their customers very competitive consumer loans, as well as to provide an opportunity for BancAlliance members to purchase bank-quality consumer loans from Lending Club’s platform. The joint nature of this relationship allows both parties to benefit from the other’s strengths.

What benefits does this partnership bring to bank customers?
For most bank customers, the interest rate on the consumer loan is well below that on credit cards or other debt. Lending Club provides consumers with a simple, fixed-rate product without teaser rates that can cause a consumer’s debt service to increase unexpectedly. On average, consumers borrowing on the Lending Club platform experience savings equivalent to 32 percent when compared to high-rate credit cards. In addition, since these loans are fully amortizing, the program puts customers on a path to reduce debt and improve their financial outlook and credit. According to Lending Club historical data, customers that take out a loan see an average FICO score increase of 23 points within three months of obtaining a Lending Club loan.

What benefits does this partnership bring to BancAlliance?
First, BancAlliance member banks benefit from the broader and deeper relationship with their customers and a larger share of wallet. Banks no longer have to tell their customers they cannot offer them this product. Second, banks enjoy higher levels of loans with attractive yields, as well as incremental fee income from referred loans. Banks enjoy risk benefits as well, diversifying their portfolios by loan type and geography. Most important, BancAlliance banks receive all of these benefits without having to make any material upfront investment and with minimal ongoing operational costs. Consumer lending is most efficient when done on a large scale basis, and this program allows community banks to mimic this scale without incurring the costs necessary to create it on their own.

Brian Graham