How Community Banks Can Grow Loans by Partnering With Competitors


bank-capital-8-5-15.pngWhat many bankers have seen as the industry’s greatest peril is suddenly becoming their most powerful possibility: shadow banking. Shadow banking is frequently the term used to describe nonbanks who offer services and products that are similar to what banks offer. A new business model for community banks is transforming shadow banks from rivals to partners, enabling the two worlds to partner to compete with the biggest banks in ways community banks standing alone never could.

How could shadow banks that often compete directly with banks instead enable something entirely different? Imagine a world in which community banks—currently limited by their smaller scale in the array of products and services they can deliver to their customers—combine their acclaimed community focus, service and customer experience with the reach, depth, technology and convenience of direct nonbank lenders.

That sounds, but isn’t, almost too good to be true. The explanation lies in both what community banks already know—what separates them from the largest banks—and in what they may not: the ways in which shadow banking has evolved, offering products that can complement and empower rather than compete and threaten.

The biggest institutional banks—the five to 10 largest—are often inefficient, stodgy and misaligned. They resist innovation. Their legacy burdens include bad systems, faceless and painful customer experiences, and regulatory issues. Yet they have the capital and reach to provide consumer loans, often at interest rates that can top 20 percent (think credit cards) in a less competitive environment because community banks lack the scale to go up against them.

The more than 5,000 community banks in the country are innovative, agile and acclaimed for customer service. By definition, they can never be too big to fail. Together, they hold $2.3 trillion in assets—14 percent of the economy.

Yet as many types of lending have shifted from relationships to technology, community banks have lacked, first, the expertise, resources and scale to offer these services themselves, and, second, the technology to connect their own platforms with those that can. It’s little surprise that their share of the consumer lending market has collapsed from more than 80 percent to less than 10 in the last 25 years.

Recently, new nonbank lenders like Lending Club have exploited the inefficiency of the big banks by providing direct loans with best-in-class customer experiences. They offer better returns to investors and better rates to customers. But these new nonbank lenders have come to recognize they lack existing relationships with customers and low-cost, stable capital—exactly what community banks have in abundance.

A new model holds out the promise of combining the ideals of community banking—trust, service, relationships, low cost capital—with the best of these new nonbank lenders: scale, efficiency, technology and superior customer experience. The idea is to bind community banks together into alliances with nonbank lenders. This blends the service of the former with the lending platforms of the latter and allows each to do what it is uniquely good at—all while providing the customer with the best possible product and experience. The only losers: the biggest banks.

My organization, for example—BancAlliance—has gathered more than 200 bank members across 41 states into a collaborative pool with the scale and expertise to compete with the largest banks. We’ve assembled an innovative partnership between this group and Lending Club to offer community banks a consumer lending platform so they no longer have to turn away customers looking for consumer loans—and so they can focus on what they do and know best, which is serving individuals face-to-face. The first bank went live with offering loans through this partnership via its website just this summer.

Surely other models will emerge, and there will be enormous opportunities to replicate this approach to other products, such as unsecured small-business loans, that make sense (but are challenging) for community banks. Some trends are clear. One is that the big banks no longer own an exclusive title to this space. Another is that community banking remains as competitive—and crucial—as ever. Finally, and every bit as important, shadow banking is no longer solely competition for community banks. For community banks, the opportunities it presents are suddenly compelling and potentially transformative.

Will Nonbanks Impact Bank M&A?


Bank-manda-6-16-15.pngBank boards should be particularly mindful of shadow banking’s strong growth. Earlier this month, FT Partners, an investment bank, presented its “CEO Monthly Securities and Capital Markets Technology Market Analysis.” Focused exclusively on the financial technology (FinTech) sector, the company lays out investor interest and pricing expectations for FinTech companies. When it comes to values assigned financial technology companies, there is quite a juxtaposition when compared to traditional banks, brokerage firms and trust service banks.

FT Partners also lists recent funding announcements with details on each FinTech company.

With lots of money—and potential customers—at stake, I believe more banks should consider aggressively growing one’s franchise through M&A than in previous years. Competition comes in so many shapes and forms that sitting idle while others take market share does not bode well. This is especially true for the 5,705 banks under $1 billion in assets as challengers offer tools and products designed for small businesses and borrowers—two key sources of revenue for community banks.

Among the most well known stealing market share from banks are Lending Club and Prosper, online lending marketplaces that offer loans to consumers and small business alike, funded by private investors and institutional money. On a side note, Goldman Sachs just entered the fray, announcing plans to offer an online lending platform to compete with the online lenders.

Although the biggest banks are not—and can’t be—pursuing an acquisition, this does not mean they are not aggressively trying to grow. Many continue to explore opportunities by making deals for smaller product/technology/capability-based companies, investing in analytics and expanding digital offerings.

With competition coming from both the top of the market and from non-traditional players, it is imperative for community banks to focus on improving efficiencies and enhancing organic growth prospects. The corollary to this is as big banks invest in customer acquisition, and non-traditional players continue to eat away at earnings potential, bank CEOs and boards need to think about what a successful deal looks like—and when such a deal can be executed.

Yes, I realize small banks are becoming more willing to consider a sale as the future operating environment, regulatory standards and valuations remain uncertain. However, being open to the idea and aggressively pursuing opportunities are two different business philosophies. Building an institution with the ability to generate earning assets at relatively high yields will become increasingly valuable. Positioning a bank with diverse revenue streams not just builds value but provides a buffer from nonbanks looking to steal customers.

Many small banks in the country simply don’t have the currency to do acquisitions, and they’re unwilling to sell. I believe many of those banks are in trouble.

At a time when retail banks are facing increasing pressure from non-traditional entrants that offer retail banking services, now is the time to think bigger, not just because of the economics of a deal, but because of the competition lining up.