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Where traditional and tech meet

August 2015

How banks and marketplace lenders can partner up

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Where traditional and tech meet

What is it that would cause today’s consumers to turn to a new company for their borrowing needs? Why are

technology startups taking on some of the largest and most established financial institutions in the world for the job

of allocating capital? These questions speak to the changing cultural and technological landscape that is starting to

impact the financial services industry – from the smallest players to the largest banks.

Not long ago, the question was – what would the traditional lenders’ response be to all of this? Would they compete

or collaborate? Today, we see institutions taking both routes, with an increasing number of established lenders

choosing to collaborate with new marketplace lending entrants. This collaboration began with loan funding

agreements: a bank funds the loans originated by a platform and then sells the loans back to the platform, along

with agreements for banks to invest in marketplace loans, purchasing loans that fit their credit profile. Today the

question becomes: which banks will be the first to truly capitalize on the deeper opportunities that these

partnerships have the ability to open up?

Marketplace lenders are often seen as disrupters competing against traditional banks. Several of them focus on

innovative technology and rapid service, and the companies are attracting a whole new segment of consumers who

are not necessarily the core strength of traditional lenders. Yet, the more traditional banks have lower cost of funds,

a long history of consumer lending and credit modeling, significant investments in customer relationships and

branch networks, well-known brands, and access to decades of customer data.

These complementary attributes open up

the opportunity for true strategic

partnerships between traditional and

marketplace lenders. Some believe that

Lending as a Service (LaaS)1 will be the

model of the future, utilizing the most

efficient parts of each company’s operations

or technology platform to create superior

loan products that offer the best prices and

service to customers. As banks progress

beyond simply investing in marketplace

loans, these partnerships will take many

forms, from basic referral programs to white

labeling and joint product development.

Each type of partnership has the

opportunity for significant revenue benefits

to each side (and their customers!) and

requires a different level of integration and

investment.

1 Rotman, Frank. “The Hourglass Effect, A Decade of Displacement”

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While the potential benefits are clear – higher returns, access to new customers, and fulfillment of obligations such

as Community Reinvestment Act(CRA), there are a few reasons why some banks have not yet pursued partnerships

with marketplace lenders. These include limited risk appetite, potential cannibalization of the bank’s own business,

and perceived potential reputational risks. Whichever type of partnership is pursued, there will be a need

foradditional due diligence and scrutiny beyond what is typically expected from pure investor partners. Banks have

certain regulations to comply with which marketplace lenders are not directly subject to, and banks will need

insight into the complexities and workings of marketplace lenders. Choosing the right partner to fit a bank’s

strategic needs and establishing a comprehensive framework to manage the relationship are critical to achieving

synergy and success. Below are a few examples of recent partnerships between marketplace and traditional lenders.

Recent examples of partnering up

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Partnering to lend–capitalizing on strengths

Most marketplace lending partnerships will begin with a financial firm or bank purchasing loans from a

marketplace lending platform based on established criteria that match the bank’s risk and return objectives with

profiles and volumesthe platform is able to produce. As the partnership matures, the partners become more

comfortable and familiar with each other and more strategic opportunities are identified, leading to additional

depth and integration. Lending as a Service) may be the model of the future; banks and platforms would each

identify their core competencies and areas of opportunity and then determine the best mix of services that each can

provide. For example, they could work together on attracting new customers: the marketplace lender can be

responsible for the application, underwriting, closing, and credit modeling process, while the traditional lender

might use its scale and expertise to handle servicing and collections functions, identify opportunities to cross-sell

products and services, and provide financial advice to the customers.

Customer Acquisition

Application, Underwriting, Closing

Credit modeling process

Servicing and collections

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Referral programs

A form of partnership beyond buying loans is a referral program wherein banks and marketplace lenders refer

prospective borrowers to each other. When a potential customer applies for a loan but does not fit the credit profile

or other specifications of one lender, that customer can be referred to the other lender. This may involve an initial

decline, with the lead then passed to the other lender, or the borrower presented with contact information for the

alternate lender. Ideally though, this process would be a seamless transition wherein the borrower would be

redirected within the online application to a co-branded partner website that presents the borrower with their loan

options and next steps. Consideration should be given to borrower experience and messaging, alignment of the

speed of funding and other parameters with regards to the original loan, and to privacy and data sharing

requirements. While such referral programs can create fee revenue, they can also allow banks and lenders to

provide a more full-service offering to meet their customers’ needs.

Imagine, Jacob has been operating a wildly popular food truck for the past year and is looking for a $25k loan to purchase another truck to expand his business. He walks into the local branch of the bank where he has his checking account and mortgage loan to discuss his options. Banker Mary tells him that while the bank only make loans to businesses with at least two years of operating history, its lending partner has some great business and personal loan products. She shares the details of the partner programs, along with some promotional materials. When Jacob finishes asking questions and says that the partner’s loans sound like they will meet his needs, Mary hands him a tablet and brings up the loan application screen. Jacob spends about 15 minutes at the branch inputting relevant information, with Mary helping to answer questions along the way. The bank receives a referral fee from the platform, along with the benefit of having helped one of its loyal customers meet his financial needs. Through his various interactions with Mary, Jacob realizes that he could significantly lower his credit card processing costs by moving over to the bank, and he eventually also moves his investment accounts.

Customer Acquisition

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White labeling

White labeling is a deeper form of partnership in which

the platform provides technology to act as a virtual

extension of the bank. These partnership may be

effective when a bank has little to no current presence

in a lending asset class, or when an institution doesn’t

have the budget to start up a new business line that

would require significant investment in technology and

operations.

White label partnerships could be developed to handle

the loan process from beginning to end, including

customer acquisition, processing, and servicing

functions, or might only involve a technology layer to

support a bank’s own marketing and processes.

From a customer experience perspective, that platform

is the bank. Because of that, there are significant

implications in terms of service quality, branding

cohesiveness, and compliance considerations. Yet, from

an operational perspective, the two entities still operate

separately and must skillfully navigate complex

workflows which touch both parties.

Imagine, Jane is about to start her first job and is moving across the country for it, but she needs some extra cash to pay for moving expenses–quickly. She knows just where to look; Jane logs on to her bank’s website, goes through a loan application, and within a few minutes, she is approved. The process is easy to understand and she can chat with a customer service agent with the click of a button.

After logging in to her bank, she was actually redirected to a bank branded version of platform X’s website. Platform X provides all the technology for the Bank to support this customer-friendly lending process in a seamless way.

The bank has found a partner with the platform and only pays a fee-per-loan, minimizing its up-front investment.

Application, Underwriting, Closing

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Joint product development

Joint product development between banks and marketplace lending platforms could take many forms, depending

on the needs and strengths of each partner. It might involve developing credit products that a marketplace lender

might not typically offer but meet the specific needs of a bank. One current example of this is a platform that has an

agreement with a large national bank to originate and sell to the bank loans that fulfill required CRA goals. Another

possibility for partnerships is collaborating on new credit models, where banks and MPLs use their diverse assets—

including alternative data, bank proprietary data, and traditional credit bureau data—to develop advanced credit

models.

Imagine: Regional Bank has a long history of always being there to meet its customers’ financial needs. It offers a wide variety of products and has collected extensive financial and transactional data on its customers over decades of relationships. Yet, it is finding that some of its younger customers don’t use many banking products and don’t have very long credit histories. Regional Bank wants to ensure that it can continue to meet these customers’ borrowing needs, but feels it doesn’t have all the data to make informed, risk-based decisions.

Regional Bank decides to partner up with Platform Y to create a credit scoring model that combines Regional Bank’s wealth of customer relationship data with Platform Y’s social and other non-traditional data and expertise to make effective credit decisions. Both companies are able to leverage each other’s strengths and assets to advance their own business needs.

Credit modelingprocess

Servicing and collections

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Identifying a strategic partner

Partnerships to provide capital or purchase loans

require banks to have a good understanding of

marketplace lenders’ credit standards, underwriting

processes, and compliance and quality controls. Yet

strategic partnerships require even more up-front

investment, have a longer time horizon, and have a

lasting impact on overall product, customer, and

revenue potential for both partners.

There are a variety of reasons why a bank or traditional

lender may want to partner with one of the marketplace

lending platforms, and based on those goals they may

look for partners where there is already an alignment,

or conversely, they may look for a partner with

complementary features.

By identifying the categories to consider, lenders can

effectively outline their goals for a strategic partnership

and then identify possible partner companies.

Once goals for the partnership are clearly established

and possible target companies identified, it is time to

take a closer look at the target companies to assess

internal factors that could point to a good match. These

factors include compliance rigor, operational efficiency,

risk management discipline, culture, credit risk

appetite, and reputation, just to name a few. Banks

must carefully vet any third party for compliance with

all applicable laws and regulations, overall customer

service, operating model, and rigor around risk

discipline. Each entity must also be mindful of the

proper transfer and safeguard of customer data,

particularly in light of the increase in cyber attacks. By

ensuring that the marketplace lending partner has the

appropriate processes and controls in place, banks can

gain comfort that the partnership will provide long-

term accretive benefits.

Considerations such as operational efficiency and

technology scalability will be indicators of a platform’s

ability to grow and succeed beyond the startup stage.

With the high-volume, smaller dollar nature of many

marketplace loans, manual tasks and operational

inefficiencies will be magnified as platforms begin to

grow. Any technology deployed must be able to quickly

scale to handle large volumes, and operations should be

streamlined and automated as much as possible.

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Evaluating potential partners

The framework below provides a guide to banks and

other financial firms to help them assess potential

marketplace lending partners. It also serves as a guide

to marketplace lending platforms that are looking at

strategic relationships with a banks, to help them

prepare for due diligence.

The due diligence of potential platform partners should

be holistic and detailed and include elements such as

company history, operational competency, technology,

financial stability, credit risk management and

enterprise risk management, compliance management

and quality control programs, and servicing and

collection practices. Each element should be thoroughly

assessed and evaluated; this may be performed by a

third party, and it likely will involve a series of data

analysis, documentation review, and on-site meetings

with management to delve into areas of question or

concern.

With respect to bank-marketplace lender partnerships,

regulatory compliance is an area of specific focus. An

effective Compliance Management System (CMS) will

establish the framework for identifying, assessing,

controlling, monitoring and reporting compliance risks

across the platform. It will also give a bank partner

confidence in the platform’s ability to manage key

compliance risks.

Key CMS elements include:

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An effective CMS is the foundation for any organization

to succeed at risk management; however, there are a

number of additional considerations specific to

partnerships between banks and marketplace lenders.

Initial partnership due diligence should also include

financial due diligence, including a requirement for

audited financial statements that demonstrate financial

stability, as well as the ability to meet obligations and

continue growth. Additionally, banks may require a

detailed understanding of the credit policy,

underwriting process, and fraud prevention

mechanisms, along with its credit model, including

actual loan performance history and stress testing

under various economic scenarios.

Platforms should be prepared to provide potential bank

partners with access to transparent and detailed

reporting and data feeds that allow insight into portfolio

performance, referral performance, or other data

related to the subject of the partnership. Regardless of

whether data is provided directly or through an

intermediary, the platform and the bank should have

technology in place that allows both potential partners

to efficiently communicate and receive information, in

order to maximize customer service, sales

opportunities, and risk management capabilities.

This reporting and data sharing should be coupled with

ongoing performance and risk monitoring to maintain

regulatory compliance and to ensure that the expected

return on investment is realized. This may include

tracking agreed-upon key performance and risk

indicators as well as adherence to service-level

agreements.

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The opportunities posed by partnerships between marketplace lenders and banks are significant, however

integrating the business relationships strategically is the key to success. With our deep banking and consumer

lending knowledge and experience with marketplace lending activities, we can assist in preparing for such a

partnership, from conducting market assessments to evaluating various partnership strategies or conducting due

diligence and advising on regulatory compliance matters. Regardless of whether your organization chooses to

partner with a bank or marketplace lender, we can provide advice and support on the critical decisions and key

implementation activities that will shape your strategy and help position the partnership for success.

How PwC can help

To discuss a range of services tailored to your organization’s needs, please contact:

Roberto Hernandez Principal Consumer Finance Group

Telephone +1 940 367 2386

Email roberto.g.hernandez@pwc.com

Linkedin https://www.linkedin.com/ in/robertohernandez1

Jason Chan Senior Manager Consumer Finance Group

Telephone +1 214 435 1161

Email jason.chan@pwc.com

Linkedin https://www.linkedin.com/ in/jchan14

Mackenzie Sullivan Manager Consumer Finance Group

Telephone +1 213 217 3612

Email mackenzie.sullivan@pwc.com

Linkedin www.linkedin.com/in/MackenzieSullivan1

Will marketplace lending be ready for increased regulatory scrutiny?

http://pwc.to/1IuOFPw

Peer pressure: How peer-to-peer lending platforms are transforming the consumer lending industry

http://pwc.to/1D6DrNT

Is it time for consumer lending to go social?

http://pwc.to/1CqOZgp

www.pwc.com/consumerfinance

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