One of the buzzwords in 2016 for marketplace lending was bank partnerships. In fact, throughout the year, we saw several MPL platforms partner with traditional banks in a number of ways. Here are a few notable ones:
- OnDeck and JP Morgan Chase – OnDeck provides small business loans. This partnership allows the company to underwrite loans they might not have access to by accessing the millions of small business customers already banking with JP Morgan Chase.
- Kabbage and Santander – In the UK, Kabbage is the small business lender and Santander is the traditional bank. Their arrangement is similar to the OnDeck-JP Morgan Chase agreement. Santander originates the loan while Kabbage underwrites it.
- Avant and Regions Bank – Regions Bank is a bit smaller than JP Morgan Chase (JPM), which means their relationship with Avant can save them millions in creating the technology to service loans that are affordable. Avant provides the technology to underwrite unsecured loans for Regions Bank.
- Lending Club and Union Bank – In a different kind of arrangement, Lending Club (LC) acquires to the borrowers and Union Bank provides the lending capital.
- Prosper and Radius Bank – In this partnership, Radius Bank finds the borrower and Prosper underwrites and funds the loan.
Will 2017 Accelerate Bank-MPL Partnerships?
Lend Academy claims 2017 will be huge year for bank-marketplace lending platform partnerships. If they made this claim last month after a year of such partnerships being announced, that tells me they're expecting next year to produce even more such partnerships. It's not a far-fetched notion. There are plenty of benefits to these partnerships, both for the banks and for the MPL platforms.
It's easy to understand why small businesses are the target of such partnerships. In recent years, small businesses have been underserved by the banks. Marketplace lenders saw the opportunity and rose to meet the demand for small business funding. This led to banks maneuvering to get a piece of that pie, but because MPL platforms could fund loans more cheaply than banks, the only way banks could profit from the demand was to offer capital and access to new customers. Direct competition was out of the question.
What can we learn from this as it pertains to the real estate crowdfunding (RECF) market? Here's where I think it's headed.
Why Banks Can Benefit from Partnership with RECF Platforms
There are well over 100 RECF platforms in the US alone. While many of them started to provide individual investors a means of connecting with borrowers and project sponsors, institutional investors have moved in and become some of the largest project funders. This presents a golden opportunity for banks.
A look at the types of RECF deals available reveals that multi-family, commercial, and industrial are at the top of the list, according to PwC. These are the types of deals that banks traditionally funded, but banks have stopped funding many of these types of loans for the same reasons they quit funding small business loans. Again, marketplace lenders came to the rescue.
If Lend Academy is correct and 2017 will see a surge in bank-marketplace lending platform partnerships, it's quite possible that at least one of these—perhaps a few—will be with real estate crowdfunding platforms. The only question is, what structure will those partnerships take?
The benefits are clear: RECF platforms can gain access to new customers and more capital while the banks can reduce costs and investment in offering new products.
Potential Partnership Structures
When it comes to structuring a partnership between a bank and an RECF platform, there are any number of ways to make it to happen. The following three structures promise the most benefits to both parties:
- Bank-as-Originator – In this scenario, the bank acquires the customer and originates the real estate loan while the RECF platform underwrites it. Retail stores, industrial expansions, or apartment complexes are three potential uses for this type of partnership.
- Banker-as-Capital – If the RECF platform acquires the customer and simply needs capital funding from the bank, this is another scenario that could benefit both parties.
- White Labeling – In this case, the bank white labels the RECF's technology to originate and underwrite the real estate loan. A variation of this is to co-brand both the technology and the service to expand the brands of both the bank and the RECF platform.
While the aforementioned markets present the best opportunities for bank-RECF partnerships, any of these structures could just as well be used to fund consumer real estate loans. Any way you look at it, it's just a matter of time before we see it happen.
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