Why Banks and Alternative Lenders Will Play Ball in 2017

The economic recession over the last decade significantly slowed banks’ willingness to approve small business loans, and the impact on small businesses’ ability to get loans from banks is still being felt today. According to the Wall Street Journal last year, big banks have decreased the number of loans to small businesses by more than 38 percent since 2006.

But the recession helped pave way for another industry – alternative lending – which has significantly improved access to capital for small businesses. According to the Small Business Administration (SBA), the 2016 fiscal year was a record setting year for loans, with more than 70,000 approved that totaled $28.9 billion and supported nearly 694,000 jobs.

The success of alternative lending showed banks the importance of expanding their offerings, particularly with online loans and small businesses. Over eight years removed from the recession, banks are taking notice and rebounding to grant more small business loans and release new financial services. More and more headlines show that banks are shifting their strategies to keep up with America’s technology and alternative lending habits, making 2017 the year banks finally get back into the fray and play ball with alternative lenders to improve the lending process.

For one, banks already have built-in advantages to accomplish this:

• an extremely low cost of capital
• a built in customer base that can be targeted
• visibility into accounts and access to a treasure trove of key data

In 2016, we saw large banks explore three key strategies: build, buy or partner. Let’s look at a few examples of each:

Build: Wells Fargo went to market with its own technology in 2014, called Wells Fargo FastFlex for Small Businesses. Opening access to lines of credit, term loans, and SBA loans, Wells Fargo set a five-year goal to extend $100 billion in loans to small businesses. In December 2016, Citizens Bank announced plans to start offering its own digital small-business loans by the middle of 2017.

Buy or License: Instead of building infrastructure, banks can acquire or license off-the-shelf technology. This route is for the financial institutions that don’t believe in building tools themselves or want to move more quickly than their internal development resources will allow. Instead of expanding its suite of offerings on its own, they would rather acquire an existing infrastructure and focus on the top end of the lending market. Kabbage has led the way on the licensing deals by announcing partnerships with ScotiaBank, Santander, and ING.

Partner: Through partnerships, banks can expand their loan offering and quickly leverage other’s technology. Through licensing deals or white-labels, banks can send businesses they decline to work with to alternative lending options to give their customers additional access to small business loans. In December 2015, JPMorgan Chase took this route and partnered with On Deck Capital to provide alternative lending and small businesses loans to its customers. JPMorgan Chase also partnered with LiftFund in October 2016 to fill the remaining gaps in its small business lending services.

It was a resurgent year for banks’ ability to offer small business lending. In fact, going into 2016, American Banker predicted that banks would set their sights on online lending by signing strategic partnerships with the leading platforms. That came true to an extent, but based on recent trends, 2017 will really be the year that banks and alternative lenders start to work together.

No longer content to be sidelined, banks are starting to play ball, and they will continue to do so at an even faster pace. The fact that banks are moving in now and increasing small business loans validates alternative lending. As JPMorgan Chase has showcased, partnerships between banks and alternative lending can offer channels of sales for both parties and improve the small business lending process. The next step is for banks and alternative lending to work together.