Banking
Banks, Alt Funders Continue to Compete for Small Business
February 13, 2018
The alternative small-business finance industry owes its very existence to banks’ reluctance to lend money to mom-and-pop shopkeepers, tradespeople and restauranteurs, but bankers’ tight fists may be loosening. Small-business owners are reporting better results when they apply for bank loans.
In fact, small entrepreneurs succeeded in landing bank loans 37 percent of the time in the fourth quarter of 2017, up from 29 percent a year earlier, according to the 1,341 merchants surveyed for the most recent quarterly Private Capital Access Index report provided by Dun & Bradstreet and Pepperdine University’s Graziadio School of Business and Management.
“That’s a big change. It’s outside the margin of error and outside normal statistical variation,” Craig R. Everett, assistant professor of finance at Pepperdine and director of the Graziadio and Dun & Bradstreet Private Capital Markets Project, tells deBanked. He’s comparing the shift to patterns established in the nearly six years the quarterly index has pegged small-business trends.
But the effects of bankers’ increased willingness to lend to small businesses may prove a bit muted in the alternative funding industry. That’s partly because Pepperdine and Dun & Bradstreet define small businesses as having up to $5 million in annual revenue. Alt funders often deal with much smaller enterprises that could still fail to capture the attention of bank loan officers, says Noah Grayson, managing director of South End Capital in Encino, Calif. “If you’re making $5 million in gross revenue, that’s a pretty robust business,” he says of his clients.
Then there are the borrowers whose companies seem small in that they employ just a few people but might rake in $5 million on a single contract – like contractors who specialize in heavy construction equipment or have a presence in the aviation business – but aren’t profitable enough to qualify for bank loans, says Gene Ayzenberg, CEO of PledgeCap, a company with offices on Long Island and in Manhattan that specializes in business and personal loans secured by collateral.
Besides, lots of alternative lenders don’t regard gross revenue as the measure of a business. “I would look at what kind of resources and infrastructure the business has to define what is small and medium-sized,” says David Obstfeld, CEO of New York-based SOS Capital. Many alt lenders cite the importance of net over gross.
The size of prospective borrowers aside, banks are probably lending to small merchants more often these days because small businesses are becoming more profitable in today’s relatively healthy business climate and thus stand a better chance of qualifying for credit, Everett says. The recent reduction in corporate taxes will also improve profits and make small businesses more credit-worthy, he says.
The change in bank lending volume seems tied to those financial gains and doesn’t appear to be linked to any shift in policy among bankers, Everett notes. But new policies at the Small Business Administration could prompt the banking community to view small-business loans more favorably, according to Grayson. The SBA is increasing the percentage it guarantees for some loans and reducing the amount required for a down payment on some loans, he notes. That could make life more difficult for some alternative lenders because most of the small-business loans made by major banks, like Wells Fargo and Chase, are SBA loans, he says. The SBA did not provide details regarding the changes by press time.
Regardless of what’s making banks loosen their grip on the purse strings, merchants are feeling more optimistic – or at least less gloomy – about obtaining bank loans in the near term, the study by Pepperdine and Dunn & Bradstreet indicates. In the fourth quarter of last year, 55 percent of small-business owners predicted difficulty in raising financing in the next six months, down from 61 percent a year earlier, the survey shows.
“That’s an improvement, but I still think it’s an alarmingly high number,” Ayzenberg says of those findings. “Before they even start worrying about how their operations are going and how good their product is, one in two businesses is already worrying that their bank is not going to be able to fulfill their needs. They shouldn’t have to have those fears.”
So, banks are becoming a bit more likely to loan to small businesses but still aren’t throwing open the flood gates to create a flood of funding. That’s true of banks that qualify as large and those classified as small.
American banks tend to be either small community institutions or huge national concerns that are swallowing up the remaining mid-sized regional banks, observers agree. Between 80 and 90 banks control assets of $10 billion or more and thus qualify as large, while thousands of small banks have more limited resources, says David O’Connell, an Aite Group senior analyst.
Large and small banks exhibit about the same degree of ambivalence toward small-business loans. Banks can mitigate the downside of the loans because they have funds to hire staffs and buy technology to analyze risk, O’Connell says. Executives at small banks can avoid potential problems with small-business loans because they’re often dealing with prospective borrowers who were their high school or college classmates, he notes.
Whether banks are large or small, they have their reasons to deny loans to small businesses. Perhaps foremost among the rationales for denying loans to small businesses is the cost of underwriting, says O’Connell. Banks simply can’t make enough money on the loans to pay the cost of processing them, he says, adding that, “It’s a long-standing problem.” For example, a bank can make a profit by loaning $2 million at prime plus 2 percent, but can’t cover the underwriting costs of an $80,000 loan that also earns prime plus 2 percent. The underwriting costs would be the same in both cases, he notes.
Banks became even more ambivalent about loaning to small businesses after the Great Recession struck in 2008, O-Connell continues. They didn’t want to repeat the mistakes of the freewheeling period that preceded the economic catastrophe. About the same time, private equity and hedge funds began madding more capital available to alternative lenders, he says. Meanwhile, technology and alternative data sets helped the alternative industry understand risk and reduce underwriting costs, he maintains.
Banks also find it more expensive to loan to small businesses these days because the Dodd-Frank Act has increased compliance costs, Everett points out. “Red tape and reserve requirements for the banks have all increased under Dodd-Frank, so making loans to small businesses is less cost-effective than it was before.” Banks now need upwards of $1 billion in assets under management to remain viable, and they feel compelled to expand their staffs to follow all the new rules for lending, he says.
What’s more, bankers still exercise extreme caution when it comes to extending credit to small businesses because stores or restaurants often fail and then the business or the owner defaults on the loan, Everett says. That’s why banks often require business-loan applicants to demonstrate two years of profitability to qualify for credit, he notes. Higher interest that can mitigate that risk, but state usury laws often capping rates at 36 percent or less, Everett notes. New York, for example, limits banks to 16 percent, he says.
State usury laws don’t apply to factoring or merchant cash advances, and that enables alternative funders to charge more for the use of funds, Everett says. “If it’s not called a loan and what the customer is paying is not called interest, then it’s not subject to state usury laws,” he says.
Obstfeld puts it this way: “In would be great to be in a business where nobody defaults. The rates we charge at SOS Capital are necessary to cover our losses and be profitable at the same time.”
The high cost of obtaining funds in the alternative market could eventually prompt the federal government to intervene with regulation but that probably won’t happen anytime soon, Everett predicts. O’Connell agrees, noting that in the current political climate the government has little appetite for new restrictions on a major source of capital for thousands of small businesses.
Because alternative funders have greater flexibility than banks in how much they can charge for access to credit, banks have sometimes formed referral relationships with alt funders to hand off small-business borrowers. “That looks good on paper and makes great headlines, but it’s harder to do in real life,” O’Connell maintains, because the bank loses control of the customer experience. If the alt funder doesn’t manage customers’ expectations effectively, the bank might have to take the blame – at least in some consumers’ minds, he contends. He’s surveyed bankers and found them feeling “really mixed” about such partnerships.
The impact of such partnerships hasn’t been as great as some anticipated. “We were quite nervous when we heard that JPMorgan would be using OnDeck’s platform,” recalls Obstfeld. “However, it’s been quite some time that they’ve been doing that and it hasn’t seemed to make a dent – at all – in alternative lending.”
But alternative funders can provide borrowers with advantages that banks can’t match. Some alternative lenders can approve a client’s application in a few hours and wire funds to the recipient the same day, Grayson says. Steve Hauptman, chief operating officer at SOS Capital, notes that banks can require weeks or even months to respond to an application.
That’s why SOS Capital customers sometimes obtains funding from the company as a bridge to keep operating while they’re waiting for an SBA bank loan or to take advantage of an opportunity that requires a quick response, Obstfeld says.
The advantages of the alternative funding industry don’t end there. SBA bank loans require more paperwork than is needed for a merchant cash advance, which can slow the process even further as the client assembles the documentation, Obstfeld notes.
In addition, banks can simply seem slow to respond to the needs of the market. “Banks are banks – they’re never going to be able to do the things we can do,” says Obstfeld. “If one product becomes an issue, we can pivot and create new product tomorrow. It takes banks years to get approval for something new.”
Then there are cards. Besides an increase in banks’ willingness to lend to small businesses, merchants are finding it easier to obtain business credit cards, the index provided by Pepperdine and Dun & Bradstreet finds. In the fourth quarter of last year, 65 percent of survey respondents applied successfully for cards, compared with 51 percent in the corresponding period a year earlier.
Easier access to credit cards might not make merchants less likely to apply for loans, Everett says. “Usually, credit cards are a backup plan,” he notes. “They’re the poor man’s line of credit. It’s a very high interest rate.” Most businesses would prefer to open a line of credit from a bank with a lower interest rate. Many cardholders use cards only for travel expenses or to ease short-term cash-flow issues, he says.
Finding the right credit card poses a challenge, even for those who are adept at online searches, says Grayson of South End Capital. In addition, many business credit cards carry a low spending limit. A business might qualify for a $5,000 credit limit on the card but could receive a $50,000 loan, he adds. “A card generally doesn’t fill their needs,” he declares.
Others have a slightly different view of business cards. “Once you get approved, it’s easy money,” Obstfeld says of business credit cards. However, cards can’t finance some of the actions that cash from merchant cash advances can cover, such as buying out a partner or opening a second location, he notes.
Moreover, the fact that competitors exist – whether they’re banks, card issuers or other alternative lenders – doesn’t necessarily threaten existing alt funders, according to Hauptman. Remember that banks and alternative lenders aren’t offering the same products, he says. Those products, such as bank loans, factoring and merchant cash advances, each have advantages and disadvantages, which prompt merchants to pursue the vehicles that are right for them, he says.
Having banks and nonbanks in the mix can even prove complementary, too. Pumping more funds into the small-business economy from any source can result in a healthier environment that offers more opportunities for all, Ayzenberg says.
The real danger resides not so much from direct competition but rather from failing to keep pace with the alternative lending industry’s introduction of new products, falling behind in the quest to speed up the decision-making process granting funding or neglecting to obtain technology that eases the application process, Grayson says.
In one recent development, some alternative lenders aren’t reviewing credit histories, he notes. Instead they look just at deposits and can extend credit based just on that, Grayson notes. That’s somewhat like a merchant cash advance, but it’s offered at single-digit rates and on favorable terms, he says. “A lot of lenders are making it very simple for borrowers to get money now,” he continues, concluding that alt funding firms that can’t afford to make such improvements probably can’t remain in business.
Though some players will inevitably disappear, the alternative small-business funding industry in general seems likely to survive so long as banks remain reticent about lending to small businesses – the situation that gave rise to the alternative industry in the first place.
Liberty Lending Partners With MetaBank
January 28, 2018
Online lender, Liberty Lending has partnered with MetaBank, a wholly-owned subsidiary of Meta Financial Group, Inc., the latter announced on Thursday.
During the three-year agreement, the federally chartered MetaBank will provide personal loans to Liberty Lending customers. Both entities will market the initiative.
According to the release, Meta expects to originate between $500 million and $1 billion in personal loans.
Eligible loans will be closed-end installment products ranging from $3,500 to $45,000 with durations lasting between 13 and 60 months.
“We are excited to partner with a respected and growing brand in online lending, and look forward to working together to deliver best in class loan products to consumers,” said Brent Turner, EVP and head of consumer lending at Meta, via release. “Furthermore, leveraging the underwriting expertise and consumer credit experience of the SCS team provides us with great resources to accomplish our objectives in consumer credit.”
“Liberty Lending’s mission is to provide innovative borrowing solutions to deserving customers. The partnership will enable Liberty Lending to further deliver on its mission to customers by leveraging Meta’s wealth of resources and expertise,” said Bill Yialamas, CFO of Liberty Lending.
Meta Financial Group is based in Sioux Falls, South Dakota while Liberty Lending is headquartered in New York, New York.
StrategyCorps: The ‘Amazon Prime Effect’ Could Significantly Alter Personal Banking
January 26, 2018
FinTech and mobile content has done more than provide exposure to alternative lenders and financing avenues.
“It’s rewiring the way that we think,” Dave DeFazio, a partner at StrategyCorps told deBanked while discussing mobile devices. StrategyCorps helps financial institutions enhance their checking account offerings.
“We’re addicted to our phones. We’re using them more than ever. The winners in whatever category of business will be the ones that connect better with their customer’s mobile lifestyles and behaviors.”
DeFazio believes that even the flagship personal banking product, the checking account, could be facing a significant makeover in the not-so-distant future.
“There are companies that are kind of nibbling away at the strangle hold on the definition of the traditional account,” said DeFazio. He added that while the public tends to define their banking relationships now by which bank holds their personal checking account, things could be different “down the road.”
Citing a white paper that StrategyCorps commissioned, DeFazio also pointed to deposit displacement as a potential cause of alarm for traditional free checking.
Easy mobile access to P2P platforms such as Venmo, make it more convenient for traditional banking users to opt to store their funds elsewhere.
Another company “nibbling away” at funds that would otherwise be deposited in a traditional checking account is Amazon.
According to Reuters, the e-commerce giant leant more than $1 billion to over 20,000 small businesses operating via Amazon Marketplace between June of 2016 and 2017.
The loans range from $1,000 to $750,000.
The results from this venture could prompt Amazon to purchase a small or mid-sized bank of its very own in the next 12 months.
“This may either be a tactical move or a broad strategic jump into banking, as Amazon seeks more stickiness with consumers and small businesses in consumer lending such as auto loans, credit cards and home mortgages,” CFRA bank analyst, Ken Leon, told Bloomberg in December.
DeFazio says that as consumers grow accustomed to whatever unique perks and advantages that Amazon and other platforms bring to the table for products such as a personal checking account, it could force traditional institutions to work much harder to stay attractive.
BB&T Taps $50M for Cutting Edge Tech Investments
January 22, 2018
BB&T has earmarked $50M for a deep dive into “emerging digital technology,” the company announced last week. The bank will look to either invest in, or acquire companies in the space.
“The sizable investment” is meant to improve the customer-experience for BB&T’s client base while simultaneously lowering operating costs.
“This sizable investment in financial technology companies represents an important strategic milestone in our digital business transformation,” said BB&T chairman and CEO Kelly S. King via release.
”We’re excited about the possibility of new partnerships and innovative approaches to provide the best possible experience for our clients.”
The bank began its focus on digital business in 2015 following the appointment of W. Bennett Bradley as chief digital officer.
“A significant investment in fintech puts BB&T on an aggressive pace to more quickly navigate our digital road map and further foster a culture of innovation throughout the company,” Bradley said in the same release.. “Things are changing rapidly and we, like many financial institutions, have to move faster to meet and exceed our clients’ expectations. While an investment in fintech is just one component of our digital transformation, it’s a powerful way for us to gain greater access to new technologies and talent.”
BB&T currently handles more than $220B in assets and a market capitalization of $37B.
Standard Chartered Names New Global Leader of Transaction Banking
January 17, 2018
Lisa Robins has been appointed as global head of transaction banking at Standard Chartered, the company announced on Wednesday.
A 38-year veteran of international business, Robins joins the Standard Chartered team from Deutsche Bank, where she had served since 2011. Before this tenure, she spent 23 years with JP Morgan Chase.
“For more than a century, Standard Chartered has been a leading trade bank supporting economic flows across Asia, Africa and the Middle East,” Simon Cooper, CEO, of corporate and institutional banking at the company said via release. “Transaction Banking is in our DNA and is integral to our future. As a banking veteran with deep experience running international transaction and commercial banking across complex markets, Lisa will ensure that the business goes from strength to strength as we deliver our network and innovative solutions to our clients.”
Robins also commented on her new role, stating that she was “excited” to get started as she has been an admirer of her new employer for some time.
“I have admired its many critical strengths like the Bank’s commitment to its global network, diverse talent, breadth of products and market leading platforms,” said the Stanford and Tufts graduate. “I am very much looking forward to leveraging my experience, built over many years across various growth markets, to see how we can further accelerate growth for the business and support the banks’ wide and deep base of clients to become an even stronger competitor in the industry.”
Robins was awarded ‘Transaction Banker of the Year Award’ by The Asset’s Triple A awards and also by The Asian Banker in 2013. In 2016, she was conferred the IBF Fellow award by the Institute of Banking and Finance Singapore which recognizes industry veterans who exemplify thought leadership and commitment to industry development.
Tech Banks: Will Fintech Dethrone Traditional Banking?
August 20, 2017On Halloween, 2014, a largely unknown, Boston-based financial institution, First Trade Union Bank, embraced high-technology, went paperless, and officially adopted a new name: Radius Bank.
In reinventing itself, Radius did more than dump its dowdy moniker. It shuttered five of its six branches, re-staffed its operations with a tech-savvy team, instituted “anytime/anywhere” banking services, and offered customers free access to cash via a nationwide ATM network. And it teamed up with a fistful of financial technology companies to offer an impressive array of online lending and investment products.
Today, the bank’s management boasts that, using their personal mobile phones, some 2,700 people per week are opening up checking accounts, funneling $3 million in consumer deposits into the bank’s virtual vault. That’s a stark contrast from a decade ago when the financial institution was being rocked by the financial crisis and “we couldn’t get anybody to walk into our branches,” says Radius’s chief executive, Mike Butler.
“We tried to leave that old bank behind,” he says. “We’re a virtual retail bank now, an efficiently run organization that offers high levels of customer service and Amazon-like solutions.”
Radius Bank is not alone. At a moment when there is much discussion — and hand-wringing — over the future of seemingly outmoded, highly regulated community banks, a coterie of small but nimble banks is exploiting technology and punching above its weight. Almost overnight, this cohort is combining the skill and hard-won experience of veteran bankers with the lightning-fast, extraordinary power afforded by the Internet and technological advances. As a result, these small and modest-sized institutions are redefining how banking is done.
In addition to Radius Bank, independent banks winning recognition for their bold, innovative – and profitable — exploitation of technology, include: Live Oak Bank in Wilmington, N.C., which adroitly parlays technology to become the No. 2 lender to business and agricultural borrowers backed by the U.S. Small Business Administration; Darien Rowayton Bank in Darien, Conn., which is making a name for itself with coast-to-coast, online refinancing of student loans; and Cross River Bank in Fort Lee, N.J., which does back-end work for a passel of fintech marketplace lenders.
Interestingly, there’s not much overlap. Each of the banks goes its own way. But what all the banks have in common is that each has struck out on its own, each hitting upon a technological formula for success, each experiencing superior growth.
“These are companies that understand the value of a bank charter,” says Charles Wendel, president of Financial Institutions Consulting in Miami. “They have to work under the watchful eyes of state and federal regulators. But their cost of funds is low and they can offer more attractive rates. Because they’re less likely (than nonbank fintechs) to disappear, run out of money, or get sold,” the bank expert adds, “they also have the image of stability with customers.”
These modest-sized banks are emerging as not only pacesetters for the banking industry. Along with making common cause with the fintechs — which had promised to disrupt the banking industry – they’re even beating the fintechs at their own game.
“Classically, community banks have looked to technology partners to provide technological innovation,” says Cary Whaley, first vice-president for payment and technology policy at the Independent Community Bankers of America, a Washington, D.C.-based trade group representing a broad swath of the country’s 5,800 Main Street banks. “They still do. You’re seeing more partnerships. But now you also see community banks building innovative products and services outside of that relationship. You see forward-thinking banks developing their own technology to support big ideas like marketplace lending, distributed ledger technology, and emerging payments technology.”
With its extraordinary skill at exploiting technology, Live Oak Bank – which trades on the Nasdaq and is the only public company encountered in the cohort — has become a Wall Street darling. “While several banks have adopted an online-only model, and nearly all banks are shifting more and more delivery through online channels, Live Oak was built from the ground up as a technology-based bank,” Aaron Deer, a San Francisco-based research analyst at Sandler O’Neill Partners, wrote in a recent investment note.
Driving the success of Live Oak, which operates out of a single branch in the North Carolina seacoast town and has only been in business for a decade, is the explosive growth in its SBA lending, the bank’s “core strategy,” Deer notes. Last year, Live Oak lent out $709.5 million in SBA loans in increments of up to $5 million, the federal agency reports, making it the country’s No. 2 SBA lender. It trailed only megabank Wells Fargo Bank, the third largest bank in the U.S. with $1.5 trillion in assets, which made $838.93 million in SBA-backed loans last year.
As its SBA lending has taken off, Live Oak, which qualifies as a “preferred lender” with the federal agency, boasts assets that have nearly tripled to $1.4 billion in 2016, up from $567 million two years earlier. Those are flabbergastingly fantastic growth numbers. But just as incongruously — by nipping at the heels of Wells Fargo — Live Oak has been challenging a bank more than a thousand times its asset size for dominance in SBA lending.
And, interestingly, the bank is able to book those outsized amounts of SBA loans while lending to only 15 industries out of 1,100 approved by the government agency, slightly more than 1% of the universe. That’s up from 13 industries in 2015, and Live Oak is adding two to four additional industries yearly for its SBA loan portfolio, Deer reports. Included among the industries to which the bank made an average SBA loan of $1.29 million last year: Agriculture and poultry, family entertainment, funeral services, medical and dental, self-storage, veterinary, and wine and craft-beverage.
The bank has a team of financing specialists dedicated to each of the designated industries. Among Live Oak’s current SBA borrowers are Martin Self Storage in Summerville, S.C.; Utah Turkey Farms in Circleville, Utah; Pinballz Arcade, Austin, Tex.; and Council Brewery Company in San Diego. Steve Smits, chief credit officer at the bank, told NerdWallet: “When you specialize in something, you become efficient. Because we do it every day and we have professionals and specialists, we tend to be more responsive and quicker.”
The heady combination of technological sophistication and banking expertise has allowed the lender to slash its loan-origination time to 45 days, about half the three-month industry average for SBA loans. To speed up loan sourcing and generation, the bank developed its own in-house technology, which led to the formation of the Wilmington-based technology company nCino, which was spun off to shareholders in 2014.
Live Oak did not return calls to discuss its lending strategies, but in SEC filings bank management declared: “The technology-based platform that is pivotal to our success is dependent on the use of the nCino bank operating system” which relies on Force.com’s cloud-computing infrastructure platform, a product of Salesforce.com.
Natalia Moose, a public relations manager at nCino told deBanked in an e-mail interview: “We work with Live Oak Bank, in addition to more than 150 other financial institutions in multiple countries with assets ranging from $200 million to $2 trillion, including nine of the top 30 U.S. banks. nCino was started by bankers at Live Oak Bank who found the logistics of shuffling paperwork among loan stakeholders to be unwieldy, inefficient and time-consuming.
“nCino’s bank operating system,” Moose adds, “leverages the power and security of the Salesforce platform to deliver an end-to-end banking solution. The bank operating system empowers bank employees and leaders with true insight into the bank, combining CRM (customer relationship management), deposit account opening, loan origination, workflow, enterprise content management, digital engagement portal, and instant, real-time reporting on a single secure, cloud-based platform.”
Live Oak, meanwhile, is not resting on its technological laurels. According to Deer’s report, the bank’s parent company, Live Oak Bancshares, has formed a subsidiary to inject venture capital into fintech companies. It’s already taken a small equity stake in Payrails and Finxact, “the latter of which is developing a completely new core processor to compete against the old legacy systems used by most banks,” the Sandler O’Neill analyst writes. “Quite simply,” he asserts elsewhere in his report, “the company is far beyond any other bank we cover in its technical capabilities and the growth outlook remains outstanding.”
Five hundred and thirty-three miles due north along the Atlantic coast in southeastern Connecticut, Darien Rowayton Bank is also experiencing tremendous success as a lender using a home-grown technology platform. State-chartered by the Connecticut Department of Banking and regulated as well by the Federal Deposit Insurance Corp., the $600 million-asset bank is winning attention in banking circles for its online student-loan refinancing.
A few years ago, DRB, as it is known, was looking to go beyond mortgage and commercial lending — “the bread and butter for most community banks,” bank president Robert Kettenmann explained to deBanked in a telephone interview – and was somewhat at a loss. The bank considered but then rejected the credit card business. Finally, DRB struck paydirt refinancing student loans. “Our chairman really seized on the opportunity,” Kettenmann says, adding: “It’s a $35 billion market.”
Thanks to the National Bank Act, it’s able to operate in all 50 states. As a regulated commercial bank with a strong deposit base, DRB can also offer low rates well below any state’s usury prohibitions.
What is most striking about DRB’s program is its nationwide targeting of upwardly mobile, affluent young professionals. According to a PowerPoint presentation obtained by deBanked, all of the bank’s super-prime borrowers, who are mainly in the 28-34 age bracket, have a college degree and a whopping 93% have graduate degrees. Average income is $194,000.
Forty-eight percent of those refinancing student loans with DRB are doctors or dentists and another 22 percent are pharmacists, nurses or medical employees; only about 20% are paying off their law degrees or MBAs. The heavy concentration of refinancing in the medical field reduces economic risk in an economic downturn. Forty-three percent of the borrowers are home-owners, the rest are renters – and prime candidates for an online, DRB-financed mortgage.
(Once known as “yuppies” today this cohort is “known by the acronym ‘HENRY,’” remarks Cornelius Hurley, a Boston University banking professor and executive director of the Online Lending Institute, explaining the initials stand for “High Earners Not Rich Yet.”)
The Connecticut bank partnered with a third-party on-line vendor, Campus Door, when it commenced making student loans in 2013. In the fall of 2016, however, DRB built out its own, proprietary loan-origination system, Kettenmann reports, emphasizing that CampusDoor had been an excellent partner but that the bank wanted to exercise end-to-end control over the process. DRB employs a seven-pronged, “omni-channel” marketing approach that includes interactive marketing, affinity partnerships, digital/online advertising, direct mail, mass-media advertising, and public relations/brand awareness campaigns.
DRB’s online enrollment provides “pre-approved rates” in less than two minutes with final approval on rates in 24-48 hours. Refinancers can complete the online application at their own speed. Through May, 2017, DRB had made $2.48 billion in refinancing to 20,000 student-loan borrowers, with only ten defaults, five of which were attributed to deaths or “terminal illness.”
On Yelp! the bank has received a batch of reviews ranging from very favorable, five-star (“I had a truly wonderful experience”) to one-star (“awful” and “truly a nightmare”). Many fault the application process as laborious, describing it as “time-consuming.” But for those who have succeeded, like the reviewer who counseled “patience,” the result can be “the lowest rate with DRB…my loan payments went down $100 a month.”
Just about an hour’s drive south and taking its name from its proximity to New York city just over the George Washington Bridge is New Jersey-based, state-chartered Cross River Bank, which has a reputation as a partner-in-arms to fintech companies. “We’re both users and producers of technology,” declares Gilles Gade, the bank’s chief executive.
The bank provides “back-end” and infrastructure support to 17 marketplace lenders that offer a suite of lending products including personal loans, mortgages and home-equity loans. Following loan origination by a fintech company – Marlette Funding, Affirm, Upstart, loanDepot, SoFi, and Quicken Loan, among other partners — Cross River does the actual underwriting. Last year, Gade reports, the bank underwrote 1.9 million loans valued at $4-4.5 billion, about 10% of which Cross River kept on its books. The bulk of the loans are sold “back to the marketplace lenders” or to a third party. “We’ve created a high-velocity automated system,” he says.
Gade is manifestly unapologetic about the bank’s role in assisting fintechs in their competition with the banking establishment. “We’re a banking infrastructure services provider for those who want to disrupt the banking system,” he says. “Consumers expect a lot better than they’ve been getting from traditional banking services.”
Back in Boston, Radius Bank’s chief executive reports that forging partnerships with fintechs to provide the full panoply of online banking services was no easy proposition. In its mating ritual, Radius not only had to determine that a fintech company’s offerings were sound and that it had the right characteristics – most especially “a long-term, sustainable business model” – but that its corporate culture meshed comfortably with Radius’s.
After meeting with as many as 500 fintechs and after a fair amount of trial and error, Radius formed partnerships with LevelUp, which enables customers to make mobile payments; with online lender Prosper, for refinancing consumer debt and “credit rehabilitation”; with SmarterBucks, for refinancing student loans; and with online investment firm Aspiration Partners – which allows investors to name their own fees and markets itself to a predominately middle-class audience as the firm “with a conscience.”
Radius employs advertising on social media websites and employs “psychographics” to appeal to “anyone who is zealous about using technology, not necessarily millennials,” Butler says. The data show that 65% of adults in the U.S. would prefer to use a traditional bank and have face-to-face interactions with a teller, he notes, leaving the remaining 35% as Radius’s target audience.
Christopher Tremont, executive vice-president for virtual banking, told deBanked that a typical Radius customer is 42 years old, lives in Boston, New York, Chicago “or one of the bigger cities in the West,” is a “technophile,” earns $75,000 a year, and has $100,000 in personal assets.
Radius’s performance since it went paperless has been stellar. The bank has seen a rapid rise in deposits, spurting to $782 million through the first quarter of 2017, up from $565 million at year-end 2014. With little fee income but ample deposits and low-cost funds, Radius realizes the bulk of its revenues – and profits — on the interest-rate spread generated from its loan portfolio.
The bank booked $43.5 million in SBA loans last year, ranking it in the top 50 banks on the SBA’s league tables, while carrying another $105 million in its commercial leasing business at the end of the first quarter this year. Loan generation is driving asset growth, which are currently at $973 billion, up more a third from $726 million in 2014, and Butler expects the bank’s assets to top $1 billion sometime this year.
“Community banks love that part of the business—lending money,” Butler says.
Loans to a Business Not Paying Their Payroll Taxes Results in the Banker Being Convicted
July 29, 2017
Here’s a chilling situation that lenders, factors and MCA funders working with merchants who are behind on their taxes might want to take note of.
On June 27th, Douglas Corriher, a bank VP, was hit with a 32-count superseding indictment over a factoring fraud conspiracy with a staffing company in North Carolina. Despite the dozens of pages alleging improper conduct between Corriher and the staffing company owner, Corriher pled guilty to employment tax conspiracy because Corriher knew the staffing company owed payroll taxes but factored their invoices anyway to enrich the bank.
As the Department of Justice summarized it:
“Corriher was aware that the company owed more than $1 million in payroll taxes. Notwithstanding this, Corriher continued to make advances on the loans knowing that the fund of unpaid payroll taxes would enable the staffing company to repay the loan and allow the bank to continue collecting high rates of interest on the loan advances along with lucrative fees.”
The indictment had alleged that Corriher knew that the money withheld for payroll taxes by the staffing company would be diverted to pay the bank instead of the IRS despite the IRS having a de facto superior lien. The bank was said to be illegally in possession of the IRS’s money due to the banker’s actions.
Despite more than 30 counts of offenses seemingly more egregious than this, employment tax conspiracy is what garnered a conviction. Corriher is scheduled to be sentenced on October 6th. He faces a maximum of 5 years in prison.
Becoming a Bank – Varo Articulates the Leap from Fintech to Banking
July 26, 2017
Varo Money wants to become Varo Bank. The completely mobile-app driven fintech startup already lets customers juggle financial tasks with the touch of a button but now they want to make it official.
Varo has applied for a full national bank charter with the bank’s headquarters in Utah in hopes of becoming a national bank. Varo is the second fintech startup to apply for a bank charter in as many months, with the SoFi application still pending, though there are key differences to the design of each application.
Colin Walsh, co-founder and CEO of Varo Money, took some time to discuss the bank charter application with deBanked, offering his take on how the future of banking is moving toward mobile and reviving the banker relationship, which has gotten lost along the way.
deBanked: Why a bank charter and why now?
Walsh: We founded Varo with a specific vision: to be an indispensable financial guide for customers, with a full suite of banking and financial products. Our founding intention was to create a bank that made it easier and more affordable to manage money. We’ve been in conversations with the regulators for a number of months, and we completed the “pre-application” process. In the past year the regulators’ openness to new de-novo bank charter applications has shifted.
deBanked: Was SoFi’s recent move to similarly apply for a bank charter any inspiration for you?
Walsh: SoFi’s filing did not affect our process; we’ve been in conversations with regulators for months (see above answer). In addition, SoFi applied for a different type of charter than we did. They applied for a state-chartered ILC, which tend to be used by subsidiaries of companies whose primary business is not banking. We applied for a national bank charter to become a full-service national bank.
deBanked: Have you faced any backlash since applying for the bank charter?
Walsh: Not so far. Varo was founded to make it easier and more affordable for customers to manage their money and improve people’s financial lives. We believe that integrating traditional bank products with modern technology (predictive analytics, contextual alerts/notifications, auto-savings, visualizations) is the best way to achieve this outcome. While it brings a new breed of competition, we believe it is the future of banking and is ultimately in the best interest of consumers.
deBanked: Is Varo 100% smartphone banking? For iOS and Android? What type of growth are you experiencing?
Walsh: We also offer service through Interactive Voice Response and phone. We pushed our iOS app into the Apple App store [in] mid-June and are already experiencing very strong demand.
deBanked: Does Varo issue loans and are they from your balance sheet?
Walsh: Yes and yes. Varo makes unsecured loans to customers in states where we have lending licenses.
deBanked: You come from traditional banking, correct? What do you think of this shift toward online and now mobile banking/lending? Are traditional banks going to be left behind?
Walsh: That is correct, I spent 25 years with traditional banking and financial services companies. 92% of all adults ages 18-36 own a smartphone, and modern technology opens up the possibility of a personal banker in your pocket. The game is changing. Banking used to be a relationship business — but most banks have gotten too big to help the bulk of their customers solve everyday problems and get ahead.
Many incumbent banks aren’t able to make the technological changes that customers of the future will demand. Instead of making step-changes to their technologies, they continue to iterate on the same products and channels that serve the same customers in silos, without imagining what the future of banking could look like.
Varo will be the first entrant to truly challenge the existing banking model. Varo combines proprietary technology and integrated financial solutions to bring relationships back to banking for everyone, all on your phone. Varo is a bank designed around solving financial problems, not pushing products. There’s room for everyone, it’s a very big market, but Varo aims to raise the bar for what consumers should expect from their banks.
deBanked: Do you work with any bank partners?
Walsh: Yes, we have great partnerships with The Bancorp Bank, who serves as our sponsor bank for Varo Money’s current business, and Silicon Valley Bank, where we have our main bank account and a venture debt facility.
deBanked: Are consumers ready to make the shift to 100% mobile banking?
Walsh: We’ve seen that many customers are willing and ready to make the shift. Varo’s vision is that everyone deserves a personal banker in their pocket. Access to financial guidance should be instant when a customer needs it and not bother them when they don’t. We want to reduce stress through financial empowerment so that our customers can fulfill their ambitions, stop worrying and go live their lives.
Just like Amazon disrupted retail by providing instant shopping in a customer’s hand, banking in the future (and even today) doesn’t have to be about geographic coverage anymore. We believe that the future of banking is about providing an on-demand solution that gets customers from A → B with minimal friction and maximum delight. Once customers experience how easy and affordable Varo is, traditional banks seem outdated. Trust, safety, and security are requirements for our business that we take very seriously.
