[Editor’s note: This is a guest post from Vince Passione, CEO and founder of LendKey Technologies, Inc. LendKey is a bronze sponsor and will be in attendance at LendIt USA 2015 on April 13-15. In this post, he talks about local lenders rewarding institutional investors.]
Online lending is growing exponentially, driven by a seismic shift in consumer preferences. Today at least 60 percent of Americans choose to shop for their financial products online, however less than 1 percent of consumers are able complete the process online. Even as traditional banks struggle to meet the increased demand for online loans, a number of alternative lenders have emerged across a variety of products – personal loans, student loans, auto loans and even mortgages.
Institutional investors trying to capitalize on the opportunity are rushing to fill their portfolios with assets from online balance sheet lenders and lending marketplaces. However, marketplace lenders often have too many investors for their limited loan volume. Additionally, lending marketplaces are now actively courting banks that have excess liquidity, encouraging them to compete for the purchase of those same fast-moving assets. LendKey provides a unique opportunity for institutional investors to acquire loans that are being originated online by local banks and credit unions, while allowing local institutions to grow & retain customer relationships.
Quantifiable Value from Neighborly Goodwill
Credit unions and community banks have the highest net promoter scores amongst financial institutions. Seventy percent of respondents in a Harris poll conducted in January 2015 said that when they do business with a community bank or local credit union, they feel as if that lending institution is a partner in managing their finances.
Meanwhile community bank and credit unions continue to deepen the connection to individual customers and communities they serve. They leverage their low cost of funds to offer consumers competitively priced lending products. The same educated, tech-savvy, social media-connected demographic that lives by the “think global, buy local” creed prefers to locally source not just their farm-to-table restaurant fare, but also their financial products. A whopping 92 percent of those local customers believe that their bank is open and transparent about charges and fees, and the majority also feels that the hometown institution has their best interest in mind.
Even in this day and age of long-distance relationships, small local lenders continue to successfully represent for many consumers a trusted, familiar, neighborhood face right there on Main Street. Over 100 million Americans banks with a credit union and more than 3 million consumers joined a credit union or community bank in 2014. LendKey allows these Main Street financial institutions to expand their reach and compete online, with a turnkey online lending platform. This allows local lenders to build the best kind of customer relationship, one that is conveniently facilitated online, and also available offline, in person, at their local branch.
LendKey: Institutional Access to Local Quality
The challenge for smaller financial institutions, of course, is to find an affordable infrastructure and effective, reliable platform to participate in the rapidly-expanding universe of online lending. For over six years, credit unions and local banks have leveraged LendKey’s platform and people to create online lending programs and offer low cost loans to their customers and new borrowers. Today, our online lending platform connects over 300 lenders with more than 35,000 borrowers with almost $750 million in loan volume.
Local lenders have limited balance sheets and don’t always have the capability to expand online lending programs in the face of increasing consumer demand. In order to manage risk and liquidity, many of these credit unions have taken advantage of shared funding networks (loan participations) managed by LendKey.
We have now introduced programs that connect institutional investors with local lenders. This gives investors the rare and valuable opportunity to purchase loans on an ongoing basis from well-established lenders who boast strong relationships with their borrowers. In the long term, we believe the strength of these relationships will translate into loan portfolios with better performance and resiliency.
Combining the Best of Two Worlds
Local lenders need liquidity options with attractive flexibility so that they can dependably and consistently grow new customer relationships and keep pace with increasing demand. Having access to institutional investors is a great way to solve those liquidity challenges, not just for the short term but also in a way that builds and strengthens a sustainable long-range relationship.
However, wide variance in pricing, underwriting and diligence standards can make it challenging for local lenders to access institutional liquidity. LendKey provides that unique structure and pipeline through the creation and management of online lending programs that now already boast more than 300 actively participating local credit unions and community banks. Institutional investors can, in turn, acquire these assets from local lenders who choose to proactively sell their new originations.
That arrangement is highly beneficial to institutional investors, because it puts them in the coveted position of participating in loans originated directly from real lenders who are connected and familiar to local customers. LendKey’s investors leverage the advantages of a local bank originating a local loan with the speed and efficiency of online lending – enabling the perfect interactive synergy between two complementary platforms.
LendKey’s objective is to work with a few key investors who are interested in finding quality assets in a new growth area and in building long term partnerships to purchase loans organically as part of the lending process. This provides investors with the ability to influence asset quality while also creating more predictability of loan volume. Rather than attempting to build a business that attracts as many investors as possible, LendKey is instead interested in committing its unique resources to a rather selective group of investors who share our vision of building a sustainable and meaningful platform which aligns the interests of lenders, investors and consumers.
The end result is a value-add for the discriminating institutional investor seeking high-quality diversification in new asset classes; the local lender seeking robust liquidity and capital; and, ultimately, the end-user consumer who wants more personalized borrowing. LendKey believes that in the long run these yin-yang investment relationships accessed through localized lending can, and will, lead to better performing, easier-to-manage assets that are both scalable and sustainable for everyone involved.
