Garnet Capital Advisors Blog

Underbanked consumers are increasingly looking to marketplace lenders to meet their financial needs.

Before the lending heyday leading up to the economic debacle of 2008, consumers were taking out loans with little regard for the precarious financial positions they were putting themselves in. And the lax lending practices didn't help.

Consumers wound up with exorbitant debt, thanks largely to inadequate financials, sky-high leveraging, and higher interest rates compared to what we've been used to seeing today.

But these days, lending requirements are a lot more stringent. Lenders are much more cautious of the types of loans they're offering, and are tightening the strings when it comes to the criteria they expect borrowers to meet.

Even as lending requirements are strict, there is an increasing need to meet the demands of a more digitally-driven society. Just about everyone has a smartphone or tablet, and they're using it to do a lot more than make phone calls or stream the latest music videos. They're accessing the internet to do their banking, and for a number of reasons.

For starters, it's more convenient. Savvy consumers these days are seeking faster, more convenient ways to do their banking and obtain the loans they require. They expect to be able to tap into this need through online banking platforms - and a host of startups are sitting up, taking notice, and acting on that need.

Fintech companies are increasingly meeting the demand of the underbanked and are making loans for as little as $1,000. These alternative lenders make use of digital technology to pinpoint potential clients, automate the loan application process, speed up underwriting, and make quick loan decisions.

There are now over 2,000 online lenders across the globe, which have been responsible for lending out billions of dollars to consumers and small businesses. While that pales in comparison to what traditional banks and credit unions continue to loan out, it's a significant number nonetheless. Considering the fact that these marketplace lenders have only been in existence for a few short years, it speaks volumes to how popular they have become, and continue to be, among the underbanked.

Marketplace lenders like On Deck and Quicken Loans are no longer considered tiny payday loan sources. They're huge, and they're capitalizing on the needs of those who are looking for an easier and quicker way of accessing funds to make purchases on finance.

Increased opportunity and innovation can realistically provide affordable lending to the underbanked of the nation.

Fintech startups have been successfully able to generate business models that effectively detour around the structural formalities that the average bank is subject to, all while providing a more efficient way to serve client needs. With access to technological platforms, simplified loan applications, quick approvals, and fast access to cash, fintech firms possess the level of innovation that consumers crave, and that banks should be tapping into.

How Are Banks Responding to Finch Competition and the Need to Innovate?

The success of online lenders - as well as their potential challenges - pose the question about how banks are responding to the fintech phenomenon. Global fintech investment went from $4.05 billion in 2013 to $12.2 billion in 2014, according to a report by Accenture. That's triple the investment amount poured into this innovative financial sector in just one year.


Partnerships between banks and online lenders can benefit both parties, in addition to underbanked consumers.

The strong points of fintech lenders cannot be denied. But banks themselves have their own benefits that such alternative lenders don't have.

With the long-standing presence and reputation of banks, there's an inherent level of trust that consumers have developed with them. The comfort and familiarity that consumers have with conventional banks are traits that cannot be paralleled. And the established consumer base that banks already possess is a huge plus.

But even with such positive traits, banks still need to take steps to level the playing field with these steam-rolling startups that are blazing a trail in the world of consumer lending. The level of technological innovation that they've developed and introduced to open-armed consumers cannot be understated.

Perhaps banks need to take a page out of the books of fintech lenders, and start opening their minds - and loan portfolios - to an increasing number of profitable consumer loan products. Consumers have been strengthening their financial positions since 2008, and are quite confident these days in their spending power. Now is a good time to create spaces in the loan portfolios of banks to make room for an increasing number of consumer loans instead of leaving them all to fintech lenders for the taking.

Going one step further, perhaps partnering with alternative lenders may be the ticket to winning consumer trust and business, particularly among the underbanked demographic. There's no reason why it can't work. In fact, it is working for the banks who've already taken the plunge.

Take JPMorgan Chase, for example, which recently teamed up with On Deck to offer loans to small businesses. This sector has a tendency to be a challenging one for traditional banks to capitalize on, which makes this partnership all the more resourceful and profitable.

CitiBank is also playing their part in collaborating with marketplace lenders. The third largest bank in the country recently partnered with marketplace lending giant LendingClub, which will help CitiBank access business from low- and moderate-income consumers more easily. At the same time, LendingClub will benefit from leveraging the bank's expansive client base.

Partnering With Online Lenders to Strengthen Banks' Loan Portfolios

There's no doubt that banks can successfully get into this space by partnering with marketplace lenders. The key is finding the right one. And at Garnet Capital, we can help your financial institution find a quality counterparty. Browse our white papers today to find out how.