Charles Krawitz is vice president of commercial lending and loan trading at Alliant Credit Union.
As fintechs capture an ever-growing share of consumer financial activity, traditional institutions face mounting pressure to maintain their appeal. Faced with such competition, it’s natural for regulated financial service providers to view fintechs as adversaries. However, taking a defensive stance can lead to missed opportunities.
Traditional financial institutions and fintechs both have much to gain from forging symbiotic relationships. While fintechs may want to diversify their funding sources, banks and credit unions may look to fintechs as a means of providing their customers and members with enhanced account management tools along with more expansive borrowing solutions.
No slowdown in sight for digital banking
There’s no stopping the shift to online banking as younger generations of digital natives establish their careers and accumulate wealth. Today’s consumers want seamless, secure technology to take care of their financial needs with a few clicks — whether they are paying bills, splitting a dinner check with friends or applying for a mortgage.
Approximately one-third of Americans have at least one account or engage in activities with a nonbank financial services provider, according to a FICO survey this year. That number jumps to 47% among millennials. S&P Global Markets projects that digital lenders will originate $62.84 billion in new loans in 2021 to consumers, students and small and medium enterprises.
Why fintechs make great partners
Traditional financial institutions should, of course, invest in the digital platforms that today’s customers demand. However, it’s clear that fintech innovators excel at developing new technology efficiently. It’s what they do. Traditional institutions have a lot to gain from leveraging tech startups’ origination prowess and processing capabilities.
Fintechs, too, can find a compelling incentive for partnering with traditional institutions. For example, many fintech loan originators need to diversify their funding sources. An institution with a strong balance sheet can put deposits to work by providing capital to fintech partners for a multitude of loan types.
Alliant Credit Union, for instance, works closely with a wide variety of fintech partners to develop mutually beneficial loan programs. By working collaboratively with fintechs, Alliant and its partners have developed sophisticated screening models to identify potential borrowers that address regulatory concerns pertaining to the fair treatment of all loan applicants. These relationships have enabled Alliant to expand its reach and assemble loan portfolios across many product types including electric vehicles, solar, home equity lines of credit and personal term loans.
Managing risks in fintech partnerships
With opportunity comes risk, and it is critical to evaluate fintech partnerships through a regulatory and compliance lens.
The mandatory regulatory oversight of traditional lenders requires fintechs that want such firms as funding partners to likewise adhere to rigorous standards. The willingness of fintechs to embrace a compliance-centric approach can produce truly productive relationships. Since some fintechs are more sophisticated than others when it comes to regulatory matters, a financial institution’s legal, risk management and compliance teams will want to be closely involved in the partnership discussions and agreements.
The process of vetting fintechs is detailed and often daunting. As an interim step, a financial institution might consider testing the waters by purchasing a pool of loans from a trusted credit union or banking partner that sourced these loans in conjunction with a fintech. For example, Alliant Credit Union purchased a book of solar loans from a credit union that generated these loans in conjunction with a fintech originator. The arrangement provided Alliant with the opportunity to learn about a new asset class in advance of further expanding into the solar lending market.
Conversely, Alliant regularly sells loans sourced from fintechs to other credit unions. This gives more credit unions the opportunity to gain experience with fintech partners and their products. Through such arrangements, Alliant is able to manage portfolio risk while helping other institutions put their deposits to work.
Embrace the power of collaboration
When new competitors enter the financial services landscape, it’s easy to view them strictly as adversaries. But extending a spirit of partnership to emerging competitors can open up new opportunities to learn from each other and work together to benefit financial consumers.