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Community banks join Citi's Bridge in bid to disrupt small-business lending

Smaller banks hope to better compete on the financial technology front by leveraging Citigroup Inc.'s resources and joining its digital lending portal.

In August, the bank launched Bridge built by Citi, a lending platform that will connect small to medium-sized businesses with community banks and regional banks. Citigroup and the participating banks see the venture as an opportunity to increase brand awareness and develop a new financial technology offering.

"We think there is a lot of opportunity in that [fintech] space, and this is another one of those products that could shape the business," said Michael Mettee, CFO for FB Financial Corp., one of the 18 participating lenders. "We probably won't be developing our own [products], but we're talking with partners all the time to provide solutions that the big boys can offer."

Tech challenge

Community banks are facing stiff competition from nimble fintech startups that chip away at business lines and megabanks that deploy billions of dollars into new and upgraded products. In the face of pressure, fintech has evolved from a selling point to a necessary offering for banks, but smaller institutions do not always have the resources to build the enhancements.

To address the issue, many have turned to M&A as bankers have said additional scale gives them a greater ability to make fintech investments. Some community banks are acting as limited partners in a fund investing in fintechs to provide solutions for banks' top problems.

The Citigroup offering gives smaller lenders an opportunity to expand their digital reach and grow loans.

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On the Bridge platform, potential borrowers will submit a request for a loan, and the participating banks — 18 institutions, most of which have less than $10 billion in assets — can respond with an offer that has nonbinding terms. The participating banks own the loan and pay no fees to Citigroup for the process. Borrowers also pay no fees to Citi. With no immediate revenue, Citigroup is viewing the lending platform as a pilot program.

"We're always looking for innovative solutions and innovative ideas," said Rohit Mathur, a senior vice president with Citi. "This is one of those innovative ideas. … We wanted to try it out, pilot it and use the data and interactions that we see and chart the course of the future based on that."

Citi's new platform is not without parallel. LendingTree Inc. has built a company worth more than $2 billion with a platform that operates similarly for residential mortgages and other consumer loans. Others including Bankrate Inc. and Credible Labs Inc. offer consumer-focused lending portals that connect borrowers to banks.

Several fintech companies such as Kabbage Inc., Lendio Inc. and On Deck Capital Inc. offer small-business loans online. But Citi believes Bridge can gain traction by leveraging the bank's branding and offering bank funding as opposed to the venture capital funding that backs the fintech nonbanks.

Providing small-business loans online would mark a departure from how banks typically execute the loans. Small-business lending typically operates out of brick-and-mortar branches, and the market could be due for a technology-forward solution, said Jeff Harte, an analyst with Piper Sandler who covers Citigroup.

"It's still a manual, branch-laden process, so if they can make it more efficient and more transparent, it seems like a good thing for the market," Harte said. "I'm not sure how good it is for Citigroup."

What's in it for Citi

Harte said Citi is looking to gain national scale with a digital-first focus given its limited branch footprint. Although the bank is one of the nation's largest, with $2.328 trillion in assets, it has only 677 branches, compared to more than 4,000 for its megabank, trillion-dollar peers. Nearly 500 of Citi's branches are in just two states, New York and California.

Citi sees Bridge as a way to increase its brand awareness without adding retail branches or originating loans. Most of the participating banks are headquartered in the Southeast. Mathur said the bank was looking for locations that presented strong growth profiles.

Citi is touting the product as part of the company's mission to pursue inclusive growth that lifts up vulnerable populations. Six of the 18 participating banks are minority depository institutions, a regulatory distinction for banks that are either majority owned or operated by minorities.

Most of the banks on the platform are small community banks, with 12 of the 18 participating banks under $4 billion in assets. But a handful of regional banks, the largest being First Horizon Corp., reported $87.57 billion in assets as of the second quarter. Bank OZK, a $26.61 billion bank, is also looking at the platform to reach new customers and evaluating a new technology, Alan Jessup, chief lending officer for the bank, said in an email.

For the participating banks, the Bridge platform provides an opportunity to book loans and workshop a new technology. Colony Bankcorp Inc., a $1.75 billion community bank, is one of the 18 lenders on the platform. The bank is based in Fitzgerald, Ga., more than 150 miles south of the Atlanta metro area where it has just five branches.

"When we talk about Atlanta, they know Citi before they know Colony Bank," said Lenny Bateman, chief credit officer for the bank. "So, the opportunity to go through a portal like this and source that loan, we likely wouldn't ever see that customer."