This story is the first in a two-part series on the digital lender GreenSky and its bank partnership model. Part 2 can be read here.
One of the country's biggest digital lenders is losing its funding from a major bank partner, but its other partnerships appear to be safe for now.
Regions Bank, one of GreenSky Inc.'s largest bank partners, will not renew its funding relationship when it expires in November. GreenSky's business depends on its ability to secure funding from bank partners to originate loans, and one analyst initially called the loss of Regions' commitment "clearly unsettling" for the digital lender. But even late in the economic cycle and as some of GreenSky's other large partners work through major acquisitions, analysts say Regions likely will be the only bank to drop out over the near term.
The announcement of Regions' departure has contributed to the lender's declining stock price since it hit public markets in May 2018, and investors and analysts had some reason to suspect other banks could follow suit. One bank analyst said the presence of a recession on the horizon made Regions' decision unsurprising. When the economy hits such a late stage in the economic cycle, banks pull back from unsecured credit risk, according to Keefe Bruyette and Woods analyst Brian Klock. GreenSky facilitates point-of-sale loans for highly discretionary consumer spending, mostly in home improvement — purchases that dry up in a downturn. Banks today are more concerned with credit quality than with growth, Klock said in an interview.
Although GreenSky executives have said Regions' pullback was exclusively due to a change in the bank's priorities, Regions President and CEO John Turner Jr. also indicated that returns in a rising rate environment were not as good as they had been.
"We had an opportunity to exit," Turner said at a conference earlier this year. "We decided ... to reallocate the capital into other parts of the business like commercial banking."
Regions initially wanted to participate in point-of-sale lending to see if there was an opportunity to build relationships with those customers, Turner said. After five years in partnership with GreenSky, Regions found that point-of-sale lending does not ultimately yield that broader relationship, he added.
The funding that GreenSky's other major bank partners, such as Fifth Third Bank and SunTrust Bank, provide is small compared with the banks' total loan portfolios. That means their exposure to credit risk tied to the GreenSky loans they fund is relatively low, and they are not likely to pull back their commitments in light of Regions' departure, Klock said.
GreenSky's nine bank partners have committed a maximum amount of $11.9 billion in loans, although the digital lender does not disclose how much funding each bank contributes. Its top five banking partners — BMO Harris Bank NA, Fifth Third, Regions, SunTrust and Synovus Bank — account for almost 90% of the company's funding commitments, according to a quarterly filing. GreenSky's other partners include Flagstar Bank FSB, Ion Bank, Midland States Bank and Renasant Bank.
The Regions Financial Corp. unit had committed $2 billion in funding, all of which will be used by the time the partnership expires. But analysts find it unlikely that GreenSky's other large bank partners will substantially increase their funding commitments to pick up the slack when Regions exits.
That is because the other major banks have their attention directed elsewhere.
Fifth Third Bancorp is likely focused on integrating MB Financial Inc., following the March closing of that $3.61 billion acquisition, Klock said. Increasing Fifth Third's commitment to GreenSky on the consumer side would be a "distraction" to their current focus on the commercial side, the analyst said.
Meanwhile, SunTrust Banks Inc. is tied up with its own integration efforts, pending a $28.28 billion merger with BB&T Corp. The bank also has its own online consumer lending division, called LightStream, which focuses mainly on unsecured loans in the home improvement space. But GreenSky Chairman and CEO David Zalik previously dismissed concerns that SunTrust might pull back its funding commitments because of its merger with BB&T.
SunTrust declined to comment on its partnership, and Fifth Third did not respond to requests for comment.
For the community bank partners, executives indicated that partnering with a lender like GreenSky is their only option to connect with digitally focused consumers.
Ion Bank, one of GreenSky's earliest partners, looks to have 100% of its total equity capital in the GreenSky program at all times, the company's chief risk officer, Ginger Fennel, said in an interview. Regions pulling out of its partnership with GreenSky has had no impact on Ion Bank, which recently increased its funding commitment, Fennel added.
Doug Tucker, corporate counsel at Midland States, highlighted the "astronomical" compliance and customer service costs that come with originating and servicing consumer loans.
"Only with huge scale does it pay," he said.
"A bank our size could never build a digital and automated loan approval process and then have it utilized across the U.S. by the type of retail and contractor presence [GreenSky] built," Tucker said in an emailed statement. Midland States had about $5.55 billion in assets as of June 30. "Even a bank 10x our size would probably be foolish to try."