The nation's largest banks are beefing up their technology tocompete with the burgeoning digital lending space through innovation, partnershipsand acquisitions.
Armed with millions of consumers and trillions of deposits, thebig banks have resources that the Silicon Valley startups cannot match. But thebig banks also lack the agility of the LendingClubsof the world, which offer customers seamless experiences and rapid financing. Amongthe four largest banks — CitigroupInc., Bank of America Corp.,JPMorgan Chase & Co.and Wells Fargo & Co.— it appears there will be a variety of approaches to deal with the potential threatposed by digital lenders.
JPMorgan made a splash in the space when it a strategic partnership with in December 2015.During the LendIt USA conference in San Francisco last week, OnDeck CEO Noah Breslowsaid the partnership recently went live, meaning Chase customers could apply forloans on the platform.
The partnership is often referred to as a "white-label"solution in which JPMorgan adopts OnDeck's technology, keeping JPMorgan brandingthroughout the customer experience. Other solutions, such as Regions Financial Corp.'s partnership with Avant, are co-branded,where the customer can receive loan offers from either Regions or Avant.
Wells Fargo, on the other hand, appears set on developing itsown digital lending solution. Jim Seitz, communications manager for Wells Fargo'ssmall business segment, said the bank is continually focusing on improving the productsand services to make financing for business owners as simple and convenient as possible."Innovation is a priority, and we will have more to announce about lendingtechnology for small business customers this year," he said.
Citigroup, too, appears to have prioritized internal development,investing in "innovation labs." During the Credit Suisse Financial ServicesForum on Feb. 9, Naveed Sultan, global head of treasury and trade solutions at Citigroup,said that the innovation labs complement the company's existing business by incubating,prototyping and piloting new product and service concepts in disruptive spaces.Sultan also said that the company is very excited about the potential of blockchainand is actively exploring its relevance in trade finance, cross-border payments,and national digital currency.
"Our research allows us to actively engage with startupsand other industry partners on blockchain and other technologies to ensure [Citi'streasury and trade solutions business] remains at the industry forefront,"he said.
Citigroup has also participated in the space in a more traditionalsense, providing a credit facility in an April 2015 agreement with LendingClub and Varadero Capital LP.
And it appears that Bank of America could be on the for a potential acquisitionin the digital lending space, especially in the payments sector, according to recentcomments from the bank's president of retail banking and co-head of consumer banking,Thong Nguyen.
"It's something [BofA] has to do. It's not like they arelooking to become a big fintech player," Sandler O'Neill & Partners LPanalyst Jeff Harte said. He thinks the future of payments over the next few yearsis unsure, so major banks are looking at how they can take advantage of the advancingtechnologies, or at least prevent these developments from eating into the bank'smarket share.
BofA has also worked with other technology providers to improvethe customer experience. Early Warning announcedon March 9 that BofA and U.S. Bancorprecently went live and can now process real-time person-to-person transactions throughEarly Warning's clearXchange network. Early Warning is a provider in real-time payments,authentication and risk mitigation, owned by BofA, BB&T Corp., CapitalOne Financial Corp., JPMorgan Chase, PNC Financial Services Group Inc., U.S. Bancorp and WellsFargo.
"I think Bank of America is very conscious that there aretechnology innovators out there, outside the banking system, especially in termsof payment technology," said David Hilder, a Drexel Hamilton LLC analyst, addingthat all other large banks are also approaching this issue through potential acquisitionsor partnerships.
While the narrative of digital lender disruption has dissipatedas venture capital and public markets have cooled on the industry, banks still facea threat from the space. A white paperfrom Citigroup argued that the digital lending space will "initially eat industrygrowth, taking new segments (e.g. underbanked) and new product categories beforeultimately turning on traditional revenues."
Steve McLaughlin, founder and CEO of Financial Technology Partners,said the largest banks face significant marketing challenges in convincing consumersthey now offer a less-intensive loan application process.
"Theoretically, if the largest four banks are armed withthis type of technology, they will be much more competitive with the independentfintech," he said.