Lessons Bank and Nonbank Lenders can Learn From Each Other
By Matt Johnner
August 26, 2019
Matt Johnner is president and co-founder of BankLabs, Little Rock, Ark. The mission of BankLabs is to reimagine banking products for the future through community-oriented technologies that create new fee income, attract deposits, expand loan opportunities and differentiate the financial institution from competitors. For more information, visit www.banklabs.com.
With the rise of technology and the expansion of financial regulation, more nonbank lenders are competing than ever before. According to CNBC, the amount of nonbank lenders has jumped 75 percent since 2010.
These alternative lenders now have $52 trillion in assets, with $15 trillion of that in the U.S. alone. With such a huge presence in lending, it begs the question: what are these alternative lenders doing that has made them so popular and what can traditional lenders like banks and credit unions learn from them?
This surge in nonbank lenders began at the end of the financial crisis, as nonbank lenders are not regulated as heavily as or in the same way that banks or credit unions are, giving them a good deal of freedom to work faster, more easily implement technology and take more risks.
Traditional lenders like financial institutions are highly regulated due to the financial collapse in 2008, especially when it comes to lending. These regulations make sure that financial institutions keep borrowers' money secure, but these regulations can also slow the lending process down. Bank loans are also cheaper, with lower interest rates, due to the nature of the loans the institution takes on.
Banks and credit unions have the opportunity to learn from nonbanks in order to stay competitive in a landscape that is clearly shifting. The rise in popularity of these alternative lenders is likely due in part to the technologies they have to offer. When traditional lenders can offer the same kind of innovative technology solutions, they will likely have a better chance competing with increasingly popular alternative lenders.
Implementing more innovate technology means that traditional lenders must be more open to change than they have been. Implementing loan automation tools could help them streamline workflow, meaning they work more efficiently, and borrowers are able to see the same kind of quick turn-around that many alternative lenders have.
In the same way, offering mobile-enabled tools helps traditional lenders to provide additional value to their services, making them attractive to potential borrowers that might be deciding between a bank or nonbank lender.
However, this is not one-sided. Nonbank lenders have something they can learn from bank lenders, as well. Though they are not as heavily regulated at this moment, alternative lenders cannot operate under the assumption that they will always be able to do business regulation-free. All it will take is one bad experience to make regulators crack down on this new type of lender.
To defend against impending regulation, it would be wise for alternative lenders to implement some of the same tools and controls that traditional lenders have so that when regulation comes knocking, they will be able to answer confidently. Alternative lenders, in some cases, have already stepped up to begin regulating themselves through trade organizations like the Innovative Lending Platform Association. Implementing certain technology solutions can also help to keep these lenders compliant with the same standards that banks and credit unions must adhere to in their lending practices.
This also has the added benefit of ensuring that borrowers are safe with alternative lenders, because they would be operating under similar standards. This is especially important post-financial crisis, as borrowers want to be sure their loans are safe.
Lastly, this would create a more level playing field for lenders, both bank and nonbank. Though both have their respective advantages and disadvantages, being held to similar standards, or any standards at all in the case of nonbank lenders, would create a fairer fight for lenders.
There is no right or wrong when it comes to bank and nonbank lenders. Either type can be the right choice based on the type of loan and the circumstances surrounding it. Both traditional and alternative lenders have strengths and weaknesses and it is important that each learns from the other, so they are both able to better serve borrowers and lend responsibly. It is key that all types of lenders are continuously assessing their performance and working to change and improve so they do not fall behind the competition and borrower demands.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)