Community banks and credit unions are partnering with fintechs to revive their personal lending business. By using digital platforms, they can offer unsecured loans to their customers faster and more efficiently. They can also compete with online lenders that provide point-of-sale financing to consumers.
The Challenge of Unsecured Lending for Community Banks
Unsecured personal loans are loans that do not require any collateral from the borrower. They are typically used for various purposes, such as debt consolidation, home improvement, medical expenses, or emergency needs. However, for many community banks and credit unions, offering unsecured loans is not profitable. The process of taking and processing the applications is time-consuming and costly, and the interest rates are often low.
According to a report by TransUnion, unsecured personal loan balances reached $156 billion in the second quarter of 2021, up 11% year-over-year. However, the share of community banks and credit unions in this market has declined significantly. In 2016, they accounted for 31% of unsecured personal loan balances, but by 2020, their share dropped to 13%. Meanwhile, fintech lenders increased their share from 24% to 38% over the same period.
One of the reasons why fintech lenders have gained an edge in this market is their ability to offer point-of-sale financing to consumers. This is a form of unsecured lending that allows consumers to pay for purchases in installments at the checkout. Fintechs like Afterpay, Affirm, and Klarna have partnered with retailers to provide this option, which is especially popular among younger and credit-challenged consumers.
A study by McKinsey & Co. estimated that fintechs active in point-of-sale financing have captured between $8 billion and $10 billion in annual revenue that might have gone to banks otherwise. The study also projected that this segment could grow by 10% to 15% annually over the next five years.
The Solution of Fintech Partnerships for Community Banks
To overcome the challenge of unsecured lending, some community banks and credit unions have turned to fintech partnerships. By using digital platforms developed by fintechs, they can streamline the application process, reduce operational costs, and offer more competitive rates. They can also leverage their existing customer relationships and local presence to provide personalized service and financial education.
One example of such a partnership is between Princeville State Bank, a $109 million-asset institution in rural Illinois, and Quilo, a fintech that has developed a digital application platform for unsecured loans. Princeville State Bank was spending about 90 minutes for each loan application, which made unsecured lending unprofitable. But after finding Quilo through the ThinkTECH Accelerator program started by the Independent Community Bankers Association (ICBA), the bank was able to reduce the time to less than 10 minutes.
Quilo also allows Princeville State Bank to offer point-of-sale financing to its business customers, such as contractors and health care providers. This way, the bank can compete with online lenders that offer similar services. Quilo has partnered with more than 50 community banks and credit unions across the country.
Another example of a fintech partnership is between Panacea Financial, a digital banking platform for physicians, and Customers Bank, a $19 billion-asset bank based in Pennsylvania. Panacea Financial was co-founded by two physicians who understood the unique financial needs of medical students, residents, and attending physicians. They offer unsecured personal loans up to $75,000 with no origination fees or prepayment penalties.
Customers Bank provides the funding and regulatory support for Panacea Financial’s loans. In return, Customers Bank gains access to a niche market of high-income professionals who are often underserved by traditional lenders. Customers Bank also benefits from Panacea Financial’s technology and marketing expertise.
The Benefits of Unsecured Lending for Community Banks
By partnering with fintechs, community banks and credit unions can reap several benefits from offering unsecured lending. Some of these benefits are:
- Customer retention. By offering unsecured loans to their customers, community banks and credit unions can prevent them from switching to online lenders or other competitors. They can also increase customer loyalty and satisfaction by providing convenient and flexible financing options.
- Customer acquisition. By offering point-of-sale financing to their business customers, community banks and credit unions can attract new consumers who are looking for alternative ways to pay for purchases. They can also cross-sell other products and services to these consumers.
- Revenue growth. By offering unsecured loans at competitive rates and fees, community banks and credit unions can generate more interest income and fee income. They can also diversify their loan portfolio and reduce their reliance on traditional sources of revenue.
- Innovation. By partnering with fintechs, community banks and credit unions can access cutting-edge technology and data analytics that can improve their operational efficiency and customer experience. They can also learn from fintechs how to innovate and adapt to changing customer preferences and market conditions.
Unsecured lending is a growing and lucrative market that community banks and credit unions cannot afford to ignore. By partnering with fintechs, they can revive their personal lending business and compete with online lenders. They can also enhance their customer relationships and strengthen their community presence.
