13Jan

Are banks core business of mortgage lending being disrupted?

Great article below by Louis Beryl saying that 2017 could be a watershed for banks – and they. Red to innovate and serve there customer’s better 

Online lenders and non-banks are encroaching key markets that used to be dominated by the largest financial institutions. Take mortgage lending. For the first time, non-banks now do more than 50% of all home loans in the United States.

But big banks are not going to give up additional market share so easily.

I predict 2017 will be the year incumbent firms will become more aggressive with their expansion into online lending either through launching their own products, creating partnerships with existing online lenders, or making a few large acquisitions of one or several of the largest new online lenders.

There are a few key reasons this is happening.

First, acquiring new customers is difficult. Big banks, along with regional ones, need to keep growing their lending businesses and their client relationships broadly. They need to connect with new, younger clients. For some smaller incumbents without large national brands already, a larger national online footprint could enable them to do that. Online lenders represent a potentially massive and scalable opportunity to access a new generation.

Second, established financial institutions very much care about the relationships they have with their customers and the ability to serve them with different services. By bringing online lenders into their brands, they create deeper and more extensive relationships with this growing group of digitally native customers.

Lastly, it’s about technology and ongoing learning. Data is vital, and to stay relevant, you need to have an orientation towards technology-based solutions. Big banks do have massive technology budgets—but are these being spent in the wisest possible ways to position for the future? Do they have the innovative teams to build these in the right ways?

Taken together, these three factors above will lead financial institutions to ask the next relevant question: buy or build? I anticipate many will choose to buy, but some, fewer, will build. Some may partner first, what I like to call the “try then buy approach.”

Very few have gone down the “build” route so far with the exception of Goldman Sachs, which launched its Marcus lending platform earlier this year. The platform emulates Earnest’s Precision Pricing, launched in 2015, which allows clients to customize their loan terms based on their preferred monthly repayment budget. I expect we will see more lenders offer similar loan-personalization services.

But very few incumbents are taking this approach. The other way is through partnerships and there have been many creative ones in the last year.

This past year, JPMorgan Chase rolled out an online loan service to its existing small business clients by partnering with OnDeck. The partnership with the online platform holds the promise that the bank can now approve loans much faster than in the past.

There have been other creative partnerships; Wells Fargo and Amazon tried a partnership this past summer. Apple has partnered with Citizens Bank to finance new iPhone purchases; FifthThird has partnered with fintech companies including Green Sky and ApplePie Capital. These are just a few of the deals we have seen between traditional banks and online partners. Expect more this year.

No one can deny that online lending is now a major market force. The winner? The consumer. We have saved more than $300 million for our clients over the life of their loans through our technology at Earnest. We have been able to add efficiency, savings, and speed where traditional institutions have been expensive and slow. 

People will increasingly demand more alignment from their financial services—whether it’s more personalized loans or insurance, or access to financial accounts 24/7 with an app. Online lenders are part of that answer—and I predict 2017 will be a tipping point.

This article is part of the LinkedIn Top Voices list, a collection of the must-read writers of the year. Check out more #BigIdeas2017 here.

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