Unlikely Bedfellows: Why are Big Banks Embracing Small Local Lenders?

Financial CrisisHealthy loan growth is vital for banks’ income growth, as well as economic growth. Following the Global Financial Crisis, major banks and small lenders suffered dramatically. It resulted in massive evictions, foreclosures, damaged investor confidence, plummeting real estate pricing and so much more. When the crisis hit, a number of lenders withdrew from the market while national governments bailed out big banks to prevent their collapse.

On the road to recovery, financial institutions are seeing changes in lending processes. Today, instead of competing with small local lenders, big banks are embracing them. Financial institutions are considering the idea that commercial banks and alternative lenders can coexist peacefully in the community. But how will this unlikely partnership benefit both parties? Let’s take a look.

Advantages to Banks

A good number of large, commercial banks are partnering with well-established small local lenders, especially in terms of small-business lending. Commercial banks would now get help from small lending institutions to pitch unsecured consumer loans to the community.

They would band together to develop products and niches. Sharing customers would mean sharing revenue, but experts say this unlikely partnership has great potential. The success of the partnership depends on the willingness of both parties to cooperate and, of course, on how they will practice honesty, transparency and consistency.

Advantages to Small Local Lenders

The idea of the partnership is that potential borrowers would apply for loans through a small lender’s online easy loan process while still acquiring mortgage products or small-business loans from the bank. The bank will then get a small share of roughly 4% from the small lender, providing a modest revenue stream.

People are yet to witness how this will benefit small lenders and consumers in the long haul. Perhaps, what these partnerships can do is boost consumer and investor confidence that the Global Financial Crisis damaged.

Big banks can help small lenders establish their credibility and reputation. Since small lenders tend to be more vulnerable to economic conditions, a partnership can turn into a collaboration to prevent major damages or to recover from a major financial crisis.

Though there may be inherent risks, this partnership can be beneficial in broadening the range of mortgage, consumer and small-business loan products and niches. The reliability of the bank and scalability of the small lender will enhance borrower confidence and harness dependable relationships. There is a great possibility that this unlikely fellowship can help consumers and the economy as well.