It appears that big banks are finally starting to warm up to online lending upstarts. The aftermath of the 2008 financial crisis resulted in big banks being very hesitant to take risks on high-tech lenders, but now it appears that this is finally starting to change.
One such online lending upstate is On Deck Capital. The company had an easy time obtaining investments from venture capitalists and attracting new customers, but for many years, getting assistance from a big bank was more difficult.
However, earlier this month, JPMorgan Chase finally agreed to support On Deck. According to On Deck, this will help them in providing small business loans to the four million customers of the bank.
On Deck CEO Noah Breslow said, “We had to lend $3 billion and prove we could do it really well before the banks felt comfortable with us.”
It appears that online lenders are being required to demonstrate security and regulatory compliance before large banks will step in. These online lenders typically work with smaller banks and established lenders in issuing loans. Online firms have learned that they will have a much more positive experience in teaming up with the big banks rather than trying to work against them.
During the first three quarters of 2015, venture capitalists invested more than $10.5 billion into global finance tech startups. This is a major increase over last year, when only slightly more than $6 billion was invested in such companies during the entire year.
Although investors are optimistic, online lending has received some criticism. It has been reported that the individual responsible for the recent mass shooting in San Bernardino, CA used an online lender to obtain funds to carry out the deadly attack. However, American officials have said that the online lender that arranged the loan, Prosper Marketplace, did nothing wrong. That being said, some regulators believe that more restrictions should be placed on the rapidly growing industry.
Many big name banks view online startup banks as potential partners or acquisition targets. The large banks are largely embracing technology to reduce their costs and attract more customers. After striking a deal with the large banks, the relatively small online lenders receive financial assistance and guidance to help their companies grow. Sometimes the owners of the online lenders sell the company outright, leading to a very big payday.
Some banks might be feeling a sense of urgency to take control of online lenders before they grow too large. One report found that upstart online lenders could eventually wipe out as much as 60% of the profits for the financial products of big banks. Some large banks are already seeing reduced margins.
For now, it appears that big banks will race to get a stake in the matter before it’s too late. Regardless, things are certainly looking good for online lenders.