Big banks like Chase are taking advantage of white label or “buy it” opportunities, by entering into licensing agreements with LaaS (lending-as-a-service) providers like OnDeck. This type of licensing arrangement provides substantial advantages to a big bank, but there can be substantial disadvantages for the technology partner.
Click on The Growth Of Lending-as-a-Service to learn about this new fintech, big bank partnership.
Big banks continue to decline more than 75% of business loan applications, which is one of the reasons the demand for alternative loans continues to rise. Leading the way are LaaS pioneers like Ezbob, Funding Circle, Market Invoice and OnDeck. These companies leverage innovative fintech platforms to decision applications and fund new loans within hours, instead of weeks. And with a much simpler application process compared to traditional lenders.
According to Noah Breslow the CEO at OnDeck, “We helped Chase take the small business loan process from six weeks to six clicks.”
As a regulatory compliance expert my goal is to help fintech companies maximize their business potential in highly regulated markets. There are two points that cause me concern as I read this article. First, according to Breslow it took 4 years “to take the partnership from idea to market” with “a million different hurdles” to overcome. Second, this is a partial stack business model where OnDeck earns only “a small payment for each loan”, and they don’t share transactional revenue like interest payments or servicing fees.
A few months ago we posted a 2-part report exploring the pros-and-cons of the full stack vs. partial stack business model for fintech developers. When you use a partial stack model your technology becomes an ingredient in a big bank’s overall lending program. You gain access to the bank’s client list; and you avoid credit risk, because the bank uses their own capital to fund the loans. You earn a small licensing fee for each loan application you process, but the bank keeps all the interest and fee revenue. Which means you’ve just left the lion’s share of profit potential on the table.
At InnReg we strongly advocate for the full stack business model, where your company becomes a regulated entity in order to offer direct loans. This approach allows you to own your client relationship, and keep your full share of interest revenue and account fees. Many technology entrepreneurs are hesitant to take on the process of becoming a regulated entity, but a cost benefit analysis will show that in most cases the benefits of the full stack model will far outweigh the cost of implementation.
Please don’t hesitate to reach out for a regulatory compliance review for your LaaS product design, including a full stack vs. partial stack assessment.
We’re looking forward to your comments regarding fintech partnerships with big banks.