Why Fundation Would Rather Work With Banks Than Compete With Them
Much of the narrative written about alternative lenders is the story of a competition, with traditional lenders (banks mostly) on one side of the divide — and a wide field of online alternative lenders on the other.
But to Sam Graziano, CEO of Fundation, that view is a little bit off — because in many cases the reality is that traditional bank-based lending and its emerging online counterparts really aren’t staking out the same ground.
“Alternative lenders, to use the term broadly, exist to do what banks can’t or won’t do,” Graziano told PYMNTS in a recent conversation.
And that, he notes, is actually very good news for emerging online lenders like Fundation.
“I think if banks really wanted to do something and to make small loans, banks could price alternative lenders out of the market,” Graziano noted. “They have the cheapest cost of capital out there. They have 80 percent of their balance sheet made up by deposits, which costs virtually nothing today. There is the operating expense, which is a big part of the business as well, but I think that is dwarfed by the cost of capital advantage.”
An advantage, he says, that in the last 5 to 10 years banks haven’t been eager to press.
“In some asset classes, non-conforming mortgages or unsecured consumer loans for example, it’s not quite as much an argument about ‘can’t’ so much as it’s an argument of ‘won’t,’” Graziano explained. “Banks got burned pretty badly by those asset classes in the last credit cycle and they decided to stay away from this stuff.”
In small business lending, on the other hand, the question hasn’t so much been about willingness, as it’s been about ability — or at least ability to underwrite those loans in an efficient and profitable way.
“Small business lending suffers from more of structural challenges, meaning the banks have not decided for now they don’t want to do this stuff because they decided against it,” Graziano explained. “Structural means there is stuff that prevents it from being an efficient or profitable business line for banks.”
And overcoming those “structural difficulties,” is the reason Fundation exists. The problems are well-known throughout financial services — small businesses are a high-risk group, and they tend to also be low collateral. Other than those basic similarities, the category “small business” captures an unimaginably large and heterogeneous population that’s hard to assess. Banks handle that difficulty with high demands for and lots of (time-consuming) documentation. Fundation comes at the problem rather differently.
“We do everything soup to nuts. We find customers through partnerships or directly. We underwrite, originate and hold on to loans as an account on our balance sheets, which means we take risk in every loan we originate,” Graziano said, noting that structurally its model is very similar to that of a traditional bank.
He also noted because they carry the loans — instead of selling them off like a marketplace lender would — they are particularly invested in their partners’ outcomes and evaluating those risks well.
“We are very heavy on aggregating third-party data in real time, doing a lot of automation, using disparate data sources and combining them to determine what kind of risks we are taking,” Graziano explained.
Banks certainly could build that kind of very specialized platform, but it would be both entirely too time-consuming and costly to do so — particularly when working in concert with a platform player like Fundation is an option.
An option that Regions Bank tapped into this week, with its announcement that it will be integrating its small business lending with Fundation with what they are described as a “first of its kind” effort at delivering coordinated lending solutions.
“Small businesses continue to drive growth throughout the economy, and in order to meet their ever-evolving needs and desire to utilize online and digital processes, the financial services industry must provide innovative solutions that offer flexibility, speed, and capital access in a responsible manner,” said Joe DiNicolantonio, head of Regions Business Banking.
“We know that 20 percent of small business owners in the U.S. are already turning to online lenders to meet their credit needs. This unique agreement with Fundation allows Regions Bank to expand loan product offerings and method of delivery for small businesses while also cultivating long-term revenue and loan growth opportunities.”
And it’s an opportunity for Fundation to expand its offering to Regions’ customer base across 16 states in the South, Midwest and Texas.
“Partnering with banks has been a great conversation point in our industry for a long time,” Graziano noted. “We are trying to really work to build a solution that exists right on a bank’s homepage, so we can really partner to get the customer into the right product.”
And building out those partnerships with banks is what’s on the agenda for the rest of the year of Fundation. Graziano expects to announce at least one other big tie-in before the year’s end.
Topics: Alt Lending Tracker alternative lending Featured Fundation
Fintech strikes again; Regions partners with start-up
In a deal that highlights the rising influence of Silicon Valley on finance, Regions Financial, which operate bank branches across 16 states, plans to partner with lending start-up Fundation to provide online loans to small businesses.
The partnership, due to be announced Monday, will give the publicly traded Regions, valued at $11 billion, a new online banking presence. It will give Fundation access to Regions' small-business customers in a deal that could double the start-up's revenue.
"We expect it will at least double (loan) originations and revenue" as a result of the partnership, CEO Sam Graziano told USA TODAY. He declined to provide revenue numbers for the privately held company, which is backed by private equity firm Garrison Investment Group.
The union comes as banks of all sizes -- including Wall Street behemoth Goldman Sachs -- look for ways to compete with the rise of online lenders — an increasingly crowded field that now includes LendingClub, OnDeck, Fundation and FundingCircle.
Online lenders present a threat to traditional banking because they face less cost and regulation. They can also provide loan guarantees faster than brick-and-mortar lenders.
Goldman Sachs predicts that the emerging financial technology industry, dubbed fintech, threatens to grab $4.7 trillion in revenue and $470 billion in profits from traditional Wall Street firms. That includes not just lending, but also payment transactions and even investment advice.
It's not just talk, either. Goldman CEO Lloyd Blankfein in May told staff that the behemoth investment bank is working on its own online lending product for consumers. "The firm has identified digitally led banking services to consumers and small businesses as an area of opportunity," Blankfein's letter said.
For Regions, the quest to find an online partner started last year after it conducted a survey of customers and found close to 20% "were using online alternatives other than Regions," said Joe DiNicolantonio, head of Regions business banking unit.
After talking with dozens of start-ups, Regions settled on Fundation, which underwrites its own loans, as opposed to LendingClub, which matches borrowers to lenders.
Small-business customers who go to the new co-branded website will fill out a single loan application. The site, powered by Fundation, will then direct borrowers to either Fundation or Regions, depending on their needs.
Customers seeking what is known as a fixed-rate installment loan, which is repaid over time with a set schedule of payments, will have their loans underwritten by Fundation up to $1 million. Borrowers seeking installment loans valued at more than $1 million, or other types of loan, such as a line of credit, will have their loans underwritten by Regions.
Fundation's Graziano said he expects to win similar partnerships with other banks. "We lend on a national basis so I could very well see us being a partner to another regional bank in the Northeast or Midwest," Graziano said.
Source: USA Today
Regions Bank Joins Forces with Fundation Group to Create First Integrated Small Business Lending Solution
Regions Bank Joins Forces with Fundation Group to Create First Integrated Small Business Lending Solution Between a Major Bank and Leading Online Business Lender
Agreement Provides Small Businesses with the Ease and Simplicity of Online Lending with Size and Influence of a Leading Banking Institution
BIRMINGHAM, Ala. – (BUSINESS WIRE) –October 5, 2015 – Regions Bank and Fundation Group LLC today announced an agreement that will combine the strengths of one of the nation’s largest full service banks with that of a leading online lender to provide small businesses with a first of its kind, coordinated delivery of lending solutions.
Small business owners looking to grow and expand, or to better manage cash flow, will have the option to access Fundation’s online application directly from the Regions.com website. This new co-branded online customer experience will allow small businesses to expedite their loan applications for Regions lending products or elect to apply for a Fundation loan.
“Small businesses continue to drive growth throughout the economy, and in order to meet their ever-evolving needs and desire to utilize online and digital processes, the financial services industry must provide innovative solutions that offer flexibility, speed, and capital access in a responsible manner,” said Joe DiNicolantonio, head of Regions Business Banking. “We know that 20 percent of small business owners in the U.S. are already turning to online lenders to meet their credit needs[1]. This unique agreement with Fundation allows Regions Bank to expand loan product offerings and method of delivery for small businesses while also cultivating long-term revenue and loan growth opportunities.”
Commenting on the relationship, Sam Graziano, CEO of Fundation, said, “This agreement is a first-of-its-kind for the online lending industry. Regions and Fundation made a commitment to develop a highly integrated and coordinated approach to serve the small business market in Regions’ footprint. Regions brings a powerful brand, an outstanding retail distribution franchise and an already very strong set of capabilities in delivering credit products to small businesses. By leveraging our digital infrastructure, we expect to enhance Regions’ leadership position in its footprint and meaningfully accelerate the growth of our own business.”
Fundation offers a streamlined online loan application with a high-touch concierge service to offer loan applicants valuable information and insight about the loan process and their loan application. Small businesses can apply for a loan in less than 10 minutes and loans can be funded in three days. To apply, customers simply visit Regions.com/smallbusiness and are directed through a link from Regions.com to Fundation’s online application.
About Fundation
Fundation is a leading online direct lender, providing small businesses with a simple and efficient online borrowing experience that leverages technology to streamline the collection of customer data, expedite the application process and offer customers unprecedented transparency. The company offers conventional term loans to small businesses nationwide for working capital, growth and expansion. Visit http://5kb.f76.myftpupload.com for more information.
About Regions Financial Corporation
Regions Financial Corporation (NYSE:RF), with $122 billion in assets, is a member of the S&P 500 Index and is one of the nation’s largest full-service providers of consumer and commercial banking, wealth management, mortgage, and insurance products and services. Regions serves customers in 16 states across the South, Midwest and Texas, and through its subsidiary, Regions Bank, operates approximately 1,630 banking offices and 2,000 ATMs. Additional information about Regions and its full line of products and services can be found at www.regions.com.
[1] “The Joint Small Business Credit Survey, 2014,” a collaboration among the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. Released February 2015.
Investing in Alternative Lending?
That Could Mean a Lot of Different Things
As CFA’s recent Alternative & P2P Lending and Investing Forum in New York proved, “alternative lending/fintech” is a topic on many minds today. It’s also still somewhat shrouded in mystery. Sam Graziano, CEO of Fundation, sheds some light on the topic, particularly about those investing in the space.
BY SAM GRAZIANO
“Alternative Lender” is a term now applied to just about any lending-oriented business model without the word “bank” in it. The term has been applied to businesses that source borrowers and refer borrowers to lenders (also known as an “Aggregator”), businesses that originate and sell loans or loan participations (also known as “Marketplace Lenders”), and businesses that originate and hold loans for their own balance sheet (also known as “Direct Lenders”). From an investor’s standpoint, there are dramatic differences in how you can participate in this market and your investment rationale for doing so.
The Old Alternative Lending and the New Alternative Lending
For many of you reading this article, “alternative lending” is not a new term. In fact, your business may have been called an alternative lender, a term that historically was applied to asset-based lenders, factors and other commercial finance companies that originated leveraged loans, equipment loans, and short-term and long-term secured receivables financing. Many of these product categories are now addressed by specialized business units within the banks themselves.
The new alternative lenders are something else entirely. The markets they address, the way they underwrite and how they acquire customers is different. The ecosystem of aggregators, marketplace lenders and direct lenders provides small-balance credit instruments predominantly through the Web to consumers and small businesses, uses business process automation to deliver cost and time efficiencies into the lending process, and uses real-time (seconds) data aggregation and analytics to predict and price risk. Fundamentally, these business models are leveraging technology to deliver small-balance credit in markets where the banks do not. I humbly suggest a different term for these companies: “Digitally Enabled Lenders,” or DELs.
Why Is There So Much Interest in DELs?
After about eight years, two IPOs and perhaps $20 billion originated, the level of investor excitement over DELs has not dissipated. LendingClub, the world’s largest marketplace lender, launched its initial public offering in December 2014, followed shortly thereafter by OnDeck Capital, the largest short-term working-capital financing provider to small businesses. LendingClub, a business without much of a balance sheet , trades at nearly 200x its annualized “adjusted” EBITDA and more than 100x forecasted 2016 earnings. OnDeck Capital, predominantly a balance sheet lender, trades at more than 4x book value and more than 35x forecasted 2016 earnings.
Unquestionably, these valuations indicate an expectation of a high rate of growth for years to come. Justifying these growth rates requires investors to assume that DELs are technology disrupters that will disintermediate the banking industry and capture meaningful market share in the process. The investment narrative is
that regulatory pressure, heightened regulatory capital requirements, and antiquated and entrenched technology put banks at a competitive disadvantage versus DELs. There is a lot of merit to this investment rationale, as the level of regulatory supervision is impeding bank innovation and consumers are embracing what the web and mobile applications deliver throughout their lives.
The Other Side of the Coin
The largest DELs address the unsecured consumer loan, nonconforming mortgage, graduate student loan and small business loan markets, where digitally enabled processes permit the delivery of small amounts of credit to individual borrowers through the Web. It is easy to understand why DELs do not exist in larger-ticket, higher-touch lending categories like ABL commercial real estate and commercial loans. However, there are also no substantial DEL franchises in some of the largest consumer markets, such as credit cards, auto finance, conforming mortgages and government-guaranteed student debt. The national banks and other national brands still dominate these product categories.
Despite an operating expense advantage enabled by technology, the banks have a potentially insurmountable advantage in terms of cost of capital. They also have a structural advantage to the customer’s mind share as a result of the deposit relationships they have with customers. So the question remains as to whether DELs can compete head-to-head with banks for a customer. DELs, thus far, thrive where the banks cannot or will not participate.
Banks will often shy away product categories where all, or many, of the following characteristics are present:
- Regulatory pressure or a deliberate risk management decision on the part of the banks to reduce exposure to a given product category
- A lack of (or material deficiency of) collateral or government guarantees
- Heightened regulatory capital requirements
- The need to employ a risk-based pricing framework to manage risk effectively, with which many banks are uncomfortable.
Even when these market characteristics are present, many of the consumer-oriented products are dominated on a national scale by virtual oligopolies among the national banks. Take credit cards, for example: this market is dominated by 7 companies—Bank of America, JPMorgan Chase, Capital One, Citigroup, AMEX, Discover and US Bank. These are business lines with massive scale and are highly profitable. These firms will protect their trophy franchises at all costs.
Investing in Digitally Enabled Lending
To be an investor in Digitally Enabled Lending, you have to pick your product category and pick your investment strategy. Marketplace lenders offer investors, for the first time, the ability to purchase consumer and small business loans at scale, a proposition that can deliver exceptional risk-adjusted returns with low volatility across market cycles.
As an equity investor, you need to pick the business model that you believe in. Aggregators and Marketplace Lenders are capital-light, low-profit-margin businesses (profit as a percentage of dollars originated) and, therefore, require substantial scale to generate profits. But scale is the name of the game, as many believe that these businesses can grow unconstrained by access to capital.
Direct lenders, on the other hand, are capital-intensive businesses, but capture the entire revenue stream on a given credit instrument rather than outsourcing most of that to the loan buyer. These are traditional commercial finance companies in the way they make money, but nontraditional in how and what they originate and retain.
In today’s landscape of Digitally Enabled Lending, we find an interesting mixture of traditional financial-services equity investors, credit investors and technology-minded investors that have different points of view.
Ultimately, every DEL is exposed directly or indirectly to the cyclicality of the demand for, and performance of, credit. Time will tell if this is a new story altogether, or the same story in digital form.
Sam Graziano is the chief executive officer of Fundation, a New York City-based small business direct lender and solutions provider that utilizes a sophisticated software platform to streamline the lending process. Fundation launched its system to the public in May of 2013 and is now backed by a group of high-profile private equity firms and other investors. Graziano is a highly experienced financial services professional and entrepreneur. Prior to Fundation, he spent over a decade in investment banking and private equity where he developed an expertise on strategic, financial and operational issues for banks, specialty finance companies, asset managers, broker/dealers and other institutions throughout the financial services sector. At Centerview Partners, Graziano provided strategic and financial advisory services to some of the nation’s largest and most recognizable financial services companies. Prior to Centerview Partners, he spent six years with Keefe, Bruyette & Woods, the nation’s largest boutique investment bank focused on the financial services sector, where he executed dozens of mergers and corporate finance transactions and then co-founded the firm’s private equity practice. Graziano graduated from Bucknell University with honors with a degree in Computer Science & Engineering.