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.