The recent troubles of Home Capital, a Canadian alternative lender, once again raises questions about the future of the industry.
The latest crisis is timely, as this month marks the one-year anniversary of the surprise firing of Lending Club CEO Renaud Laplanche. In May 2016, the company’s stock price was in a tailspin, ultimately dipping below half its value from earlier that same month. Shares of OnDeck Capital were likewise plummeting after a very weak quarterly earnings announcement.
At the time, there was consensus in the industry that these stumbles by two of the largest peer-to-peer or “alt lenders” represented an opportunity for banks. But there was also a tacit recognition that this was not the first elevation change on the roller coaster of this disruptive industry, and was not likely to be the last.
As it turns out, alt lenders continue to struggle 10 months later, despite having made some moves toward stability. At this writing, Lending Club’s stock price is still more than 40% below its 52-week high, having recovered only one-third of its Spring 2016 price drop.
Similarly, the company’s loan volume is increasing again but is still well below its peak. For their part, banks seem to be retaking market share, particularly in loans to small and medium enterprises (SMEs).
Rediscovering the value of the branch
It was just a couple years ago that Lending Club and OnDeck Capital went public to great fanfare, and many assumed that banks and credit unions would have to emulate them in order to compete. Brick-and-mortar bank branches no longer served a purpose, the reasoning went, because customers would demand an optimized online experience. In some circles, branches came to be seen as mere cost centers—impediments to profitability rather than sources of revenue.
Indeed, several global banks have made headlines by closing hundreds of U.S. branches in an effort to better match demand with floor space.
But while the large players have significantly reduced location counts bloated by mergers and acquisitions, the overall number of bank branches in the country has declined by only three percent. To paraphrase Mark Twain, “reports of the death of bank branches have been exaggerated.”
Community banks and credit unions have a rich history of serving a community, deep customer relationships, and the breadth of products that customers want. And the option to speak with someone in person is a part of that value proposition.
In fact, the trend from brick and mortar toward online interaction with brands seems to have slowed significantly, and may be stabilizing at “all of the above.”
Online-only enterprises are investing heavily in physical locations, part of an omnichannel strategy that attempts to unify the customer experience in person, on the desktop and via mobile device. This is in response to customer behavior data suggesting that consumers like to research products online, but often want to experience them in person before making a buying decision.
Even e-commerce pioneer Amazon has begun to explore brick and mortar stores in order to better serve customers – opening both bookstores in prominent locations and experimenting with re-invented brick-and-mortar grocery stores. Niche online retailers like Birchbox and Frank & Oak are now expanding their store networks, in response to customer demand for a unique in-person experience.
In this environment, many traditional financial institutions have realized that their branch networks are valuable assets that can help them compete with alt lenders. While everyday transactions like deposits and payments have largely moved online, many customers want to have a face-to-face interaction with a real person before making a major borrowing decision—even if most of the process is ultimately handled electronically.
Age is not determinant
While the desire for an in-person experience is commonly associated with older demographics, it is also a part of the complex tapestry of preferences found in everyone’s favorite generation—the millennials. In a recent conversation with a regional bank I learned that a lot of young borrowers still want to meet face-to-face at some point in the process, if not from the beginning. By contrast, buyers who apply through their online interface tend to be a little older and more comfortable with the process.
The first mobile mortgage processed via D+H’s technology was for a 47- and 49-year-old couple who were refinancing. Many milliennials are first-time home-buyers and, just like first-time home-buyers 25 years ago, are a little intimidated by the process. For them, that person-to-person interaction—whether through chat, a call center, or at the branch—is reassuring.
By John Zepecki, D+H group head of global lending product management1 - Reader Likes This Post