An Online Lender `Disrupting' Banks? More Like Helping Out

  • Lending startup Fundation enters pact with more than 200 banks
  • Program aims to reduce `friction' in small-business lending

More than 200 U.S. banks are finding not every financial-technology startup is out to steal their business.

Fundation, an online lender founded 2011, announced a partnership Tuesday with BancAlliance, a network of community banks spanning 40 states. The deal has two parts: Banks get access to a Fundation platform that simplifies underwriting for small-business loans. Fundation, in turn, can offer credit to customers that don’t fit the banks’ borrowing criteria.

The arrangement echoes a deal BancAlliance reached with LendingClub Corp. last year to help community banks provide personal loans to their customers. At the time, that partnership showed Silicon Valley was starting to approach traditional lenders more amicably than some startups’ bank-bashing suggested.

Over the past few years, a growing number of new ventures have muscled into financial services. There are websites now where borrowers can get financing for small businesses, elective medical procedures, consolidation of credit-card and student-loan debts, and even to open a franchise restaurant.

Seeking Partners

Fundation has made a bank-friendly pitch central to its strategy. Last year, the startup struck a deal with Regions Financial Corp. to share technology and offer loans to borrowers that the bank doesn’t lend to.

“We really don’t emphasize, like so many companies in our market do, trying to disintermediate banks,” Fundation Chief Executive Officer Sam Graziano said in a phone interview. “We want to be the leading partner to the banking system.”

Others are pursuing a similar strategy. OnDeck Capital Inc. struck a deal with JPMorgan Chase & Co. late last year to speed up lending to small businesses. The online lender followed up that arrangement weeks later with a referral agreement with Commonwealth Bank of Australia, the continent’s largest lender.

The appeal of the latest Fundation pact is simple, said Brian Graham, CEO of Alliance Partners, the manager for the BancAlliance network. Most community lenders don’t have the technological resources to make certain segments of small-business lending economically viable.

“It costs the bank the same to underwrite a $500,000 loan as it does a $5 million loan,” he said in an interview. “Loans under $250,000, most banks lose money on.”

Setting Terms

Fundation’s main products are fixed-rate installment loans from one to four years. Under the partnership, loans will be capped at $1 million. Specific terms and interest rates will be left to the partnering banks, Graham said. Whichever institution underwrites the debt keeps the servicing rights.

Partnering with Fundation won’t replace community banks’ normal due-diligence on borrowers, Graham said. But it will remove some of the “friction” in the process.

“This isn’t about automating everything,” Graham said. “In small business, in particular, you can’t do $500,000 without talking to a person.”

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