There are several ways in which banks and marketplace lenders can partner to serve customer needs. This document provides a point of view on ways in which banks and marketplace lenders can partner up and strategic considerations

1. www.pwc.com/consumerfinance
Where traditional
and tech meet
August 2015
How banks and marketplace
lenders can partner up

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Where traditional and tech meet
What is it that would cause today’s consumers to turn to a new company for their borrowing needs? Why are
technology startups taking on some of the largest and most established financial institutions in the world for the job
of allocating capital? These questions speak to the changing cultural and technological landscape that is starting to
impact the financial services industry – from the smallest players to the largest banks.
Not long ago, the question was – what would the traditional lenders’ response be to all of this? Would they compete
or collaborate? Today we see institutions taking both routes, with an increasing number of established lenders
choosing to collaborate with new marketplace lending entrants. This collaboration began in the form of loan
funding agreements, where a bank funds the loans originated by a platform and then sells the loans back to the
platform, along with agreements for banks to invest in marketplace loans, purchasing loans that fit their credit
profile. Today the question becomes: which banks will be the first to truly capitalize on the deeper opportunities
that these partnerships have the ability to open up?
Marketplace lenders are often seen as disrupters competing against traditional banks. Several of them focus on
innovative technology and rapid service and are attracting a whole new segment of consumers who are not
necessarily the core strength of traditional lenders. Yet the more traditional banks have lower cost of funds, a long
history of consumer lending and credit modeling, significant investments in customer relationships and branch
networks, well known brands, and access to decades of customer data.
These complementary attributes open up the
opportunity for true strategic partnerships
between traditional and marketplace
lenders. Some believe that Lending as a
Service (LaaS)1 will be the model of the
future, utilizing the most efficient parts of
each company’s operations or technology
platform to create superior loan products
that offer the best prices and service to
customers. As banks progress beyond simply
investing in marketplace loans, these
partnerships will take many forms, from
basic referral programs to white labeling
and joint product development. Each type
of partnership has the opportunity for
significant revenue benefits to each side
(and their customers!) and requires a
differing level of integration and investment.
1 Rotman, Frank. “The Hourglass Effect, A Decade of Displacement”
Lending as a Service (LaaS) is a
derivation of the commonly used
term ‘X as a Service (XaaS). It is
often used to describe services
delivered over the internet, as
components, and sold as a service
rather than a product. It often
involves integrating different
pieces of a system or process
from providers who specialize in a
particular area. Lending as a
Service involves utilizing
technology or other service
providers to supply a particular
component of the overall
lending process.

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While the potential benefits are clear – higher returns, access to new customers, and fulfillment of obligations such
as CRA (Community Reinvestment Act), there are a few reasons why some banks have not yet pursued partnerships
with marketplace lenders yet. These include limited risk appetite, potential cannibalization of their own business,
and perceived potential reputational risks. Whichever type of partnership is pursued, there will a need for an
additional due diligence and scrutiny than is typically expected from pure investor partners. Banks have certain
regulations to comply with which marketplace lenders are not directly subject to, and banks will need insight into
the complexities and workings of marketplace lenders. Choosing the right partner to fit a bank’s strategic needs and
establishing a comprehensive framework to manage the relationship are critical to achieving synergy and success.
Below are a few examples of recent partnerships between marketplace and traditional lenders.
Recent Examples of Partnering Up
In May 2013, the US unit of a large European bank
became the first high street bank to see one of the major
MPL platforms as an opportunity and entered into a
receivables purchase agreement that allowed them to
purchase up to 25% of their originations for the next
three years.
Allowed to
purchase up to
25%
Community Banks found marketplace lending platforms to be their
friend as they look for new sources of growth amid tight margins on
lending. By partnering with platforms, community banks benefited
from their low operational cost which gave them the ability to
facilitate small consumer loans that they could not profitably
originate and service on their own.
A Silicon Valley startup platform, valued at $1.7 billion, is drawing
more than just venture capitalists and private equity but also
strategic bank investors as they raised $165 million in new
financing in April 2015. Investors included top 5 US and
European banks.
A large European bank recognized that partnering
with one of the largest US platforms was an innovative step
forward in finance and actually allows some of their clients to
buy parts of loans originated on the marketplace platform.
In April 2015 one of the largest US banks announced a partnership
with an MPL (Marketplace Lending) platform to originate loans specifically
designed to meet the bank’s CRA goals.

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Partnering to lend – Capitalizing on strengths
Most marketplace lending partnerships will begin with a financial firm or bank purchasing loans from a
marketplace lending platform based on established criteria that match the bank’s risk and return objectives with
profiles and volumes that the platform is able to produce. As the partnership matures, the partners become more
comfortable and familiar with each other and more strategic opportunities are identified, leading to additional
depth and integration. Lending as a Service (see figure 1) may be the model of the future, wherein banks and
platforms would each identify their core competencies and areas of opportunity and determine the best mix of
services that each can provide. For example, they could work together on attracting new customers: the
marketplace lender can be responsible for the application, underwriting, closing, and credit modeling process,
while the traditional lender might use their scale and expertise to handle servicing and collections functions as well
as the identification of opportunities to cross-sell products and services and provide financial advice to the
customers.
Figure 1
Customer Acquisition
Application,
Underwriting, Closing
Credit modeling process
Servicing and collections

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Referral programs
A form of partnership beyond buying loans is a referral program wherein banks and marketplace lenders refer
prospective borrowers to each other. When a potential customer applies for a loan but does not fit the credit profile
or other specifications of one lender, they can be referred to the other. This may involve an initial decline, with the
lead then being passed to the other lender, or the borrower being presented contact information for the alternate
lender. Ideally though, this would be a seamless transition wherein the borrower would be redirected within the
online application to a co-branded partner website that presents the borrower with their loan options and next
steps. Consideration should be given to borrower experience and messaging, alignment of the speed of funding and
other parameters with regards to the original loan, and to privacy and data sharing requirements. Such referral
programs can create fee revenue, but also allow banks and lenders to provide a more full-service offering to meet
their customers’ needs.
Imagine, Jacob has been operating a wildly popular
food truck for the past year and is looking for a $25k
loan to purchase another truck to expand his business.
He walks into the local branch of the bank where he
has his checking account and mortgage loan to discuss
his options. Banker Mary tells him that while they only
make loans to businesses with at least two years of
operating history, their lending partner has some
great business and personal loan products. She shares
the details of the partner programs, along with some
promotional materials. When Jacob finishes asking
questions and says that the partner’s loans sound like
they will meet his needs, Mary hands him a tablet and
brings up the loan application screen. Jacob spends
about 15 minutes at the branch inputting relevant
information, with Mary helping to answer questions
along the way. The bank receives a referral fee from
the platform, along with the benefit of having helped
one of their loyal customers meet his financial needs.
Through his various interactions with Mary, Jacob
realizes that he could significantly lower his credit
card processing costs by moving over to the bank, and
eventually also moves his investment accounts.
Customer Acquisition

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White labeling
White labeling is a deeper form of partnership in which
the platform is providing technology to act as a virtual
extension of the bank. White label partnerships may be
effective when a bank has little to no current presence
in a lending asset class, or when an institution doesn’t
have the budget to start up a new business line that
would require significant investment in technology and
operations.
White label partnerships could be developed to handle
the loan process from beginning to end, including
customer acquisition, processing, and servicing
functions, or might only involve a technology layer to
support a bank’s own marketing and processes.
From a customer experience perspective, that platform
is the bank. Because of that, there are significant
implications in terms of service quality, branding
cohesiveness, and compliance considerations. Yet, from
an operational perspective, the two entities still operate
separately and must skillfully navigate complex
workflows which touch both parties.
Imagine, Jane is about to start her first job and is moving
across the country for it, but she needs some extra cash to
pay for moving expenses – quickly. She knows just where to
look – Jane logs on to her bank’s website, goes through a
loan application and within a few minutes, she is approved.
The process is easy to understand and she can chat with a
customer service agent with the click of a button.
After logging in to her bank, she was actually redirected to
a bank branded version of platform X’s website. Platform X
provides all the technology for the Bank to support this
customer friendly lending process in a seamless way.
The Bank has found a partner with the platform they need
and only pays a fee-per-loan, minimizing their up-front
investment.
Application,
Underwriting, Closing

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Joint product development
Joint product development between banks and marketplace lending platforms could take many forms, depending
on the needs and strengths of each partner. It might involve developing credit products that a marketplace lender
might not typically offer, but that meet the specific needs of a bank. One current example of this is a platform that
has an agreement with a large national bank to originate and sell to the bank loans that fulfill required CRA goals.
Collaborating on joint development of new credit models is another possibility for partnerships – where banks and
marketplace lenders could use their diverse assets of alternative data, bank proprietary data, along with traditional
credit bureau data to develop advanced credit models.
Imagine, Regional Bank has a long history of always being
there to meet their customers’ financial needs. They offer a
wide variety of products and have collected extensive
financial and transactional data on their customers over
decades of relationships. Yet they are finding that some of
their younger customers don’t use many banking products
and don’t have very long credit histories. Regional Bank
wants to ensure that they can continue to meet these
customers’ borrowing needs, but feels they don’t have all the
data to make informed, risk-based decisions.
Regional Bank decides to partner up with Platform Y to
create a credit scoring model that combines the depth of data
from Regional Bank’s years of customer relationships with
social and other non-traditional data that Platform Y has
developed expertise and a track record in utilizing in order to
make effective credit decisions. Both companies are able to
leverage each other’s strengths and assets to advance their
own business needs.
Credit modeling
process
Servicing and collections

8. PwC 7
Identifying a Strategic Partner
Partnerships to provide capital or purchase loans
require banks to have a good understanding of
marketplace lenders’ credit standards, underwriting
processes, and compliance and quality controls. Yet
strategic partnerships require even more up-front
investment, have a longer time horizon, and have a
lasting impact on overall product, customer, and
revenue potential for both partners.
There are a variety of reasons why a bank or traditional
lender may want to partner with one of the marketplace
lending platforms, and based on those goals they may
look for partners where there is already an alignment,
or conversely, they may look for a partner with
complementary features.
By identifying the categories to consider, lenders can
effectively outline their goals for a strategic partnership
and begin identifying possible partner companies.
Once goals for the partnership have been clearly
established and possible target companies have been
identified, it is time to take a closer look at the target
companies to assess internal factors which could point
towards a good match. These factors include
compliance rigor, operational efficiency, risk
management discipline, culture, credit risk appetite,
and reputation, just to name a few. Banks must
carefully vet any third party for compliance with all
applicable laws and regulations, overall customer
service, and operating model and rigor around risk
discipline. Each entity must also be mindful of the
proper transfer and safeguard of customer data,
particularly in light of the increase in cyber attacks. By
ensuring that the marketplace lending partner has the
appropriate processes and controls in place, banks can
gain comfort that the partnership will provide long term
accretive benefits.
Considerations such as operational efficiency and
technology scalability will be indicators of a platform’s
ability to grow and succeed beyond the startup stage.
With the high-volume, smaller dollar nature of many
marketplace loans, manual tasks and operational
inefficiencies will be magnified as platforms begin to
grow. Any technology deployed must be able to quickly
scale to handle large volumes, and operations should be
streamlined and automated as much as possible.

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Evaluating potential partners
The framework below provides a guide to banks and
other financial firms to help assess potential
marketplace lending partners. It also provides a guide
to marketplace lending platforms who are looking
toward strategic relationships with a bank to prepare
for due diligence.
The due diligence of platform partners should be
holistic and detailed and include such elements as
company history, operational competency, technology,
financial stability, credit risk management, enterprise
risk management capabilities, compliance management
program, quality control program, and servicing and
collection practices. These elements should be
thoroughly assessed and evaluated, may be performed
by a third party, and likely will involve a series of data
analysis, documentation review, and on-site meetings
with management to delve into areas of question or
concern.
With respect to bank-marketplace lender partnerships,
regulatory compliance is an area of specific focus. An
effective Compliance Management System (CMS)
establishes the framework for identifying, assessing,
controlling, monitoring and reporting compliance risks
across the platform, and will give a bank partner
confidence in the the platform’s ability to manage key
compliance risks.
Key CMS elements include:
Key
elements
Board & Senior
Management
Oversight
Responsibilities
Standardized
Policies &
Procedures
Training
Monitoring
& Corrective
Action
Consumer
Complaints
Data Mining
and Management
Independent
Compliance
Testing
Third Party
Oversight
Privacy and
cyber security
elements

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An effective compliance management system is the
foundation for any organization to succeed at risk
management, however there are number of additional
considerations specific to partnerships between banks
and marketplace lenders.
Initial partnership due diligence should also include
financial due diligence, including a requirement for
audited financial statements which demonstrate
financial stability and ability to meet obligations and
continue growth. Additionally, banks may require a
detailed understanding of the credit policy,
underwriting process, fraud prevention mechanisms,
and the credit model being used, including actual loan
performance history and stress testing under various
economic scenarios.
Platforms should be prepared to provide their potential
bank partners with access to transparent and detailed
reporting and data feeds that allow insight into portfolio
performance, referral performance, or other data
related to the subject of the partnership. Regardless of
whether the data is provided directly or through an
intermediary, the platform and bank should have
technology in place which allows them to efficiently
communicate and receive information, in order to
maximize customer service, sales opportunities, and
risk management capabilities.
This reporting and data sharing should be coupled with
ongoing performance and risk monitoring to maintain
regulatory compliance and ensure that the expected
return in investment is being realized. This may include
tracking agreed-upon key performance and risk
indicators as well as adherence to service level
agreements.

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The opportunities posed by partnerships between marketplace lenders and banks are significant, however
integrating the business relationships strategically is the key to success. With our deep banking and consumer
lending knowledge, and experience with marketplace lending activities, we can assist in preparing for such a
partnership, from conducting market assessments, to evaluating various partnership strategies, or conducting due
diligence and advising on regulatory compliance matters. Regardless of whether your organization chooses to
partner with a bank or marketplace lender, we can provide advice and support on the critical decisions and key
implementation activities that will shape your strategy and help position the partnership for success.
Due Diligence
• Strategic fit assessment
• Risk and compliance
assessment
• Bank oversight and
monitoring readiness
• Third party risk
management
• Financial and
operational assessment
Strategy
• Partnership strategy
and goals
• Market entry
strategy
• Customer
experience strategy
• Alternative data and
social media strategy
• Cross selling and
relationship
deepening
opportunities
Technology
• Requirement definition
• Process and
technology integration
• Origination and servicing
automation
• Managed testing service
PwC Offerings
Operations
• Operating model alignment
• Data structuring and transfer
between parties
• Credit Risk modeling and
underwriting validation
Regulatory
• Compliance management
system design
• Third party risk management
• Fair lending assessments
How PwC
can help

12. To discuss a range of services tailored to your
organization’s needs, please contact:
Roberto Hernandez
Principal
Consumer Finance Group
Telephone +1 940 367 2386
Email roberto.g.hernandez@pwc.com
Linkedin https://www.linkedin.com/
in/robertohernandez1
Jason Chan
Senior Manager
Consumer Finance Group
Telephone +1 214 435 1161
Email jason.chan@pwc.com
Linkedin https://www.linkedin.com/
in/jchan14
Mackenzie Sullivan
Manager
Consumer Finance Group
Telephone +1 213 217 3612
Email mackenzie.sullivan@pwc.com
Linkedin www.linkedin.com/in/MackenzieS
ullivan1
Will marketplace lending be
ready for increased
regulatory scrutiny?
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