If Marty McFly grabbed your hand in 1969 and brought you to 2015 would you believe that Honda was selling about one million new cars every year in the United States? In the space of 50 years foreign car makers have carved out an enormous percentage of the US car market.
The dismissive eye-rolling from a reigning champ is always the first sign that they may have grown complacent. A small, scrappy start-up is looking into the future and trying as hard as they can to be the answer for the problems they are trying to solve. An established profit center is looking into the future wondering how they can possibly keep all their current customers with them. It’s a difference worth exploring, and Joel Rosenberg and Jessica Stone do just that in today’s podcast.
Hi, and welcome to Lender Performance, your guide to becoming a better lender. I’m your host, Jessica Stone, a client success manager here at Precision Lender. Thank you for joining us. Today I am joined by Precision Lender’s senior vice-president of client delivery and success, Joel Rosenberg. Thanks for being on, Joel.
Joel, although you’ve been on a podcast previously, for those of us who don’t know you, could you introduce yourself, tell us a little bit about your background, and what you do here at Precision Lender?
Sure. I am a part of the consulting group. I’m one of the senior consultants, and I work with new clients in terms of helping them set up their assumptions for our tool. I also work with existing clients that want to change assumptions. I do some analytical projects, and write some blogs and articles that people have read.
I have fifteen years experience as a consultant on loan pricing systems. Prior to that I was a treasurer at several banks throughout the United States, and I have a bachelor’s in economics through Rensselaer Polytechnic, a master’s in business from Carnegie Mellon, and I’m a chartered financial analyst.
Great. Recently Joel wrote an article for Western Banker Magazine, called “What Banks Can Learn From The Non-Bank Sector,” I believe?
We’re here to talk about that a little bit today. Joel, let’s start off with a quote I’m going to read from that article. “A vice-president at Rafferty Capital Markets said he projected repeatedly that the actions of the government and the bank regulators would stimulate the creation of a huge, unregulated shadow banking system, and that this is no longer a projection, it’s a reality.” Can you explain to us what shadow banking is?
Sure, Jess. Shadow banking is how the financial industry refers to the massive change coming from non-regulated, non-traditional, non-bank sector. Although shadow banking has been around for a while… It took a hit during the Great Recession of 2007 to 2010, but it’s come back, especially what they call peer-to-peer lending, and that’s where loans are being made privately through individuals via dedicated websites.
This has exploded over the past five years. It’s now one of the fastest growing areas of non-bank lending, and this is according to a report by Goldman Sachs on shadow banking. Peer-to peer lending companies, because you’re using a website include such companies as Lending Club, and Prosper.
Okay. Joel, you mentioned Lending Club and Prosper. How are those two companies like Honda? I loved this analogy in the article.
Yeah. I can think back because I’m a little bit older to the ’70s, and back in the ’70s the big auto companies like Ford, and GM, and Chrysler made these massive cars that some of you may remember fondly about sitting in the back seat, probably without car seats, but in the back seats as young kids. We had the oil shocks in the ’70s, and there was a little scrappy company called Honda, Toyota also, and they were making smaller, gas efficient cars.
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Ford and GM thought they owned the market, but Honda was meeting an under-served area of the markets, people that wanted these non-traditional cars, or basically not the gas guzzlers. As we’ve seen, they’ve taken over the market.
Similarly, the new, faster moving, non-traditional lenders are appealing to potential borrowers that find that banks- because of the regulatory nature, and the compliance that they have to go through- are not able to respond as quickly, not able to meet the needs of certain segments of the market because of the regulations that they have, both on a state and federal level, what’s happened with the CFPB.
While many banks want to expand their lending, and help their community, they’re finding it increasingly difficult to do. As compared to the auto companies, banks are regulated entities, but on the other hand to some extent they’re getting their lunch eaten by these smaller, non-insured, non-regulated companies that can be more flexible.
Okay, and so do you think banks are paying attention to these new companies? Do they know that those are on the horizon?
You know, some are. I was actually at an ABA conference, and one of the sessions had to do with these new companies, but on the other hand there are a number of bankers that are still rolling their eyes, and saying it’s like talking apples and oranges. Certainly as the demographics of customers change, many, and especially the younger ones, don’t understand the difference between doing business with an online lender, and the old brick and mortar branch banking.
In most cases they really don’t care about the difference. What they care about is convenience. Can I get the deal done? I don’t think branches are dead yet, but for many newer customers, the only time they go to a branch is when they open up an account, and actually even now with apps that banks have you don’t even need to go to a branch to open up a new account.
A lot can be accomplished through apps, through online, and the old brick and mortar may not be as relevant today as it was twenty or thirty years ago. The other thing is we can think about travel agents.
If you think about it, and if you’ve got a very involved travel plan you may want to go to a travel agent, but if you’re just going from Detroit to Sheboygan, and all you want is a flight, a car, and a hotel, you can use things like Orbitz, or Expedia, or even the apps that the airlines have. Blockbuster. There used to be a zillion Blockbusters throughout the United States.
On every corner.
They were certainly better in terms of the variety of stuff you could get form them, but now Netflix has come in, and it’s delivered right to your door. Again, there are no more Blockbusters. Same thing, people used to love to go shopping on Main Street, or the big box stores.
With Amazon Prime, if you need something you just contact Amazon. I don’t think they have the drones working yet to drop it, but it’s getting close to that. A lot has changed, and banking needs to do that, too.
Yeah, so it seems like ease, convenience, and quick service is what’s kind of winning out in those examples.
What do you think banks can learn from that?
Banks and credit unions need to adopt their model to be more transient, easier to deal with, and more customer-centric. There’s almost no reason to be inconvenienced in today’s hyper-connected world, and banking needs to follow suit.
Do you have maybe some specific tips how banks might want to think about this, or pursue those kind of themes?
Clearly if I was a banker I would at least get on the Lending Club site or the Prosper site and see what the customer’s experience is. I’m not saying necessarily actually get a loan, but go pretty far down the process of getting one, and compare what it’s like going on their site to what it’s like dealing with your bank.
The other thing is these sites are looking for peers to make the loans, and so often you can join them. You can use them as an origination source. You can think about, “How can we use a third party similar to indirect lending that banks have done for a long time?” and use these sites.
Then, make sure that decisions that you’re making to deliver products are not all made by the same group of people. Not all twenty-five year veterans of the bank. There’s nothing wrong with long-time employees, but you want to make sure you have a diversity of opinion and background in making these decisions.
Okay. That’s definitely some great tips, some good food for thought for folks, for listeners out there. Thank you, Joel, for being on the podcast today. That will do it for us. You can always find more information about today’s episode, and we’ll share a link to Joel’s article at precisionlender.com/podcast.
If you like what you’ve been hearing, make sure to subscribe to our feed in iTunes, SoundCloud, or Stitcher, and we’d love to get ratings or feedback on any of those platforms. Thanks for listening. Until next time, I’m Jessica Stone, and this is Lender Performance.