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Will banks in the US dominate consumer lending once again?




By Peter Renton on 24th July 2017


Back in the good old days, as in before the financial crisis, big banks in the US did a lot of consumer lending. I am not just talking credit cards, they clearly had huge businesses there, but unsecured personal loans. Wells Fargo, Chase, Bank of America, Citi and many other banks had thriving businesses in personal loans at one time. Then the financial crisis hit and most large banks either pulled back or canceled these programs completely.

 

But there are signs now that banks are coming back to this once lucrative market. After watching on the sidelines for the most part banks are starting to take action. They see the big loan books that online lenders like Lending Club, Prosper, SoFi, Avant and others have amassed over the last decade. So, some large banks are wading back in.

 

Large banks that have made a move into unsecured consumer loans

 

SunTrust Bank is an interesting case in point. They are a large 125-year-old bank headquartered in Atlanta. They had total assets on their balance sheet of $204 billion as of December 31, 2016 which makes them a top 25 bank in the US.

 

From our perspective, what is most interesting about SunTrust is they have an online consumer lending platform. They actually acquired a small online lending platform called FirstAgain a few years ago and relaunched it as LightStream in 2013. They are starting to get some real traction, having done $1.5 billion in loans in 2015 and over $2.3 billion in 2016. Their average interest rate is lower than the marketplace lenders and their biggest categories are auto lending and home improvement.

 

Discover Bank is most well known in the US for their credit cards but they also have a robust personal loan business. In 2016 they originated $4 billion in new personal loans making them the second largest online lender in the category behind Lending Club. Unlike Lightstream, Discover’s personal loans are focused on debt consolidation so they are going directly after Lending Club and Prosper in this space. I find this a curious decision given that they have a $62 billion dollar credit card loan book (as of December 31, 2016).


Discover have been something of a quiet achiever in the online lending space. But they have a growing loan book and they devote a great deal of attention to personal loans in their annual report. Clearly, they see it as a growth area for their business and one that does not necessarily cannibalize their credit card business.

 

Much has been written about Marcus by Goldman Sachs. After almost 150 years of primarily serving the wealthiest Americans Goldman Sachs launched their new online consumer lending platform in October of last year. To me, this was the most significant move made by any bank in the history of the online lending space. For Goldman Sachs, arguably the most successful investment bank in the world, to make a move like this indicated that online consumer lending is a big opportunity for banks.

 

Marcus is focused on debt consolidation loans and they are scaling this business quickly. They have already crossed over the $1 billion mark in just eight months making them the fastest online platform to reach that milestone. They are expecting to do another billion dollars in loans by the end of the year.

 

Regions Bank is a regional bank in the southern US with $125 billion in assets, putting it just outside the top 25 banks. Its approach is a little different to the other three banks discussed above in that they are partnering with an online platform, Avant, to offer unsecured personal loans. This partnership began in 2016. On their website when you apply for a personal loan you will see a co-branded page that says Regions, Powered by Avant.

 

We don’t know how much volume this partnership is generating but we do know that Regions has an outstanding balance of “other consumer” loans of $1.1 billion on December 31, 2016. Other consumer is defined as direct consumer loans, overdrafts and other revolving loans.

 

The four biggest US banks are still mostly on the sidelines

 

Looking at the biggest four banks now, Wells Fargo does offer personal loans online. These are unsecured loans from $3,000 - $100,000 with funding as soon as the next day. Borrowers can also apply on the phone or at a local branch. According to their annual report, Wells Fargo has a sizeable consumer loan portfolio of $40 billion, defined as “other revolving credit and installment” as of December 31, with $12 billion in student loans. So, this leaves $28 billion of which an unknown amount is personal loans, although I am guessing it is a pretty small fraction of that number right now.

 

JPMorgan Chase is the largest credit card issuer in the US with $142 billion in balances outstanding. Possibly because of their dominance in credit cards, they do not offer a personal loan product beyond student loans and a Home Equity Line of Credit.

 

Bank of America is very much like Chase in their offerings towards personal loans – they offer home equity loans and student loans. Nowhere on their website can you find an offering for personal loans. At one stage, before the crisis, B of A had a robust personal loan business but today it is minuscule. If you dig deep into their annual report you can find the number $585 million in unsecured consumer loans outstanding as of December 31. They provide no detail on this number so we don’t know exactly what this product is but even so it is a tiny number for a company with total consumer loans outstanding (including credit cards and mortgages) of $457 billion.

 

Even though Citi is the second largest credit card issuer it does actually offer personal loans. You can apply on Citi’s website for a personal loan up to $30,000 (up to $50,000 if you apply by phone). Rates range from 7.99% to 17.99%. When you look at their 2016 annual report you see the total outstanding balance for “Installment, revolving credit and other” at December 31 was just $3.4 billion in the US. This compares with $133 billion in credit card balances.

 

So, two of the top four banks have unsecured personal loan products, they are just not focused on marketing them. Interestingly, when I went to LendingTree, one of the leading loan price comparison sites, to apply for a personal loan recently three of my five recommendations were banks (Marcus, Lightstream and First Midwest Bank). The other two were SoFi and Lending Club.

 

The reality is this: most banks are still ignoring personal loans as a product offering. But as Marcus gets more publicity and other large banks like Discover and SunTrust build up their loan books it will only be a matter of time before the biggest banks start to wake up to this opportunity. Consumer demand remains strong for personal loans and I think eventually we will see most large banks return to the good old days with a personal loan offering – the only difference is these will be personal loans originated online.

 

Peter Renton is the founder of Lend Academy and the co-founder of LendIt

 

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