Tuesday, June 23, 2015

High Cost Traditional Brick-and-Mortar Retailing Takes Another Hit --- Small Banks and Online Lenders Join to Get More Customers

Traditional brick-and-mortar retailers remain under heavy attack by Amazon and other online sellers.

It's all happening quickly, and it's absolutely a very big deal. One of the latest businesses to feel the pinch is Gillette. See Razor Sales Move Online, Away From Gillette.

Whether it be book stores like Barnes and Noble, conventional retail stores such as Target, local hometown merchants, stock brokerage offices, insurance agencies, academic institutions or local community banks, online selling is gaining each and every day in winning customers. We'll look briefly at the trends in consumer lending herein.

In business it's all about satisfying customers at a cost which renders a profit to the business.

The key word is customers. Without customers no business can survive. And without covering its costs of staying in business, no business can get and keep investors interested in that business. So without profits, cost control and volume growth, there's no reason to be in business.

There is a developing partnership between Lending Club's online banking business model and small community banks. Branch banking is becoming an obsolete business model, and local community banks are threatened as a result.

Lending Club and Smaller Banks in Unlikely Partnership is subtitled 'More than 200 community banks have signed on to deals with Lending Club despite some inherent risks:'

"For a glimpse of how financial technology is bringing together some unlikely bedfellows, look no further than the partnership between online upstart Lending Club Corp and Rhode Island’s 200-year-old BankNewport.

A traditional community bank with 15 branches around the state, BankNewport turned to Lending Club for help in getting back into unsecured consumer loans, a business it lost to bigger competitors years ago.

The odd couple in February announced a co-branded partnership under which the online lender will send direct mailings to BankNewport customers, and share some revenue from any loans it makes to them.

BankNewport is one of more than 200 community banks that have signed onto a deal with Lending Club on pitching consumer loans. . . .

Whatever hesitation the banks may have about sharing customers, BankNewport feels it has little choice.

“We have to make sure we remain relevant,” Sandra Pattie, BankNewport’s CEO, said in an interview at a cafe overlooking the sailboat-dotted Newport harbor. “We’ve been trying for years, six years or so, to get away from our strong reliance on the residential mortgage market. This seemed like it does that for us.”. . .

The move isn’t without risk: Some observers wonder if the community banks are handing a competitor information on customers and making them more likely to go to an online firm rather than a bank branch for mortgages or other financial needs. . . .

Community banks—those with less than $10 billion in assets—made slightly more than 75% of all consumer loans in 1990 . . . but that amount has plummeted to less than 9% of the market last year, with larger banks seizing that business. . . .

If the partnership works as planned, the customers will get loans through Lending Club’s online process but remain loyal to BankNewport for products such as mortgages or small-business loans. The bank will get a small share of the roughly 4% upfront fee that Lending Club collects, or about 0.5%. That is expected to provide a very modest revenue stream, but to BankNewport, that isn’t the main point.

“We do practically no auto loans, no student loans, no unsecured personal loans. We can’t compete” on price, said Leland Merrill Jr., the bank’s chief lending officer. He said while the bank is on a first-name basis with many of its customers, that doesn’t help it sell loans that aren’t competitively priced. . . .

Mr. Merrill acknowledged that the risk of sharing customers with a competitor is real. The BancAlliance arrangement prevents Lending Club from soliciting the bank’s customers to sell them mortgages or other products, but if they get used to banking from their laptops rather than bank branches, a natural process of attrition could take place, he said.

Lending Club, which is nine years old, first offered its shares to the public in December, at $15; the stock closed Monday at $16.86. It originated $4.38 billion in consumer loans last year, a 112% increase from the previous year, and it added $1.64 billion in the first quarter of this year, a 107% increase from the year earlier. It is gearing up its lending for residential mortgages and small businesses, the company says.

Renaud Laplanche, chief executive officer of LendingClub, said in an interview that the deal is a two-way street: His company gets access to lists of customers considered likely loan candidates outside of the urban areas where it is better known, a valuable benefit. The customers who want loans benefit from Lending Club’s efficient online infrastructure, and usually get lower interest rates."

Summing Up

And so it goes with the creative destruction and ever changing ways of businesses continuously needing to get and keep satisfied customers by offering competitive values. {NOTE: It's so unlike government, but that's another story for another time.}

Brick-and-mortar physical structures add needlessly to additional costs, and added costs lead to higher prices. Smart consumers avoid high prices which don't represent added value to the purchase decision. It's just that simple.

Who's next for local bank hook-ups?

Will it be payday lenders, auto title lenders, credit unions, pawn shops or others?

And doesn't the 4% upfront charge by Lending Club seem too high to you? It does to me.

But then there's the 7%+ real estate commission, the hidden multi-percentage points stock broker commissions on mutual fund purchases and individual stock buys, as well as other high transaction fees paid by unsuspecting buyers for services not rendered on auto loans, credit cards and the like.

Smart buyers deserve better. They will get better too.

That's my take.

Thanks. Bob.

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