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Regional lenders have been struggling to attract the next generation of banking consumers to fill the gap that will be left by an aging baby boomer population. As a result, traditional financial institutions have been rushing to acquire or invest in fintech companies to reach the student loan market. In 2017, the education finance start-up Earnest was purchased by Navient, a federal loan servicer and provider of asset management and business processing solutions, for $155 million. A subsidiary of Fifth Third Bancorp jumped into the fray in 2018, leading a $50 million financing round for student lender CommonBond. And, earlier this year, Key Bank acquired the digital student lending business of Laurel Road Bank for an undisclosed sum.
While originating and refinancing student loans is an attractive business in and of itself, these institutions have bigger aspirations in mind when cutting deals with online student lenders: Using student lending as a platform to build long-term relationships with millennial consumers. Key Bank made this rationale crystal clear in its Form 10-Q for the quarter that ended March 31, 2019: "The acquisition of Laurel Road allows us to expand national, digital-only lending capabilities, boost our client experience through compelling digital tools and deliver a holistic banking experience to a targeted segment of consumers."
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Small and Midsized Lenders Have FOMO
Many regional banks and credit unions – which either lack the financial resources to spend tens of millions on such M&A transactions or don't want to deal with the hassle of integrating a fintech company into their organization – may be experiencing a profound "fear of missing out" on the digital student lending opportunity. These small and mid-sized institutions should think more creatively about how to tap into the vast and growing market for financial services among millennial borrowers, such as building a partnership with an experienced online student lender.
Why are traditional banks scrambling to buy their way into the millennial market? Although most borrowers of that generation are still in the early stages of their careers and have not accumulated substantial wealth, that fact will quickly change as the group matures. The 2017 Wells Fargo Millennial Survey of nearly 1,800 millennials found that 26% were already "affluent," with an average salary of $88,000 annually and $100,000 or more in investable assets. The oldest millennials are now in their late 30s and will hit their peak earning and borrowing years in the next decade.
As the financial needs of millennials evolve, they will become a very important consumer segment for banking institutions. According to a recent study from research firm Cornerstone Advisors, which tracked borrower behavior 10 years after getting a student loan, two-thirds of borrowers opened up a checking account with the financial institution that provided their student loan, 60% got a credit card and 20% took out a mortgage or home equity loan. In fact, the lifetime value of a student loan borrower was as high as $23,000. For a portfolio of 100 borrowers using between one and six additional products, the lifetime value would approach $650,000.
Winning the allegiance of millennial borrowers is not only an opportunity, it is a necessity for the future of traditional financial institutions. The average U.S. credit union member is in their late 40s, and the typical regional bank customer is not far behind. As these borrowers approach retirement and are no longer in their peak wealth-building years, credit unions and banks must start expanding their market to younger generations.
Reaching these millennial consumers will require banks and credit unions to offer best-in-class digital banking services – including relevant loan products. According to PricewaterhouseCoopers's 2017 Digital Banking Consumer Survey, 82% of 18- to 24-year-old smartphone owners do their banking on a mobile device. Building a portfolio of digital solutions will be essential to serving the largest generation of consumers.
Banks such as Key and First Republic clearly understand that digital student loan services are entry-level products that can help them form lifetime relationships with high-value millennial consumers. The Cornerstone study found that up to 60% of the borrowers who applied for a student loan from a lender other than their primary institution went on to add further products.
Building Digital Student Lending Partnerships
Regional lending institutions that aspire to serve the digital student loan market, but are not willing or able to make an acquisition, have several options for partnering with an established online platform. Partners offer a number of advantages: They do not always require the same commitment of capital as a full-scale M&A deal, there is much less integration risk and it is possible to develop a significant volume of student loan "flow" relatively quickly.
Among the alternatives to M&A, a financial institution can partner with an online platform that will "white label" student loan products under the brand of the bank or credit union. The originating lender can specify its own underwriting standards and pricing parameters and has the option of holding 100% of the student loans on its balance sheet. Another alternative would be to join a participation network with other lenders, in which an institution could hold a stake of 10% in a pool of loans originated by the lending group. Yet another digital lending partnership option would be a forward sale program, in which the bank or credit union originates loans under its brand and then sells the loans through a secondary market of investors, allowing the original financial institution to maintain the borrower relationship.
In particular, it would be important for a bank or credit union to partner with a provider that has a strong student loan refinance offering, as the borrower's credit quality is typically stronger than an in-school student, and there is an opportunity to acquire a customer or member who is out of school and thus more likely to need other financial products.
In all of the above cases, the originating lender maintains the consumer relationship – even if the loan is sold – and thus has an opportunity to cross-sell other products and services to its newfound millennial consumers.
Accelerating Speed-to-Market
Partnering with an experienced digital student loan provider also offers the advantage of speed-to-market and reduced risk. Most acquisitions take considerable time from deal announcement to closing, and further delays may be incurred during the integration process. There are also numerous merger integration risks, including incompatible systems, culture clashes and the potential loss of key talent. In contrast, a partnership with a digital platform can be up and running in a matter of weeks. For example, when the BankMobile division of Customers Bank launched its new student loan refinancing platform in partnership with LendKey, it immediately started generating $7 million to $10 million in loan volume per month. According to Luvleen Sidhu, co-founder, president and chief strategy officer for BankMobile, "LendKey's digital lending solution enables us to expand our products quickly and cost-effectively using our brand and underwriting standards."
Regional banks and credit unions that recognize the strategic importance and long-term value of millennial consumers, but lack the resources to make a sizeable acquisition of a digital student loan platform, don't need to fear missing out. Partnering with an established online student loan provider can offer many of the same benefits as an acquisition without the capital outlay and potential merger integration risk, and may achieve the financial institution's goals of "better, faster and cheaper."
Vince Passione Vince Passione is Founder and CEO for LendKey Technologies. He can be reached at [email protected].
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