Many banks and credit unions still see fintechs strictly as competitors, but digital-only Alliant Credit Union sees “lendtechs” as partners that can help them find fresh loan volume. Typically these digital lenders generate credits in select fields — among them are loans for solar energy installations, electric vehicles and home equity credit — that Alliant can buy for its own portfolio.
The Chicago-based credit union, with assets of $15 billion, has staffed up to increase this digital form of third-party lending in 2022, with a target of $1 billion in lendtech loans for the year, according to Charles Krawitz, Chief Capital Markets Officer and Head of Commercial Lending at Alliant. The strategy can be viewed partly in the context of the credit union’s 2020 decision to close all its branches and operate digitally only. Yet it also reflects the needs of all traditional institutions to find loan growth.
Partnering for Growth:
44% of credit unions surveyed by Cornerstone Advisors say fintech partnerships of all kinds strongly support growth. The top reason for partnering is increasing loan volume, cited by 59%.
In concept, working with lendtechs resembles classic indirect lending with dealers, but much of the process is digitized and automated once parameters have been set for volume, risk appetite, credit standards and compliance with each lendtech, according to Robert Perrelli, who recently joined Alliant as Vice President of Partnership Development.
As the credit union works to build up its third-party lendtech credit activity it will typically be partnering with multiple firms in each specialty. Krawitz explains that scaling up the operation will hinge on specialties where Alliant has or can develop deep product knowledge and risk analytics.
“Using multiple partners in each product category enables us to see differences in practices, and it allows us to do some benchmarketing among the partners,” says Krawitz. Over time Alliant plans to build its base of partners into the dozens of lendtechs.
The goal is to focus on a range of credit types that revolve around consumer needs, especially those of homeowners. Beyond solar and vehicles, this includes landscaping, furniture, and home improvements.
“Everything revolves around the home and people’s aspirations and needs in that context,” says Krawitz.
He adds that “we were one of the early lenders on Teslas. I remember sitting in meetings, and people were thinking, ‘Is this electric car thing for real? Is it going to last?’ But it turned out to be a good fit for us as an organization.”
Making a Lendtech Loan Acquisition Program Work
The process of partnering with specific lendtechs begins with a meeting of minds.
“There has to be a cultural fit, because we are selective in terms of who we want to partner with,” Krawitz explains, “and there have to be long-term prospects. We are not expecting the partner to have everything wrapped with a bow on Day One, but we are expecting openness and a path to maturity.”
Krawitz says Alliant looks for partners with some willingness to adapt their operations and a clear willingness to handle compliance and other regulatory issues as the credit union needs it to do. This includes having a comprehensive compliance management system, privacy and information security programs, and fair-lending and anti-money laundering safeguards in place.
This willingness is less common than you’d think for a business that depends on financial institutions for funding.
“Often, I think lendtechs think they have everything figured out. They expect the capital partner to come along and adapt to how they conduct business, rather than expressing a willingness to see the world from your perspective.”
— Charles Krawitz, Alliant Credit Union
Overall, Alliant tends to work most often with lendtechs that are more mature, or, among younger firms, ones that are willing to build a platform that fits well with Alliant’s preferences.
Individual arrangements vary according to the type of loan, Alliant’s appetite for the category and the demographics the lendtech serves.
“We don’t generally commit to a specific figure, we don’t commit our balance sheet in advance,” says Krawitz. “We have to have the flexibility to control how we grow. We can’t let an outside party do that.”
On the other hand, Krawitz says, this has to be balanced with consistency and reliability on Alliant’s part.
“We can’t turn to a partner and say, ‘Sorry, it’s a new week and we’re not going to be here for you’,” says Krawitz. The middle way tends to be expressing an appetite for so many dollars in credit. Also key is a clear understanding that the lendtech will supply the loans within the credit and compliance constraints Alliant specifies.
Opening Up the Hood:
Alliant also insists that prospective lendtech partners explain what's inside their 'black box' of algorithms.
Ultimately, no financial institution can claim ignorance if loans purchased run into compliance trouble.
“We really need them to peel back the curtain and explain how decisions are being made,” says Krawitz.
Membership Growth: Icing on the Cake
Some lendtechs supply loans on a “flow” relationship, supplying Alliant loan by loan with the credit union funding the lendtech daily. Other lendtechs will build a supply of loans for Alliant on their own balance sheet and periodically package them for bulk sale to the credit union. Both arrangements are subject to quality control measures.
One nuance that separates Alliant’s loan purchasing from bank efforts is that in order to obtain the loans offered by the lendtechs, consumers must become members of Alliant.
As the lendtech effort grows, the hope is that it will build up Alliant’s nationwide membership in addition to building credit balances. In time, this will represent a base for cross selling as well. The credit union’s completely digital approach increases the potential of this membership expansion, as everything is remote.