What is it that would cause today’s consumers to turn to a new company for their borrowing needs? Why are technology startups taking on some of the largest and most established financial institutions in the world for the job of allocating capital? These questions speak to the changing cultural and technological landscape that is starting to impact the financial services industry – from the smallest players to the largest banks. Not long ago, the question was – what would the traditional lenders’ response be to all of this? Would they compete or collaborate? Today we see institutions taking both routes, with an increasing number of established lenders choosing to collaborate with new marketplace lending entrants. This collaboration began in the form of loan funding agreements, where a bank funds the loans originated by a platform and then sells the loans back to the platform, along with agreements for banks to invest in marketplace loans, purchasing loans that fit their credit profile. Today the question becomes: which banks will be the first to truly capitalize on the deeper opportunities that these partnerships have the ability to open up? Marketplace lenders are often seen as disrupters competing against traditional banks. Several of them focus on innovative technology and rapid service and are attracting a whole new segment of consumers who are not necessarily the core strength of traditional lenders. Yet the more traditional banks have lower cost of funds, a long history of consumer lending and credit modeling, significant investments in customer relationships and branch networks, well known brands, and access to decades of customer data. These complementary attributes open up the opportunity for true strategic partnerships between traditional and marketplace lenders. Some believe that Lending as a Service (LaaS) will be the model of the future, utilizing the most efficient parts of each company’s operations or technology platform to create superior loan products that offer the best prices and service to customers. As banks progress beyond simply investing in marketplace loans, these partnerships will take many forms, from basic referral programs to white labeling and joint product development. Each type of partnership has the opportunity for significant revenue benefits to each side (and their customers!) and requires a differing level of integration and investment.

1. www.pwc.com/consumerfinance
Where traditional
and tech meet
August 2015
How banks and marketplace
lenders can partner up

2. PwC 1
Where traditional and tech meet
What is it that would cause today’s consumers to turn to a new company for their borrowing needs? Why are
technology startups taking on some of the largest and most established financial institutions in the world for the job
of allocating capital? These questions speak to the changing cultural and technological landscape that is starting to
impact the financial services industry – from the smallest players to the largest banks.
Not long ago, the question was – what would the traditional lenders’ response be to all of this? Would they compete
or collaborate? Today, we see institutions taking both routes, with an increasing number of established lenders
choosing to collaborate with new marketplace lending entrants. This collaboration began with loan funding
agreements: a bank funds the loans originated by a platform and then sells the loans back to the platform, along
with agreements for banks to invest in marketplace loans, purchasing loans that fit their credit profile. Today the
question becomes: which banks will be the first to truly capitalize on the deeper opportunities that these
partnerships have the ability to open up?
Marketplace lenders are often seen as disrupters competing against traditional banks. Several of them focus on
innovative technology and rapid service, and the companies are attracting a whole new segment of consumers who
are not necessarily the core strength of traditional lenders. Yet, the more traditional banks have lower cost of funds,
a long history of consumer lending and credit modeling, significant investments in customer relationships and
branch networks, well-known brands, and access to decades of customer data.
These complementary attributes open up
the opportunity for true strategic
partnerships between traditional and
marketplace lenders. Some believe that
Lending as a Service (LaaS)1 will be the
model of the future, utilizing the most
efficient parts of each company’s operations
or technology platform to create superior
loan products that offer the best prices and
service to customers. As banks progress
beyond simply investing in marketplace
loans, these partnerships will take many
forms, from basic referral programs to white
labeling and joint product development.
Each type of partnership has the
opportunity for significant revenue benefits
to each side (and their customers!) and
requires a different level of integration and
investment.
1 Rotman, Frank. “The Hourglass Effect, A Decade of Displacement”

3. PwC 2
While the potential benefits are clear – higher returns, access to new customers, and fulfillment of obligations such
as Community Reinvestment Act(CRA), there are a few reasons why some banks have not yet pursued partnerships
with marketplace lenders. These include limited risk appetite, potential cannibalization of the bank’s own business,
and perceived potential reputational risks. Whichever type of partnership is pursued, there will be a need
foradditional due diligence and scrutiny beyond what is typically expected from pure investor partners. Banks have
certain regulations to comply with which marketplace lenders are not directly subject to, and banks will need
insight into the complexities and workings of marketplace lenders. Choosing the right partner to fit a bank’s
strategic needs and establishing a comprehensive framework to manage the relationship are critical to achieving
synergy and success. Below are a few examples of recent partnerships between marketplace and traditional lenders.
Recent examples of partnering up

4. PwC 3
Partnering to lend–capitalizing on strengths
Most marketplace lending partnerships will begin with a financial firm or bank purchasing loans from a
marketplace lending platform based on established criteria that match the bank’s risk and return objectives with
profiles and volumesthe platform is able to produce. As the partnership matures, the partners become more
comfortable and familiar with each other and more strategic opportunities are identified, leading to additional
depth and integration. Lending as a Service) may be the model of the future; banks and platforms would each
identify their core competencies and areas of opportunity and then determine the best mix of services that each can
provide. For example, they could work together on attracting new customers: the marketplace lender can be
responsible for the application, underwriting, closing, and credit modeling process, while the traditional lender
might use its scale and expertise to handle servicing and collections functions, identify opportunities to cross-sell
products and services, and provide financial advice to the customers.
Customer Acquisition
Application,
Underwriting, Closing
Credit modeling process
Servicing and collections

5. PwC 4
Referral programs
A form of partnership beyond buying loans is a referral program wherein banks and marketplace lenders refer
prospective borrowers to each other. When a potential customer applies for a loan but does not fit the credit profile
or other specifications of one lender, that customer can be referred to the other lender. This may involve an initial
decline, with the lead then passed to the other lender, or the borrower presented with contact information for the
alternate lender. Ideally though, this process would be a seamless transition wherein the borrower would be
redirected within the online application to a co-branded partner website that presents the borrower with their loan
options and next steps. Consideration should be given to borrower experience and messaging, alignment of the
speed of funding and other parameters with regards to the original loan, and to privacy and data sharing
requirements. While such referral programs can create fee revenue, they can also allow banks and lenders to
provide a more full-service offering to meet their customers’ needs.
Imagine, Jacob has been operating a wildly popular
food truck for the past year and is looking for a $25k
loan to purchase another truck to expand his business.
He walks into the local branch of the bank where he
has his checking account and mortgage loan to discuss
his options. Banker Mary tells him that while the bank
only make loans to businesses with at least two years
of operating history, its lending partner has some
great business and personal loan products. She shares
the details of the partner programs, along with some
promotional materials. When Jacob finishes asking
questions and says that the partner’s loans sound like
they will meet his needs, Mary hands him a tablet and
brings up the loan application screen. Jacob spends
about 15 minutes at the branch inputting relevant
information, with Mary helping to answer questions
along the way. The bank receives a referral fee from
the platform, along with the benefit of having helped
one of its loyal customers meet his financial needs.
Through his various interactions with Mary, Jacob
realizes that he could significantly lower his credit
card processing costs by moving over to the bank, and
he eventually also moves his investment accounts.
Customer Acquisition

6. PwC 5
White labeling
White labeling is a deeper form of partnership in which
the platform provides technology to act as a virtual
extension of the bank. These partnership may be
effective when a bank has little to no current presence
in a lending asset class, or when an institution doesn’t
have the budget to start up a new business line that
would require significant investment in technology and
operations.
White label partnerships could be developed to handle
the loan process from beginning to end, including
customer acquisition, processing, and servicing
functions, or might only involve a technology layer to
support a bank’s own marketing and processes.
From a customer experience perspective, that platform
is the bank. Because of that, there are significant
implications in terms of service quality, branding
cohesiveness, and compliance considerations. Yet, from
an operational perspective, the two entities still operate
separately and must skillfully navigate complex
workflows which touch both parties.
Imagine, Jane is about to start her first job and is moving
across the country for it, but she needs some extra cash to
pay for moving expenses–quickly. She knows just where to
look; Jane logs on to her bank’s website, goes through a
loan application, and within a few minutes, she is
approved. The process is easy to understand and she can
chat with a customer service agent with the click of a
button.
After logging in to her bank, she was actually redirected to
a bank branded version of platform X’s website. Platform X
provides all the technology for the Bank to support this
customer-friendly lending process in a seamless way.
The bank has found a partner with the platform and only
pays a fee-per-loan, minimizing its up-front investment.
Application,
Underwriting, Closing

7. PwC 6
Joint product development
Joint product development between banks and marketplace lending platforms could take many forms, depending
on the needs and strengths of each partner. It might involve developing credit products that a marketplace lender
might not typically offer but meet the specific needs of a bank. One current example of this is a platform that has an
agreement with a large national bank to originate and sell to the bank loans that fulfill required CRA goals. Another
possibility for partnerships is collaborating on new credit models, where banks and MPLs use their diverse assets—
including alternative data, bank proprietary data, and traditional credit bureau data—to develop advanced credit
models.
Imagine: Regional Bank has a long history of always being
there to meet its customers’ financial needs. It offers a wide
variety of products and has collected extensive financial and
transactional data on its customers over decades of
relationships. Yet, it is finding that some of its younger
customers don’t use many banking products and don’t have
very long credit histories. Regional Bank wants to ensure
that it can continue to meet these customers’ borrowing
needs, but feels it doesn’t have all the data to make informed,
risk-based decisions.
Regional Bank decides to partner up with Platform Y to
create a credit scoring model that combines Regional Bank’s
wealth of customer relationship data with Platform Y’s social
and other non-traditional data and expertise to make
effective credit decisions. Both companies are able to leverage
each other’s strengths and assets to advance their own
business needs.
Credit modeling
process
Servicing and collections

8. PwC 7
Identifying a strategic partner
Partnerships to provide capital or purchase loans
require banks to have a good understanding of
marketplace lenders’ credit standards, underwriting
processes, and compliance and quality controls. Yet
strategic partnerships require even more up-front
investment, have a longer time horizon, and have a
lasting impact on overall product, customer, and
revenue potential for both partners.
There are a variety of reasons why a bank or traditional
lender may want to partner with one of the marketplace
lending platforms, and based on those goals they may
look for partners where there is already an alignment,
or conversely, they may look for a partner with
complementary features.
By identifying the categories to consider, lenders can
effectively outline their goals for a strategic partnership
and then identify possible partner companies.
Once goals for the partnership are clearly established
and possible target companies identified, it is time to
take a closer look at the target companies to assess
internal factors that could point to a good match. These
factors include compliance rigor, operational efficiency,
risk management discipline, culture, credit risk
appetite, and reputation, just to name a few. Banks
must carefully vet any third party for compliance with
all applicable laws and regulations, overall customer
service, operating model, and rigor around risk
discipline. Each entity must also be mindful of the
proper transfer and safeguard of customer data,
particularly in light of the increase in cyber attacks. By
ensuring that the marketplace lending partner has the
appropriate processes and controls in place, banks can
gain comfort that the partnership will provide long-
term accretive benefits.
Considerations such as operational efficiency and
technology scalability will be indicators of a platform’s
ability to grow and succeed beyond the startup stage.
With the high-volume, smaller dollar nature of many
marketplace loans, manual tasks and operational
inefficiencies will be magnified as platforms begin to
grow. Any technology deployed must be able to quickly
scale to handle large volumes, and operations should be
streamlined and automated as much as possible.

9. PwC 8
Evaluating potential partners
The framework below provides a guide to banks and
other financial firms to help them assess potential
marketplace lending partners. It also serves as a guide
to marketplace lending platforms that are looking at
strategic relationships with a banks, to help them
prepare for due diligence.
The due diligence of potential platform partners should
be holistic and detailed and include elements such as
company history, operational competency, technology,
financial stability, credit risk management and
enterprise risk management, compliance management
and quality control programs, and servicing and
collection practices. Each element should be thoroughly
assessed and evaluated; this may be performed by a
third party, and it likely will involve a series of data
analysis, documentation review, and on-site meetings
with management to delve into areas of question or
concern.
With respect to bank-marketplace lender partnerships,
regulatory compliance is an area of specific focus. An
effective Compliance Management System (CMS) will
establish the framework for identifying, assessing,
controlling, monitoring and reporting compliance risks
across the platform. It will also give a bank partner
confidence in the platform’s ability to manage key
compliance risks.
Key CMS elements include:

10. PwC 9
An effective CMS is the foundation for any organization
to succeed at risk management; however, there are a
number of additional considerations specific to
partnerships between banks and marketplace lenders.
Initial partnership due diligence should also include
financial due diligence, including a requirement for
audited financial statements that demonstrate financial
stability, as well as the ability to meet obligations and
continue growth. Additionally, banks may require a
detailed understanding of the credit policy,
underwriting process, and fraud prevention
mechanisms, along with its credit model, including
actual loan performance history and stress testing
under various economic scenarios.
Platforms should be prepared to provide potential bank
partners with access to transparent and detailed
reporting and data feeds that allow insight into portfolio
performance, referral performance, or other data
related to the subject of the partnership. Regardless of
whether data is provided directly or through an
intermediary, the platform and the bank should have
technology in place that allows both potential partners
to efficiently communicate and receive information, in
order to maximize customer service, sales
opportunities, and risk management capabilities.
This reporting and data sharing should be coupled with
ongoing performance and risk monitoring to maintain
regulatory compliance and to ensure that the expected
return on investment is realized. This may include
tracking agreed-upon key performance and risk
indicators as well as adherence to service-level
agreements.

11. PwC 10
The opportunities posed by partnerships between marketplace lenders and banks are significant, however
integrating the business relationships strategically is the key to success. With our deep banking and consumer
lending knowledge and experience with marketplace lending activities, we can assist in preparing for such a
partnership, from conducting market assessments to evaluating various partnership strategies or conducting due
diligence and advising on regulatory compliance matters. Regardless of whether your organization chooses to
partner with a bank or marketplace lender, we can provide advice and support on the critical decisions and key
implementation activities that will shape your strategy and help position the partnership for success.
How PwC
can help

12. To discuss a range of services tailored to your
organization’s needs, please contact:
Roberto Hernandez
Principal
Consumer Finance Group
Telephone +1 940 367 2386
Email roberto.g.hernandez@pwc.com
Linkedin https://www.linkedin.com/
in/robertohernandez1
Jason Chan
Senior Manager
Consumer Finance Group
Telephone +1 214 435 1161
Email jason.chan@pwc.com
Linkedin https://www.linkedin.com/
in/jchan14
Mackenzie Sullivan
Manager
Consumer Finance Group
Telephone +1 213 217 3612
Email mackenzie.sullivan@pwc.com
Linkedin www.linkedin.com/in/MackenzieS
ullivan1
Will marketplace lending be
ready for increased
regulatory scrutiny?
http://pwc.to/1IuOFPw
Peer pressure: How peer-to-
peer lending platforms are
transforming the consumer
lending industry
http://pwc.to/1D6DrNT
Is it time for consumer
lending to go social?
http://pwc.to/1CqOZgp
www.pwc.com/consumerfinance
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