Big Banks Start to Embrace Startups

Established firms hunt for partners on small-business loans

J.P. Morgan Chase & Co. recently decided to tap On Deck Capital Inc. to create an online small-business loan for its customers. The move is the clearest sign yet that large banks are choosing the path of embracing up-and-coming lenders rather than facing off against them.

Other banks also are turning to upstarts to boost small business lending. This fall, Regions Financial Corp. partnered with online lender Fundation Group LLC, in part because of its transparent terms. Annual percentage rates on Fundation loans top out at 30%.

Some of these partnerships have been in place much longer. A Wells Fargo & Co. unit that processes credit-card payments for merchants has had an arrangement with CAN Capital Inc. for the past five years in which customers who were declined a bank loan are referred to the online lender.

“We are in discussions about ways to expand the program” with Wells and in talks with “several others,” said CAN Capital chief executive Daniel DeMeo. “There’s a lot more curiosity over the last six months than there had been previously.”

Small-business lending is a natural place for banks to start collaborating with newcomers from Silicon Valley given the amount of ground that they have lost since the financial crisis. Ten of the largest banks offering small loans to businesses extended $44.7 billion in credit in 2014, down 38% from their 2006 volume.

“Every major bank is working on this,” said John Barlow, president of Barlow Research. “This is really just the beginning of a re-engineering of the entire small-business lending process.”

But not every bank will end up enlisting outside help. For instance, Bank of America Corp. has no plans to partner with online or alternative lenders in part because of potential dings to its reputation, Chief Executive Brian Moynihan has told analysts.

In the case of OnDeck, J.P. Morgan determined that its technology, specifically the coding, and compliance operations were scalable.

Many of the details are still under development. J.P. Morgan is planning to begin the partnership in select cities next year before launching in full, a person familiar with the matter said.

J.P. Morgan will integrate OnDeck’s technology into its checking-account website in order to offer loans to pre-screened borrowers, but the bank is keeping its partner’s name off of the product.

That contrasts with a similar type of loan that OnDeck developed earlier this year for small businesses that use Intuit Inc.’s accounting software. That product, which synced to businesses’ Quickbooks accounts and provided them with quick access to credit lines, was branded as being “powered by OnDeck.”

Meanwhile, Regions decided to put a link to Fundation’s online application on the bank’s website and co-brand the arrangement.

“The product is very simple and easy to understand,” said Joe DiNicolantonio, head of Regions’s business banking group. “We want to make sure our partner is lending in a very responsible and fair way to our customers.”

Source: Wall Street Journal, Peter Rudegair, Ruth Simon, and Emily Glazer
Photo: A Wells Fargo unit has an arrangement with smaller CAN Capital. (Patrick T. Fallon, Bloomberg News)