Startups in the world of financial technology, or “fintech”, think of banks as hulking mediocrities ripe for disruption. Banks in turn look down on fintech outfits as little more than gadflies swarming over chicken feed. As any fan of romantic comedies would know, such apparent incompatibility is often the precursor to a close relationship. On December 1st JPMorgan Chase (JPM), America’s biggest bank, announced it would make small-business loans through OnDeck Capital, a “marketplace lender” of the sort that usually claims to be on the verge of putting financial-services behemoths out of business.
The deal may seem odd at first: after all, banks like JPM have customers wanting to borrow and the money to lend to them. The catch is that their desire to make smallish loans—the pilot will focus on credits of $250,000 or less—is limited by the cost and hassle of originating them. It is “the kind of stuff we don’t want to do or can’t do,” said Jamie Dimon, JPM’s boss.
OnDeck, whose share price spiked on the news, is one of hundreds of lending platforms active in America. Most of them started life by matching individuals or firms needing money with those with too much of it, dubbing themselves “peer-to-peer” lenders. But the relatively high returns on offer attracted banks and other financial institutions, which began to buy up the platforms’ loans. For instance, plenty of American community banks, which garner lots of deposits but have few opportunities to lend beyond their immediate local area, have piled in.
This flirtation has since evolved into a full-on fling. British banks like RBS and Santander UK have been trying to shrink their balance-sheets, but denying loans to small businesses is a public-relations no-no. So they have been directing them to the startups instead. The latest phase of the courtship is even more intense. JPM is farming out credit assessment to the upstart, on lending that will be done in its own name. BBVA, another big bank, has a similar relationship with OnDeck.
Goldman Sachs, a Wall Street rival to JPM, is building its own marketplace platform focused on consumer credit. Meanwhile, the share prices of big marketplace lenders such as Lending Club are in the doldrums. That hints at the inevitable happy ending, when a bank plucks up the courage to buy a marketplace lender. It all spells wedding bells.
© The Economist Newspaper Limited, London (December 5th 2015).