The announcement of a BBVA/OnDeck deal to work together funding small business credit left Bloomberg Businessweek simply aghast. “Banks are outsourcing some of their small business lending. This week brought more evidence that banks aren’t interested in competing with a new breed of alternative lenders for low-dollar-amount small business loans” screamed their article.
The article followed the BBVA Compass (U.S. subsidiary of Spanish lender BBVA) announcement that they were teaming with online lender OnDeck to offer business owners short-term loans. If you’ve been reading this column, this arrangement should make perfect sense.
According to Bloomberg, the deal announced last week was that BBVA Compass, with its 687 branches in the South and West, will market OnDeck loans to its small business banking customers. OnDeck will make the loans and collect repayments.
This partnership makes perfect sense because most business lenders can’t scale these loans (OnDeck’s average loan is about $40,000) profitably using today’s banking technology. OnDeck and a slew of other innovative lenders have mastered the digital platforms, but don’t have the capital to fund the business demand – particularly capital at a reasonable rates.
So combining forces with a major bank is a natural strategy that serves all interests. While the announcement pointed out that “OnDeck will make the loans and collect repayments,” I’ll bet that’s not the entire story.
Know that BBVA has been studying their portfolio results carefully and is satisfied with the results to the point that they are confident the credit model is working. And that said, it’s safe to suspect that BBVA is ultimately carrying the loans – whether by buying notes, participations or lender finance – and getting a rich financial return on this partnership.
Trust me – this combination of a major bank with a proven technology platform is a game-changer. Watch for more deals like this ahead as other lenders step up to the window to start buying deal flow and access to a market they can’t service as well.