Getting Into Consumer Lending During the Pandemic

It may seem odd that a risk officer was one of the main proponents of Drummond Community Bank entering the consumer lending space — a space that, historically, most banks

 have considered to be risky. In addition, the recommendation was to enter that space at the height of the pandemic when uncertainty reigned supreme.

However, that was exactly the case. And for Matt Gallman, that speaks to how people incorrectly view risk management.

“A lot of people think that risk managers are there to get you in trouble and shut things down,” says Matt, “but that really shouldn’t be the case, because really, risk is just uncertainty and all about how we manage that uncertainty.”

That means that risk managers spend an equal amount of time talking about how you should take a risk.

That’s what led Matt to push for partnering with Upstart and enter the consumer lending space. It was a risk worth taking and, quite frankly, a necessary risk.

Embracing Change

“We’re in an extremely difficult environment where it’s a challenge for us to try to meet or grow our earnings with historically low interest rates and insane levels of liquidity in the banking system,” says Matt.

Given the challenging times, they went in search of alternative ways to generate revenue. 

They chose to purchase a portfolio of consumer loans from a bank that partners with fintechs. It was an eye-opening experience. They were able to see firsthand the data analytics involved in that process and were shocked at how well the loans performed.

By taking this small step, they gave themselves an opportunity to test the waters of the consumer lending space. In doing so, they saw the value and scale that fintech partnerships can offer.

But ultimately, Matt believes the biggest risk would have been not changing at all.

“If you really think about it, with the way COVID has impacted consumer preferences, if we don’t start embracing change, and we don’t start finding partnerships, we’re going to become stale and irrelevant in the minds of our customers,” he says.

Advice for Banks and Credit Unions Looking to Partner with Fintechs

Look for Compliance

Matt’s biggest piece of advice is for banks and credit unions to engage their risk and compliance team and try to find fintech partners that are proactive with regards to compliance.

“That’s what was so appealing about Upstart,” he says, “working with the CFPB and getting the no-action letter.”

Use Vendor Frameworks

In addition, engaging your risk department allows you to use frameworks that normally fall within the realm of vendor management, which will help you get over the initial hump of adoption.

“When you approach a new fintech partnership,” Matt says, “it can be overwhelming to think where do I start?”

But following the framework you use in vendor management will allow you to break down the different areas for research and help you get everyone in the organization comfortable with what the partnership will entail.

Partnership Model

“You have to have a partnership model, or else it’s not going to work,” says Matt.

At the end of the day, you have to trust the people behind the company and endeavor to have a fully transparent relationship. Look for partnerships that will allow both parties to grow in mutually beneficial ways.

Originating Unsecured Loans

In entering the consumer lending space, Matt’s initial hurdle was getting the team at Drummond Community Bank comfortable with unsecured loans.

It helped that everyone could see that they were outperforming every other asset class.

With those fears pacified, it came down to the team gaining comfort with data analytics and the new approach to underwriting.

Finding Best-in-Breed Solutions

A big part of what drives Matt’s desire to enter the consumer lending space is the ability to really enhance people’s lives.

“What I try to do every day is figure out how we can deliver every single product that [our customers] need to help improve their lives,” he says.

And in this fast-paced, always-changing, technological world, that involves partnering with nimble companies and fintechs that can weave APIs into those products and solutions so that you can continue to innovate.

Waiting on the huge players to come up with an all-in-one solution just doesn’t work anymore.

“It’s going to be extremely difficult for existing incumbents to just wait on some of the legacy providers,” Matt says, “because by the time you launch that new online banking solution, it’s going to become stale.”

The big takeaway: Be open to new, best-in-breed solutions from multiple providers because they will allow you to deliver relevant value to your customers and consistently innovate over the long run.