Much has been said about the firing of Lending Club (NYSE:LC) this month after the company's loan review process allowed a secondary market investor to buy loans that didn't meet the requirements of the purchase agreement.
In this segment of The Motley Fool's Industry Focus podcast, host Gaby Lapera and bank analyst Jay Jenkins reveal the one strategic change online lenders should make to, believe it or not, do business a little bit more like you'd see at a high-performing, old-school bank like Wells Fargo (NYSE:WFC).
Because if they don't and the industry continues to stumble, well-heeled banks that are currently nipping on their heels could drive them out of the market altogether.
A transcript follows the video.
This podcast was recorded on May 16, 2016.
Gaby Lapera: There are some people who need access to loans but, you're right, they have low credit ratings or they have other risk factors associated with them. They can't get loans from a bank. A lot of these people turn to payday lenders, which a lot of the time, I'm going to say most of the time, are predatory lenders, right? They end up in much more debt than they with have otherwise.
Jay Jenkins: That's right.
Lapera: This could potentially present an avenue for these people, but the way it's being done now is just so risky.
Jenkins: It absolutely is. I'm not smart enough to find the solution to this problem, but to me, there is an answer in online and in payday lending. I'll give you an example of a couple traditional banks doing it right. Wells Fargo has rolled out an online business application. Wells Fargo is the number one, by number of loans, SBA lender. SBA loans are government-guaranteed small business loans. The number two SBA lender is a small private bank in Wilmington, North Carolina. Both of those banks accept SBA applications online, the user experience is smooth, it's easy, it's intuitive. But in both those cases, it's not 100% automated. There is a human being that gets routed this information, all the stuff is verified, human eyes with human instinct and gut make a decision, and they can move forward on the loan.
It's this nice balance where you get the benefits of online, the speed, the transparency, plus you get the benefits of a traditional risk management department who can protect deposit holders and protect investors from all these undue losses from perhaps unscrupulous borrowers who might try to do something shady.