“Is it worth it weighed against the potential penalties?” a senior banker recently asked. The “it” involves teaming with third-party lenders, commonly termed alternative finance companies (AFCs). AFCs provide digitally enabled lending to borrowers that usually operate outside a bank’s credit comfort zone.

More banks are now evaluating whether and how they should partner with AFCs —particularly related to small business loans. However, as this banker’s comment underscores, bank management needs to address both real and perceived risks before traveling down the partnership path.

The payoff to partnering for banks can prove substantial and result in improved operating expenses, increased revenues and an enhanced customer experience.  Today, most banks lose money on business loans up to $250,000 or more. Some costs are one-time, such as loan origination and underwriting — while others continue throughout a loan’s life, including loan ops, loan review, compliance, and monitoring. Costs have also increased with the advent of additional reporting requirements.