The private student loan market is dominated by big financial institutions and established lenders, but could technology help smaller banks gain a foothold?
That's the hope of community banks such as First Dakota National Bank in Yankton, S.D. The $1.1 billion-asset institution — which was the first in the Dakotas to receive a bank charter, in 1872 — has partnered with ReliaMax, a company that insures, originates and services loans on behalf of lenders, with the goal of considerably expanding its student lending portfolio.
"We look at this as a big opportunity for us and hope to make the most of it," said Rob Stephenson, First Dakota's president and chief operating officer.
The bank has begun using ReliaMax's Connext product, which was launched in August, and is designed to allow smaller banks to offer student loans even if they lack the internal resources to underwrite and service these loans. ReliaMax insures, underwrites and services the loans on behalf of the bank, which funds them. The product can be integrated into banks' online platforms and uses proprietary analytics to enable banks to target the most coveted borrowers, said the company's chief executive, Michael VanErdewyk.
First Dakota's Stephenson said the bank did not have a formal student-loan strategy before this. It had accumulated only about $2 million-$3 million of student loans on its books over a 20-year period, mostly through "accommodation lending; schools that we had relationships with in South Dakota, families that we knew through regular connections, things like that."
After meeting with ReliaMax about Connext, bank officials grew more bullish. Stephenson estimates First Dakota can grow to about $25 million in student loans in the first 3-6 months of using the product.
"And we're not planning to stop there," Stephenson said. "We sure hope it can grow even bigger. And with the online component, we see this as a nationwide opportunity."
Indeed, the private student loan market is a growth area some banks could consider getting into, said Marc Weston, vice president, senior credit officer with Moody's.
"The private student lending market has been growing; federal loans don't come close to covering the cost of education," Weston said. "So there's definitely a vibrant market for private student loans."
Still, there are challenges for new entrants, he said, including it being "a sector dominated by a [few] large players: SLM Corp. [colloquially known as Sallie Mae], Wells Fargo, Discover."
Those three lenders and three others — Citizens Bank, PNC Bank and Navient — account for more than 65% of the $102 billion private student lending market in the United States, according to a report in July by the student-loan-data-analysis firm MeasureOne. Federal loans make up the rest of the $1.36 trillion market.
Another major challenge for smaller lenders is that student loans are "servicing intensive," requiring the necessary technology and internal resources to provide them, Weston said.
That is why First Dakota was intrigued by the partnership with ReliaMax, which services the loans on its behalf, Stephenson said. "We weren't originally looking to enter this market otherwise," he said. "But after hearing about [Connext] we felt we could really scale" in this area.
And ReliaMax's VanErdewyk said for that very reason the company is targeting banks in the $500 million-$5 billion asset range as its "sweet spot" since they may not have the infrastructure to offer such loans.
"We're not looking at the large money center banks," he added.
VanErdewyk also said offering student loans also presents banks with the opportunity to build credibility and a relationship with sought-after millennial consumers. "Oftentimes the student loan is the first contact with a bank, and it lets them start a relationship with the millennial customer, who is the next generation of bank customer," he said.
Still, while it could make a good introduction to millennial customers, banks need to focus on providing relationship-driven advice to this segment of consumers, said Mark Schwanhausser, director of omnichannel financial services at Javelin Strategy & Research.
"You do have the opportunity to get that millennial as a loan customer and then grow the relationship with them," he said. "On the other hand, a student loan has weaknesses as it's not typically an engagement-based product like a checking account. The key is for banks to truly ingratiate themselves with young borrowers on a regular, if not daily, basis. The aim for the bank is to deliver insight and advice — again, daily if truly relevant — to position the bank as an essential part of the daily routine and,
more important, as an adviser."
One way a bank can do this via student loans is helping millennial customers navigate the myriad options they have before them in choosing a loan, Schwanhausser said.
"Students today have an incredible pressure to figure out how to pay for college," he said. "They're looking at all kinds of loans, which ones are government, which ones are private. There is an incredible opportunity there for a bank to really establish a relationship, to tell them, 'Hey here's your options, here's how we can help you, and we have a banker that can talk to you about this.' "