Are banks outsourcing lending to fintechs?

During the pandemic, the fastest-growing loan category at large US banks was loans to non-bank financial institutions, which mostly means warehouse lines to fintechs. Banks increasingly grow in assets where they don't own the customer.

The fastest-growing loan category at large US banks during the pandemic was an obscure one: "loans to non-bank financial institutions" (NBFI). In other words, warehouse lines to fintech lenders.

On second thought, it makes sense. Fintechs typically operate at the lower end of the credit spectrum, which is where loan demand was. Borrowers at the top were flush with stimulus money and had little to spend it on. Banks wanted assets, fintechs wanted funding, and a senior secured warehouse line let a bank reach that demand without underwriting it borrower by borrower.

Banks report NBFI loans together with securities-based lending, and the combined category at large banks is approaching $1 trillion.

A pattern, not a coincidence

Look beyond NBFI and a broader pattern appears. In recent years, most loan growth at large US banks has come from asset classes where the bank doesn't own the primary customer relationship:

Warehouse and forward-flow funding for fintech originators
Point-of-sale and partner-originated consumer loans
Purchased whole-loan pools

Is that a coincidence, or another sign that banks are becoming deposit-gathering institutions rather than lending vehicles, renting their balance sheets to whoever owns the customer?

Implications

For banks: NBFI exposure is senior and structured, but it's a bet on the originator's underwriting, servicing and fraud controls, as well as the collateral. Monitoring has to go below the borrowing-base certificate, down to the vintage curves.

For fintechs: A warehouse lender is a partner with a lot of leverage over you. Advance rates, eligibility criteria and performance triggers are where your economics really get set, and they're worth negotiating with data.

For private credit: When banks pull back, as they did later in the cycle, this is exactly the space that asset-based finance funds have moved into.

The relevant question, then and now: can this trend be extrapolated, and what does it mean for who really owns the consumer lending franchise?