Skip to content

Blog

The Future of Student Lending: Wells Fargo’s Partnership with Amazon

August 10, 2016 | Cheryl Cross

A few weeks ago, Wells Fargo made headlines by announcing a strategic partnership with Amazon in the student lending space.

The deal calls for the bank to cut half a percentage point from the interest rate on student loans to Amazon’s “Prime Student” customers, who subscribe to a service that includes free two-day shipping and unlimited access to streaming of movies and television service.

The move comes as big banks, including Wells Fargo, bolster their loan-loss reserves—in most cases for the first time since the recession—a sign that the boom in credit quality has reached its peak, and that now banks are trying to expand loan volume.

“We’ve had the best of times,” Wells Fargo’s CFO John Shrewsberry said on the bank’s earning call last week. “It probably gets a little bit more average.” This fiscal year, Wells Fargo has added $350 million to its reserves, the first increase since 2009.

The partnership is also the latest discount offered by private student lenders to stand out in what has become an increasingly competitive market. Other banks have adopted new approaches including discounts to borrowers who set up automatic recurring loan repayments or who join professional associations.

The relationship between the two companies is only promotional for now, but given the peak in credit quality and rising competition it raises the question: where will the student lending industry go from here?

Wells Fargo and Amazon’s partnership alone is rife with potential. At a time when lenders are finding new and innovative ways to assess borrowers’ creditworthiness, Amazon could provide Wells Fargo with troves of consumer data that would allow the bank to optimize its credit decisioning processes.

The deal also offers Wells Fargo the valuable opportunity to build an early relationship with the next generation of borrowers — today’s online Prime Student shopper are tomorrow’s first-time house and car buyers and insurance and credit card applicants.

Several other notable lenders have been testing the waters with new and innovative strategies. Citizens Bank and U-Fi both offer refinancing products for non-resident aliens if their cosigner is a US citizen and meets other eligibility requirements. Commonbond and Social Finance (SoFi), two emerging P2P lending platforms, made names for themselves connecting student and graduate borrowers directly to alumni looking to give back to their alma maters while still seeing a steady return. Both platforms have tried to attract borrowers and lenders alike by forming a community around the lending process, leveraging their nationwide networks of students, graduates, alumni, and professionals to organize networking and social events so that lenders and borrowers can get to know each other in person.

There’s no telling exactly what the future of student lending has in store, but one thing is certain: as new, innovative companies enter the space and the old guard takes strategic measures to embrace the cutting edge, the industry will never be the same.