The future of banking will surprise you
A new world in banking is emerging as millennials look for on-demand solutions for their credit needs. For them traditional lenders are highly inefficient at originating and servicing loans, and lengthy, paper-based application processes take too much time. In recent years, online lending platforms, which include so-called "marketplace lenders" and "peer-to-peer lenders," have emerged to fill the gap. These companies use technology to source, underwrite and service small-balance loans cost effectively.
Big data technology enables these platforms to make fast, sophisticated underwriting decisions and arms them with capabilities such as online application gathering, online eligibility assessment and identification verification, as well as automated information pulls from third-party sources, thereby enabling borrowers convenient and increased access to credit while providing investors with high-yield investment opportunities.
Today the peer-to-peer marketplace lending sector represents only 1.1 percent of the unsecured consumer loans and 2.5 percent small-business loans in the U.S. While the industry is still in its infancy, it is expected to grow at an annual rate of 47 percent in the U.S by 2020, according to Morgan Stanley.
Silicon Valley has taken note of the sector's growth potential, and venture capital firms have poured $2.3 billion into dozens of start-ups that provide a variety of loan types, including personal loans, student loans, small business, auto and mortgages.
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Firms like LendingClub and Prosper are on track to originate several billion dollars' worth of personal loans for prime borrowers this year to refinance credit card debt at lower interest rates. SoFi and CommonBond are changing the way that student debt is originated and delivering loans to borrowers at rates far lower than what they are currently paying, while firms like CAN Capital and Kabbage are lending to otherwise "unbanked" small-business owners.
As investors continue to pour money into the sector, a healthy competition among these loan originators will develop, resulting in a range of loan options and better access to credit for consumers, small businesses, real estate owners and other borrowers.
Traditional lenders, like banks and credit unions, initially ignored the online lending sector as it challenged the status quo. More recently, however, they have been investing in loans originated by the top online lenders or lending money to investors who do.
Banks are also announcing partnerships with top players. Recent examples are the BBVA partnership with OnDeck, Lending Club's partnership with BancAlliance (a banking industry cooperative group comprised of 200 small banks) and the Zopa partnership with Metro Bank in the U.K. in which Metro Bank will fund loans with deposits. Traditional lenders—including several of the top 10 U.S. banks—are also exploring how they can connect more of their turned-down loan applicants to alternative sources of lending capital, such as online lenders.
At the same time, technology solutions are being developed to support this referral channel and to improve the connectivity between borrowers and online lenders. One such solution, Marketplace Lending Gateway, announced today by Crowdnetic, seamlessly connects bank borrowers to online lenders through a real-time matching engine.
What lies ahead?
U.S. regulators, such as the CFBP and Treasury Department, are becoming increasingly familiar with the online lending industry. While they have not taken any measures to regulate the sector to date, international precedents—such as the FCA's regulation of peer-to-peer lenders in the U.K., which includes minimum capital requirements and general rules for conduct—would suggest that the regulation is on the way, which could increase online lenders' operating costs and slow the industry's development.
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Today, online lending is new and novel, but it will become mainstream as the industry continues to grow and mature. And with traditional lenders increasingly partnering with and investing in their online peers, it is only a matter of time before the difference between the two is indiscernible.
—By Jonathan Barlow, founder and former CEO of Eaglewood Capital Management