Big data makes lending to the least risky borrowers even easier. And tight regulation of the banking industry has created an opening for new kinds of loans.
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With interest rates at all-time lows and traditional banks laden with new rules following the financial crisis, a new breed of financial institution has emerged: online lending marketplaces that match investors and borrowers, and evaluate borrowers using a wide range of data available online.
One of the largest such companies, Lending Club, raised $780 million in an IPO late last year, while Prosper has raised almost $200 million in venture capital. On these two platforms, loan issuance has grown from $26 million in the last quarter of 2009 to $1.7 billion in the third quarter of last year.
A new Goldman Sachs report on the industry estimates that some $4.6 billion worth of traditional banking industry profits are at risk of being lost to online lenders. Of the $843 billion of consumer loans outstanding, the report says, some $209 billion could move to online lenders and they could eventually capture almost 15% of the market, compared to the 2% they have grabbed so far.
Online personal lending has exploded, and, for Lending Club, it's mostly used to pay off high-interest credit card debt or refinance loans.
Goldman Sachs
The loans offered by these online lenders tend to be fixed-rate loans, paid off in between three and five years, with rates that start around 5.5%. But instead of being funded by bank deposits, they are funded by investors who snap up the loans after they originate, by a bank in Utah, in the case of Lending Club.
So while traditional banks will end up keeping some loans on their own balance sheet, Lending Club merely stands as a middleman between investors and borrowers. Banks still do some human evaluation of credit risk — traditional underwriting — while the online lenders use a wide array of data beyond traditional credit scores. The new online lenders can also offer loans at very high rates (Lending Club's highest advertised APR is almost 29%).
How Online Lenders Could Take Billions Of Profit Away From Big Banks http://ift.tt/1Kixpjc
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