It’s not that they haven’t tried. Post the 2007-2008 credit crisis, many of them have cleaned up their acts.
- they’ve stopped predatory lending (well, kinda)
- they’ve shored up their capital reserves (actually, they have to add another $68 billion against future financial disasters)
- they’ve shut down underperforming branches (truth is, they can’t close ’em fast enough)
But, it’s not just the fact that banks are now forces to lay in their own financial beds that has made bankers lives so tough of late.
Banks face (new) tough competition
It’s also about competition. Banks are being assailed on all fronts in a way they’ve never been threatened and I think the writing is one the wall: the core functions of banking are being challenged by a whole new generation of startup financial service providers that may eventually displace them. We’re in the early stages of sprinting a marathon to build the most influential finance companies.
Today’s consumer lending: from the consumer to the consumer
One of retail banking’s bread and butter business lines is a basic form of lending arbitrage. They take deposits from customers (paying out a low interest rate) and then lend it out to other customers (at a higher interest rate).
But many individuals are borrowing outside traditional banking channels. Lending Club, the largest peer to peer lender, just surpassed $4 billion in small personal loans it’s underwritten on its platform. Borrowers on peer to peer lending platforms either couldn’t qualify for loans, got worse rates with banks or just would rather avoid the banking sector all together. Banks see the writing on the wall — Union Bank just announced it would team up with Lending Club to deploy its own capital into loans on Lending Club’s website. You can hear how far the company has come since my 2012 interview with Lending Club founder and CEO.
Business loans: the next domino to fall
Lending Club made it very clear as it gears up for its own multi-billion dollar IPO (expected this year) that it’s interested in getting into business loans. It’s here, in the commercial loan business, that banks are facing their fiercest rivals right now.
- Long term loans: Newly-minted companies like Funding Circle has already lent out hundreds of millions of dollars to business looking to borrow money for years at a time. The demand for these types of loans from non-banking sources is huge.
- Short term loans: Businesses looking for shorter term loans and access to working capital are turning more and more to companies like OnDeck. Armed with new credit models, these firms can frequently be more quick and nimble, approving loans in minutes (versus days and weeks at traditional lenders).
- Specialty loans: Perhaps the most interesting entrants into the online lending market are the specialty ecommerce and payment platforms. Amazon is hiring boatloads of people to staff up its new lending division. Paypal is doing the same with its new Working Capital loans for small businesses that use the payment platform. These companies are perfectly situated in their customers’ business to a) determine creditworthiness and b) to provide them with a loan. And student loans? Forget about it — there are startups like Pave (hear my recent interview with Pave’s co-founder) trying to create more efficient (and cheaper) ways to finance higher education.
Look for more innovative online lending models to proliferate in the next few years like the kind that Zazma employs. A startup that’s received investments from top venture capital firms, Zazma provides trade financing to small businesses. Need to stock up on some inventory before the holiday season? Zazma will pay your supplier for the goods and work with you on payback — all almost instantly online. Low friction like credit cards and quick access to working capital.
Today’s “no respect” for the banking sector is so much more than just the product of the recent credit crisis. Smart, well-funded startups are beginning to chip away at banks’ core value to the economy and consumers (both retail and business) seem to happier with their new-found options.
What do you think about the changes in the lending market? Let’s discuss in the comments below.