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 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.
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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).
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Goldman Sachs
But the competitive advantage that peer-to-peer lenders advertise doesn't just come from using big data to make underwriting decisions. They also have a significant regulatory advantage, the Goldman Sachs analysts found. In fact, the analysts say Lending Club has higher per-loan costs than the consumer lending businesses of JPMorgan or Discover (6.9 for JPMorgan and 6.3 of their loan receivables, whereas Lending Club only has 1.7 of which is for prime borrowers, about $258 billion of which could be refinanced by one of the new lending marketplace lenders. Goldman estimates that banks earn $4.6 billion from these loans.
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Goldman Sachs
Right now, Goldman says, marketplace lenders are claiming an additional .31 of it today. They could end up with 14% of it in 10 years -- about $725 million in profits, largely taken from big lenders like American Express, Discover, Capital One, or JPMorgan Chase. But it would still be a small portion of the consumer finance universe -- Discover alone had some $2.3 billion in profits last year.
Read more: http://www.buzzfeed.com/matthewzeitlin/how-online-lenders-could-take-billionsfrom-banks How Online Lenders Could Take Billions Of Profit Away From Big Banks
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