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Moses Annenberg

How Online Lenders Could Take Billions Of Profit Away From Big Banks

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%).

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