The internet has impacted nearly every aspect of our lives, from how we communicate to how we learn, and even the way we conduct business.
The proliferation of mobile devices has changed our world even more. The beauty of these technological advances is that they provide greater access to all kinds of information and services. Companies like Lending Club have built their entire business platform online; their model forever changes the way we look at traditional loans, and banks for that matter.
Breaking traditional financing
The Lending Club model matches investors with people who want to borrow—and the entire process happens online.
Consumers like it because they get unsecured loans at lower interest rates and can choose from different options without impacting their credit score.
Investors like it because they earn a higher rate of return on LendingClub notes that show historical returns of 5.06% to 8.74%, over traditional CDs currently averaging 0.58 % APY across all term lengths. Additionally, they receive monthly returns to reinvest or cash out.
Consumer-to-consumer lending, crowdfunding, and online lender exchange services are all radically changing the way loan transactions happen. This movement to “democratize” access to capital is heavily influencing the financial industry as banks face new competition in an unfair environment.
Online lending models don’t have the same regulatory hurdles as banks, their costs are lower, and they meet customers where they are (online and mobile devices) and on their schedule, which isn’t always 9 to 5.
Banks are facing headwinds coming up. Lending models that provide financial services without hidden costs and gotchas are going to attract people to internet companies where there is a great deal of transparency.
Consumers like transparency. It creates trust and a feeling of not being taken advantage of. Where federal regulations and examinations often shut down innovation for financial institutions, non-traditional lenders can step in with nimbler platforms and offer higher-risk loans.
The online space keeps getting more crowded—OnDeck Capital, LendingTree, Kabbage, Kickstarter, Indiegogo—to name a few relatively new entrants. There doesn’t seem to be a lack of business, even as newer players come into the field. Banks can't be complacent about these competitors and should seek mutually beneficial relationships.
Alternative lenders as partners
Danae Ringelmann, co-founder and chief development officer of Indiegogo actually views her company as an incubation platform for banks. Indiegogo has the ability to help people fund their dreams when traditional loans are not an option due to lack of credit history or other risk factors. Their model builds businesses up that will then come to banks for future loans, not to mention deposits.
Even though Lending Club posted a loss of $6.4 million in the first quarter of 2015, the company continues to see rapid loan growth and reports a desire from the traditional financial industry to partner. In fact, Lending Club recently joined forces with Citigroup to provide $150 million in loans to low- and moderate-income American families. This relationship provides greater access to capital and lowers the cost of credit for borrowers.
Lending Club also looks for ways to expand their business model in innovative ways, including partnerships with Google and Alibaba.
While Google may seem like an unlikely competitor to banks, the company poses another interesting challenge.
Banks don’t fear Google because they see them as a competitor; they dislike them because they are able to get conversations with the consumer first.
If someone wants a credit card, they search for one on Google.
Consumer dynamics shift
The financial industry is in its infancy of change. In a world of online lending platforms, digital wallets and virtual currencies what will be next? The dynamic of reaching consumers is changing and exerting immense pressure on the ability to attract more business.
These are the game changers moving forward—getting the customer’s attention first and giving them affordable, equal opportunity access to capital.
Is your bank ready?
About the author
Chris Nelson is founder and CEO of Zoot Enterprises Inc., a global provider of origination, acquisition, and decision management solutions for large financial institutions.