Traditional banking is being challenged by new technology and the sharing economy. And this time, there is no bailout in sight.
We're in the early stages of a peer-to-peer lending revolution, bolstered by last week's spectacular Wall Street debut of Lending Club, an online marketplace for loans.
Though Lending Club has revenues of less than $150 million, it raised a whopping $800 million in its Initial Public Offering in what is the largest tech IPO of the year and the first ever for a peer-to-peer lender. This undoubtedly paves the way for more homegrown financing firms to go public. Lending Club processed more than $6 billion in loans this year, up from $4.8 million during its founding year in 2007.
The company nabbed a $9 billion valuation, higher than most U.S. banks. It's a giant nod from the investment community for its potential to disrupt the financial services industry — an even bigger shot across the bow of bank lending.
And it's about time. The only reason banks exist from a lending point of view is that they have traditionally been the one large type of institution that can float the risk of an individual loan.
But as an online, peer-to-peer lender, anyone can lend a little bit of money to lots of people. If you take one loan and divvy the risk up among 10,000 people, then that's a pretty good investment.
In fact, the rate of return on peer-to-peer loans can actually beat the market. That's because peer-to-peer lending usually involves an interesting group of borrowers: a self-selected group of technologically advanced people who are short on cash. So the likelihood of the borrower paying its lenders back actually ends up being pretty high.
Overall, it's a way better way to get money than by using a bank. Less concentrated power in institutions. Less corruption. Less Wall Street.
That doesn't man that Lending Club is full of new faces and startup innovators. Its board includes an ex-Morgan Stanley CEO and former Treasury Secretary Larry Summers.
Though state regulations have kept peer-to-peer lenders out of about half the country, the IPO means Lending Club is governed by federal regulators and can operate anywhere. Execs have said they plan to use the money raised in the IPO to acquire other financial tech startups. Let's hope they leave competitors in place and not just turn into a peer-to-peer banking behemoth.
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