Author Topic: Are The Banks About To Gobble Up Peer-to-Peer Lenders?  (Read 6491 times)

gamassey

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Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« on: June 27, 2014, 06:37:56 PM »
Article in Forbes:

"What happens when new entrants to the financial services industry harness disruptive technologies in order to take on the established order? Much as those who despise the banks and their kin might like it to be, the answer is not that these large, established and sophisticated businesses just roll over. Rather, they fight back – very often by taking on the upstarts at their own game."


http://www.forbes.com/sites/davidprosser/2014/06/05/are-the-banks-about-to-gobble-up-peer-to-peer-lenders/

Fred93

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #1 on: June 27, 2014, 06:43:57 PM »
Quote
The gossip now is that large banks in both the US and Europe are seriously considering launching their own peer-to-peer ventures.

Hilarious silly piece.  Doncha just love the style of story where they warn you that somebody is "considering" something?  Are we supposed to shiver?

Wake me up when some big bank has actually launched such a venture and made it successful.

My opinion is that even the theory is wrong.  Banks seem to be wanting to invest their own money with the P2P ventures.  Witness recent agreements with Union Bank and Santander.  See all those bankers in the expensive suits at Lendit.

Booleans

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #2 on: June 27, 2014, 10:26:38 PM »
My first thought was that banks just can't compete with Lending Club because of all the overhead that comes with being a bank.

rawraw

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #3 on: June 27, 2014, 10:31:23 PM »
My first thought was that banks just can't compete with Lending Club because of all the overhead that comes with being a bank.
It could easily operate a subsidiary which is consolidated into the financials.  But it may get regulated differently as a result if its owned by a bank or the bank holding company.

AnilG

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #4 on: June 27, 2014, 11:09:41 PM »
My first thought was that banks just can't compete with Lending Club because of all the overhead that comes with being a bank.

Can you list some overheads of the banks?

IMHO, comparing banks with Lending Club is like comparing apples to oranges as they are two different line of businesses in a lending workflow. Banks are lenders, Lending Club is a loan broker. Of course overheads will be different.
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Fred

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #5 on: June 28, 2014, 03:07:30 AM »
IMHO, comparing banks with Lending Club is like comparing apples to oranges as they are two different line of businesses in a lending workflow. Banks are lenders, Lending Club is a loan broker. Of course overheads will be different.

Technically, banks are intermediaries.  They take deposits and lend the money, making profit through the spread.

I think it is not too far-fetched to compare LC with traditional banks. I agree with Laplanche when he said:
Quote
The advantage of Lending Club’s model is that it replaces “the traditional banking system with the low-cost marketplace,” Laplanche told Fortune in March.

http://fortune.com/2014/06/27/lending-club-reportedly-selecting-banks-as-it-looks-toward-public-offering/

rawraw

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #6 on: June 28, 2014, 07:43:09 AM »
The real advantage for the economy IMO is it isn't fractional banking.  The entities presumably are funding the notes with equity and not through leverage.  But I'm sure that's going to change and then something will blow up 

AnilG

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #7 on: June 28, 2014, 11:08:42 AM »
Technically, every business including your neighborhood corner store and gas station are intermediaries and they all make profit through the spread. There will be no business if there was no spread in transaction between what businesses are buying and what they are selling.

In a lending process, Lending Club is an online loan broker and banks are traditional and now also online lenders.

The main difference between traditional and online lending is who holds the pricing power. In traditional lending, lender (banks) have the pricing power. Lenders decide whom to lend and how much to charge. A loan broker only sources the borrower and gets a cut of origination fee.

In online lending, online loan broker (lending club) have the pricing power. Online Loan broker decides whom to lend and how much to charge. Online lender doesn't have any pricing power as final say is of a loan broker.

Look up lending club financial statements, there is no revenue and profit for lending club through spread between lender and borrower, all through the loan origination and servicing fees.

Business economics 101: whoever has the most pricing power in a transaction chain makes the most profit. With online lending this power has shifted to a loan broker from a lender.

IMHO, comparing banks with Lending Club is like comparing apples to oranges as they are two different line of businesses in a lending workflow. Banks are lenders, Lending Club is a loan broker. Of course overheads will be different.

Technically, banks are intermediaries.  They take deposits and lend the money, making profit through the spread.

I think it is not too far-fetched to compare LC with traditional banks. I agree with Laplanche when he said:
Quote
The advantage of Lending Club’s model is that it replaces “the traditional banking system with the low-cost marketplace,” Laplanche told Fortune in March.

http://fortune.com/2014/06/27/lending-club-reportedly-selecting-banks-as-it-looks-toward-public-offering/
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mchu168

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #8 on: June 28, 2014, 01:47:05 PM »
Technically, every business including your neighborhood corner store and gas station are intermediaries and they all make profit through the spread. There will be no business if there was no spread in transaction between what businesses are buying and what they are selling.

In a lending process, Lending Club is an online loan broker and banks are traditional and now also online lenders.

The main difference between traditional and online lending is who holds the pricing power. In traditional lending, lender (banks) have the pricing power. Lenders decide whom to lend and how much to charge. A loan broker only sources the borrower and gets a cut of origination fee.

In online lending, online loan broker (lending club) have the pricing power. Online Loan broker decides whom to lend and how much to charge. Online lender doesn't have any pricing power as final say is of a loan broker.

Look up lending club financial statements, there is no revenue and profit for lending club through spread between lender and borrower, all through the loan origination and servicing fees.

Business economics 101: whoever has the most pricing power in a transaction chain makes the most profit. With online lending this power has shifted to a loan broker from a lender.

IMHO, comparing banks with Lending Club is like comparing apples to oranges as they are two different line of businesses in a lending workflow. Banks are lenders, Lending Club is a loan broker. Of course overheads will be different.

Technically, banks are intermediaries.  They take deposits and lend the money, making profit through the spread.

I think it is not too far-fetched to compare LC with traditional banks. I agree with Laplanche when he said:
Quote
The advantage of Lending Club’s model is that it replaces “the traditional banking system with the low-cost marketplace,” Laplanche told Fortune in March.

http://fortune.com/2014/06/27/lending-club-reportedly-selecting-banks-as-it-looks-toward-public-offering/

With P2P lending, the investors determine pricing.  Think about it.

LonghornSF

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #9 on: June 28, 2014, 02:53:01 PM »
With P2P lending, the investors determine pricing.  Think about it.

Except that LendingClub, Prosper, etc. set the price, not the market. Prosper 1.0 and Funding Circle in the UK are examples of true marketplaces where the price is set by the market.

There are several misconceptions that are common even within the industry. Some of these are:

1) P2P platforms "remove" the intermediary. Truth: the platform replaces the bank as an intermediary.

2) P2P platforms have a vast cost advantage over banks. Truth: P2P platforms' administrative costs are lower, but banks have a significantly lower cost of funding since they use deposits to fund loans. A bank's cost to fund a loan is ~2-3%, whereas the lowest rate a P2P investor will accept is around ~5% (and many investors expect more than this).

3) P2P loans are significantly cheaper. Truth: in some asset classes they are but in many they are barely, if any, cheaper than bank loans. The P2P platforms are selling access, ease, and convenience. Truth 2: interest rate is not the primary motivator of many consumers.
« Last Edit: June 28, 2014, 02:55:09 PM by LonghornSF »

AnilG

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #10 on: June 28, 2014, 02:56:49 PM »
How so? Not at all, investors/lenders, on their own, have no influence on the pricing right now. Online Lending Platform operator  determines the credit worthiness of borrowers, sets the interest rate, and has final say in issuing loan. Platform has all the pricing power.

As a lender/investor, you have a choice to lend or not that is pretty much it. There are hundreds of other lenders who are ready to come in if you decide to walk away.

With P2P lending, the investors determine pricing.  Think about it.
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Booleans

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #11 on: June 28, 2014, 03:00:05 PM »
My first thought was that banks just can't compete with Lending Club because of all the overhead that comes with being a bank.

Can you list some overheads of the banks?

IMHO, comparing banks with Lending Club is like comparing apples to oranges as they are two different line of businesses in a lending workflow. Banks are lenders, Lending Club is a loan broker. Of course overheads will be different.

Having to maintain branch offices and all the related expenses.

LonghornSF

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #12 on: June 28, 2014, 03:05:36 PM »
Having to maintain branch offices and all the related expenses.

You're forgetting that the trade off for banks is that they're getting free deposits from consumers. They have a tremendous cost of funding advantage compared to any P2P platform as a result.

Also, people are acting like LC is some lean operation without any overhead. LendingClub has 500+ employees and is still growing its headcount rapidly. Granted, their administrative costs are likely to always be lower than banks', but they aren't a startup with just a few people anymore.

mchu168

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #13 on: June 28, 2014, 03:10:37 PM »
How so? Not at all, investors/lenders, on their own, have no influence on the pricing right now. Online Lending Platform operator  determines the credit worthiness of borrowers, sets the interest rate, and has final say in issuing loan. Platform has all the pricing power.

As a lender/investor, you have a choice to lend or not that is pretty much it. There are hundreds of other lenders who are ready to come in if you decide to walk away.

With P2P lending, the investors determine pricing.  Think about it.

Bingo.  Investors decide whether to invest or not.  Therefore we set prices. 

AnilG

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Re: Are The Banks About To Gobble Up Peer-to-Peer Lenders?
« Reply #14 on: June 28, 2014, 03:14:42 PM »
Fully agree.

Branch office expense is distributed across banking and lending operations. All those branch costs just doesn't belong to lending operations. People need to look at the complete cost of a lending transaction among different stakeholders and who is bearing what portions of this cost. Online lending platforms cost is little lower because they moved some of the transaction cost to lenders, primarily through servicing fee. The recent decline in bank branches is not because lending operations are moving online, it is because banking operations are moving online.

Traditional Lending: Borrower (origination fee) + Bank (servicing, marketing, operating and funding cost)
Online Lending:  Borrower (origination fee) + Online Platform (marketing and operating cost) + Lender (servicing and funding cost)

Having to maintain branch offices and all the related expenses.

You're forgetting that the trade off for banks is that they're getting free deposits from consumers. They have a tremendous cost of funding advantage compared to any P2P platform as a result.

Also, people are acting like LC is some lean operation without any overhead. LendingClub has 500+ employees and is still growing its headcount rapidly. Granted, their administrative costs are likely to always be lower than banks', but they aren't a startup with just a few people anymore.
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Anil Gupta
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