Common themes are apparent when examining business models disrupted by technology. Amazon sells products more cheaply and conveniently than traditional retailers. Uber and Lyft disrupted the cozy monopoly of taxicabs, creating a more pleasant experience for consumers frustrated by rude drivers and dirty cabs. Apple changed the way in which people “consume” music, while Zipcar and Airbnb were trendsetters in the growth of the flexible “sharing” economy. BlackRock and Vanguard’s asset growth demonstrates a form of technology disruption, as their index ETFs take market share from high-cost actively managed mutual funds.
Banks may be vulnerable to the factors that inspired disruption in other industries. Consumer respect for banks fell dramatically during the global financial crisis, and the fake account scandal at Wells Fargo renewed public anger toward the banking industry. Regulatory scrutiny has made most banks more bureaucratic in their lending practices, with the mortgage process particularly challenging for most consumers. Credit cards continue to be an important profit center for many banks. Although banks are benefiting from a low cost of funds given today’s low interest rate environment, average credit card rates have remained high. Technology-enabled innovators such as marketplace lenders see an opportunity to capture market share from banks, offering better prices and a more convenient customer experience.
Marketplace lenders and online lending
Marketplace lenders originate loans through online portals rather than “brick and mortar” branches, a convenient and easy to use experience for an increasingly technology-savvy audience. Lending Club and Prosper were the first marketplace lenders in the U.S., founded in 2006. Today, there are more than 200 marketplace lenders. Marketplace lenders specialize in a wide variety of loan products, including small-business loans, consumer debt consolidation, student loans and mortgages.
Technology is a focal point in the user experience, streamlining the process for obtaining documents from borrowers and accelerating the credit decision-making process. Marketplace lenders can be more nimble in their use of technology than banks that typically are shackled to legacy technology systems and processes. Marketplace lenders, however, don’t have recognizable brand names, a competitive disadvantage against banks that have spent decades building their brands.
Operating costs may be much lower for marketplace lenders that don’t have the cost burden associated with maintaining physical branches, enabling marketplace lenders to be aggressive in pricing loans.
Digital loans can be a lower-cost alternative to credit cards. With major card issuers offering average credit card rates above 20%, a digital loan with an interest rate in the low to mid-teens can offer a significant financial benefit to borrowers committed to paying down debt. Marketplace lenders typically make money by charging a loan origination fee to the borrower, and a loan servicing fee to the investors who buy the loans.
Marketplace lenders were originally peer-to-peer lenders, matching individual borrowers and lenders with one another. As marketplace lending has grown in popularity, with institutional funding mechanisms becoming the more dominant form of matching borrowers and lenders. U.S. consumer marketplace loan origination grew to over $25 billion in 2017, which is a small percentage of the nearly $500 billion of credit card balances.