I recall reading the then pretty revolutionary book “The Death of Distance” by The Economist journalist Frances Cairncross in 1997. Published 10 years before the first iPhone the book has stayed with me ever since. It was prescient in many respects, not in the least with her list of 30 predictions with most of them pretty much on the mark more than 15 years later.
Today, I’m looking at “The Death of Friction” as the new mantra that will define a lot of what we’ll see happening in many places in the world, transforming businesses and processes along the way, and disrupting existing value chains, at times to the point of disappearance. It is happening now, it is gaining in speed, and it’s waiting to come to the surface for all to see in the very near future. And there is no better place to see this happening than in the one industry where most actors still think things will never change, and that is Financial Services and Banking. Change is coming to a theatre near you, and it is coming fast.
Wherever there is friction, there is a cost, and frustration. The funny part though is that a lot of business is to be had because of this, to the point where there is a vested interest to keep the status quo. Banks continue to be extremely reluctant to (rapid) change, as the current setup pretty much guarantees continued profits.
Other businesses are happy to see customers go through a lot of frustration while dealing with a transaction, as it may drive them to a live – call center – conversation with a sales rep whose job it is to upsell you higher margin product. Luckily, change is coming, and way overdue.
One of the areas where this has been most prevalent is a particular subset of the Crowd Funding proposition, and a great illustration of the above. It’s a revolution called Peer-to-Peer and Direct Online Lending.
Dara Albright, one of contributors to Equities.com, has been very early and constructive towards Crowd Funding in general, and P2P and Direct Online Lending in particular. Early on she has been a big proponent for the industry, and is now being validated if we look at the progress that has been made so far.
So what are we talking about? Most people are equating crowd funding with the donation and rewards based models – you receive a product or token of appreciation for your small donation to the cause. This is currently mostly dominated by artists and other creative minds and with such online platforms as IndieGoGo, Kickstarter and Rockethub.
Others are focused on the equity-based crowd funding models. In the US though, these models are generally open to accredited investors but effectively closed to non-accredited investors. This may change due to proposals impacting Title III of the Jobs Act and where, for a small amount of money, non-accredited investors will effectively be able to own a small piece of equity in a business, mostly startups.
But then we come to the debt-based crowd funding vertical. This is where I roam. This is where real things are happening, fast and furious, for real people and real institutions.
Lending Club and Prosper, the 2 leading online lending players, currently control that market with a market share in excess of 95%. These companies are giving creditworthy borrowers a welcome and cheaper alternative for accessing credit. Investors, for the first time, can happily take the other side, at much more attractive yields — a classic disintermediation win-win, growing at a $300 million plus per month rate.
Both platforms have been growing at a 100% per-annum plus clip for a while now, and at least one of them (Lending Club) appears firmly on its way to an IPO soon. In the meantime, a number of other platforms are waiting in the wings, both in the same asset class (consumer credit) but also in others: real estate credit, student loans, small business loans, and any other category that is ripe for disruption and disintermediation.
And where are the banks in all this? With few exceptions, they don’t notice, or they wait and see.
The numbers are still too small too matter. On the face of it, they are – Lending Club has issued $3.6 billion in consumer loans so far, compared to a $3 trillion US consumer credit market. With that number though, Lending Club, measured by outstanding credit, is already ranked as a top 20 player. With its current growth rate sustained, it will become a top 10 player before yearend.
American Banker Magazine, in its current March issue, quoting Lending Club’s COO Scott Sanborn: “We believe now we’re one of the top five issuers of personal loans in the US”. And The Economist, in its most recent March issue, headlining with the title: “Banking Without Banks– By offering both borrowers and lenders a better deal, websites that put the two together are challenging retail banks”.
Then again, most recently, Wells Fargo (WFC) was reported to have banned employees to invest on any of these platforms, saying that it was not in the interest of the firm, mentioning competitive reasons. Could it be that maybe, just maybe, something’s afoot? Once again, happy to see that history does not repeat itself, but rhymes instead. And Schumpeter is alive and well indeed.
Yvan De Munck is a Managing Director at R.W. Pressprich & Co., a NY based broker dealer and investment firm. The views expressed herewith are his personal views, and in no way reflect those of R.W. Pressprich & Co. He can be reached @yvandemunck.
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