Peer-to-peer lender Lending Club finds niche, but banks don't see it as major threat
Banks and credit unions in Central Massachusetts have their eyes on the newest competition in the lending marketplace, which writes lower-rate loans using money from individual investors.
Lending Club, a peer-to-peer lender, blends a lack of overhead with the speed of Web communications as a competitive advantage while pulling capital from everyday people who are looking for investments with returns higher than those of traditional deposits, but off the stock market.
Lending Club makes personal loans of up to $35,000, using money from individual investors who usually spread their funds across several loans. The company, one of the two largest peer-to-peer companies, along with Prosper, has loaned $6 billion since its debut in 2007 and recently raised $1 billion in capital through an initial public offering of stock. Lending Club has loaned more than $150 million in Massachusetts and just began accepting Bay State investors in December.
The highly automated process uses information including credit scores, income and employment to calculate a loan rate within minutes and usually a loan agreement with 24 hours to a week, depending on the application's complexity, said Scott Sanborn, Lending Club's COO.
“We are matching borrowers on the one side looking for credit, with investors of all shapes and sizes who have capital available and who earn, in exchange for that capital, the interest,” he said, explaining that the loans made by Lending Club are handled through Utah-chartered WebBank.
In one local example, Dan, who lives outside of Boston, and didn't want to disclose his last name, was able to get a loan rate of around 6 percent from Lending Club to consolidate $18,000 in credit card debt. That, compared to annual interest rates of 14 percent to 21 percent on the cards, has allowed him to better control his debt, he said.
According to a study by the Federal Reserve Bank of Cleveland, the majority of loans made through Lending Club were to consolidate credit card debt. The same study found that the use of these services has grown rapidly in the past three years, experiencing an average increase of 84 percent in the dollar amounts of loans being made per quarter. This lies in contrast to bank-originated consumer loans that have declined, on average, 2 percent per quarter.
Can peer-to-peer lending last?
What remains to be seen is the staying power of peer-to-peer lending, said Christopher Alt, visiting professor of finance at Clark University, who explained that not being able to expand beyond borrowers who want to refinance credit card debt could be the limiting factor.
“I think it's trying to capture a limited but fading opportunity,” he said. “I think that Lending Club may have to find other sets of impeded borrowers that they can tap into in the future.”
Loaning to people who have credit card debts, yet good credit but a lack of other assets against which to obtain a secured loan, is just a very focused market, Alt said.
Tim Garner, senior vice president of marketing and strategy at Digital Federal Credit Union, has been watching the rise of peer-to-peer lending and sees it as a niche competitor with local credit unions, but not something that raises concern at Marlborough-based DCU — yet.
“There's always too much competition and it comes from everywhere and you need to keep an eye on it and what is going on,” he said. “There's all kind of competitors in all different parts of what we do.”
In fact, Garner believes credit unions offer a better option for consolidating credit card debt. By moving into a secure loan backed by a car or home, DCU members could get an annual interest rate as low as 1.49 percent, he said. While Lending Club rates may be better than those on the credit cards on which holders have accumulated debt, credit unions can offer a wider array of options.
How it stacks up against banks
Mike McAuliffe, chief commercial banking officer for Middlesex Savings Bank, based in Natick, doesn't see peer-to-peer as direct competition to community banks. Many of Lending Club's loans will be one-time interactions, he said, explaining that he sees community banks as a place to build relationships for more than one-time interactions.
“That segment of the lending market is really a very, very small piece of what community banks would do,” he said of single-time unsecured loans.
McAuliffe does see a place for the unsecured loans offered by Lending Club. For example, he said the loans can serve people with a good credit score but a lack of banking history.
“You might have the cash flow to be able to pay the loan back but it's for a purpose a traditional bank might not approve,” McAuliffe said.
Sanborn said Lending Club loans have been used for everything from weddings to moving costs.
In the short term, the Lending Club model does not represent a true disruption, said Alt, although similar lending models heavy on online automation might prove to be a disturbance to banks eventually. If nothing else, they could push traditional lenders to move even more services online, he said.
“I think that parts of the model will lead to a more efficient market over time,” Alt said. “My hunch is that it will lead to a catalyst to other changes. People will keep experimenting and trying different things, and this may just be a waystation along the way.”
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