On Thursday, Lending Club announced that two community banks, Titan Bank and Congressional Bank, had signed on with Lending Club for two types of transactions:
- The banks will buy loans through Lending Club
- The banks will offer personal loans to customers through Lending Club
What does this mean for banking?
1. There is plenty of money supply chasing limited loan demand
The Fed’s easy money policies have meant plenty of cash chasing fewer loans in banking. This signal from Titan and Congressional is that the banks are sitting on piles of cash. They don’t have enough loan demand to profitably deploy their cash, so they’re looking elsewhere.
While the Fed has said they will taper their quantitative easing policies, experts believe the Feds printing presses will remain on for the foreseeable future.
2. Small banks could begin outsourcing credit policy
Titan Bank and Congressional Bank are saying they will stop underwriting some loans and let Lending Club do the heavy lifting of approving loans and assigning interest rates. This was the most surprising part of the announcement for me – Local Banks historically have had a competitive advantage in underwriting: knowing their customers and the local environment better than national banks. However, this signals that some banks are giving up.
3. Local banks still have competitive advantage in access to cheap funds.
Checking accounts don’t pay any interest, and savings accounts offer virtually nothing to depositors. This means cheap cash for local banks – cash that has been historically been more difficult and expensive to acquire nationally (online banks offer almost 1% interest to depositors).
Take, for example, monoline credit card companies like the mid-2000s versions of Capital One, MBNA, and Providian. Those companies didn’t have cheap access to funds and instead had to rely on the market to fund their credit issuances. If (and when) the credit markets locked up, the companies were toast. Capital One survived (partially through acquiring local banks like Hibernia and North Fork), and the others were swallowed up by other big banks.
For Lending Club, it could mean improvement to their bottom line, or a push to improve market share by passing the lower cost structure on to borrowers. It will be interesting to see if and how Prosper responds.
4. Lending Club is taking the long-term view.
While Lending Club’s current balance of P2P supply and demand is tilted towards too many investors and not enough loan demand, Lending Club is looking to grow both investors and borrowers. While Peer Lending Advisors’s clients would rather they focus 100% on getting more loans on the platform, it’s the right move for Lending Club as they work toward an IPO in the next year.
Lending Club will need more cheap money. How could they do this? We could see more partnerships with local banks. Or, we could even see an acquisition, along the lines of what Capital One did in the late 2000s.
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