Before delving into the various types of non-traditional lending options, let’s talk about why these banking alternatives are here in the first place. What does this industry offer that traditional banking doesn’t, and why are people increasingly choosing to use them over banks? Is it that our tech-savvy generation is more willing to trust technology (crowdfunding, virtual currencies, and online payment platforms) over traditional financial establishments and corporations? The booming FinTech (financial technology) industry suggests yes. Susan Herbst-Murphy from the Federal Reserve put it this way: “Millennials are open and want to do business with alternative financial services platforms, more so than any other generation.”
Millennials have proven to be much different than their Baby-Boomer parents. Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup—the 4 leading US Banks—all appear on the “10 Least Liked Brands by Millenials," indicating that they are a generation ready to embrace a future without banks. Consequentially, traditional banking has been at an evident decline—JPMorgan Chase just announced that they would be closing 300 branches this year—and borrowers continue to look for innovative alternatives to banks.
With confidence in U.S. banks remaining low, peer-to-peer (P2P) and marketplace lending platforms are experiencing rapid growth. The growing distrust that millennials had towards banks set the stage for the emergence of lending alternatives. It should be of no surprise, though, that millennials lack trust in our financial system. During their life they’ve witnessed the market soar, collapse, re-soar, re-collapse, re-soar... they’ve seen their parents get laid off during the Great Recession. They've read about stock market scandals and manipulations, and high frequency trading. They have seen the financial giant wipe out hard working folks. Millennials have become the generation that dislikes banking, driven by the environment that has surrounded them.
“Peer-to-Peer” lending (platforms where lenders can lend to borrowers directly, instead of through banks) has experienced rapid growth in recent years. One of the major benefits that P2P lending offers over traditional banking is the easy application process and quick access to funds. Applying online can take as little as 20 minutes and your P2P loan can be listed on the platform and fully funded in 7-10 days. The process is not that simple with personal bank loans: it can take a few days just to organize a meeting with your bank, and even longer to compile paperwork and make your formal loan application. For your loan to be approved and for your funds to be received from your bank, it can take up to a few weeks.
The recent success of these P2P platforms to generate steady returns has attracted Wall Street capital and institutional investors—giving rise to “marketplace lending,” where the capital sources have grown rapidly. Billions of dollars in loans have been issued just between 2 platforms alone, Lending Club and Prosper. In 2015, they issued nearly $1 billion in loans and are set to lend more in the coming years as more capital flocks to the industry.
Non-traditional lending is not just here to disrupt, but to displace. The industry is continuing to innovate and grow; estimates say peer-to-peer lending is destined to hit the $1 trillion mark by 2025.