I learned about Lending Club today via Facebook. They are the latest entry in the burgeoning peer-to-peer (P2P) lending space. Here's how they describe themselves on their web site:
Lending Club is an online lending community where people can borrow and lend money, bypass the banks, and get better rates. By working together, members can borrow money more easily and at a better rate than they would get from a bank, or invest in a portfolio of loans at higher rates than those served by savings accounts or CDs. A proprietary technology called LendingMatch™ helps match lenders with borrowers using connections established through social networks, associations and online communities, and build diversified portfolios based on lender preferences. Lending Club is backed by Norwest Venture Partners and Canaan Partners.
Other P2P lenders include Zopa and Prosper. Although the models differ in various respects, they are the latest form of dis-intermediation. A bank is an intermediary -- it takes deposits in various forms, and turns them into loans of various forms. These P2P operations aren't deposit-takers; they facilitate the matching of lenders and borrowers. Because of this, they aren't covered by most of the regulations that affect banks.
These organizations are low-end disruptive in the Clayton Christensen sense of the word: an innovation that brings an imperfect solution to the market that addresses needs of a particular group of customers more cheaply than the current solution. It's a 'good enough' solution. These P2P operations cannot possibly offer lenders or borrowers some of the bells and whistles of conventional financial services, or even the simple speed, efficiency and reliability. But they may offer better rates. Over time, they are likely to get better at what they do, and take a share of the market through sustaining innovation.
Previous articles on this topic:
Update on Zopa and Prosper, online un-banks. August 17, 2006
Financial Services Innovation Watch: The E-Bay Model Comes to Banking. March 30, 2005
A related topic: Vendor Relationship Management - What the heck is it? June 13, 2007
