The Internet has managed to disrupt many industries, from publishing to music. So why not lending?
Google is teaming up with the nation's largest peer-to-peer lender. The search and tech giant is investing $125 million in Lending Club, which gets borrowers and lenders together outside the conventional banking system. Google's move and the actions of other big players reflect a growing interest in peer-to-peer lending.
Chanda Lugere works for a bank, but when she wanted a loan to consolidate her credit card debt, which carried a high interest rate, the bank didn't have much to offer. She tried other banks, but even with her excellent credit score she got nowhere.
So Lugere, who's in her 30s, went online seeking alternatives. She found Lending Club.
"I went ahead and applied for the loan and I was able to get it funded in one week. And my rate was 6 percent. So it's half of what I had been paying. I thought it was a really great experience from beginning to end — really easy, you apply online and they gave you status updates."
Both Lending Club and its much smaller rival, a company called Prosper, have been around for several years. But lately things have really taken off at both companies.
"Last year we facilitated about $800 million in loans and we are planning on $2 billion this year," says Renaud Laplanche, the CEO of Lending Club.
The system works like this: Investors put up the money to fund the loans; typically they'll have pieces of hundreds, even thousands of loans which are ranked according to risk. An investor's rate of return will vary accordingly.
Laplanche says investors make a nice profit, but consumers still get lower rates than they would with a conventional lender because peer-to-peer lending operates like a marketplace.
"It is a more direct funding process between the investors and the borrowers," he says. "There's no branch network. Everything happens online and it is really powered by technology and the Internet. And we use technology to lower cost."
In the industry's early days, most of the money for loans came from individual investors. But today — and this is a big change — large institutional investors like insurance companies and pension funds have put up a lot of the cash.
"That is about one simple thing and it's called yield," says Peter Renton, who blogs and teaches courses about investing in peer-to-peer, or P2P, lending. In recent years, he says, institutional investors have had a hard time finding good fixed-income investments. But P2P lending can offer that. And with more institutional money flowing in, the lenders can make more loans.
(Renton invests some of his own money in these P2P loans and when he directs investors to Lending Club and Prosper he gets referral fees.)
So, what about Google's investment? It's not putting money into loans but is making an investment in Lending Club itself. Neither company is saying exactly what it plans to do. But Renton and others speculate that Google sees synergies between Lending Club and Google Wallet, the company's virtual payment system. Imagine, for example, Google's own credit card or perhaps an instant big-ticket loan.
"If you can hook up a loan institution who is really innovative that can get something happening quickly, there is the potential that Google Wallet could hook up with Lending Club and you could go buy a car on your cellphone," Renton says.
Indeed Lending Club's Laplanche has grand ambitions: He wants to make small-business loans, student loans, car loans, even mortgage loans. For him, the multitrillion-dollar market for consumer credit is a giant opportunity.
"It's really one of the few large markets that has not been fully transformed by the Internet, so we believe we can become the mainstream alternative to the banking system," Laplanche says.
But David Schehr, who follows banking and investment services at the research firm Gartner, says P2P lenders won't be putting conventional banks out of business anytime soon.
"They're growing, they're growing steadily, but realize they're growing off a very small base," he says. "Their total volume of lending might be what a small two- or three-branch community bank does in a year."
And he says it can take a long time for consumers to change their behavior when it comes to banking.