Peer-to-peer lending platforms such as Prosper and LendingClub (NYSE:LC) have changed the way people can borrow money, and apps such as Venmo and Zelle have made it easier and cheaper to send money.
In this segment from Industry Focus: Financials, analyst Michael Douglass and Motley Fool contributor Matt Frankel talk about the ways that technology is disrupting big banks, and what this trend could mean to the banking industry.
A full transcript follows the video.
This video was recorded on April 2, 2018.
Michael Douglass: Let's start with lending, specifically peer to peer lending.
Matt Frankel: Sure. The peer to peer lending term is kind of a loose term nowadays. Like Michael said, a lot of the bigger banks have started to copy this business model, so it's not exactly peers loaning to peers anymore. But, at its heart, Prosper was actually the first mover on this. A lot of people think it was Lending Club but Prosper actually got there a little bit earlier. But, Lending Club was definitely the big one that got the banking industry on its toes in terms of peer to peer lending.
Basically, how it works is, investors like you and I would fund the loans of other people and profit from the interest. Instead of a bank making interest money, you make the interest. Returns were attractive, so a lot of investors jumped on board. Within their first seven or eight years, by 2015, Lending Club had already broken the $10 billion mark in originated loans, which is a lot, especially since at first, the banks thought they weren't going to have to worry about this.
Since then, a lot of other companies have similar business models. Marcus by Goldman Sachs is one of the newest ones. Goldman is getting into consumer banking a little bit. On the business side, you have companies like Funding Circle, which is a really interesting concept, because business lending is a big pain in the neck, especially in certain industries. For example, long before I was in this line of work, when I was in college, I was in the restaurant business. If you own a restaurant, it's almost impossible to get a bank to lend you money to extend your business. So, peer-to-peer lending sites like Funding Circle had made that more streamlined. Square Capital is another example from Square, where they loan based on how much credit card volume a business does, so they know they're going to get their money back. Just different, more streamlined ways of loaning money to individuals and businesses that make the bank's process a whole lot better and more efficient. And most banks, other than Goldman Sachs, have yet to really catch up to this idea.
Douglass: It's interesting, because you also see some of the smaller banks like Bank of the Internet -- BofI, rather. Most people still call it Bank of the Internet, but it's BofI Holding, technically. They're doing a fair amount of business lending these days, and that's one of the areas they're really trying to expand. But the fact of the matter is, the financial industry as a whole has been a little bit slow to cotton on it and is still very much in catch-up mode.
And what's really interesting about this to me is, it's really taking an area that's been underserved by banks and is now serving it a lot better, and banks are beginning to recognize that there's a business model there. To some extent, that creates an opportunity for them, but they're also competing with really asset-lite internet start-ups, which frankly don't have nearly as much in terms of costs as they do. So, that's going to be a competitive issue for them long-term.
Frankel: Yeah, definitely. Going hand-in-hand with that is the concept of these peer to peer payments. Two big apps that people use -- I don't know if Michael uses either, but I've used Venmo a few times -- Venmo and Zelle are two big ones. And unlike peer-to-peer lending, banks have actually really started to embrace peer-to-peer payments. Zelle is actually integrated into most big banks. I was looking at their website before we recorded this at their partner list, and I couldn't think of a bank's name in my head that wasn't on their list. Names like Bank of America, Capital One, Wells Fargo, Citi, Chase, all the big ones and most of the smaller mid-size banks are using Zelle.
What this allows people could do is send money to whoever they want without going to the ATM, writing a check, pay wire transfer fees. Anyone who's done that knows they're not cheap. And this gets really useful for situations like if you want to split a check at dinner with somebody. I'm sure most listeners have already used one of these two and they know this. Not me so much. No one splits my check. I have a family, so I pay the entire bill now. But, I could see where I would have a very, very, big for an app like Venmo 10 years ago. But, this is an area where the banks have really embraced the disruption.
Douglass: Yeah, it's interesting. For the record, I use Venmo, and I've certainly seen, Bank of America, where I do some of my banking, has done a lot of promotion of their peer-to-peer transfers, which is, as you noted, powered by Zelle. It's kind of the banking industry's response to primarily Venmo's disruption. And it's interesting, because this is another area where fees are very much heading toward zero. And that's definitely going to be, long-term, an issue for banks. Because historically, as you noted, they made their money from wire transfer fees and all these different fees, check writing fees and check cashing fees and all this stuff. If peer to peer payments end up taking over and doing everything, that stream is going to dry up for them.
And I'll just finish with a personal anecdote. When my wife and I were heading to closing on our house, I really did not want to carry a cashier's check for our down payment, so I did a wire transfer. And my bank was like, "It's $27." Of course, you're spending a lot of money on a house, so $27 doesn't matter, but I was like, "Come on, really?" I was so annoyed about that. [laughs]
Frankel: Not only that, wire transfers are often not instantaneous.
Douglass: Oh, yeah. I think they promised it within two business days, so I had planned ahead, but I was still checking my email constantly making sure, has it gone through, has it gone through, am I going to be able to close? Anyone who's bought a house knows there's a lot of stress, particularly in that last day, particularly if you're carrying the check, I think, but also if you're doing a wire transfer. And yeah, that's a pretty major area where a lot of banks make a lot of money that long-term looks like it's going to dry up.