Every type of business has sustained some impact or the other from the rapid proliferation and advancement of technology, which most have sought to improve efficiency and stifle competitors. And the banking industry is no exception.
Morgan Stanley says the online lending industry is expected to grow steadily for the next five years. Large financial companies have been cutting down on loans for small borrowers, thereby creating a gap left to be catered to by new online lenders. The gap is primarily a result of the need for loans amounting to $250,000 or less, which is too scanty for large banks.
Last week, JPMorgan joined the club by joining hands with On Deck Capital Inc. On Deck stock rose 28% in after market trading, following the announcement of the collaboration. A similar move is likely to come from Goldman Sachs, which is likely to focus on customer-oriented and small businesses.
The good thing for large banks is they have set their eyes on the right segment at the right time. They are starting to shut down branches and invest in software which will improve and maximize utility for customers in times to come. Inevitably, they will realize they were right to notice that the focus in global banking is shifting away from personalized money management to convenience banking, where the customer wants to be able to have access to the account 24/7.
Several large banks are also worried though, about the increased interest rate. Their fears suggest it may benefit assets, but harm the liability aspect of the business, because depositors will be honed in by other entities offering better rates.
Lower cost structures at banks which have converted into holding companies have allowed them to offer higher rates on deposits, which will increase further when the Fed raises rates. Regardless, the issue is deposits rates in the online lending industry are already significantly high, but customers are not responding as expected perhaps because they prefer a safe and nationwide banking system that allows them to manage money anywhere, anytime.
It is essential especially now, for large banks to differentiate their business against online lenders before the rate hike. Lending Club, the largest online lender has forwarded up to $13 billion in loans, yet its stock price has plunged more than 46% year-to-date (YTD) and continues the downward trend.
Market conditions suggest online lenders will swoop in and capitalize on the vacuum to finance businesses and individuals, but concerns in Washington have also been raised, and transparency and high interest rates are just two of them.
The rapidly growing online industry has recently attracted increased scrutiny, and the enquiry by California State regulators is one such instance. Regulatory bodies are asking online lenders for more information on their investors and business models. Back in July, the US Treasury Department announced it was going to open an investigation into the industry because of the suspicious rate at which the demand and granting of loans increased. FY14 saw loans worth $14 billion being forwarded, and loan creation has almost doubled each year since FY10, a report by Morgan Stanley concluded.
The investigation by Californian authorities will determine whether the industry needs further regulation. Though it scares those with capitalist inclinations, further regulation may be just what this segment needs to fortify consumer confidence.