Courtesy of Mish.
Banks are in the business of making loans.
This may sound ridiculous, but is that the right model?
Before answering, please consider the model of Lending Club. Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. We replace the high cost and complexity of traditional lending with a faster, smarter way to borrow and invest.
Here is the initial process straight from the Lending Club Website.
Steps
- You decide you want to borrow money
- You go to the Lending Club website
- You enter the amount
- You specify what it is for
- You answer a question regarding your credit
- Lending Club evaluates the information with no impact on your credit score, determines an interest rate and instantly presents a variety of offers to qualified borrowers
- If accepted, you can prepay at any time with no penalty
Lending club claims borrowers substantially reduce their rates over those offered by banks.
Exploring Lending Club
Bloomberg columnist Mat Levine explores the issue in Lending Club Can Be a Better Bank Than the Banks.
There are a lot of ways in which [Lending Club] is not a bank, but the big one is that basically all (95.6 percent) of its liabilities are “notes and certificates,” that is, just unsecured structured notes tied directly to specific underlying loans.
Banks, on the other hand, are funded mostly by deposits and repo and other short-term senior borrowing. …
