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B207 Reading 18: Karen Mills on Marketplace Lending …
B207 Reading 18: Karen Mills on Marketplace Lending
Marketplace Lending and Banks
The Small Business Credit Gap Confirmed
The Enigma:
There was a conflict between banks claiming they were lending to every creditworthy borrower and small businesses (SMEs), the engines of economic growth, still saying they couldn't get loans.
Mills' Conclusion:
Based on her experience at the Small Business Administration (SBA), Mills concluded there was a resounding yes to the small business credit gap.
The Problem for Banks:
Banks found it economically unviable to make small loans ($50,000 to $100,000) due to the high effort and cost associated with individual, personal underwriting.
70% of the loans small businesses want are under $250,000, and 40-50% are under $50,000
2. The Transformative Role of Marketplace Lending
Disruption:
The online lending industry capitalized on the fact that mainstream finance was tied to traditional, brick and mortar operations and was slow to move online.
Transformation:
Marketplace lending is absolutely transformative , at the very least delivering a transformative customer service experience.
It provides better service at a lower cost.
It has forced banks to notice the need for a faster turnaround cycle and a more online process (e.g., removing the need to manually send tax returns).
Investor Interest:
The industry received significant interest from early investors seeking yield in a low-interest rate environment.
3. Why Banks Remain Relevant
Assets
: Mills advises not to count the established banks out yet , as they possess valuable assets: customers, low-cost deposits (federally insured), and underwriting expertise.
Market Reality:
The first place borrowers typically go is the bank.
Future Strategy:
Banks are considering strategic responses, including developing faster online processes , moving into new territory, or forming partnerships with new entrants.
Downturn Risk:
Mills is not completely convinced that marketplace lenders will fare as well as banks in a future downturn.
4. Regulatory Environment
Complexity (US):
The US is a "far more complicated beast" with overlapping agencies and no explicit oversight mandate for the online lending sector.
Online direct lenders are not classified as banks, so they do not fall entirely under banking regulation.
UK Contrast:
The UK developed the British Business Bank to facilitate distribution channels to the SME market. The UK's Financial Conduct Authority (FCA) balances rule-making/enforcement with a need to foster competition.
US vs. UK Styles:
The UK uses principles-based regulation, while the US uses rules-based regulation.
Policy Goal:
The key question for US policymakers is how to provide the appropriate level of oversight (for borrower and investor protection) without dampening the growth in creativity and innovation where a credit gap exists.
Transparency:
Transparency is a big principle for borrowers. Initiatives like the Small Business Borrowers Bill of Rights (BBOR) are trying to help lay the industry framework.