Do We Need Banks For Small Business Loans When Online Lenders Do Better?

bank loansFrom www.forbes.com -

I just read two articles about microfinance that surprised me. One pointed out how convenient and competitive the online peer-to-peer lending sites had become.


The second pointed out the low loss ratio at these lending sites. In essence, the article said that “loans at Kiva are repaid at a rate of 98.75 percent.” (Find a Balance in Microfinance, StarTribune, May 3, 2015, page D5). If the data in this article is true, it could shake up the world of finance, and more.

I don’t know if this is hype or fact. But think about the implications of this number. Compare this repayment rate with that of the average bank. Federal Reserve Bank data shows that the average loan loss for all banks in the U.S. was an average of 1.72 percent over the last 20 quarters. This means that Kiva’s lenders lost 1.25 percent compared with 1.72 percent for U.S. bankers.

Does that make you think?

The average Kiva lender supposedly lends money to borrowers around the world (many of whom are low-income and most of whom cannot get money from banks) and loses less money than the hardest-nosed financiers in America...


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Editor’s Notes:

♦ Dileep Rao of Forbes is coming to the realization that the traditional banking model may be broken. Online lenders are able to determine a lender's creditworthiness without being physically close and as shown by Kiva, they can do a good job of it. Kiva lenders only lose 1.25% while banking institutions lose 1.72%. Many people are in awe of the ability of online lenders, but I assume that this awe will eventually go away and it will become expected as lending moves online more and away from brick-and-mortar banks.

♦ We truly are on the verge of a revolutionary change in banking and lending. Fintech is the wave of the future and the internet will claim another victory in the world of finance. The stuffed-suit, high overhead, pomp and circumstance model of banking appears to be going the way of the dinosaur.

♦ What can you really say bad about online lending? It's more convenient, the interest rates are lower, loans are funded quicker, you aren't made to feel like a grade-school student sitting in front of the school principal when you apply for a loan. It's the wave of the future.

(Go to full article)

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