Disintermediating Banking
I’ve become pretty fascinated by the idea of disintermediating banking lately. It’s clear that the current system is broken and it’s also clear that the need for capital is not going away, so something’s got to give. Felix Salmon, as I’ve mentioned in the past, clearly thinks a big part of it is disintermediation. He wrote this in a post today about his anger with community banks not lending money:
I wish these loans could be disintermediated somehow: I’m sure there are lots of Americans — even Americans who know how to underwrite loans — who would love to get 2 percentage points over prime on $35,000, spread over six years. (Prime is currently 3.25%, and almost certainly won’t go any lower; that puts a floor of 5.25% on the interest that these loans throw off. Try getting that from a CD.)
Certainly sounds right to me. Clearly there is risk here, but with risk comes reward (in this example 2 percentage points over prime). The thing is, I don’t understand the banking system well enough to know why something like this isn’t happening. Can anyone fill me in?
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Well, it’d be hard for the average consumer to evaluate default risk wouldn’t it? Unless we want to go back to the rating agencies…and we all know how well that ended up…
I see why Felix is making the prime + 2 comparison with CDs but I’m not sure if the comparison is entirely appropriate given risks involved with SMEs– here’s a quote from the NYT article Felix references: “While the loan is 100 percent guaranteed, it’s only 100 percent guaranteed if you follow all of the underwriting guidelines, and some of those guidelines are very fuzzy,’ Mr. Seiwert said. ‘If you miss one, you put your whole loan at risk.’” I’m guessing that has a big part to do with this, especially in light of tastier AAA corporate loans, which today are already at least a hundred basis points higher than prime + 2.
Still I think the idea of disintermediation is interesting given that lending incentives are considerably different from a typical bank… I feel like you might be talking about a microfinance model like Accion?? but probably more like Kiva, which just entered the US with the support of none other than Maria Shriver? Apparently the SBA’s also graciously put up $30 mm toward that on top of the $255 mm. Hopefully the US will see more of that going forward.
Alibaba’s easing of b2b transactions in the US can’t hurt either.
http://adage.com/globalnews/article?article_id=138431
Also check out Lending Club.
@Jeremy: Good point … that does raise an issue. I wonder if you could crowdsource something like that?
There are a multitude of factors. First, banks have a lower cost of funding because of access to the Fed window. Second, banks can leverage their equity so that they can make more loans and a higher return (versus individuals). In essence, the more equity you have the easier it is to get a loan at a good rate. Third, diversification is really important in making loans. it is less risky to lend to a bunch of people, in different businesses, in different geographies (etc) versus to one person. Fourth, scale matters. Per Jeremy’s comment, it is expensive to do credit research and better to spread the cost of a credit department out over multiple loans. Finally, experience counts and everyone (hopefully) learns from their mistakes. There has been some talk of your concept in the student loan market. Here is a link to an article from the Saturday NY Times about a company called SafeStart (http://thechoice.blogs.nytimes.com/2009/08/15/debtfears/?scp=2&sq=ron%20lieber%20student%20loans&st=Search). Hope that helps….
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