Shadow Banking Soars with Non-Bank Alternatives/Financial Technology (“FinTech”) Enables Online Lending and Crowdfunding

As banks face tougher regulations and restrictions, which often result in greater difficulties and red tape for borrowers, consumers and businesses are looking for other sources for loans or lines of credit. Enter the concept of “shadow banking,” which in the simplest terms means lending by any institution or entity other than a bank, such as hedge funds or private equity funds.

Many firms, such as Prosper Marketplace, have established web sites that enable what they call peer-to-peer lending. That is, borrowers may post their loan needs and potential lenders can review those loan requests and invest in loans that meet their requirements and criteria. This means that individuals can loan money and earn interest as readily as banks can. However, a review of the actual loans made shows that commercial banks are often the main lenders under such services, as some constantly monitor these sites and offer loans through them.

On the plus side, shadow banking sometimes affords customers more favorable terms on loans such as higher amounts or longer periods (perhaps a 10-year loan term as opposed to three-year) or securing a loan with less collateral than that required by banks. On the negative side, shadow banks are subject to less regulation. Regardless of the risk, shadow banking is responsible for trillions of dollars in global loan transactions each year.

Lending Club (www.lendingclub.com) is an online marketplace where investors put up funds for loans to consumers who complete simple applications online. The site uses proprietary software to evaluate the borrower’s answers and determines interest rates for each loan as well as fixed monthly payments and flexible terms. There are no prepayment penalties.

OnDeck Capital (www.ondeck.com) is a non-bank lender focused on serving small businesses. Lenders of this type are of growing interest to business owners, particularly those under 35 years of age. OnDeck was acquired by consumer firm Enova International in mid-2020. LendingClub also serves the small business loan sector. Other firms in this space included Kabbage (which was acquired by American Express in mid-2020), Lendio and Funding Circle (formerly Endurance Lending).

Other shadow banking examples include firms that finance leases for vehicles, industrial equipment and aircraft, such as AerCap, which owns over a thousand jetliners that it has leased to the world’s airlines. Toyota Financial Services provides lending and leasing services for Toyota automobiles and trucks for consumers and businesses.

Hedge funds and private equity funds have become massive non-bank lenders, as has a type of corporation known as a Business Development Company. These types of lenders provide short- to mid-term business loans and leases. In return, they not only charge substantial interest rates on their loans, but also frequently receive stock warrants enabling them to acquire an ownership position in the borrowers under certain conditions.

Crowdfunding began as a way for individuals to utilize peer-to-peer, web-based services to provide funding for artistic endeavors (such as books or independent films), charitable activities and the launch of new businesses or unique products. Several successful sites in this realm have raised very significant amounts of money for their members. These sites include Kickstarter and Indiegogo. However, individuals who provide money through these schemes receive the products that are eventually produced as a result of their investments, instead of receiving shares of stock.

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Shadow Banking Soars with Non-Bank Alternatives/Financial Technology (“FinTech”) Enables Online Lending and Crowdfunding, Business and Industry Trends Analysis

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