Will Online Lending Eventually Beat Out the Big Banks?


According to Inc.com, Wells Fargo has announced its intentions to enter the online lending business. To be precise, it plans to offer commercial loans of between $10,000 and $35,000 to those of its small business clients that have managed to prove their creditworthiness through their longevity as well as their solvency. In exchange, all these small businesses have to do is be one of Wells Fargo’s existing clients before filling out a simple and straightforward application, which can be submitted through the Internet.

Since Wells Fargo is not just the third largest bank in the United States, but also the largest Small Business Administration lender when measured using dollar volume, this is a significant boost to the credibility of online lending, which in turn, means a significant boost to the future prospects of online lending.

This is critical because online lending is still in its initial phase, meaning that its existence remains tenuous. Something that is particularly true because of recent scandals such as the forced resignation of Lending Club’s CEO by his own board members because of alleged improprieties, which have combined with the natural caution of careful and considerate investors to create a general air of suspicion about the industry.

As a result, Wells Fargo’s decision to enter the online lending market is not just a benefit for its own revenue-earning operations but also a potential benefit for the beleaguered industry as a whole.

What Is Online Lending?

Like its name suggests, online lending means providing loans to interested individuals through the Internet rather than through more traditional means, though the sheer extent of the focus on alternative means of connecting both businesses and consumers with credit is more than enough to distinguish online lenders from those of their counterparts that have online components to their lending operations. Although online lending features a broad range of financial products in much the same manner as its counterparts, there are some generalities that can be drawn based on commonalities in the industry.

For example, online lending tends to focus on small loans, which serve to minimize the risk of online lenders and thus the number of checks needed to ensure that each of their customers can be trusted with credit enough to make the loans profitable for them. As a result, online loans are also fast, so much so that some of the loan applications can be completed in as little as 24 hours, which makes them an excellent choice for both businesses and consumers that need credit as soon as possible. However, it is important to note that online lenders tend to make up for this increased risk-taking by charging higher interest rates than those on the financial products offered by their more traditional counterparts, though with Wells Fargo’s entrance, that could start seeing some changes because of the bank’s bigger and better-established resources.

What Is Online Lending’s Current Status?

At the moment, online lending is in a tenuous state. The earliest online lenders such as Lending Club and OnDeck have been in business for some time now, but their initial success was based on optimal conditions that encouraged their particular sort of online lending. However, those conditions did not last forever, meaning that those businesses are now floundering as they struggle to keep up with the changing business environment. With that said, it should be mentioned that while some of them will go under, others will manage to overcome their current problems by improving on their current business models through incorporating the lessons of their experience. In part, this is because this is how business works, and in part, this is because online lending holds much genuine promise.

For proof of online lending’s genuine promise, look no further than the fact that Wells Fargo is entering the field. Furthermore, look at how other established banks and other financial institutions such as Eastern Bank and JP Morgan Chase are toeing the waters as well, which suggests that Wells Fargo is not alone in its opinion of online lending’s potential. Although a single established institution can be mistaken about what it sees, that chance falls more and more with each established institution that shares it to the extent that they are willing to risk their valuable resources in pursuit of its promises.

Something that is particularly noticeable because it is not just banks and other financial institutions that are getting into online lending, but also otherwise unrelated businesses such as Square and Shopify, which might not be offering online loans exactly but are nonetheless stepping up to fulfill similar needs among both businesses and consumers by providing similar financial products.

What Is Online Lending’s Future Course?

Right now, online lending is still maturing as an industry, meaning that it consists of a mix of pioneers who have managed to convert their hopes and aspirations into actual revenue-earning operations as well as late-comers who are jumping onto the bandwagon. With time, it is probable that the best of both of these groups will hone their revenue-earning operations to an extent that they will become stable earners, while being joined by new entrants that will have learned the lessons of their predecessors but continue to develop the industry as a whole by introducing new innovations and inventions.

Ultimately, it is extremely unlikely that online lending will ever overtake the big banks and other financial institutions. In part, this is because the big banks and other financial institutions are already involving themselves in the industry in order to realize its promised potential. However, it should also be noted that both businesses and consumers have a wide range of needs for finance, which means that there must be a wide range of financial products to cater to those needs. Since online lending is profitable because it caters to a particular segment of said individuals rather than all of them out there, it will not be able to displace the rest of lending altogether. However, it should be able to carve a significant niche of its own, which should be able to provide more than a few online lenders with more than respectable profits not just in the short run but also in the long run.

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