By Mike Montgomery
The world’s 10 largest banks control nearly $25 trillion in assets — almost as much as the annual GDP of the U.S. and China combined. But their size doesn’t mean they are invincible. Politicians have called for breaking up Wall Street banks. Business credit is tightening. The financial industry seems ripe for disruption.
For the past few years, tech upstarts from Silicon Valley and New York have been doing their best to do just that. Online lenders such as OnDeck Capital, LendingClub and Prosper have been stealing momentum from the big banks by promising to make borrowing easier for small businesses and individuals. OnDeck and LendingClub even went public.
Yet some of the high-profile financial technology, or fintech, startups have stumbled recently. LendingClub, a peer-to-peer lender that has funded more than $20 billion in loans, is under investigation by the U.S. Justice Department for disclosure failures. Its CEO and finance chief both resigned. Prosper cut back on marketing to new borrowers and laid off 28% of its employees.
“At a certain point, these smaller companies start to run up against the same issues that the larger financial institutions have,” says Maria Gotsch, president and CEO at the Partnership Fund for New York City, a corporate-funded, nonprofit group with a mission to create jobs in New York.
Even with the aid of new technology, predicting customer defaults and complying with regulations is extremely challenging. So the upstarts have started working more closely with the old-line banks. Prosper is reportedly in talks with investment firms to sell them $5 billion in loans, possibly in exchange for equity warrants. J.P. Morgan Chase signed a deal with OnDeck to help make loans for small-business customers.
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