John Donovan is a FinTech entrepreneur who was previously involved with Lending Club and currently advises several FinTech startups. He discusses how marketplace lending returns to more individual-focused banking by allowing individuals to provide capital to others at reasonable returns. However, mega-mergers led large banks to prioritize profits over customers. Currently, four large banks control over half of US banking assets and debt. Marketplace lending platforms offer better rates to borrowers and returns to investors while having lower costs than banks.

1. Thoughtson Marketplace LendingandLendingClub
John Donovan is a FinTechentrepreneur. Hewas on themanagement team ofLending Club fromthestart,and thoughhe left in2012, hestill
owns equity inthefirm. He is also an advisor/board member to CircleBack Lending (P2PL), UrbanFT(Platform-as-a-servicebanking),OfferBoard
(crowdfunding), andis a partner ina fund, FinsightVentures (finsightvc.com), that invests in FinTech,P2Pand payments (and also owns equity
in Lending Club).
Marketplace Lendingis,insome importantrespects, bankingthe wayitusedtobe,the way itwas
meantto be;individualsmakingexcesscapital available tootherindividualsforareasonable return. It’s
a wonderful life…….itreallyis. Butsomehow,bankinglostits waywithmega-mergerscreatingtoo-big-
to-fail banks,securitizations withtoxicingredients,andsomehow forgottenwas the individual
customer,the one whowas actuallypayingthe bills. CreditUnionsandCommunityBankshave
generallystayedtrue totheirmission,butdon’thave the toolsto compete effectively onthe national
stage againsta fewhuge banks thatcontrol the majorityof consumerdebt inthe UnitedStates. There
are similaropportunitiesinEurope, AsiaandLatinAmerica, butthe largestmarketforconsumerdebtis
the UnitedStates.
I startedworkingforMasterCard in1988. At the time,itwas an associationof banksandincludeda
varietyof regional organizations tooconfusingtoexplainrightnow. Ifoundsome statistics below that
showthat 10 banksrepresented about43% of the outstandingcreditcard debtinthe US. Citibankand
Chase were dominantonthe East Coast. Bank of AmericaandWellsFargowere dominantonthe West
Coast. FirstChicagowasin the middle,andthere were a lotof smallerniche players.
Overthe nextcouple of decades Chase acquiredormergedwith Chemical Bank(whichhadmergedwith
Manufacturers“Manny Hanny” Hannover) and withFirstChicago(which hadmergedwithBancOne).
Bank of Americaacquired MBNA whichwasa large part of Maryland Bank N.A.,andCiti acquired
AssociatesNational Bank. Duringthistime many regionalplayers whohadprosperedbyknowingand
servingthe needsof theirlocal customers were alsoacquiredbylargerbanks whowanted tobecome
national mega-banks.
Currently,Chase,Citi,WellsandBankof Americaaccountfor overhalf of the $15 trillioninbankassets,
justunderhalf of the $10 trillioninDeposits,andhalf of the $850 billioninRevolvingDebt.

2. "Concentrationon the national level issomethingthatoughttobe of concernto policymakers"because
it means"fewerchoicesandless-competitive pricing"forsmall businessesandconsumers,saysWilliam
Isaac, chairmanof the FDIC1981-1985 (andcreditedwithpreparing the FDICforthe bankfailuresof the
1980’s and 1990’s). Possiblyevenworse,the consolidationputsmore risk"infewerandfewerhands,so
whenmistakesare made,theyare doozies."
Mega-banksshouldbe able tounderprice everyoneelsebecause of theirscale and low costof capital,
but theyare dealingwith significantlegacysystems,andthousandsof new regulations whichare
negativelyimpactingtheirgrowthand profitabilityinthe nearterm. More importantly,banksjustdon’t
appearto be re-imaginingwhere theyneedtogo. In Mary Meeker’s2012 InternetTrends she identifies
the $6 trillionfinancialindustryas beingripe forre-imagination:
There are manyexamplesof where bankshave done itrightinthe past. The bestexample of grabbing
revolvingdebtmarketshare inmymindwouldbe MBNA whichgrew to over$150 billioninmanaged
loansand carrieda 35% CAGR forover20 years(priorto beingacquiredbyBankof America). They
accomplishedthis throughAffinityMarketing –sellingcreditcardsto people withastrongcommon
interest. Theysoldintoover5,000 organizationsincludingprofessional,college anduniversity,and
sportsrelatedorganizations. Witha classic‘cream-skimming’strategy,theytargetedthe best
customerswithsuperiorserviceandendedupwith 30% lowerattrition,150-200 basispointlower
losses,25%higherusage,and48% largerbalances – all whichproduced 90% highernetmargins.
Accordingto a Harvard BusinessReviewarticle,thisfocuson providingthe bestservice tothe best
customers allowedMBNA tomove up inindustryrank from38th
to 4th
injust8 years,and increase
profits16 fold. Theywere the leadersinsocial-networkmarketingbefore MarkZuckerbergandBigData
were born.
MBNA showed ushow to outbank the banks througha unique marketingangle,greatcustomerservice,
betteroperatingefficiencyandasolidmanagementteam. There are clearsimilaritieswhenwe lookat
the growingsuccessof marketplace lending. These new platformsare carryingveryhighNetPromoter
Scores(70+%) versusnational banksandcreditcards (<10%),provide great value toborrowers (instant
riskbasedoffer,fastonline application,cashinthe bankaccount in days),investors(attractive returns,
newassetclass),andthe platformshave a clear cost advantage overthe banksdrivenprimarilyby
betteroperatingefficienciesandthe lackof a branch network.

3. Financial Technology(FinTech) isaveryhotspace to investthese days withrecentannouncements like
Apple Pay,andthe growthwe are seeinggloballyasAlibaba(Alipay) islargerthanPayPal andChina
UnionPay isa largerglobal paymentbrandthanMasterCardor Visa. LendingClubfiledtheirS-1on
August27 and theirstockisexpectedtostart tradingthisyear. And, the financial press expectsseveral
othercompanieswithinthe space,like ProsperandOn-Deck-Capital,toIPOwithinthe next12months.
Differentanalystsare callingforMarketplace Lending tobe a $1 Trilliondollarbusinessinthe next10
years. I certainlydon’tsee anythinglimitingthisspace rightnow. The banksare tiedup with
bureaucracy,and while the numberof brancheshaspeakedandisslowlycomingdown,the legacy
systems, lackof innovation andextremelylow netpromoterscores probablymeanthatthe runway
aheadof marketplace lenders,aswellasthe entire FinTechspace, isprettyclearforthe nextfew years.
Source Material:
MBNA
http://library.corporate-ir.net/library/71/715/71595/items/188007/3_17_FinalBAC.pdf
http://www.slideshare.net/QuarterlyEarningsReports3/combining-superior-distribution-and-products
http://hbr.org/1993/03/loyalty-based-management/ar/1
Lending Club
http://cdn.lendingmemo.com/wp-content/uploads/2013/08/1.pdf
MasterCard/ Visa
http://socsci2.ucsd.edu/~aronatas/project/academic/ausubel%20on%20cc%20monopoly.pdf
Mary Meeker
http://www.kpcb.com/insights/2012-internet-trends