M-RCBG Associate Working Paper No. 73

When Markets Quake: Online Banks and Their Past, Present and Future

Marshall Lux and Martin Chorzempa



This paper examines why what has been called peer-to-peer and marketplace lending has attempted, but has not yet fulfilled, its dream of fundamentally transforming finance by disintermediating the regulated banking system. That said, we remain convinced that its impact will be significant and longstanding, particularly on the traditional consumer finance sector. This paper recounts the history of the industry, explores both the promises of marketplace lending and the flaws in its evolving model and concludes that the Internet-based model has enormous promise and could well create a sustained competitive advantage. Though many new lenders may not survive the next downturn in the credit cycle, the sector will adapt to new commercial, technological, financial and regulatory realities and continue to drive innovation. The paper concludes with scenarios for the future and a series of policy recommendations aimed at encouraging financial innovation while protecting consumers and the safety of the financial system. Fundamentally, this paper explores the intersection of technological innovations—the Internet, computing power and big data—and financial regulation. The larger underlying issues involve the tradeoff between accessibility, price and safety of important mass financial products as well as the age-old problem of how we shape and regulate this critical financial activity known as banking.

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