Bypassing the Banks: Good News, Bad News

By Shlomo Maital      

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    A new Israeli website called e-loan will open for business in the next few days. It will import an idea proven abroad —  Web surfers can borrow up to NIS 50,000 (about $12,500) at 8% – 10% interest, with a 2% commission to the website,  from funds invested by surfer-investors with spare funds.  Background checks will on would-be borrowers will be done by the website but investors are urged to diversify their loans, and spread the risk. 

    This is a trend toward what economists typically, in their impossible jargon, call financial disintermediation.  That means, we no longer need the banks to intermediate between those who have money and those who need it and want to borrow it.    We can bypass the banks.  We can do this on the Web.  Banks are hoarding their cash anyway, fearful of lending it.  So we need to find our own solutions. 

      Financial disintermediation is already a strong trend, as large corporations access capital markets directly by issuing bonds.  This has not proven successful in Israel; tycoons are now struggling to redeem the bonds and ask for ‘haircuts’ (reductions of half or more in the principal of the debt).    Will it work better for ordinary small investors and small borrowers?  Will they have higher standards than the tycoons?

    I think the e-loan phenomenon, bypassing banks, is both good news and bad.  Good news, because it provides access to credit when none would be available otherwise.  Bad news, because, look at the price!   Interest of 8% to 10%, plus 2%, is very high, hard to pay back, hard to find investments that make such debt worthwhile.  It is high, because of the risk premium.  And because ordinary citizens, and small businesspersons, do not have the privileges that the fat cats have, of borrowing at low interest, without full collateral, or any collateral at all, from banks.  

    Let’s wish e-loan well.  Above all, let’s wish for new alternatives to the banks,  disintermediation,  to lower their power and to lower our dependence on them.  The less power they have, the less they can scalp us.