Since the financial crisis in 2007/8, regulators and policy makers have focused most of their energy on strengthening the financial system.

Massive amounts of capital and a tsunami of new regulation have swept banks and other financial institutions, causing many of them to complain about the exploding costs of doing businesses and extreme difficulty to comply with rules.

Across the six lending segments in the U.S. (personal, small business, leveraged lending, commercial real estate, mortgages, and student loans), Goldman Sachs estimates $12 trillion of loans outstanding, with 59 percent held on bank balance sheets and the rest on the books of non-banks. If new entrants in the lending space mature, banks stand to lose tens of billions in profit annually in the U.S. alone.¹ Yet traditional credit institutions remain largely on the sidelines in the disruption of the financial sector even though they would have the most to gain from innovation. If they participated more actively in development, and integrated new ideas into their existing business model, they assured themselves leadership and new markets in the future. Otherwise, some critics warn, banks may suffer the fate of the music industry around the turn of the millennium, which technology turned upside down. For banking to stay relevant, the financial sector might ultimately become a hybrid financial sector, where established institutions and new entrants define the future of credit together.

At the same time, Wall Street and the venture capital community have a good track record of reporting about the success stories of sectors they heavily invested in. It is easy to get carried away by shiny new objects, especially in a bull market. Technology startups often fall short in delivering what they promise, and they come with challenges of their own: if FinTech continues on its growth trajectory, we may end up with a massive shadow banking system that is hard to regulate, a high potential for concentration risk, and yet increased financial instability. Because finance is a relatively complex field, things that sound too good to be true often are. Is this the case with FinTech also? We feel there is a need for a thorough analysis of financial technology innovation that takes into account the banking and analytics perspective, especially in the space that has been receiving the most attention and venture capital in recent years: marketplace lending. Hence, this book came about. To fully understand how marketplace lending works and how it differs from traditional bank credit, it is important to know how banks “do” credit, including profitability analysis and risk management. For this reason, we included an in-depth treatise on the mechanics of bank lending, which builds the foundation of our analysis and of understanding the complexity of credit in the financial system. We then apply a banking risk­management approach to address the financial management of marketplace lending platforms and portfolios of marketplace loans.

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