Nick Clements is the co-founder of, a price comparison website. The website is an independent, advertising-supported comparison service that receives compensation from some financial providers, including marketplace lenders, whose offers appear on its website. 

I remember the last dot-com boom. Young kids promised to change the world while wearing jeans, drinking beer and playing foosball. Instead, they wound up burning through venture capital money with no model to produce revenue.

This time is different. Today's marketplace lenders have proven revenue and profitability models. While you can argue over the level of valuation that some lenders have received, these are real businesses that can make money. And these new entrants have the goal of disintermediating banks entirely.

Large, incumbent traditional banks should be nervous for two reasons. First, they will no longer be able to hide behind the competitive advantage of scale. Second, the most talented people want to work in a place where they are empowered to make a difference. Large banks often remain risk-averse, conformist and bureaucratic. A recent announcement by a large bank banning jeans and sandals at its headquarters just reinforces the cultural divide that exists between businesses looking to change the way the world works those that just want to defend the status quo.

Scale Isn't What It Used to Be
Consumer banking is a business of scale. In the olden days of about five years ago, the fixed costs and regulatory burdens required to build a banking business were significant and protective. You had to have deep pockets and regulatory approval in order to get your business going. Once you got going, scale was disproportionately rewarded. As more customers are acquired, a bank's total cost per customer declines. Big banks could generate better returns and more earnings just by becoming bigger.

The biggest lenders with trillion-dollar balance sheets have enormous scale and are the product of countless acquisitions. Smaller institutions attempting to compete in their core consumer lending businesses would have found the task almost impossible.

Today, marketplace lenders have found a much cheaper way to compete. They hire talented people to create businesses that are not banks but perform the core function of matching borrowers with investors. The initial startup costs of these lending unicorns were remarkably low. According to Crunchbase, SoFi's series A investment round was $8 million. Lending Club's was $12.3 million, including the angel investing round. Scrappy programmers who are fully empowered can create businesses quickly and for a very low cost.

At their core, banks exist to transfer funds from savers to borrowers. They provide interest income for savers and access to credit for borrowers. But marketplace lenders believe that traditional banks are inefficient "middle men" making too much money.

Borrowers, particularly credit-card customers, often pay high interest rates. Savers, meanwhile, do not receive enough money in return for their investment. Anyone buying bonds issued by large banks or participating in the securitization of consumer lending has received returns in the low single digits in recent years.

Because marketplace lenders have a cheaper lending platform, they can give borrowers lower interest rates and investors higher returns. Investors at Lending Club have received a median return of 8.8%. Borrowers at SoFi can receive interest rates in a highly competitive market as low as 4.05%.  

In sum, technology removes the protective barrier of scale. But these new entrants will also benefit from scale as they continue their exponential growth. Lending Club generated $96.1 million of revenue in the second quarter of 2015, compared to $48.6 million a year ago. The business is choosing to reinvest all of its earnings to fuel growth. As Lending Club continues to grow, it will start to have the muscle for consumer marketing that is as aggressive as that of the largest banks. Other lenders, such as Prosper and SoFi, are not far behind.

The Culture Problem
Marketplace lenders also have a major cultural advantage over big banks. At these startups, the focus is on building the best product and offering the best customer experience — not preserving a stuffy institutional culture.

I have worked in very large corporations. We had to appear professional in our dress code. We read from scripts. And our primary point of focus was each quarter's earnings announcement.

It's hard to inspire the best and the brightest with that kind of mission. Meanwhile, startups are able to maintain a lower cost base because they attract and empower brilliant people who want to build businesses. Large banks will struggle to replicate that model and attract the best talent.

Marketplace Lending: An Irreversible Trend
Undoubtedly, a number of new lenders will fail. Some of their experiments with big data and new underwriting models will be a disaster. But the reinvention of consumer lending is an irreversible trend.

Even some large banks that have historically stayed away from the consumer lending market now smell opportunity. Goldman Sachs, for example, has decided that it wants to mimic the startups by building a low-cost digital platform to originate consumer loans.

The marketplace lending business isn't the exclusive territory of Silicon Valley startups. Any business willing to embrace technology, advanced analytics and a world of lower returns has the opportunity to take market share. But it's likely that many large incumbent players will ignore these trends at their own peril.

Nick Clements is the co-founder of, a price comparison website. The website is an independent, advertising-supported comparison service that receives compensation from some financial providers, including marketplace lenders, whose offers appear on its website.