A brief history of lending


By John Atkins

Lending has existed for thousands of years and has taken on many forms throughout. While the history of online lending is short, the roots of traditional lending can be traced back to the beginning of civilization through 3,000-year-old written loan contracts from Mesopotamia that show the development of a credit system and included the concept of interest. 

While some may try and tout the downfalls of lending, the immense expansion and progress of human civilization would not have been possible without credit. For example, loans supported Spain's exploration of the New World, made possible the successful colonization of America, and fueled the Industrial Revolution. Lending is productive to society and has brought about some of the greatest projects known to man.

Today, online lending is in full swing and only getting bigger. However, to understand where the world of online loans is headed, we must first understand the complexities of its roots in the pre-online era. 

The Beginning of Lending

The earliest form of informal lending existed between family members and friends and still exists today.

Mission Asset Fund, a non-profit company that helps financially underserved families, writes that lending circles operate by each individual in the group, “making the same monthly payment... The loan rotates each month to a different participant. In the first month, one participant receives $1,000 and each month after that a different borrower will receive the loan, until everyone in the lending circle has gotten a chance.”

Ancient Rome

Formal lending, as we know it today, dates back to Ancient Rome. In Roman times, ‘banking’ was carried out by private individuals or pawnbrokers. These lenders offered regular borrowers loans similar to today's 'payday loans.' Generally, farmers would borrow large sums in order to plant crops. Farmers would repay the loan at harvest time and request a new advance for next season's plantings. 

At this time, lenders used secured lending, with items held as collateral to keep the risk downWhile interest rates and term lengths are more stable than they were in Ancient Rome, the structure of this type of lending remains the same.

Dark/Middle Ages

In 325 AD religious leaders decreed any form of ‘lending’ with interest above 1% per month as usury. Moving into the middle ages, Christians were forbidden from lending money with any interest, while Jews could lend with interest only to non-Jews. During this time, lenders primarily conducted their business from benches, or 'bancas,' which is where the word "bank" originates. When a lender retired, he would smash his bench, 'banca rupta,' hence the term bankrupt. 

By the 18th century, while lenders still used collateral, the primary type of loans shifted to indentured loans. Viktorija Gorcakovaite of CreamFinance.com, a European lending company, said, “The rich lent to those without means and in return the borrower worked off their debt.”

1800s

The early 1800s ushered in a new era in lending, one meant to be more equitable and available to average and lower income Americans. In December 1816, Philadelphia Savings Fund Society, the first of many savings and loan associations, opened its doors with the purpose of giving the average American a place to save and a resource for loans.

Mid-20th Century

However, the mid 20th century sparked a major shift in how lenders identified responsible borrowers. Instead of family ties or physical collateral to keep lending risks low, the mainstream model shifted to financial data.

In 1950, businessman Frank McNamara paid a restaurant bill with a small cardboard card, known today as a Diners Club® Card. Only eight years later, Bank of America launched the BankAmericard, which later became Visa. The BankAmericard was sent to over 60,000 consumers in order to convince merchants that it was a valid form of payment.

Used by nearly 90% of lenders today, the FICO score first gained steam in 1955, when the Federal National Mortgage Association (known as Fannie Mae) and Freddie Mac recommended FICO scores for evaluating mortgage loans. By 1959, lenders officially started using FICO scores to make informed credit decisions.

First Wave of Online Lending

As computers and electronic data evolved and became more prevalent, so did the ways of lending. In the mid-1980s, a mortgage lender from Detroit called Quicken Loans, dramatically sped up the process of lending, as their name aptly suggests.

“In 1985, Quicken Loans launched with much of the application and review process conducted online,” states Provenir.com.

However, given the confined use of computers at the time, it wasn't until 1999 that First Internet Bank truly pioneered online-only banking, offering home mortgage loans and banking services. With the full application and review process online, borrowers no longer needed to leave their house or even talk to a bank to apply for a loan. 

Steve Creasy, President & Owner, South Street Designs LLC, believes online lending's popularity is because:

“It eliminates many of the headaches of traditional loans, expediting the process substantially - especially for business loans. Private lenders can get access to customers and offer financing where people and businesses would get turned down by banks because of things like credit scores, not enough time in business, etc.”

This dramatic change planted the seed for alternative online lending to take root.

Alternative Online Lending

After the lending process moved online, entrepreneurs and data scientists quickly began dreaming up new ways to get credit to responsible borrowers. With it's launch in 2006, Prosper is widely seen as the pioneer of alternative lending. However, other companies such as Lending Club, SoFi, and OnDeck were not far behind.

The biggest appeal of online alternative lending to borrowers is that individuals don’t have to rely on receiving a loan from a bank, believes Gorcakovaite. Furthermore, she said:

“Alternative lending became a ‘thing’ once people realized that lending from a bank may sometimes be complicated and burdensome, especially if an individual aims to lend a small amount of money for a short period of time."

Gorcakovaite continued, "Even though banks benefit from enormous economies of scale across the entire value chain, banks fail to service customers in a speedy manner (and especially online) and require long, burdensome processes to borrow (such as scanning documents, etc).”

Ganesh Ramakrishnan, a former Executive director of Goldman Sachs and a member of the founding team at Finvoice, comments that, “brick-and-mortar banks have historically found it uneconomical to make loans to small businesses especially for amounts lower than $600k or so. Moreover, banks have retrenched from small business lending post financial crisis by > 20%.”

The future of online lending is hard to predict, but one thing is for sure - online lending is here to stay.


Written on August 30, 2016

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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