[Editor’s note: This is a guest post from Jonathan McMillan, who has published the book The End of Banking: Money, Credit and the Digital Revolution. The book explains why a financial system without banking is both possible and desirable in the digital age. The article is part of a two-part series. The first article explained why marketplace lending is disadvantaged in the current regulatory framework. The opinions expressed in this article are the author’s own.]

To ensure their survival in the long run, marketplace lenders have to tackle the privileges of banking institutions – such as government guarantees and the access to Federal Reserve liquidity. We made this point in a previous article. But what specific changes should the industry propagate to create a sustainable and fair regulatory environment for the financial system?

The Obvious Option: End the Unfair Advantage

The most obvious solution is to simply ban government guarantees and prohibit the Federal Reserve to provide emergency liquidity. Prominent libertarian politicians advocate this solution. Should the marketplace lending industry befriend the Tea-Party movement, demand to end the Fed, and pledge to throw the head of Treasury into jail if he bails out another banking institution?

In some cases, such as this one, the obvious solution is not the right one. The current financial system is vulnerable to unpredictable chain reactions. Just think about the repercussions of the bankruptcy of Lehman Brothers. Could you stick to a pledge not to bail out financial institutions if it means that the whole system goes bust, implying millions of people to lose their jobs and homes?

The government can only remove the unfair advantages for incumbent banking institutions if the financial system is immunized against these destructive chain reactions. Even the former chairman of the Fed, and the current chairwoman from the International Monetary Fund acknowledge that the too-big-to-fail problem has not been solved – despite many new banking regulations. We have to take another angle on enabling a modern and stable financial system.

The Intuitive Option: End Banks

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This is a guest post from Jonathan McMillan, who has published The End of Banking: Money, Credit and the Digital Revolution. The book explains why a financial system without banking is both possible and desirable in the digital age. The views expressed in this article are the author’s own and do not necessarily reflect the views of Lend Academy.]

Ten years ago, marketplace lending did not even exist. Today, the industry features a publicly traded company and has underwritten a loan volume of more than $10 billion. The low returns for investors and high rates for borrowers in traditional lending channels suggest that marketplace lending has not even started to tap on its full potential.

The growing loan volumes and attractive return prospects increasingly attract major financial intermediaries to invest in marketplace loans. This direction is not what Lending Club CEO Renaud Laplanche envisioned in an interview in January 2011, where he described his business model as “the shortest possible path between the source of capital, individual investors, and the use of capital to individual people and small businesses.”

The recent success in attracting funds from traditional financial institutions has pushed the vision of disintermediating the financial system to the background. Instead of understanding itself as the disruptive force of finance, marketplace lenders now see themselves as a complementary part of the existing financial system. Today, they mainly focus on being more cost-efficient and providing a better customer experience than banking.

But being better is not enough for marketplace lending to succeed, and losing sight of the greater picture will turn out to be a fatal mistake.

It’s the Regulation Stupid!

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