Shadow Banking almost always ends up badly. Think of GE Capital’s almost total destruction of the American industrial icon called GE.
Square, a tech company, has become a “shadow bank” with a subsidiary called Square Capital which offers loans to small businesses. In the last 12 months, they have made approximately 200,000 small business loans, totaling $405M in credit.
Using algorithms instead of bankers, successful borrowers have enjoyed this experience, as long as they can get money. Unsuccessful borrowers have lamented about not being able to actually talk to a banker to find out why their loan application failed.
Square has “off-loaded” their risk to pension funds, and other investors. Does that sound familiar to you? This is another sign that our economic cycle has peaked. Worry about the ripple effects.