Lending Club is the world’s largest online marketplace for connecting borrowers and investors. Through its innovative online platform, the company is able to pass on a portion of its savings to investors and borrowers because of its substantially reduced need for physical infrastructure, which is typical to most financial institutions. The company has issued $11bn in loans since inception.
As the first company in the peer-to-peer lending industry to go public, Lending Club has the inherent advantage of being the most capitalized by far, having raised over $1bn in its public offering in 2014. This enables the company to further execute its strategic growth initiatives and pursue acquisition opportunities as they arise through its first-to-market advantage.
Borrowers benefit from the reduced cost and complexity of seeking a traditional bank loan. Investors benefit by gaining transparent access to a diversified range of lending opportunities offered at above-average rates of return. Lending Club benefits as a middle man earning fees on successful loan originations.
- Greater financing access to SMEs
- Lower borrowing costs for consumers
- Better returns for investors
- Gives investors access to a new asset class (consumer credit and small business credit)
Benefits to borrowers: easy online application, low fixed rates, flexible terms, no hidden fees
Benefits to investors: better returns compared to traditional deposits, easy to diversify across many loans, simple and straightforward
Value capture: Contribution margin from loans originated
1. Data, track record and trust
- Lowers risk premium
- Expand investor base
- Lower interest rates
2. Benefits of lower interest rates
- Expand borrower base
- Lower acquisition cost
- Positive selection
- Reinforce track record
“A key driver of our network effect comes from the amount of data we have been collecting over the last 8 years and our track record of delivering consistent returns, which we believe increases investor confidence and lowers the risk premiums required by investors. This enables our platform to deliver lower interest rates to borrowers, which drives positive selection, increases loan performance and further reinforces our track record.As a result, the risk premium on the Lending Club platform, as measured by the spread over 3-year treasuries, came down by 270 bps over the last 3 years. ” – Q2 2015 Earnings Conference Call
The disruption of an online marketplace for lending is giving rise to tensions between large banks and peer-to-peer platforms, because the P2P model cuts traditional lenders out by matching capital directly with borrowers.
Given that it doesn’t need to comply with reserve requirements, branch infrastructure of traditional lenders, the operating expense of Lending Club is ~2%, compared to traditional lenders’ operating expense of 5-7%.
Traditional banks excel at originating loans and underwriting credit, but are slowed by the batch process and portfolio approach to their deposit and loan legacy systems. By far the biggest advantage for marketplace lenders has been the lack of capital and liquidity requirements relative to the incumbents.
For marketplace lenders, the regulatory environment remains a questions mark, as financial rule-makers play catch-up with the latest technology. Another wildcard is how this model would fare in an economic downturn.