Lending Club (NYSE:LC) is an online lending marketplace based in San Francisco, CA. Lending Club provides consumers with access to small and medium sized loans (typically $10-15K borrowed per loan). Although the Company started as a peer-to-peer loan marketplace, Lending Club’s funding partners are primarily banking and financial service institutions, who fund and hold the loans that Lending Club generates through its platform. Lending Club currently has a market capitalization of $4.9B and generated $360M in trailing 12 month revenue.
The business of lending is made up of three particular activities: originating, underwriting and servicing a loan. Originating is the process through which a lender generates demand for a loan, including direct mail marketing, referral programs, advertising, etc. Underwriting refers to the pricing of a loan based on the risk level of the borrower, as assessed through credit scores, demographic information and other information sources. Servicing a loan involves providing ongoing customer support to borrowers, reporting for funding partners, collections, etc.
As an intermediary between its borrower base of consumers and its institutional funding partners, Lending Club must add value in one or more of the three areas of originating, underwriting and servicing in order to be a sustainable business. Several aspects of the Company’s operating model help it add value in these three areas.
Lending Club, relative to its primary competition (i.e., banks and credit unions), focuses mostly on online marketing channels (video, retargeting, email, etc.) that are untapped by its incumbent competitors. Lending also obtains critical cost and conversion data by choosing this scope and can mix towards more cost-effective channels over time. Its partner strategy has also been informed by a desire to add value in originating a loan. The company partners with several online community banks in order to receive warm leads to potential borrowers, reducing borrower acquisition costs. Furthermore, the Company offers potential borrowers a seamless, mobile and Web-enabled interface that significantly improves the borrowing experience. On the other hand, traditional lenders’ loan application processes are renowned to be long, confusing and cumbersome. In fact, a study conducted by management showed Lending Club had a net promoter score (NPS) of 70+ vs. national banks, who have an NPS of 3.
Lending Club must maintain high underwriting standards and loan performance in order to retain the funding sources on its platform. The Company’s hiring strategy is informed by this goal, as it recently recruited Capital One’s former Chief Credit Officer Sandeep Bhandari to its executive team. Bhandari is tasked with developing Lending Club’s proprietary risk and pricing model. As part of this effort to improve underwriting, Lending Club is working on introducing additional, non-traditional criteria (social media data, e-commerce data, etc.) into its risk
scoring algorithm to achieve at a differential view on a potential borrower relative to a bank. In addition, Lending Club’s borrowers also “self-serve” when obtaining a loan, completing many of the steps autonomously without direct help from any Lending Club employee. This allows the Company to cut costs in the underwriting process, which is helpful especially in light of the fact that Lending Club is funding smaller loans on average relative to a bank and therefore earns less money per loan.
Lending Club services its loans through technology-enabled processes that also improve user experience while limiting costs. For example, the Company has been able to develop algorithms that identify accounts who require a particular type of customer service. These algorithms make customer service labor incredibly efficient, and allows Lending Club to hire fewer people for a given borrower base. Additionally, the Company has a wide variety of IT tools that assist with the management of delinquent and defaulted accounts, improving collections rates. The Company also reports delinquent accounts to the credit agencies on a monthly basis, creating significant disincentives to missing mandatory loan or interest payments.
Lending Club is an example of a highly effective business that has formulated its operating strategy based on its business model. The company has great prospects going forward as it has put in place a number of operating initiatives to help it be a better originator, underwriter and servicer of small to medium consumer loans.
Sources: Lending Club SEC filings and publicly available news articles.