Lending is an old, established, and successful industry. Historians traced evidence of grain loans as far back as the ancient world, and dated the birth of banks at around the 14th century . Lending is also profitable: Finance is the third most profitable sector in the economy, with a 17.14% net margin .
One potential explanation for the industry’s longevity and success is the timeless and complex nature of the problem it solves. Many lenders want to invest excess funds for a profit, while many borrowers need money to finance their projects, such as buying houses, paying for education, etc. Although lending is mutually beneficial, parties have historically been unable to match without banks as intermediaries.
How lending traditionally works
Traditional financial intermediaries collect funds from individual and institutions, against a promise to pay them back with interest. Intermediaries pool these funds, search for suitable borrowers with the right risk profiles, and lend them money at higher interest rates. Intermediaries profit by 1) lending at higher interest rates than what they pay to investors and 2) minimizing defaults through risk assessment and collections management.
To implement this business model, lenders have traditionally needed large organizations and infrastructure. Physical branches and call centers service customers. Marketing teams increase sales. Trading desks invest temporary capital holdings. Risk teams ensure loans perform as expected. And the list goes on. For example, Wells Fargo, a commercial bank with a market capitalization of US$ 260bn  and US$ 1.9 trillion in outstanding assets, employs 268,000 people in 8,600 locations .
But wait, this is 2016. Can digital marketplaces cut intermediaries out?
Enter digital marketplaces: Lending Club
Lending Club is an internet marketplace that connects investors and borrowers directly, with limited intermediation. Founded in 2006, Lending Club is seen as the “flagship company” of the young peer-to-peer lending industry [5,6].
Beyond spearheading digitization in the lending industry, Lending Club has also created a significant financial impact. To date, it has facilitated US$ 22.7bn in loans. Furthermore, Lending Club’s model has been competitive by offering cheaper rates for borrowers and higher risk-adjusted returns for investors [6,9]. This enabled Lending Club’s IPO in 2014, attaining a peak market capitalization of US $10bn .
How is this different from traditional lending?
Lending Club’s business model is fundamentally different. Instead of lending their own funds, Lending Club provides a marketplace where borrowers and investors make their own transactions. Borrowers publish loans, and investors handpick individual loans to invest in. In return, Lending Club charges a small service fee to both parties [11, 12]. As a result, credit risk is transferred from institutions to investors, who now bear the full potential gains and losses from their investment decisions.
Also, Lending Club’s operating model is much leaner than traditional institutions:
- Fully automated loan approval. Borrowers fill an online form with personal and third party data, such as FICO scores. Lending Club then runs proprietary risk assessment and fraud detection algorithms to automatically approve the loan and set the appropriate interest rate given the loan’s risk.
- No physical branches, as all operations can be done via the website.
- Less employees, with only 1,400 employees reported as of December 2015. 
Although Lending Club’s model seem to make sense, trouble has hit the young company. Its stock price has steadily declined since the IPO, and currently trades 74% below its peak in 2014.
Cited reasons include slight increases in default rates, which scared some investors away and pushed interest rates up, which in turn scared some borrowers away. With a fee-based model, Lending Club requires steady inflows of investors and borrowers to keep revenues up.
Other cited reasons are on legal, compliance, and regulation. Some investors that lost money are suing through class actions. Scandals have arisen from claims that its founder used the platform for personal gain. Regulators are still scrambling to refine the right legal framework for these marketplaces. In summary, there is a lot of uncertainty ahead. 
In my opinion, Lending Club needs to strengthen its economics and reputation. For economics, Lending Club should continue perfecting its algorithms, to reduce defaults. It should also cross-sell highly-scalable financial services, such as insurance and automatic debt consolidation advice.
I would also encourage Lending Club to fully disclose sources and uses of capital, to shatter any doub of shady deals. I would also increase social networks presence with educative videos on the risks of investing in loans, and how they can be managed but not eliminated.
Regardless, the peer-to-peer lending industry is an exciting space likely to grow fast in the US and abroad. Its powerful value proposition and efficient operations are threatening to disrupt finance. However, will it have sufficient thrust to break into one of the most established and powerful industries in history? Only time will tell.
 Banking through the ages by Hoggson, Noble Foster, b. 1865, https://archive.org/details/bankingthroughag00hogg
 “The most profitable industries in 2016”, www.forbes.com, http://www.forbes.com/sites/liyanchen/2015/12/21/the-most-profitable-industries-in-2016/#73cae7317a8b
 Yahoo Finance, consulted on November 16, 2016
 Wells Fargo Factsheet, 2nd Quarter 2016 https://www08.wellsfargomedia.com/assets/pdf/about/corporate/wells-fargo-today.pdf
 “The Stunning Fall of LendingClub’s Founder”, Bloomberg, https://www.bloomberg.com/news/articles/2016-05-09/lendingclub-founder-goes-from-wall-street-darling-to-unemployed
 “Banking without banks”, The Economist, http://www.economist.com/news/finance-and-economics/21597932-offering-both-borrowers-and-lenders-better-deal-websites-put-two
 Latest Company Stats, Lending Club, consulted on November 17, 2016, https://www.lendingclub.com/public/about-us.action
 United States Population Statistics, Census Bureau, consulted on November 17, 2016, https://www.census.gov/popclock/
 “Lending Club Can Be a Better Bank Than the Banks”, Bloomberg, https://www.bloomberg.com/view/articles/2014-08-27/lending-club-can-be-a-better-bank-than-the-banks
 “Frequently Asked Questions for Investors”, Lending Club, consulted on November 17, 2016, https://www.lendingclub.com/public/investing-faq.action
 Annual Report 2015, Lending Club, http://ir.lendingclub.com/file.aspx?iid=4213397&fid=1001209585
 “Lending Club: Membership Revoked”, The Economist, http://www.economist.com/news/finance-and-economics/21698698-sacking-ceo-leading-peer-peer-lender-jolts