Peer-to-peer lending – or “P2P lending” in Silicon Valley and Wall Street parlance – has set its sights on disrupting the massive $3 trillion consumer credit industry by unleashing the power of digitalization on financial services.  Within the space, LendingClub is the poster child and boasts status as the world’s largest online credit marketplace, claiming an impressive $22.7 billion of originated loans since 2009.  Its board includes a curated collection of financial leaders, including Mary Meeker and John Mack, as well as Larry Summers, who is quoted on the company’s website as proclaiming:
“LendingClub’s platform has the potential to profoundly transform traditional banking over the next decade.” 
Fundamentally, LendingClub is an online marketplace that tends to two primary stakeholders: borrowers and lenders, and has carefully crafted a value proposition for both constituencies.
- For borrowers, LendingClub’s menu of credit products, including personal loans, auto financing, and small business loans, competes directly against traditional brick-and-motor credit unions and commercial banks. The value of LendingClub’s loans is created through: access to affordable credit, a superior borrower experience, transparency and fairness, and fast and efficient decisioning.  With only a couple of clicks, borrowers skate through a friction-less application process, accessing loans with interest rates ranging from 5.32% to 30.99% and waiting only a few days for funding. 
- For lenders, LendingClub offers a diversified and innovatively sourced investment opportunity with fixed income returns of 5.12% to 7.78%.  The key value is generated through attractive risk-adjusted returns, which are ultimately driven by the success of LendingClub’s loan underwriting, monitoring, and servicing rigor. Investors can cleanly slice through LendingClub’s loan book to build a customized (by geography, loan purpose, or credit grade) portfolio of direct consumer loans with the right return profile for their appetite.
From an operating perspective, LendingClub has embedded state-of-the-art technology across its platform. Chiefly, the digital nature of its operations allows LendingClub to avoid significant costs associated with operating branch infrastructure. Further, it utilizes sophisticated risk assessment technology to evaluate loan applicants, which reaps further cost savings from improved application processing times, optimized pricing, and sharpened risk management.  In aggregate, LendingClub postulates that its costs are one-third those of traditional banks , which allows it to pass along benefits to its users in the form of lower interest rates for borrowers and higher returns for lenders.
Founded in 2009, LendingClub experienced enormous growth and quickly achieved unicorn status and blue-chip venture capital backing.  The company was embraced by public markets and IPOed in 2014 at a $8 billion valuation.  However, there is concern whether this growth was realized through lax underwriting standards, under-priced loans, and a lack of internal controls. Others note the absence of regulatory oversight as a significant – and potentially dangerous – growth driver for the nascent industry.  Until recently, much of these concerns were simply conjecture; however, the music stopped for LendingClub in May 2016, when a $22 million mistake was revealed when a prominent investor was sold loans that did not meet its investment criteria.  The incident cast doubt on LendingClub’s loan practices and credibility, which ultimately led to board inquiry and ousting of its Chief Executive Officer and Founder, Renaud Laplanche. The press surrounding the incident spooked the market, sending LendingClub’s stock price down 34% and raising questions on the stability of the whole industry.  Looking forward, a tremendous challenge for LendingClub will be to repair investor confidence in its own company as well as in the P2P lending business generally.
An additional challenge that LendingClub faces is to truly realize its “peer-to-peer” concept. Although its borrower base holds true to its “for the people” mission, its lender base is primarily made up of institutional investors.  Its messaging of “for the people by the people”  falls flat. This lender base composition creates concentration risk and may arguably erode the integrity of the “peer-to-peer” concept. Further, from a purely commercial perspective, the company has not yet proven its ability to generate attractive risk-adjusted returns in a non-zero-interest rate environment. As such, future institutional appetite for LendingClub products may wane, leaving the two-sided marketplace imbalanced, and thus, ineffective. LendingClub could protect against such an imbalance by actively seeding new (and sticky) pools of lenders through stronger marketing efforts.
As LendingClub looks to the future, there is an opportunity for the company to repair its recently damaged reputation and to re-emerge as a leader in the P2P lending space. Its business model and operational model are fundamentally sound; however, the company must diligently maintain the rigor of its underwriting standards and fraud detection practices through constant technological investment and research. Specifically, advances in machine learning and blockchain technologies offer LendingClub the opportunity to sharpen its pricing and risk algorithms and strengthen its fraud protection.
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