Lending Club paves way for rivals: low cost is the critical success factor

An interesting article in the Financial Times analysing the bumpy ride for Lending Club, the leading US P2P lender, in its first year post-IPO. Like Amazon, offering the lowest cost is key to success.

January 26, 2016 11:15 am

Lending Club paves way for rivals

Ben McLannahan in New York

Larry Summers was effusive, when asked in December 2014 to comment on the stock market debut of Lending Club. Shares in the San Francisco-based group leapt more than 50 per cent on day one on the New York Stock Exchange, as investors scrambled to get exposure to a branchless lender that had vowed to “transform” the banking system.

“It’s a good day for Lending Club,” said the former US Treasury Secretary, part of an all-star board of directors assembled by the company, which connects people seeking money with people willing to lend. “It’s not the beginning of the end, but it is perhaps the end of the beginning.”

But in the 13 months since, the revolution has not yet come to pass. Although Lending Club has grown strongly, more than doubling revenues last year while pumping out billions of dollars of personal loans, the stock has mostly fallen amid fears of rising competition and tougher regulation. And far from displacing the old bricks-and-mortar banks, Lending Club appears to have galvanised them into action, spurring copycat services and all manner of alliances between traditional lenders and the upstarts.

Mr Summers himself has been a seller of the stock, offloading about 120,000 of his 1m shares since September, according to public disclosures logged by Bloomberg. A spokesperson said that Mr Summers has a “substantial concentration of his net worth” in the stock, so “made a decision when the company went public to diversify and established a regular selling programme”.

So poorly have Lending Club’s shares performed, in fact — down 56 per cent last year, and another 28 per cent this year — that other online lenders such as Prosper and SoFi appear to have cooled on the prospects of going public.

Underwriters sold Lending Club as if it were a web platform in a similar vein to LinkedIn, Facebook or Alibaba, said one Wall Street banker, speaking on condition of anonymity. “The reality is that it trades more like a bank.”

Michael Tarkan, a Washington, DC-based analyst at Compass Point, argues that intense competition and an “inhospitable” policy environment will continue to weigh on the shares.

Lending Club and its instalment-lending peers are facing new levels of oversight by the Consumer Financial Protection Bureau, beginning later this year, for example, and a sector-wide probe into pricing and credit quality by the California Department of Business Oversight, due to complete in March. And later this week federal lawmakers are due to start debating laws on terrorism financing — an effort that could result in extra scrutiny for online lenders, given that one of the killers in December’s shootings in San Bernardino had taken a big loan from Prosper.

Meanwhile, regional banks such as Citizens and SunTrust have pushed more deeply into personal loans, while non-banks such as LoanDepot.com are moving on to Lending Club’s core patch of debt consolidation. Even Goldman Sachs, the New York investment bank, is preparing to launch a consumer-focused online venture.

A survey by the Office of the Comptroller of the Currency last month found that banks expected the risk profile of their personal loan portfolios to rise this year by the largest amount since 1998 (excluding the crisis) — implying a direct assault on the web-based lenders.

“Lending Club is offering a commoditised loan product,” said Chris Gamaitoni, an analyst at Autonomous Research. “We don’t see a moat that cannot be attacked by large peers.”

Renaud Laplanche, Lending Club’s co-founder and chief executive, told the Financial Times that increased regulatory interest in online lending does not imply a crackdown on the sector, and argued that the company has beaten back waves of challengers since its founding nine years ago.

As for the stock price, he said that it is only a matter of time before sentiment turns. He noted that it took about a year for Facebook stock to start to climb after the company’s initial public offering in May 2012.

In the meantime, he added, an imminent announcement of entry into a new product area, perhaps car loans, could rekindle some excitement. He hinted the move could be taken in conjunction with one of the traditional banks — similar to JPMorgan Chase’s tie-up last month with OnDeck Capital, a specialist in lending to small businesses.

That deal was seen as an admission from the biggest US bank by assets that it could not issue or service loans as cheaply and as efficiently as OnDeck, an online lender. But equally, it was a sign that OnDeck needed the customer connections and the steady funding of Chase, the bank’s huge retail network. Since signing the partnership early last month, OnDeck’s stock has steadied, outperforming the financials sector.

“Think of the cost of credit, which is basically the cost of operations plus the cost of capital; Lending Club has the lowest possible cost of operations, with technology and automation, and banks have very low cost of capital,” said Mr Laplanche. “I think the partnerships between marketplace lenders and banks make tons of sense.”