The evolution of Lending Club

By Felix Salmon
September 30, 2013

I have a piece in this week’s NY Mag about Lending Club, part of a series of profiles of what the magazine calls “boom brands“. I’ve been a fan of the Lending Club model since April 2009, and have watched its steady, disciplined growth with admiration since then. As I explain in my article, the company has changed over the years: at this point, it’s much more about the Lending than it is about the Club, and the peer-to-peer nature of the site is much less important than it was at the beginning.

But Renaud Laplanche, Lending Club’s founder, tells me that there are interesting developments ahead on that front, too: he has started talking to companies in Silicon Valley about the idea of providing low-cost loans to employees. As in, very low cost: you could borrow at a rate of as little as 3% from your employer, which in turn would still be making a higher return on its money than anything easily available to its Treasury operation. And because you’re an employee, you’re much more likely to be accepted into the program than a random applicant to Lending Club — and you’re also much less likely to default on your loan.

This kind of program wouldn’t make sense for, say, McDonald’s — but it does make sense for places like Apple or Intel. Again, it’s not an expansion of credit to places where it was formerly unavailable, but it is a way of disintermediating banks and strengthening bonds — in this case, between employer and employee.

And Laplanche thinks that there are areas where he might even be able to expand the size of the borrower pool — specifically, small businesses, which always have a devil of a time borrowing money, and which banks find very difficult to lend to. Lending Club will probably use its own money to start lending in a small way to small businesses in the first instance, rather than putting any peer money at risk. This is a whole new underwriting nut to crack, and there are too many things which could go wrong at the start. But if it works, then Lending Club could really become an engine of economic growth.

Lending Club will go public next year in what will surely be one of the easiest IPOs in memory. The company’s financials and quarterly reports have been publicly available for years, in fully SEC-approved form. In fact, thanks to something called blue sky laws, going public will actually reduce Lending Club’s regulatory burden, by putting the whole company under the aegis of federal regulators. No longer will it need to laboriously work with regulators in 50 different states. But there will be a short burst of publicity, much of which will concentrate on the company’s growth rate.

And the thing to note here is that although Lending Club is by far the world’s biggest peer-to-peer lender, it isn’t following the standard Silicon Valley model of growing as fast as possible. Loan quality changes over time, and it doesn’t want too much of its investors’ money to be tied up in a single cohort of borrowers, as would be the case if it expanded at a too-rapid clip.

Once Lending Club started being able to attract Wall Street money, a lot of things changed, including the fact that all accepted borrowers started getting funded, sometimes within minutes and always within a couple of days. In that sense, the growth constraint at Lending Club is the number of borrowers it accepts, rather than the amount of money available to be lent. But the pool of possible borrowers is still much larger than the one from which Lending Club is currently fishing — it doesn’t even need to expand its product line to be able to grow, at current rates of growth, for many years to come. There are lots of Americans out there who want to borrow money, or refinance. And over time, we’ll surely see a substantial proportion of the best credits among them moving online for their funding needs.

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