Opinion

Felix Salmon

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.

Comments
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So Felix, what’s the deal with them operating in all 50 states? Is that on the horizon, or dead in the water? I was a Prosper lender back in 2006, and ended up making a small (1%) return on a few thousand $ in loans. As you mention in the story, defaults were not uncommon and Prosper was frustratingly slow to do anything about them. But then Prosper shut down and I’ve never been able to get back in. I live in a state where Prosper and Lending Club can’t offer notes and I don’t think the list of states where they can offer notes has changed in the last 3-4 years. It’s really frustrating…

Posted by Harpstein1 | Report as abusive
 

I am a banker so take that bias into account when you read this post. At what point would employer to employee lending be worth the time or hassle for either party? a 2% pickup on a 10 billion dollars of cash is of course a cool 200 million and who wouldn’t want that right?

Keep doing the math and the limitations become pretty apparent, in two minutes it looks like Cisco has the most cash as a % of market cap so a company like that would have the most to gain. To put the 10 billion to work (10 billion being only 20% of their current cash pile they would need to lend $100,000 to 100,000 employees. (Yahoo says they currently have 75,000.)

Some companies already lend to their key executives and rising stars but they do it only to reward them/tie them down. I can see that kind of thing growing… especially with the taxation of wages on the rise and limitations on the deduction of salary expense above some high thresholds… but this will never be a main-street/middle-class option.

P.S to Harpstein… you should see if there are any groups of hard money lenders that meet in your local area. Lots of people write private party notes backed by assets. Many are so well protected that the lender/loan sharks are hoping for default because they want to take the collateral on the cheap. It sounds like a cooler hobby than knitting but yikes after earning a 1% return on your money why would you be looking to do this again at all? I mean Verizon just came to market with 5% paper a few weeks ago!

Posted by y2kurtus | Report as abusive
 

Hapstein, you should consider yourself fortunate that you made any net profit at all because Prosper royally screwed up in the beginning. The platform did not become favorable to lenders until they revamped their risk model a few years ago.

Lending Club actually continues to underprice the risk all this time which is why borrowers flock to it in droves and why re-lending to it is a bad idea. A 3-5 year unsecured loan, even in AAA grade at 5% net yield after a couple of defaults, is not really worth the stress and trouble when there are asset-secured alternatives paying double digit yields available, as the banker noted. Banks do not lend out unsecured loans for less than double digit yields — do you think maybe they might know a thing or two?

As for P2P not being available in your state, I think you need to place blame on the glory hound bureaucrats for “protecting you against yourself”. They know best.

Posted by MachineGhost | Report as abusive
 

P2P lending has changed drastically over the last 3-4 years mainly due to the deployment of institutional capital. As a result, the bottleneck has become borrowers rather than lenders as Felix aptly notes.

P2P lending has also paved the way for accredited investor crowdfunding. Platforms like RealtyShares (www.realtyshares.com) and Circleup (www.circleup.com) are creating ways for investors to invest as little as $5,000 into real estate and small businesses and earn yields similar to what they earning with platforms like lending club and prosper.

Exciting times for the fintech space and I commend LendingClub and Prosper for being pioneers.

Posted by NavAthwal | Report as abusive
 

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