Google: "[Our mission] is to organize the world’s information and make it universally accessible and useful.”
The creative destruction unleashed by the internet has transformed numerous industries and wiped out hundreds of firms. Publishing, book selling and stock brokerage are three good examples. The Post Office is not far behind. Now, that may be the fate in store for commercial banks, at least those that live off consumer credit card advances and small business borrowing.
Lending Club, founded in 2007, is a “peer-to-peer” lender that sells CD-like “notes” to investors and makes loans of $1,000 to $35,000 to individuals or from $15K-$100K to small businesses. Through a recent acquisition, it has gone into the business of lending to students and for medical events. Acting as a broker for both deposits and loans, the entire operation is carried out over the internet from San Francisco.
As of March 31, it had $2.1 billion in loans on its books, roughly double the volume a year ago. It is about have an initial public offer of stock this year that will reputedly value the company at $5 billion.
Risk v. reward: your choice. At Lending Club, investors have many choices about the number, size and risk of the actual loans they are funding. Borrowers apply via the web. Lending Club evaluates them via web-based information providers and assigns them a risk rating. The Club gives the general public access to detailed reports regarding the historical performance of each risk category by losses. (It is the most transparent and robust public credit rating/lending experience system I have seen.) Loan losses appear to be running at under 4% to date – an excellent performance for this type of lending.
Like other peer-to-peer startups, the firm is not subject to the costly and onerous detailed bank regulatory apparatus that is an ever-increasing burden for its established competitors. However, one large bank CEO told me that if this business model gets too successful, he will push the regulators hard to saddle it with enough regulatory weight to slow it down.
Lending Club’s market: loans under $100,000. Management’s focus to date has been on individuals who borrow against their credit cards and unsecured installment loans, the bread and butter of many commercial banks. A recent acquisition puts them in the student and medical loan markets. The firm makes its money primarily on the origination fees it charges when loans are made and a small, on-going management fee on loans outstanding.
The company’s investor base appears to be changing as more sophisticated institutional investors sign up for entire portfolios of Lending Club-underwritten loans. This used to be called “securitization,” and its reappearance here is another example of how regulators can’t keep a well-managed good idea out of the kitchen, fortunately.
In short, Lending Club, in its own words, is competitive as a financial intermediary because the web enables it to be “more cost efficient, transparent, and consumer friendly” than the competition. Although it has yet to record a profit, nearly all analysts expect the disappearance of red ink by the end of this year. Its board of directors sports some highly credible names – John Mack, ex CEO of Morgan Stanley and Larry Summers, former Secretary of the Treasury.
A successful IPO will mean that the company will be able to solicit deposits from all 50 states (at the moment in can do so only in the 26 states that have given it permission to do so). No doubt they are brain-storming how to enter other countries as well.
Why is Lending Club Google’s child? Because it is one of the clearest examples of how the technology of the internet as deployed by companies such as Google, is “organizing the world’s information and making it universally accessible and useful” – and inexpensive, I would add.
Banking, particularly the lending function, is primarily about information: can and will the borrower repay? Answering these two questions and paying for poor lending decisions consumes vast resources. Those who know how to use the new technology and are not saddled with costly legacy systems, attitudes and regulation, are destined to grow tall.