"Lending Club's platform has the potential to profoundly transform traditional banking over the next decade."
--Larry Summers, 71st U.S. Treasury secretary and Lending Club board member.
Lending Club's (LC 3.81%)stock is up a stellar 66% since the company went public in December. The peer-to-peer lending specialist offers an alternative to the traditional banking system with an online platform for borrowers and lenders. It has a leading 40% share of the peer-to-peer lending market, far outstripping No. 2 player Prosper.com and its 8% market share.
Value proposition
Lending Club offers a more efficient, transparent, and customer-friendly way to process transactions between a lender and a borrower than most traditional banks. As the company has no branch infrastructure, its cost structure is relatively lower than that of standard banks. The online system and sound technology help the company lower the cost of credit and pass the savings back in the form of lower rates for borrowers and solid returns for investors.
How does Lending Club make money?
Lending Club generates revenue from transaction fees (from its platform's role in matching borrowers with investors to enable loan originations), servicing fees (from investors), and management fees (for investment funds and other managed accounts). The borrower pays a one-time origination fee that ranges from 1.11% to 5% of the loan amount, depending on loan grade and term. Origination fees account for 88% of the company's revenue. Investors, meanwhile, pay a 1% service fee on each payment received from a borrower.
What do consumers and employees think?
Based on 1,398 reviews, the company is rated four out of five by customers on Credit Karma, a personal loans website. According to those reviewers, Lending Club's application process is easy and quick, borrowers can get loans at lower interest rates, and the feedback mechanism helps them voice their opinions to management. Employees give the company a rating of 4.6 out of 5 out of Glassdoor, and CEO Renaud Laplanche has an approval rating of 100%. According to Laplanche, the company is primarily focused on prime and superprime borrowers. That indicates borrowers don't come to Lending Club because they are declined by banks, but rather because they seek better rates.
How robust is the lending process?
The average Lending Club borrower has a FICO score of 699 (a credit score in the range of 690 to 720 is considered good), debt-to-income ratio of 16.9% (excluding mortgage), and a credit history of 15.8 years. Based on personal income, Lending Club's average borrower is in the top 10% of the U.S. population. Moreover, Lending Club approves only 10% of the total applications it receives.
Who is the CEO, and who backs up the company?
Laplanche has a 2.4% stake in the company. He developed the idea for Lending Club when he realized that his credit card carried an 18% interest rate, while he was only earning 1.5% from his bank on high-yield certificates of deposit. Laplanche thought that connecting investors directly with borrowers would be a useful platform for both sides of the loan process and would cut the banks out of the equation.
Interestingly, Norwest Venture Partners, an investment arm of Wells Fargo Investment Group, has a 14% stake in Lending Club. Banking is a highly regulated industry. So, backing from an established bank gives more credibility to the business.
Opportunity ahead
In the first three quarters of 2014, Lending Club issued $3 billion in loans -- more than double the amount it had issued in the same period of the previous year. Given that total consumer debt outstanding in the U.S. is $3.3 trillion, Lending Club accounts for 0.09% of U.S. lending business. In other words, there is plenty of potential for this technology to displace brick-and-mortar banking.
Foolish takeaway
It is difficult for brick-and-mortar businesses to lower their costs to the level of online innovators. This is why bookstores can't compete with Amazon.com and travel agents can't compete with Priceline.com. According to Laplanche, banks will be unable to compete with Lending Club in the future. Fools, be ready to witness a revolution in the banking industry and enjoy its benefits as a customer as well as an investor..
