Lending Club issued its first loan in 2007. Since then, it has overcome major challenges. Last year it hit $100MM in revenues and crossed $3 billion in loans originated through the platform. The latest investment in the company (November 2013) put the company’s valuation at $2.3 billion.
In the second in a series of articles on P2P lending, founder and CEO Renaud Laplanche shares the Lending Club story and insights on where the industry is going.
Q: How did you come up with the idea for LC? What was the inspiration?
A: In the summer of 2006, I was looking at my credit card statement while on vacation and realized that despite a great credit history, if I carried a balance I would pay 18% APR on it, while deposits at the same bank were only earning 0.5% interest. This inspired me to do more research, and I began to understand just how inefficient the traditional banking system was, as a large part of that 17.4% spread was going to cover the costs of the banks. I founded Lending Club on the premise that an online marketplace would offer a more cost-efficient and transparent way to allocate capital between savers and borrowers.
Q: Why was there a need for LC?
A: The need was on both sides. On the borrower side, credit cards aren’t a great way to manage debt and offer very high interest rates. On the investor side, there aren’t a lot of options for high yield and steady returns. Lending Club’s platform matches investors with creditworthy borrowers, bringing value to both by passing on the savings generated by our lower-cost operating model.
Q: What were some challenges LC faced and how did you overcome?
A: Lending Club faced daunting challenges in its early stages, when the 2008 credit crisis hit as the company was just getting started. The resulting impact to borrower credit and investor confidence affected both sides of our business. At the same time, it created opportunities as Lending Club aggressively built awareness as an alternative to the traditional banks and investment options that were not meeting the needs of their customers.
Another challenge was in 2008, when Lending Club made the determination that the investments offered by peer to peer platforms were securities and should be registered with the SEC. We proactively began discussions with the SEC, and committed to the lengthy and expensive registration process. The decision paid off: when Lending Club’s registration was accepted in October 2008, it created a very high new standard for the market and since then we’ve grown rapidly and now have 75% market share.
Q: Overall, what's the greatest challenge right now and how dealing with it?
A: In terms of the greatest current challenge, as an online marketplace, an ongoing challenge is maintaining a balance between borrowers and investors and it’s one I’m proud to say we are meeting. Lending Club’s successful track record has enabled us to build a very predictable flow of investor funds, which we have matched with a steady and ever increasing supply of borrower loans. To ensure access to investment inventory for all interested parties and to aid in the investment process we have put in place purchase limitations on large investors and enabled automated investing both online and through an API.
Q: What have been some of the major milestones thus far?
A: Lending Club was established in 2006, with the platform’s first loan issued in May 2007. The platform hit $1 billion in loan originations in November 2012, $2 billion in July 2013 (9 months later) and $3 billion in December 2013 (6 months later). The latest investment in the company (November 2013) put the company’s valuation at $2.3 billion.
Having respected names in finance and technology—including John Mack, Mary Meeker, Larry Summers and Hans Morris on our board—has ramped up credibility and built awareness of our platform.
In May 2013, Google bought a minority stake in Lending Club as part of a $125 million secondary round.
In March 2014 we launched our first new product line, a true interest rate loan for small businesses.
Q: How significant is Google's involvement?
A: In May 2013, Google bought a minority stake in Lending Club as part of a $125 million secondary round. As part of the investment, Google’s David Lawee took an observer seat on the Lending Club board. Few companies know the Internet as deeply as Google does, and we’re excited to be working with them.
Q: How have you been able to attract such top names to the board?
A: Our board members each bring deep knowledge of and a unique perspective on the financial services market and they were excited by the opportunity to transform the banking industry. In their own words:
· "Lending Club’s platform has the potential to profoundly transform traditional banking over the next decade." --Larry Summers, 71st Secretary of the Treasury of the United States of America; Lending Club Board member
· "Lending Club is helping reinvent the consumer lending industry" --Mary Meeker, Kleiner Perkins, Lending Club Board Member
Q: LC is a leader in the P2P space, what are some challenges of trying to stay number one – any threats on the horizon from the competition?
A: We benefit from being the dominant player in the space. There are platform effects and marketplace dynamics that give a powerful advantage to the leader: the largest marketplace has more inventory, more velocity, more liquidity, etc. which makes us more attractive, which makes us larger — it’s a little like how eBay rose to dominate its space.
Our lead over the second largest marketplace has increased every quarter for the last 4 years, which puts us in a position to control our growth pace and really set the pace for the entire industry considering we have over 75% market share.
Q: Where do you think the P2P industry is headed and why?
A: 2013 was a tipping point for the industry, with heightened interest and a move more into the mainstream. For Lending Club, it was our largest year ever – we hit nearly $100MM in revenue and crossed $3 billion in loans originated through the platform, $2 billion of which came in 2013 alone. This velocity is driving interest, and we’re seeing new parties coming into the industry, including into adjacent spaces like small business and student loans. What started as a new and interesting alternative investment has grown into an asset class that is attracting a wide range of investors—from individual investors to family offices and institutional investors such as banks and insurance companies.
Q: Did you think LC would be where it is right now, has it exceeded expectations, fallen short?
A: We started Lending Club with an ambitious goal to transform the financial system to make it more transparent, cost efficient and consumer friendly. What is exciting to us is that we are seeing that vision come to life. We knew from the start that our model addressed fundamental needs for both borrowers and investors, and we are pleased that so many others have recognized the value of our platform, and thrilled with the rapid, consistent growth we’ve seen over the past several years. Launching our business loan product is a huge milestone: for the past seven years, we've been working to grow our first product, and today we launched the first in what will be a series of new products, designed to address a variety of funding and credit needs in our quest to always be more useful to more people, and over time transform the banking industry to make it more transparent, cost efficient and customer friendly.
Q: What do you see as the biggest challenge to the industry?
A: From the beginning our goal has been not just to bring affordable products into the marketplace but also to create a great customer experience. That’s what will keep people coming back to try the new products we intend to offer. The fact that we’re growing so fast and expanding our product lines is exciting – the challenge will be to ensure that operational execution keeps up. The biggest challenge to any industry is keeping the customer front and center.