Does Lending Club provide a novel source of investor capital?
Peer-to-peer lender Lending Club does not provide a novel source of investor capital, but it does provide a novel source of credit supply by redirecting investor funds towards peer-to-peer loans and away from other fixed income products with different return and duration profiles as exemplified by the chart on page 5 of Lending Club’s investor deck. Lending club expanded its base of self-direct retail investors from less than 30,000 in 2010 to more than 200,000 in 2018. Concurrently, hedge funds, insurance companies, and pension funds were buying large pools of marketplace loans, including those of Lending Club, seeking returns in a low-rate environment. (Corkery, 2016)
Lending Club’s ability to generate this novel source of credit supply was due to multiple factors. Without reserve requirements or the costs of brick-and-mortar locations, Lending Club was able to grow rapidly and facilitate a boom in supply (Corkery, 2016). The peer-to-peer lender also leveraged technology and data to better serve clients that may not have qualified for a traditional bank loan based on their FICO score and credit history alone. Lending Club had flexibility to provide more amenable financing terms, which increased both supply and demand.
Lending Club largely captured the market share of existing credit demand, but it did, in part, create a novel source of credit demand by increasing access. Prior to Lending Club, there was unmet demand for credit by individuals who were unwilling or unable to go to a bank for a loan. By providing quick, low-friction, online access to credit, Lending Club captured some of that demand, facilitating over $10 billion in originations to over 3 million consumers in 2018, up from $100 million in originations in 2010. Much of Lending Club’s growth in originations was reallocated demand, i.e., refinanced credit card debt, a better alternative to payday loans, or demand from consumers who would have gone into a bank for a personal loan but now choose to use Lending Club. Some of it came from consumers who have poor credit quality and would have only had the opportunity of working with a high-friction specialty credit provider. Some of it came from consumers who would not have previously considered taking out a personal loan, but with an online, low-friction option with a high likelihood of getting funded with reasonable terms, demand from those consumers was generated.
Ultimately, Lending Club provides a platform to unite credit supply and credit demand, using information and technology to better allocate supply and meet specific demands, resulting in a reduction of waste. The Economist article, To Do With The Price of Fish, explains how cell phones provided a way for fishermen to communicate with fish markets on their way back to shore. For the first time, cell phones provided a way to efficiently identify demand and match supply with demand in different markets. Access to real-time information created a more efficient market, resulting in an 8% increase in profit, 4% decrease in price. Eventually, no fish were wasted, compared to a previous average waste of 5-8% per fisherman. (The Economist, 2008) Similarly, Lending Club deploys platform strategy to create a more efficient market, matching credit supply with credit demand, reducing waste, and ultimately capturing previously unmet demand in the market.
Sources
The Economist. (2008b, May 6). To do with the price of fish. The Economist. https://www.economist.com/finance-and-economics/2007/05/10/to-do-with-the-price-of-fish
Corkery, M. (2016, May 10). As Lending Club stumbles, its entire industry faces skepticism. The New York Times. https://www.nytimes.com/2016/05/10/business/dealbook/as-lending-club-stumbles-its-entire-industry-faces-skepticism.html
Pymnts, & Pymnts. (2016, May 13). A brief history of Lending Club - PYMNTS.com. PYMNTS.com - What’s next in payments and commerce. https://www.pymnts.com/news/alternative-financialservices/2016/lending-club-timeline/
https://www.lendingclub.com/ 2024
Lending Club Investor Roadshow Presentation Summer 2019
