Lending Club's Brilliant Charade
If you think the Lending Club is Silicon Valley's answer to banking or the financial world's Uber, the company's filing for its planned $500 million initial public offering should help disabuse you of that notion. That said, it might still be the bank of the future.
Lending Club's founder and chief executive, Renaud Laplanche, has repeatedly portrayed the business as a high-tech marketplace bringing together borrowers and lenders. As he put it in a 2013 interview, "We do the matchmaking and perform important risk management functions. We underwrite, price and service the loans on behalf of investors."
That's not quite right. According to the IPO filing, Lending Club has $2.36 billion worth of loans on its books. The actual loan origination is done by WebBank, a Utah-chartered financial institution that sells the loans to Lending Club. There's nothing peer-to-peer about it. The company is an intermediary between a bank and institutional investors, a structure that moves the lending business out of a regulated environment and into an unregulated one.
What differentiates Lending Club isn't the lack of legacy software, costly brick-and-mortar branch networks or any of the other things Laplanche likes to talk about when he explains his business model's advantages. WebBank, established in 1997, has all the same advantages, but its regulators would never allow it to take on the $2.36 billion in assets it has helped generate for Lending Club -- the current $39.5 million in delinquent loans alone would be enough to eat through its capital. Lending Club can do so because it's not a regulated bank. Rather, it relies on regulated banks "to originate all loans and to comply with various federal, state and other laws," according to the IPO filing.
My colleague Matt Levine does a great job of explaining why Lending Club is less risky than a traditional bank. The durations of its assets and liabilities are perfectly matched, and the notes it issues to investors neatly transfer default risk to them. Unlike pre-2008 mortgage lenders such as Countrywide, Lending Club doesn't hold any "residuals," or risky bits left over after loans are bundled into securities and sold. Investors take on all the risk in exchange for high returns. The biggest single group of loans issued by Lending Club, $311 million worth, pays 11.8 percent. The investors are all qualified professionals who know what the risks are and do not require government protection.
Lending Club has a great business model. It performs a useful function that is difficult and expensive for banks to perform. This leads to interesting conclusions about banking in its current form.
Traditional banking consists of many separate businesses. There are unsecured consumer loans like the ones Lending Club handles, credit cards, trade and project financing, mortgages, car financing, current accounts and payments, term deposits and more. All these businesses could, in theory, stand on their own. With the exception of the bits that involve private deposits, most wouldn't need to be regulated. Lending Club's business is an excellent example.
The full-service bank is an obsolete concept. Given the current state of technology, it would not be difficult for a customer to assemble a portfolio of services from different providers. Getting banks to split up along business lines would solve most of the sector's systemic-risk problems. Perhaps Lending Club's disruptive role is to demonstrate the benefits of narrowly focused banking.
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