Even Renaud Laplanche IEP1995 has to admit to being surprised by the sheer scale of Lending Club’s success.
He hoped he was on to a good idea when he launched back in 2006 but he couldn’t have predicted that just nine years later his online credit marketplace would have made US$9.2 billion of loans to American individuals and small businesses. In December 2014 Lending Club became the first marketplace lender to go public and is currently valued at US$5.49 billion – although its share price is taking time to stabilise.
“Each success helps us raise our own expectations and the public’s expectations of what we can do,” says Laplanche. “And we can now see a path to becoming really quite large and actually larger than many of the banks. And using marketplace dynamics to create the one place people will go for all their credit needs.”
Lending Club’s ambition - as Laplanche told CNBC on the first day of trading in the company’s shares – is nothing less than to “transform the entire banking system.”
Along the way it’s pulled in some US$100 million of venture capital and built a board of directors that includes the former U.S. Treasury Secretary Larry Summers, the former chief executive of Morgan Stanley John Mack, and technology analyst Mary Meeker of Silicon Valley venture capital firm Kleiner Perkins Caulfield & Byers. Advisors include executives from Google and Facebook, along with former executives of MasterCard and Citigroup.
So how did we get here? After completing his MBA, Laplanche, a former sailing champion in his native France and holder of two world speed sailing speed, became a securities lawyer for Cleary Gottlieb Steen & Hamilton, first in Paris, and then in New York. It was the late 1990s and he found himself working on technology company deals. Inspired by the entrepreneurial spirit, he left his law firm in 1999 to set up an enterprise software company called TripleHop Technologies. Six years later TripleHop was bought by Oracle and Laplanche moved to Silicon Valley to work for them.
But it wasn’t long before Laplanche left Oracle and started Lending Club. The idea came from a moment when he happened to open his bank account statement and credit card statement at the same time. He was struck by the 16.99 per cent rate he would pay if he carried a balance compared with the o.48 per cent rate on his savings. Such a mismatch was surely a sign of opportunity. And he says his background as a lawyer and software company CEO turned out to be the perfect mix for his new venture, bringing an understanding of how technology can solve problems along with an appetite for helping to build the regulatory framework.
And back in 2006 this was breaking new ground – Lending Club and Prosper were the first peer-to-peer lenders in the U.S. Zopa had started in the UK the year before. There were several mobile payments companies. But all of them were years ahead of the fintech boom that’s currently taking place.
“It was an uphill battle for the first couple of years to create a regulatory framework that would be protective of consumers but also trusted by the regulators,” says Laplanche. “We were bringing a very disruptive business model to the market and there was no regulation that fitted it perfectly so we worked with regulators to establish that framework.”
The financial crisis of 2007/8 made things tough for the fledgling Lending Club – it was a hard job selling the idea of credit as an investment at a time when newspapers were full of stories of people defaulting on their mortgages. But the crisis brought in a wave of regulations designed to keep the banks in check. It also made people distrustful of the incumbents. And as the banks made fewer loans, people looked for alternative sources of finance.
“Rightly or wrongly a lot of people felt the banks were responsible for the financial crisis and now, everything else being equal, we believe they would rather deal with a company like us than a bank,” says Laplanche who embraces the idea of being a disruptor of the financial services industry. “With fintech it’s the first time we have financial innovation that’s not about taking more risk or finding loopholes in regulations but using technology to lower the costs and pass on the cost savings to customers.
“I do believe we have the opportunity to make finance more cost efficient, more consumer friendly, more transparent. All the things that banks have ceased to be.”
Lending Club makes personal loans to people looking for between US$1,000 and US$35,000 (business loans go up to $300,000). Many borrowers are looking for money to pay off or consolidate debts, make home improvements, buy a car or fund a vacation. Others want cash to expand their business or send their child to college. One even wanted to buy a pony.
Everyone has to fill out an application, which is then screened by the company’s platform. Less than 10 per cent of applications are accepted. These accepted loans are then displayed online and investors can either choose from them individually or set a risk profile and have them chosen automatically. Loans are invested in through US$25 “notes” and investors are advised to diversify rather than just lend to one person.
If all goes well, the borrowers get better rates and the lenders get better returns, while Lending Club makes money from charging investors a 1 per cent servicing fee and its issuing banks transaction fees of from 1% to 6%. Laplanche says 75 per cent of investors are individuals, the rest are institutions.
Recently Lending Club’s been developing partnerships with banks and with technology companies with a large customer base. The aim, says Laplanche, is to make credit more affordable than ever, providing the lifeblood of cash flow to small businesses and families. “If you think of the cost of credit as cost of operations and cost of capital, then Lending Club has a low cost of operations and banks have a low cost of capital, so that delivers benefit to consumers,” explains Laplanche.
Some 200 community banks offer co-branded loans to their own customers using Lending Club’s customer service, underwriting and pricing, but their own capital. They’ve realised they can use Lending Club’s marketplace to make loans to their own customers more cheaply than they can on their own.
Looking back on his journey from lawyer to fintech leader, Laplanche says he was helped by his experience at London Business School and still remembers much of what he learned. In particular the finance elective, which gave an early hint that the banks hadn’t got everything right. “We had long discussions on the efficiencies - or rather the inefficiencies - of the capital market,” he says, “and the fact that very often a tiny change can bring a ripple effect throughout the entire financial system. So while the markets might be efficient at a certain point in time, any piece of new information or new twist can create vast opportunities for better efficiency over time.”
And from his vantage point in San Francisco, Laplanche is looking forward to seeing those opportunities play out as Lending Club and other players continue to disrupt the business of banks.
Photo credit: Lendingmemo by Simon Cunningham