Investors warm to Lending Club, the fintech that became a bank

When Lending Club was founded in 2006, it was hailed as a pioneering “fintech” company — a consumer lender that operated online without the regulatory burdens of a bank.

This year, under chief executive Scott Sanborn, Lending Club has shifted gears and obtained a banking charter, reckoning that extra attention from the government is a fair price to pay for an opportunity to lower its funding costs and diversify its product offering.

With last month’s acquisition of Boston-based digital bank Radius, Sanborn told the Financial Times, Lending Club will be able to move away from its dependence on “partner banks” that financed its loans until they could be sold to investors.

“We don’t need to pay somebody else to issue our loans. We don’t need to pay somebody else [to] warehouse our loans,” he said. “Over the past two years on average we paid issuing banks alone $20m a year. Now we can recapture that.”

Investors seem to like the change. After discussing its plans for Radius last week, along with its fourth-quarter earnings, Lending Club’s shares have risen more than 60 per cent to nearly $18, adding some $600m to its market capitalisation.

The rally also has been encouraged by Lending Club’s biggest investor, tech-stock evangelist Cathie Wood’s ARK Investment Management, which has added to its position in the company.

We’ve got a really high-yielding asset and we’ve got a really low cost of capital

“Being a bank is transformative on a number of fronts: it gives you access to lower-cost funding [and] it also lets you test out, for example, auto lending as a product,” says William Coffey of Wedbush Securities. “You can go to Radius depositors and say, ‘You need a line of credit.’”

Lending Club’s core product is unsecured personal loans, which borrowers use to refinance higher-rate card and car loans. Demand for the loans and their credit performance have both been relatively consistent across the company’s 15 years of existence. But Lending Club’s dependence on partner banks to finance the credits put pressure on its profitability.

“In the first quarter of last year we held a billion dollars in loans, and our average cost of funding was about 330 basis points,” Sanborn said. “Our total cost of funding today at the bank we acquired, which has more than $2bn in deposits, is 35 basis points. Our borrowing costs just went down by 90 per cent.”

The core checking account at newly acquired Radius offers depositors a yield of 0.10 per cent, Lending Club says. By contrast, a key rival, Goldman Sachs’ digital bank Marcus, pays depositors 0.5 per cent.

Lending Club plans to retain about a fifth of the loans it originates and sell subprime loans to investors — asset managers, hedge funds — with higher risk appetites. Marcus, by contrast, retains its loans, pushing it to focus on prime customers.

Sanborn estimated that Lending Club’s new business model will be 40 per cent more profitable than the old one and he expects the company to generate a return on equity superior to that of a traditional bank.

“We’ve got a really high-yielding asset and we’ve got a really low cost of capital,” he said. “You put the two together, we’ve got a real economic engine.”

Consistency of revenue will also be improved with a banking charter, Sanborn said. Last year, as the pandemic hit, the company issued $4.3bn in loans, down from $12.3bn in 2019.

“The typical fintech marketplace model, your primary revenue stream is directly tied to loan originations,” he said. “Let’s say a global pandemic happens, and the market pulls back by 70, 80, 90 per cent. Guess what happens to your revenue?”

It was an attempt to even out demand, by setting up an asset management company that bought Lending Club loans, that helped get the company’s founder and former chief executive, Renauld Laplanche, in trouble. The FDIC alleged that the loan purchases were misrepresented to investors; Laplanche resigned in 2016 and was banned from the securities industry under a settlement with the SEC.

Loan investors, particularly banks, pulled out following the regulatory problems and Lending Club shares, worth more than $100 in 2015, fell below $5 last October.

To win back investors, Sanborn said, the company increased compliance efforts to bank-like levels, so he does not expect having the charter to significantly increase its administrative costs.

Lending Club was the second big US fintech to acquire a banking charter, after Varo Money. Another rival, SoFi, is following Lending Club’s example, buying California’s Golden Pacific bank in pursuit of a charter.