Lending Club Courts Small Banks as Personal-Loan Partners

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Lending Club has been a sly financial services chameleon, wearing the skins of a high-tech startup, an old-school investment vehicle, a disruptive shadow banker and even an alumni group for Wall Street veterans.

Now the online lender, which began as a threat to traditional banking, is cloaking itself in its most retro identity yet: one more vendor to small banks.

The San Francisco startup arranges peer-to-peer loans, which allow individuals to lend each other money online. Borrowers can apply on Lending Club's website for loans of up to $35,000, which they tend to use for purposes like paying down credit card debt or making home repairs. The company, which is expected to go public next year, has increasingly entwined its business with Wall Street's, relying on hedge funds and wealth managers for loan financing that once largely came from individual visitors to its website.

Now Lending Club is trying to cultivate another corner of the traditional financial industry, by selling its loans to community banks that need to diversify their asset portfolios. It has agreements with seven small banks, who buy loans that Lending Club originates and services, and who now account for almost 10% of its financing. The company is also working with some of those banks to make personal loans to their customers a service that Lending Club and its partners see as an opportunity to compete with bigger banks like Citigroup (NYSE:C) and JPMorgan Chase (JPM) that dominate the credit card market.

"It's really a more targeted way for banks to recapture the personal credit card business that their customers have at Citi or Chase," says Renaud Laplanche, Lending Club's founder and chief executive. "That's good for their customers, but it also helps the banks."

Laplanche, a French former securities lawyer, started Lending Club in 2006 and has made it into one of the most successful newcomers trying to circumvent or "disrupt" the banking industry's traditional ways of doing business. He did so in part by recruiting celebrities from the worlds of technology and finance; bankers who work with Lending Club say they were attracted in part by the bold-faced names on its board, including former Morgan Stanley (MS) CEO and Chairman John Mack, former Visa (NYSE:V) President Hans Morris and Lawrence Summers, the frequent White House economic jack-of-all-trades.

Having made $3 billion in loans as of this month and planning an expansion into small-business loans, Lending Club is one of the most established peer-to-peer lenders in a growing market. Such online crowdfunding is a popular business for financial services disrupters, even those supported by onetime bankers. Just last week, former Citigroup CEO Vikram Pandit invested in a seven-employee company called Orchard, his second recent foray into peer-to-peer lending.

Despite the threat such startups seem to pose to banks, Lending Club has spent recent months trying to forge alliances in the sleepier corners of the small-town banking world. In the process, it has taken on an unusually unglamorous role, selling products and services to small banks that can't afford to develop certain businesses on their own. It's a model that invites the occasional comparison to more prosaic bank vendors like Fiserv (FISV) and Jack Henry (JKHY).

"I look at Lending Club as any other IT data service provider," says Jonathan Morris, a director at Titan Bank, a small-business specialist in the Dallas area.

Titan, with two branches and $63 million in assets and a website that proclaims, "We are not some New York bank that thinks of you as a just a number" is one of a growing number of small banks that buy loans from Lending Club, and it is also one of the two banks testing a more tailored loan-origination program from the peer-to-peer lender. The idea is that small banks that cannot afford to develop their own credit card business, or do not want to take on the risk of extending more credit to some existing customers, can refer those customers to Lending Club.

Morris, also the president of Titan parent company BMC Bancshares, says that the bank has used Lending Club to originate loans to customers who could not meet its in-house credit standards. Instead of flat out rejecting those customers, the bank refers them to Lending Club, which originates the loan through a "private Titan application" channel and pays the bank a marketing referral fee, Morris says.

"It's a small income source, but any income is good in this market, and it could help the customer otherwise find a solution" and keep them happy with Titan, Morris adds.

Laplanche says that the arrangement "helps Titan repatriate to the bank balances that its customers would otherwise carry on their credit cards. Titan has the flexibility over time to offer a custom credit policy and pricing."

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