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."
He and Morris declined to be more specific about the financial terms of the loan-referral deal, but the arrangement is just part of Titan's bigger relationship with Lending Club. The bank also buys loans that Lending Club has already originated through its website. Titan and other banks buy the startup's loans at face value and pay a percentage of the underlying balance as a monthly servicing fee back to Lending Club, which keeps the relationship with the borrower.
For banks with lots of deposits and few places to put them to use, such an arrangement could be "a relatively low-risk way for a bank not only to deploy liquidity but to diversify the portfolio beyond the concentration in real estate that a lot of banks struggle with," says Jeff Davis, a managing director with Mercer Capital.
That was exactly the thinking at MainStreet Bank (MNSB), which started buying Lending Club loans in August. Since then MainStreet, a $272 million-asset bank with five branches in northern Virginia, has bought more than $7 million of Lending Club loans, at a pace of about $2 million in assets per month.
"We were looking to diversify some of what we're doing here... and their type of losses are pretty reasonable," says MainStreet Chief Financial Officer Thomas Chmelik.
That asset diversification also came relatively cheap for MainStreet, which — like most community banks these days – is trying to keep its costs down in a tough economic and regulatory environment. Chmelik says that he has all of two people working on managing the Lending Club portfolio — a task that takes them about one hour per day.
"That's the beauty of it. I have not had to hire one person," he says.
MainStreet decided to start buying Lending Club loans at the suggestion of the Promontory Interfinancial Network, the vendor known for offering deposit insurance products to community banks. Promontory, co-founded by former Comptroller of the Currency Gene Ludwig (who also runs the consulting firm of the same name), this year launched an online marketplace allowing banks to buy and sell different types of assets, including distressed loans. Executives there are hoping that the Lending Club/MainStreet relationship will encourage more small banks to use its services to diversify their portfolios.
"Banks are starting to sign flow agreements" through the site, with the idea that "I can fill up my loan bucket" without operationally expanding, says Richard Walter, who runs the Bank Assetpoint service for Promontory Interfinancial.
MainStreet has been a longtime Promontory Interfinancial customer, which Chmelik says made the bank receptive to the idea of buying Lending Club loans — though he was initially wary about the risk of buying assets MainStreet had no role in underwriting.
"It took a good eight to nine months before we pulled the trigger on it," Chmelik says. "You've got to make sure that all of the... underwriting standards are up to what the regulatory standards are. Even if you're buying these loans after the fact, you have to be sure, with everything that's going on."
Similar concerns might slow Lending Club's ability to expand much more quickly to other community bank buyers, despite Laplanche's ambitions — and praise of the sector.
"We really like the diversity of community banks. We don't like to be highly concentrated into any particular funding source," he says, adding that "community banks have proven to be very long-term-minded partners, and we like that stability."