Wednesday, after my interview with Prosper, I barely had five minutes of rest before I arrived at Lending Club’s headquarters. Arriving at 3:30pm, I was invited by their receptionist to take a seat and wait for Scott Sanborn, Lending Club’s Chief Operating Officer.
Behind her stood the red squared Lending Club logo, cut and illuminated. Next to me on the wall was mounted the infographic they produced when they crossed $1 billion in issued loans (see here). The whole thing felt a bit surreal.
It is somewhat difficult to recreate here how thrilled I was for this meeting. I am one of these people that Lending Club’s Renaud Laplanche describes as having “Lending Club fever”. I love this company. Maybe it’s because my first lending account was with them. More likely, I simply have had a great experience with them over the years. Whatever the case, I must have looked pretty funny sitting on the edge of that couch, sipping water at twenty second intervals so as to look the part.
I should have been more chill. When Scott Sanborn came and brought me into a conference room, his demeanor was overwhelmingly relaxed. He closed the door and sat down across the table from me. After exchanging introductions I asked Sanborn, “Can we talk about this Google investment a bit?” (WSJ article)
“Sure,” Scott replied. “Renaud is better able to talk about this than I am, but I can certainly cover the basics.”
“Great,” I said. “So tell me, what does this mean?”
Scott thought for a moment. “I’m not able to talk to Google’s motivation for making the sale,” he said with an easy tone. “What we’re excited about is that there is a lot that Google does well. If you look at their tenets, they are very similar to Lending Club. It’s a data driven business that is committed to doing the right thing. They created a lot of efficiencies in online advertising; we’re creating efficiencies in banking. We have opportunities to learn from them and work with them in the future.”
“So you see collaboration happening?” I responded with interest. “A union of Google and Lend…”
“I’m not sure about a union of Google and Lending Club,” Scott said with a hint of kind sarcasm, downplaying my dramatic line of thinking and provoking laughter from me. “Right now, it is an investment, but it does open the door for opportunities for us.”
“What are some of the risks or drawbacks from this?” I asked, beginning to get a feel for Scott’s dry humor.
“I don’t see any drawbacks”, he said. “This has been…”
“…nothing but good news,” I offered.
“Nothing but good news,” Scott agreed.
We continued talking, speaking about the possible IPO that would allow every state in the US to be open to investors, the so-called ‘blue sky exemption’. Scott spoke about how hard Lending Club is working to get more and more people lending.
“Over time there will be other ways to broaden investor participation,” he explained. “We currently have the retail platform that, for the extremely involved and self-directed investor, is a way to totally control your investment at the detailed level. But I think, over time, there is nothing to stop us from having a public fund that people could buy into. In regard to a public offering, we do plan to be ready next year, but going public depends on the market window. That said, our financials are already public. We report quarterly; all our numbers are already out there. So we’ve got a lot of the burden without receiving a lot of the benefit.”
“Renaud Laplanche was talking to Bloomberg,” I said (source). “He said, ‘We are trying to reshape the way people think about credit.’ What is the way people think about credit wrongly?”
Scott thought carefully. “The big insight for us is this. If you ask people whether or not they need a loan, they generally say ‘no’. The idea of needing a loan doesn’t feel great. But when you ask people if they paid off their credit card in full last month, they also tend to say ‘no’, because almost half of all Americans have outstanding credit card debt. So the answer is, ‘You already have a loan, and it is likely at an interest rate that is higher than you need to pay.’”
“A credit card is a great utility vehicle. It’s in your wallet. You can pay for anything; use it anytime. As a debt instrument it’s not that great,” Sanborn said, emphasizing this point. “We think we have something better. It’s fixed rate and fully amortizing at lower cost.”
“So imagine I’m the average American,” I replied. “How am I thinking of credit wrongly?”
Scott said, “I wouldn’t say you’re thinking about it wrongly. You’re probably not thinking about it, right? If you ask a lot of Americans, they often don’t know what the interest rate is on their credit cards. They didn’t get a credit card based on an interest rate. They got it based on flier miles, on gas points, or on a shopping discount, and those cards often times have interest rates of 18-22%. They are not aware of interest rates until they can’t pay it off. It’s more just about being conscious. If you’re using the card and you’re not paying it off, you need to make yourself aware of the interest rate you’re paying, and find out if there’s a smarter way of approaching that.”
Scott further explained this point. “If you have equity in your home, then that’s a great way to pay for lots of things. One thing you should think of right away is to tap that first rather than the credit card. And if you don’t have that credit available, look for a personal loan from Lending Club.”
“Interesting,” I said, thinking about the gap that exists between low-interest mortgages and high-interest credit cards. “Let’s look at another really interesting quote from Renaud. The New York Times Dealbook spoke with him, and to them he said, ‘The reason we like Google is that they are the good guys of tech, and we’re trying to be the good guys of finance.’” I asked Scott, “What does it mean to be the good guys of finance?”
“You’ve talked about some of it already, right? Transparency,” Scott said plainly. “Essentially, delivering a fair, responsible product with transparency as to what you are getting. That is, to me, what it means to be the good guy. We like to make credit available to people who can afford to have it, at a rate that is representative of their risk. A lot of banks won’t make personal loans. And if they do and you qualify, your rate is the same. To this I say, ‘Well, wait a minute. That means if I have an 850 FICO (credit score) I’m paying the same rate as someone who has a 660 FICO?’”
“It’s the same with credit cards,” I said. “People’s FICO scores not involved.”
“Correct, “Scott agreed eagerly. “We are able to give prime credit consumers the credit they deserve. To me, that’s what means to be the good guy.”
I really liked that last sentence. Wanting to hear more about who, exactly, Lending Club was on the path to disrupting I asked, “What is the side of finance that this approach corrects? Referencing these existing non-transparent less-efficient models, how are you different from the traditional financial system?”
Thinking this out, Scott said, “There are a lot of things we’re doing different from the traditional financial system. One is, we were built from the ground up to be technology enabled (he tapped the table with each of these two words). The borrower application is dynamic and progressive. As you’re telling us things, the application changes based on what we are learning about you. The process of underwriting is highly automated. We’re doing as much as we can through third-party data systems and models as opposed to individual humans checking boxes. The process is more efficient. The structure is more efficient. We don’t have the branch system we’re trying to pay for. We don’t have the same capital reserve requirements. This is not FDIC guaranteed (like a savings account at a traditional bank), which means we don’t need to reserve capital against your investment. While we’re subject to all the same fair lending regulations and truth in advertising, we’re not subject to the same capital reserve burdens and regulatory hurdles.”
“Do you think the nation is going to move away from the volatility of the stock market?” I asked.
“Um, boy, that’s too big a sweeping statement for me,” Scott said. “I’ll tell you what we’re observing. People are very hungry for stability and stable yield. I think a lot of people are thinking differently now. This has been a lost decade for investors. People are thinking different about portfolio planning and how to round out their investment portfolios. I think that equities will continue to play a vital role in people’s overall investment mix, but alternatives are certainly getting a lot more interest. People are thinking more broadly. This is why we’re getting such demand right now.”
I switched topics. “Talk to me a little bit about the relationship you have with Prosper. From my conversations with various people, it’s almost like Prosper wants a place at the table, and you guys are kind of hesitant to allow that.”
“Place at what table?” Scott asked.
“In the conversation that is happening about peer to peer lending in general,” I said.
Scott paused. “Prosper is under new management now,” he said. “And I’m excited to see what they do. In the past there have been some pretty big mistakes that we often got swept up in. I think it is a fair statement to say there is a level of enterprise risk that is different between the two companies. We respect their business and are interested to see what happens with the new management, and we want it all to work out great because it is to our benefit to have investors doing well, but I think we’re trying to be cautious about being lumped together.”
“We’re profitable at this point. We have $60 million in cash in the bank. I guess it isn’t that they are not a player in the market, but we’re doing 10 times their volume. So when people say, ‘There are two major players in the market and here’s how they stack up,’ we want to say, ‘Yes, there are more than two players; there are several. But there are very significant differences. We are making lower interest rate loans to a higher credit quality population with a lower default rate. It’s a different risk profile on the investment.'”
We finished by talking about where Lending Club was going in the coming year, about the mobile site they are working on and their upcoming automated investment tool. I asked him if I could see their people at work, and Scott led me around to two different floors, each filled with working employees.
As we walked down the stairs, Scott pointed my attention sideways. At first, I thought he was just admiring the lit glass panels surrounding the stairway, but he actually was pointing through them. Anybody who walks down the stairs at Lending Club is met by a row of bright displays, screens which give constantly updating statistics of Lending Club’s progress. I saw Scott exude a deep-seated pride towards these stats, and it was easy to see why. There, in cascading bar-charts, was Lending Club’s ever growing base of investors and borrowers, of new IRA accounts and large-value deposits. To me it looked something like a revolution, a kaleidoscope of momentum, the epitaph of Wall Street.
Honestly, when I had first walked in to Lending Club that day, I was hoping Renaud Laplanche, Lending Club’s CEO, would be available. I was originally let down when only Scott was available, let down because I assumed he would be less at liberty to speak his mind, less involved with Lending Club’s journey.
I could not have been more wrong. Over the time we met, Sanborn revealed himself to be not just deeply knowledgeable about his company, but unmistakably passionate about its success and mission.
When Scott said goodbye, ushering me away from Lending Club’s offices to the elevator, I was awash with amazement over what I had seen. Something big is happening here. Google’s recent investment is really not the news Bloomberg and Dealbook should be focusing on; it is really just an arrow pointing towards something else: Lending Club itself.
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Nice writing Simon, but I don’t really see how Lending Club is “doing away” with banking or Wall Street. Yes, they offer a novel mid-range interest rate on personal loans, but that is a far cry from ending the existence of savings accounts, home mortgages, and revolving credit lines.
It is interesting, I suppose, watching this tech-enabled company find that untapped market, but how does that make Wall Street at risk in any way at all?
Hi Greg, thanks for your response. The reason we talk about Lending Club doing away with the banking system and Wall Street are for a couple reasons. Without going into too much detail, the loans are better: more people are approved at lower interest rates. It’s hard for people with decent credit to even get a personal loan these days! Second, the investing side is better: lower volatility than the stock market, higher returns, greater liquidity. If p2p lending catches on, you’re going to have far less independent investors on the stock market, and far fewer people applying to their banks for loans.
Wow, excellent post Simon. I enjoyed it. What I am interested in a lot is that retail platform. Can a little dude as me participate on it or is it only for a big investors? Or what do they refer to as “retail platform” is the regular platform we see when log in to our accounts?
The next thing I am interested in is the potential IPO. I will definitely be buying some post IPO shares, because I really believe in this business model and I think it has a bright future ahead.