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LendingClub is really only crowdfunding lite

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MarketWatch | By Tim Mullaney | Dec 11, 2014

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You might save a little money, but you still have to go through a bank to use its services

If ever there were a market ripe for disruption, it would be the credit market circa 2008 through 2011. The mortgage market locked up. New-car sales fell by half. Even credit-card balances shrank by a quarter after four solid decades of 17% annual revolving-debt growth.

Through all of that, LendingClub Corp. the much-hyped “peer-to-peer lending” startup whose initial public offering yesterday valued the eight-year-old company at $5.4 billion, didn’t grow really at all. And that’s just the latest reason to beware of bankers bearing tales of hyper-growth and transformation.

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The company simply isn’t as transformational as it says it is. Its stock, I’ll wager, will pop in the short term without justifying its hype any time soon. And if I were investing in LendingClub, which despite what I’ve said so far is a perfectly nice company, I’d buy its debt rather than its stock.

The company also sells shares in the loans it makes, and those are as good a debt investment as its equity is risky.

The idea of LendingClub is to crowdfund lending and save people money. The San Francisco company kinda-sorta does that, for some people sometimes. The average loan it makes is $14,182 at 15% interest — which saves customers an average of 6.8 percentage points on card balances. Enough people like it that the company has expedited $3 billion in loans this year — about 215,000 folks, still a fly on the haunches of the $850 billion revolving-loan business.

But if this is crowdfunding, it’s crowdfunding lite. When consumers go to LendingClub, they actually apply for a loan from an honest-to-God bank, the very same institution they hit when they apply to finance a Dell computer. Only after they go through a fairly conventional underwriting process and the bank wants to move the paper into a secondary market does vox populi come into the process. It’s not fundamentally different than how mortgages and some credit-card receivables are securitized.

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The thing that bugs me, despite the very smart investors who think LendingClub is terrific, is that the company didn’t begin to make any material number of loans until it brought a traditional bank into its model in 2013. This is a very different plan than when peer-to-peer lending began around 2005. Back then, groups of lenders considered applications of individual borrowers. And that approach never got much market share.

I clearly recall my 2006 dinner with early Prosper lenders. It was a convivial market, aimed less at underpricing credit-card companies than at professionalizing the friends-and-family loan market. The funniest discussion of the night was about a mother of five who wanted a loan for breast implants. As it happened, she had very good credit: The line my editor rebelled at was the quote about “AA credit for DD boobs.”

So there really isn’t a big pent-up demand for crowdsourced credit. LendingClub’s edge is that investors who ultimately fund its loans accept a narrower profit margin than credit-card companies. The company makes its own money mostly from fees, about $143.9 million in revenue through nine months this year, for a net loss of $23.9 million but an operating cash flow of positive $35.4 million.

One reason it took a while for LendingClub to take off is that most consumers have better options, which will also inhibit its growth as the economy improves. While the 15% its average customers pay is less than many credit cards — the national average for fixed-rate cards last week was 13.02%, according to — it’s three to four times more than the same consumer could pay by refinancing credit-card logjams using home equity. I get their solicitations myself — and recycle them.

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