Lending Club shakes up the loan market
Lending club’s business model is challenging the way we think about loans by leveraging their crowdfunding community to fund loans.
In the past, people equated peer to peer lending with going around asking a few friends or family members for a loan. Now, the practice of soliciting funds from others for a loan has been partnered with the practice of wanting to invest in the loans of other’s through Lending Club’s online platform.
Lending Club is the world’s largest online marketplace connecting borrowers and investors. Qualified individuals (and now even small businesses) can receive loans of up to $35,000 in just a few days, at attractive interest rates and by extremely easy process. What’s unique about these loans however is that they are funded by individual investors. Investors have the option of choosing which loans to invest in, and how much they want to invest in that loan. Once a loan has received the total amount from investors, the loan is funded to the borrower.
So other than access to loans, why would a borrower participate? Lending Club’s technology based platform enables them to operate a credit marketplace at a lower cost than traditional bank loan programs, which in turn passes the savings on to borrowers in the form of lower rates and to investors in the form of solid returns. Borrowers report an average savings of over 30% compared to other debt obligations.
Investors are enticed by Lending Club’s attractive, risk-weighted returns (which historically average 5.23% – 8.82%), easy access to a different asset class, and ability to diversify across many loans. Research also shows that peer to peer investors are significantly more likely to invest in a loan when they know the reason for the loan, strengthening the community aspect of Lending Club’s platform.
Lending Club and Prosper dominate the US peer to peer lending market. Regulatory risk and the retaliation from traditional banks remain the top two risks for growth in this market. Although regulation in international peer to peer lending markets, such as the UK, is more defined, the US still has yet to define its regulatory approach to peer to peer lending platforms, leaving skeptics critical of whether or not these business model will be crippled by stringent legislation. On that same note, traditional banks are really thinking through their approach to counteract Lending Club’s hit on the traditional loan process. How will banks respond? Will they fight back and potentially crowd out and eliminate the peer to peer lending market? Or will they choose to partner with and take part in the potential growth? This remains to be seen, as we are now seeing a mix of strategies. Goldman announced the build out of their own peer to peer lending platform. On the other hand, Lending Club just partnered with BancAlliance to give community banks access to Lending Club’s low cost loans.
As of June 2015, Lending Club has originated over $11.1 billion in loans. However, growth is not only projected in its current customer demographic – Lending Club is putting a significant focus on partnering with banks and large corporations. A recent partnership with Google is now making low cost loans available to Google’s small business partners – with Google putting up the capital for these loans, allowing them to invest in the growth of their partners. Earlier this year, Lending Club and Alibaba announced a partnership in which they will provide financing for manufacturers in the United States to buy products and supplies through Alibaba’s Chinese marketplace.