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A Visit With Lending Club

by Peter Renton on September 10, 2013

Lending Club yacht on San Francisco Bay

I have been in San Francisco these past few days for a number of reasons. First, I was invited to speak on a panel about crowdfinance at the National Association of Business Economists annual meeting on Sunday. Second, we have decided to have LendIt 2014 in San Francisco and we did a number of site visits with potential venues. More on that in a week or two. Third, I wanted to use this opportunity to sit down and have some face to face meetings with the management teams at Lending Club and Prosper. Finally, I was invited out on the Lending Club yacht for a sail on San Francisco Bay. So, it has been quite a busy trip.

The Lending Club Yacht

Let’s start with the Lending Club yacht. Although I should clarify something here – it is not really the “Lending Club yacht”. Lending Club sponsored this yacht for a three month period that included the Transpacific Yacht Race in July and that period ended this past weekend. The owner of the boat will be taking off all the Lending Club branding and so the “Lending Club yacht” will be no more. Before that happened, though, last week Lending Club invited investors and partners to come out and have a sail around San Francisco Bay. My lucky turn came on Friday.

We had a beautiful morning on the bay with no fog and warm weather. A group of about 14 people, including several Lending Club employees, were driven out in a motor boat to meet the Lending Club yacht (I took the photo above as we neared the yacht). We climbed aboard and sailed around the bay for a couple of hours, going under the Golden Gate bridge and back close to Alcatraz Island. It was a great time, the only minor disappointment being the light winds. I was hoping for some windy conditions so we could really see the boat perform. It can go as fast as 30 knots (35 mph) but on our outing our top speed was 12 knots. Still, it what a fantastic experience and one I will remember for a long time.

Meeting With Lending Club Management

We didn’t talk shop much on the boat, I left that to our meetings on Monday. I sat down with both Renaud Laplanche and Scott Sanborn yesterday for a chat and also did a tour of their ever expanding office space. Lending Club is up to 275 employees now and occupy three floors of the building at 71 Stevenson Place in the San Francisco financial district. And they will be expanding to a fourth floor later this year.

One of the questions that everyone here wants to know is what they are doing to help retail investors, so a lot of my discussions centered on this topic. Laplanche said that they have been adding staff steadily over the summer so they can handle a much larger volume of loans on a daily basis that will help in the short term. In the last week we are starting to see the results of this with more loans being added than ever before.

I know there have been several discussions on this blog about putting restrictions on large investors to give the retail investors a better chance at investing in the loans they want. There have been many suggestions on the forum such as putting a $100 maximum note size on the fractional loan pool. I put that idea to Laplanche as a way to really help retail investors. But he said that option is not on the table. Many of the large investors have contracts in place that puts limits on the fractional loan pool of a certain percentage and all these contracts would have to be renegotiated for a $100 limit like this to become a reality. And he wasn’t willing to do that.

Laplanche pointed out that there have been numerous restrictions placed on institutional investors to try and level the playing field somewhat. For example, if a large investor comes to them now and wants to put, say, $20 million on the platform this month they are told they have to wait, possibly for quite some time, before they can invest.

Trying to Balance Institutional and Retail Investors

For this reason institutional investors are complaining about access just like retail investors. He is trying to balance access for both groups at a time when interest in Lending Club is exploding. Some large investors have suggested to Laplanche that he needs to speed up Lending Club’s growth – that 250% annual growth was somehow too slow. He rejected that idea – he is focused on building a sustainable company for the long term and that means fast but manageable growth.

Scott Sanborn pointed out that August saw record inflows from new retail investors so the story is not just about the growth of the large investors. Investor money from retail investors still makes up a significant percentage of the total volume. He said that mechanisms will be put in place very soon (a couple of weeks was the time frame stated) that will start to address some issues around investor demand. I can’t share anything today but Sanborn said Lend Academy readers will be the first to know when these changes start to be implemented.

One the comments Sanborn made is that there are no easy solutions here. And he reiterated what Laplanche said. Institutional investors are complaining just as loudly as retail investors, they are just not doing it on Lend Academy – they do it directly with LC management. Sanborn described a number of changes coming very soon, some of which are long needed and some that will be unexpected.

But if retail investors were looking for news that the playing field is going to tilt back in their favor they will be disappointed. We are not being ignored, but we will not be given any specific advantages over institutional investors. There are some changes coming that will please some people but don’t expect to see any new limitations on large investors.

{ 21 comments… read them below or add one }

nealS September 11, 2013 at 7:48 am

Well, we learn one thing – institutionals get custom contracts that tie Lending Club’s hands. That might have made sense early on, but no longer. If they are standing in line to throw money at LC, why wouldn’t LC insist on standard contract terms? That would lower legal costs for one thing.

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Peter Renton September 11, 2013 at 12:03 pm

I don’t have any information on this but if I had to guess I would say that the current contract terms are much more standard than ones signed last year or the year before.

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Brendan Ross September 11, 2013 at 9:37 am

I think LendingClub is doing a remarkable job in its continued support of retail investors. The “normal” path for fundraising would be to evolve over time towards larger investors who are considerably less expensive to support.

It is a testimony to Renaud and Scott’s roots as internet/tech leaders that they put the effort they do into retail, and I’m impressed with their ongoing commitment to this effort.

Of course my fund owns P2P business loans, so I’m looking in from the outside, but their approach seems fair.

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Peter Renton September 11, 2013 at 12:15 pm

Most of us only see it from our own perspective – that it is much more competitive for loans today than it was six months ago. But I agree that Scott and Renaud both are trying to consider the impact on retail investors with all the changes at Lending Club.

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Brian September 11, 2013 at 10:20 am

Great read. It’s interesting to hear that institutional investors are complaining just as loudly as we are. Thanks for posting the article!

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Peter Renton September 11, 2013 at 12:51 pm

You’re welcome Brian.

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Frankie September 11, 2013 at 6:29 pm

12 knots is still pretty fast!

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Peter Renton September 11, 2013 at 10:02 pm

Not for this boat. It was built for speed. Renaud said in the Pacific in the Transpac race on the way to Hawaii they regularly had it doing over 30 knots.

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Martin September 11, 2013 at 9:57 pm

I like sailing ships a lot, so I kinda envy you this trip. Can you take me next time? I will be your door opener, bag holder, coffee stirrer, and some other unimportant function performer…

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Peter Renton September 11, 2013 at 10:03 pm

Martin, Now that the Lending Club branding has ended I don’t know if there is going to be another time. But I sure hope so.

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Dan B September 11, 2013 at 11:59 pm

I assume that being a catamaran it was pretty smooth & no one on board “fed the fish”?

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RG September 12, 2013 at 12:35 am

Brendan writes he thinks Lending Club is doing a remarkable job of balancing the interests of retail and institutional lenders. If that were true I don’t think I would have had to withdraw $35,000 of uninvested cash over recent months. These funds were once fully invested but as loan availability has dried up in relation to investor demand Lending Club has failed to redeploy my cash as loans were paid off and interest accumulated. The fact is, from my vantage point, that Lending Club’s promise has not been kept. They’re supposed to reinvest my cash, not allow it to continually grow to larger and larger sums. A “remarkable” job? The only thing remarkable as far as I can see is Lending Club’s failure to adequately balance loan demand with investor demand.

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Dan B September 12, 2013 at 12:58 pm

Brendan, your response?

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Peter Renton September 12, 2013 at 2:12 pm

Well I can’t speak for Brendan I think I know where RG is coming from. The one place where Lending Club has dropped the ball this year is on their PRIME accounts. I think that is what RG is referring to here. I have heard from several PRIME account holders who have complained to me about the cash buildup in their account. Often there is 4-5 weeks between investments. LC should be doing a better job here and keeping their PRIME accounts fully invested.

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RG September 12, 2013 at 2:31 pm

Yes, I was writing about my Prime accounts. I neglected to mention that fact.

To flesh things out a little more, in response to your comment about there being weeks between investments, Peter, I haven’t found that to be true, not lately, anyway. What is true is that the number of loans I’m seeing my cash reinvested into with each order is in the single digits, often just one to three loans. There has been a steady decline in the number of loans my funds have been placed into by LC. Months ago I had orders with my cash being reinvested into dozens of loans and sometimes over 100 if I recall correctly. Now I’d be lucky to see 5 loans in an order. The way things are progressing, or should I say regressing, I expect to withdraw another $10,000 cash from LC in the not too distant future, when the cash balance in each of my accounts reaches $5,000.

On a related note, the failure of LC to redeploy my cash reduces the rate of return in my accounts. While there are of course a number of ways to analyze returns, one way I have chosen to use is by figuring what the annualized rate of return would be based on an individual monthly statement. I have done this by dividing the amount of the Net Change by the Beginning Balance and multiplying that by 12 (for 12 months). Calculated this way the annualized ROR has been lower in recent months than it was in 2012 or 2011 with one month coming in as low as 4.3%.

In my remarks in my post above I referenced Brendan’s post. Dan B then asked for Brendan’s response. There really isn’t any response called for as I see it. There is no debate here, no controversy; nobody trying to prove himself right and the other wrong. Two opinions are being expressed, that’s all. From where I stand the promise of P2P has been broken by LC. I’ve moved the funds I’ve withdrawn from LC to Prosper which is doing a better job of deploying my cash into loans. Prosper isn’t doing a great job, IMHO, but at least my cash is flowing, albeit slowly, into loans, rather than loans turning into cash. To be fair to LC, Prosper has less of my funds to invest so it’s easier for them to get and keep my money invested than it is for LC.

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Dan B September 13, 2013 at 6:57 am

RG………….You’ve voiced your views I would have thought that 2 widely diverse opinions on the same subject would have warranted a more detailed exploration as to the rationale behind the other view,………….. but maybe that’s just me that is interested. :)

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RG September 13, 2013 at 7:02 am

Dan. I think you’re right. It would be in e to hear why Brendan reached his conclusion.

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Emmanuel September 17, 2013 at 1:44 pm

It seems the main problem for LC is the unbalance between lenders and borrowers: there are simply not enough loans to invest in to keep the lenders happy. But a natural equilibrium should occur sooner or later. Supply (lenders) would go down with interest rates, while demand (borrowers) would go up.

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Peter Renton September 17, 2013 at 5:14 pm

In my recent conversation with Renaud Laplanche he insisted that would not happen. Sure, there is more investor money than borrowers on the platform but the problem is not interest rates. Lending Club just doesn’t have the resources to add enough borrowers to meet investor demand. He said that he doesn’t think that there will need to be a downward push on interest rates to attract borrowers. They have many years of runway of obtaining borrowers even with keeping interest rates steady. That should be good news for investors.

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Rev September 18, 2013 at 12:59 pm

What does “being loud” has anything do to with the merit of what is being asked? First of all, P2P means peer to peer, and I don’t think Institutions are peers to the borrowers. Second, the retail investor helped raise the platform when things were the most uncertain and the risk was much higher than today, and for that they are being left out now?
I couldn’t care less if Institutional investors are complaining directly to Lending Club management. What is this? A shouting contest?
Peter, is that the best argument we can bring to the table, that the forum has been showing a lot of “talk” about this, so something must be done? I’m pretty sure the forum has been also showing a lot of good arguments for leveling the field better, not just noise. In your article it appears that our main argument, being vocal, was not enough because the adversaries were being as vocal or more, and so we rest.
If LC growth is the bottleneck, and Laplanche is pacing it, why isn’t the retail money good enough? Why can’t the $100 limit be imposed to new investors that didn’t sign anything? What will be the difference between LC and Wells Fargo or Capital One in a few years?
I feel we missed a chance to hear explanations as why things were going that way, but instead we entertained a exchange of arguments that sounded more like how brothers dispute a firetruck toy when they’re 8. I’m with RG, the promise and essence of LC have been broken.

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Peter Renton September 18, 2013 at 5:39 pm

Hi Rev, Some interesting comments there. But we already know the answer to the question of why it is that way. I think I can confidently state that if LC was only focused on retail investors today then they would still be losing money hand over fist and probably be at $30-$40 million a month in loan volume.

While we may wax lyrical about the promise of p2p and the abandonment of its principles the fact is in today’s environment it is simply not a good business model. Now, one day when everyone has heard of Lending Club and regular investors have embraced this asset class someone will come along and launch a true p2p lending business. And it could well be successful.

I wish it was different and that Lending Club could still be focused on building a true p2p business and be doing just as well. But that is not reality. The large investors provide an efficient way for LC to scale the investor side of their business.

As to your question what will be the difference between LC and a large bank in a few years? I expect in the long run they will become more alike. But until I can get 10% in my Wells Fargo direct lending account then I will be sticking with Lending Club and Prosper for my investments.

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