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Podcast 237: Scott Sanborn of LendingClub

The CEO of LendingClub talks about their pending acquisition of Radius Bank, sharing the backstory and how the new "marketplace bank" will look

March 6, 2020 By Peter Renton Leave a Comment

Views: 740

It rocked the fintech world. When LendingClub announced they would be acquiring Radius Bank (pending regulatory approval of course) it was a groundbreaking moment for fintech. It was the first time a fintech company had acquired a bank and suddenly the rules were being rewritten. Now, a lot has to happen before the acquisition is complete with some complicated regulatory hurdles to overcome.

Our next guest on the Lend Academy Podcast is Scott Sanborn, the CEO of LendingClub (he was last on the show back in 2016). He is leading this new chapter for LendingClub as they seek to become the first ever “marketplace bank”.

In this podcast you will learn:

  • An update on their core business.
  • The mood inside LendingClub today.
  • Why they decided to do an acquisition instead of apply for a charter themselves.
  • When they started talking to Radius Bank.
  • Why they decided not to buy a smaller community bank.
  • How Scott views the banking-as-a-service side of the Radius Bank business.
  • How a LendingClub “marketplace bank” will look.
  • The first product we can expect once the transaction is complete.
  • The three pillars they are looking to integrate for new products.
  • Scott’s view on a possible future LendingClub credit card.
  • Their plans for individual retail investors and how the bank will provide them new opportunities.
  • How their conversations with regulators have gone to date.
  • What is next on the timeline in their conversations with regulators.
  • How the fintech industry should think about LendingClub going forward.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020, the world’s largest fintech event dedicated to lending and digital banking.

Download a PDF of the transcription of Podcast 237 – Scott Sanborn.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 237–SCOTT SANBORN

Welcome to the Lend Academy Podcast, Episode No. 237, this is your host, Peter Renton, Founder of Lend Academy and Co-Founder of the LendIt Fintech Conference.

(music)

Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th at the Javits Center in New York City. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

Peter Renton: Today on the show, I am delighted to welcome back Scott Sanborn, he is the CEO of Lending Club, a company that I am sure every listener knows quite well. They’ve been in the news a lot lately with their acquisition of Radius Bank. So, I wanted to get Scott back on the show to go in depth about this acquisition, why they went and did it, how it all came together, you know, some of the background to it.

We talk about all the different products that Radius Bank offers and how that’s going to fit in with Lending Club going forward, talking about some of the banking offerings, the Banking-as-a-Service pieces. We talk about Scott’s vision for what this new marketplace bank will look like and that was super interesting, and we talk about the timeline they’ve set forward, and, finally, how the industry really should think about LendingClub going forward. It was a fascinating interview, I hope you enjoy the show.

Welcome back to the podcast, Scott!

Scott Sanborn: Thanks, Peter, good to be here.

Peter: Likewise. Let’s just….before we get to the big news that you’re going to devote most of this podcast to, I want to just maybe take a step back and give the listeners a little bit of an update on the core parts of your business, how’s that been going?

Scott: Yeah. So, our core business is doing great, we’re executing very well against the plan we laid out at our Investor Day back in December of 2017. You know, we’ve regained market leadership and actually gained share throughout last year, put ourselves, most importantly, on the path to sustainable profit in Q4. We achieved gap profitability, just barely, but an important milestone on the last ….and the first time we’ve hit that since I became CEO, and a very important pre-requisite to becoming a bank.

We also achieved record customer satisfaction last year and are building a really important foundation for a lasting relationship and a lifetime relationship with the customer that our recent announcement that’s perfectly in tune.

Peter: Right, right, okay. So, we’re recording this…it’s February 25th today, it’s a week since you made the big news, I’m curious…..before we dig into it, what’s been the mood like inside the company over the last week.

Scott: It’s been electric, people are extremely excited about the future we’re building and have this…..you know, we’ve obviously been public since after our Q1 earnings of last year about our intentions, and so it’s now real and especially the technology and marketing folks who are really, really looking forward to taking in a new front that we can innovate on behalf of the customers.

After every earnings call, I do the Ask Scott Anything Session which is kind of a open mic forum where people can ask questions and let’s just say, it was a packed house, we went overtime because people were really enthusiastic and everybody, of course, is eager to know how they can help and when we could get started.

Peter: Right, I’m sure it’s good to be back on offense again in a big way, so that’s great. So then, let’s just maybe start with why did you decide to do an acquisition, not just Radius Bank, why did you decide to do an acquisition instead of pursuing a charter yourself?

Scott: Yeah. So, as you know, there’s two paths here. One is the normal application and the other is through acquisition, and, you know, we had always preferred the acquisition path because it de-risks execution and it accelerates your accretion, right, and so what I mean by that, de-risking execution, you can imagine, with the regulators, we clearly have a lot of experience on the lending side of the house, right.

We’ve been doing this first loan since 2007, we’re doing it at scale with over $55 Billion in loans issued to date, but we don’t have experience on the deposit side of the house, so….and we don’t have the systems, the processes, the people to manage that. And that makes, you know, kind of validating for regulators that you’re going to be a responsible steward of those capabilities more challenging, right. As you know, there’s only one fintech that’s made it through that process and it’s been three and a half years, so we view this as really significantly accelerating the path and de-risking the path.

The other piece of that acceleration is that it’s earning acceleration, right, because by acquiring a bank you’re acquiring a book of deposits, right. In the case of Radius, over a billion dollars in deposits and you’re acquiring a book of loans that are already earning net interest income. So, that helps, you know, I’m not an expert on bank accounting, but, as you know, as you build a loan portfolio, especially under CECL, you need to take all of the loss reserves up front, right, so that the GAAP financial picture early on is one of the more challenging and when you do an acquisition path, you’re much more quickly accretive.

So, with that, it’s always been our goal….. we were scouted, but, you know, finding the right partner is the challenge. There’s more than 6,000 banks in the US, and, you know, you get both practical and strategic consideration, you know, practically somebody we can afford to buy that’s for sale, that’s willing to sell to a non-regulated institution which, you know, bears thinking about, right, because there’s more risk in the transaction there for them, and, certainly, timeline, at the very least, and it’s not bringing legacy infrastructure to the table. And then there’s the strategic side, right, is there are cultural fits here and do they have, you know, the online deposit taking capabilities versus, you know, some kind of a branch infrastructure that obviously wouldn’t fit.

Peter: Right.

Scott: So, you know, finding the right partner was critical.

Peter: Right. So then, when did you actually first start talking to Radius Bank about this?

Scott: Yeah, actually, over the summer, late summer, we started talking to them and the initial call was really about a partnership. We were evaluating partners…that’s always been part of our vision to add a transaction account for our customers, and, you know, prior to having a charter, we were looking at ways of developing one in partnership.

And so, our first conversation with them was to explore that idea and the CEO was on the phone, I was on the phone and, you know, I would say five minutes into the conversation, after they gave the intro to their company, gave the intro to our company, we both clearly had a wow, should we be talking about something deeper here because it was so clear that we had  separately built at scale, the two sides of a bank balance sheet, right, and we had built deposit at scale and they had built online deposit taking at scale. Putting those two things together is a one + one = three.

Peter: Right. So, it’s fair to say that you really….obviously, there are not many banks quite like Radius Bank in this country. You know, I had Mike Butler on my show just a couple of months ago and I’ve really been impressed by them. So, suffice to say, you took off the table then this sort of going to buy like a one-branch community bank. It would have been a lot cheaper to go and buy a one-branch bank to get………. a banking license in some small town in the middle of America, but it sounds like you took that off the table pretty quickly.

Scott: Yeah, it goes back to that question of what are we looking for, right? We’re looking for somebody who’s got the ability to take online deposits at scale, and who would be excited about, you know, being part of Lending Club and building, a major brand in business and that’s what Radius brought under Mike’s leadership. They, several years ago, went through the process of closing down their branches and investing in their online capabilities and that’s been where all their focus has been, just like all our focus has been on, you know, building out our lending capabilities.

Peter: Sure. So, when you look at Radius, it’s business, they obviously have a much broader kind of product suite.  From what you’ve just talked about, I mean, they have this sort of Banking-as-a-Service part of their business. You know, I know that they’ve got NerdWallet, they’re doing savings accounts for NerdWallet, they’re doing bank accounts for Brex. These are sort of pretty unrelated type offerings than what Lending Club has today, I mean, how do you feel about that part of their business. Is this something you want to adopt and grow, or not?

Scott: Yeah. So, we are very excited about what they’ve built and on the partnership side of their business, yeah, they’re bringing over a billion dollars in deposits and just like in lending, having a diversified portfolio is important. Same thing is true in deposits, so these partnerships are an important part of their diversified deposit portfolio and, you know, once we get through the nuts and bolts of the integration, we can provide them real exciting potential for future growth and the ability for us to potentially provide some other services to those partners.

Peter: Okay, what about……

Scott: Peter, that’s why we’re being…whenever we talk about this, we say we’re going to be a marketplace bank, right, this is all part of that. It just differentiates us from what people think of as the traditional banking model.

Peter: Right. So, maybe just expand on that a little bit. When you say a marketplace bank, do you mean like….obviously, you’ve got the marketplace lending operation which I think everyone gets, but do you mean having a marketplace…like Radius Bank has a marketplace where products that they don’t offer directly they have referral type programs….I mean, maybe you could just spend a minute just teasing out your vision of what a marketplace bank actually will look like.

Scott: Yeah. So, there’s a couple of aspects to it. One is, again, you know, on the lending side of the house, we believe the marketplace model has some really critical strategic advantages for the customer and by extension, for the company, which is, you know, we’re able to serve a very broad range of customers, right. That goes beyond what a traditional bank would do by virtue of the fact that, you know, there’s a segment of customers that don’t comfortably sit on a typical bank balance sheet due to their risk profile, but there are plenty of buyers for that asset.

And so, by being able to cover both high quality, let’s call it traditional bank customers, as well as still creditworthy, but higher risk customer segments that will enable us to say, yes to more…makes our marketing much more efficient and really kind of drives the overall business model, so that’s on the lending side. The other concept of the marketplace on the lending side is we don’t need to build every product ourselves. You know, we will have a customer relationship which will soon be enhanced by not only being able to extend credit in the form of unsecured lending, or auto re-finance, but also the ability to offer them a transaction and/or savings account.

So, we’ve got that, then we’ll have significant data on our customers who will understand their cash flow, understand their credit history, understand their behavioral patterns and can we identify other opportunities for these customers to save, regardless of whether or not we manufacture those products, right. So, if I see rates has gone down and I know somebody re-financed two years ago when rates were higher, shouldn’t I prompt them that they can save off of their mortgage and can I, with their permission, provide them a pre-approved offer from a partner who we know will deliver on the experience.

So, that’s all part of vision for us of a marketplace bank is, you know, investing in areas that are strategic for us to really own the experience, but then integrating and partnering with others to add value to the customer and not feel like we need to build it ourselves.

Peter: It reminds me, actually, of your LendIt keynote, your first keynote as CEO back in 2017, where….I still remember this distinctly where you sort of teased sort of the audience about becoming sort of the Amazon….I think you used the Amazon analogy directly, saying the Amazon of financial services, I mean, is that really what …..sounds like that’s what you’re talking about here.

Scott: It is, and, you know, we are making progress towards that vision. As you know, last year, we integrated with several partners on the small business side to do just this, right, which is we’re working with Opportunity Fund and Funding Circle to enable customers who are coming to us organically, right, just because they know the brand and potentially have experience with the brand as a consumer, or also might just have heard of us through, you know, you, or other places in the media, or word of mouth. We are enabling them to get connected to, you know, credit at a fair and transparent process and these aren’t products…it’s not a product that we are manufacturing, so we are already building towards that vision.

Peter: Right. And then, what about the products that Radius is manufacturing? Like when I talked with Mike, he mentioned equipment finance, SBA loans, like would you continue those kinds of products as in having them manufactured in-house?

Scott:  Yeah. As I mentioned before, kind of having a diverse portfolio in lending is a good thing than bringing a portfolio of loans while at a significantly smaller scale, obviously, than what Lending Club is producing is part of that enables this deal to pay for itself within two years. Certain of those portfolios, we think we can even turbo charge, for example, the SBA loans, make perfect sense as part of our current portfolio where people are coming to us looking for small business loans and we’re working with partners. The SBA product would be something that we could click right into that.

Peter: Right, right, that makes sense, that makes sense. So then, if we fast forward….you said 12 to 15 months you said on the earnings call, if we fast forward 15 months…I mean, when this is all said and done, what are you most excited about offering. I mean, what can we expect to see first as you kind of integrate, what new products?

Scott: So, the number one thing we are really excited to get to work on is a uniquely Lending Club checking account, transaction account for the customers. Right now, as you know, we help people pay less when they’re borrowing money. What we want to do is help them earn more when saving and really create an integrated experience that goes after, you know, some of the fundamentally broken things in the current banking experience, right.

For example, a significant percentage of Lending Club customers today get hit with overdraft fees and the average customer that gets hit with an overdraft fee actually gets hit with it three, or four times in a year. I think you know how those things work, they’re not considered loans. If they were, they would be at usurious interest rates that you’re paying. You write a $30 check and you pay a $35 overdraft fee.

We look at that and say, well, can’t we use the tools available to us today, both a combination of artificial intelligence to do some predictive modeling on a batch of consumers and say, hey, you’ve got some bills coming up, your account’s getting low, you’ve got to be thoughtful about the payments that are due at this time, and if the customer doesn’t have a choice extending fair and reasonable credit seamlessly as part of the actual integrated account experience for them.

So, that’s something we are super excited to go after, it really gives us a reason to have a mobile experience, to have an experience that’s high engagement, our customers want this from us. You know, we did a survey of our customer base and 90% of them said that they would consider a Lending Club account and 36% of them said, you know, I’d just do it. (Peter laughs)

I think you know we rolled out late last year in beta a credit health tool for customers and we’re seeing really high adoption of that as well. You know, people are saying they tried Lending Club, we’ve helped them save money and this idea that we can, you know, kind of have a product and have a business where the interests of the customers are aligned with the interest of the company and when we win, they win. It’s something that is super exciting for everybody here.

Peter: Interesting. So, another question I was going to ask about is the financial health piece. You’ve been pushing that message for some time now and so, sounds like what you’re saying is that the new products that you launched as a result of this merger….. are you going to have new….this financial health is going to be the backbone of the ….you know, the thing that ties it all together, I take it, is that how you’re thinking about it?

Scott: Yeah, that’s right. We’re going to make this a really integrated experience and you can think about a couple of things we’ve been talking about for a while all coming together. One is, you know, really investing in this idea of club membership that once you come to us the first time and, you know, we have underwritten you and you’ve successfully paid off a loan, how do we make any subsequent experience you have with us in lending really, really seamless.

So, last year, we got to a one quick offer for you when you come back, so no need to fill out another application, and, you know, have a fee like a stranger, we treat you like a member of the club. This year, we’re going get to a one click-loan by using the data that we have to enable really, really…..you know, our goal is to make it as easy to get an unsecured personal loan as it is to swipe your credit card, but, obviously, we’ll be giving you a superior product at a lower fixed rate versus a card, so that’ll be one aspect though.

The second is continuing to invest in this credit health tool that helps people understand where they are and how the actions they’re taking are most directly affecting their eligibility and their cost of credit, something we internally call “do this, get that.” So, we’re building this experience where we’re tracking all your cards, we’re tracking your credit and we can tell you, hey, the problem is your utilization is getting high because you’re putting it all in this one card. You either need to raise the limit on that card, or, you know, spread it out amongst your cards. Those kinds of things that’ll help you manage your credit, specifically your cost of credit, and your eligibility.

And then, the third is going to be a new tool available to us which is being able to help you manage your cash flow, and, actually, manage your spending so that we can help you save more in your checking and savings account. That’ll be the new front, and so the goal is to have all of these three, upon approval, come together into a really unified experience.

Peter: So, does that mean you would offer a Lending Club credit card at some point?

Scott: I don’t see that on the near term horizon. I do think there is a way to offer a credit card that is on brand for Lending Club, right, where you are being rewarded for your good behavior, but that is not something we’re focused on near term right now.

Our near term focus is these kind of three pillars that I just talked about, and, obviously, bank readiness, just making sure we are ready to really hit the ground running such as post-approval, we have the ability to issue our own loans, gather our own deposits, deploy a sub-set of those deposits into loans and really take the customer experience to the next level.

Peter: You know, I read recently you crossed, I think, three million borrowers now, so you’ve got a very large customer base there, but I actually want to talk about the individual investor. Obviously, the numbers are much less than that, obviously, I’m one of those, I’ve been an individual investor now for, boy, coming up to 11 years very soon, but…… (laughs)

Scott: Thank you, Peter.

Peter: (laughs) You’re welcome. So, what are the future plans for that sort of sub-set of the Lending Club, membership, shall we say.

Scott: Yeah. I mean, we view kind of the retail investor as sort of the, you know, pinnacle of a successful journey for the customer, right. If you come to us to get savings off of your cost of debt, you open a Lending Club checking account, we help you actually generate real savings in the form of your own kind of cushion so that you don’t need to turn to debt if there is an interruption in your cash flow, or an unexpected expense. And then, from there, the ability to pay it forward and to support other American consumers who, you know, we’re where you were however many years ago, and also earn a compelling return.

So, we think as part of our overall part of the customer journey, the retail investor is an important part of it. We look forward to being able to evolve that experience under the bank charter frame. I mean, I think you can imagine a world where you’ve got a Lending Club retail investor account and it’s lent to a card and you could set up how much you want to invest, how much you want to keep in cash and, you know, you have the ability to use that at ATMs. That would be an example of something that we could do in the future.

Peter: Right. So, from what you’re saying, obviously, you’re filing….. the self-managed individual investors are becoming a smaller percentage as you grow, but it sounds like you’re still committed to maintaining and potentially improving the offerings there.

Scott: Yes, this will give us new opportunities to do that.

Peter: Right, okay, I look forward to that. Okay, so then, you’ve got this timeline that you’ve laid out there, I’m curious about what are some of the near term targets that you are looking to hit to make sure that you maintain…obviously, you’ve been talking to regulators, I imagine, for a long time, but what are some of the things that are coming up on that timeline?

Scott:  Yeah. So, correct, we’ve been engaged with the regulators for more than a year now and the important thing is we now feel like we’re at a place where we’re ready for this next stage. You know, if you go back a year, one of the ….I’ll share with you, the question was, okay, does Lending Club know how to manage credit, check. Is Lending Club profitable, hmm that was an X year ago, we’re now profitable, that’s a check.

So, one of the things we need to do now is maintain profitability, that’ll be a key thing and that’s a core focus of us this year is maintaining that. And next is, does Lending Club know how to manage deposits? Now, with the acquisition of Radius, the answer to that is again a check. And so, the process we need to go through now is essentially, you know, get regulatory feedback on all of our cross board; people, processes, tools, systems, our business plan, all of those.

You know, process that feedback from the regulators, revise and remediate anything that they’ve identified on our behalf, incorporate that and then, you know, eventually submit a formal….and that will be a public application that will come later in the process, you know, that’s the mission of the formal application. The formal application will be something that, you know, will indicate that we’re kind of through the process of remediation.

Peter: I imagine it’s fair to say that you had conversations with the regulators before you came and made this public announcement. I mean, what were those conversations like?

Scott: You know, the conversations have been incredibly constructive, really constructive and, you know, we’re trying to do something that hasn’t been done before. It’s not every day that a company doing $12 Billion in loans acquires a directly supervised institution. So, the conversations have been okay; what do we need to do to essentially get the regulators comfortable with the frameworks that we have in place and how do we need to ready ourselves for the process we’re about to go through, but they’ve been very constructive and very frequent. You know, we’re feeling a high degree of engagement on the part of the regulators and we’re looking forward to working with them collaboratively as we go through this process.

Peter: Right, right. I mean, it is good….I was listening to a podcast on the weekend with Jo Ann Barefoot, she had Jelena McWilliams on, the Head of the FDIC, and I just was struck by how much she wants to promote innovation and new ways of doing things, and…doing away with a lot of the sacred cows at the FDIC that ….when I was listening to that and thinking about what you guys are doing, I feel optimistic.

I imagine you did too about the fact that the regulators are not throwing up hurdles against you. I know that Varo, obviously, had a really long time before they were able to get approval, complete approval there. But, I imagine even the OCC tried with the Fintech Charter, that’s sort of in limbo now, but maybe you can maybe give us your sense too that the regulators really want to say yes, whereas before, I feel like they wanted to say no.

Scott: I think there is a recognition that, you know, there is a lot of benefit that a company like Lending Club brings to the system, right. We have been demonstrated in some studies by the Federal Reserve that we’re making credit more affordable, we’re making credit more accessible, we’ve reached a scale at which…..you know, it makes sense for us to be directly supervised and as a result of that scale and the unique aspect of our model in which we’re partnering with so many banks, we’ve built so much of the systems and processes and have hired so many of the people that you would expect to see in a bank that it just makes sense.

And I think that desire….you’re not only hearing the top where the tone is being set, but we feel that throughout the whole organization. That said, it is an awesome responsibility that, you know, comes with a bank charter. So, you know, real work needs to be done to validate that an organization is prepared for the responsibility that they’re about to be granted. So, there is real work that needs to be done and not everyone is going to be ready. You know, I look to …..I think we are really uniquely positioned given the length of time we’ve been in business to scale. We’re operating in the nature of our banking relationships that has required us to build out these capabilities.

You know, I think when you look in other markets, there are certainly some interesting models. You’ve probably seen what Singapore did with these bank charters that kind of have levels of charter that they grant and they’re trying to make it possible for new entrants to come in and gradually move up, in terms of the capabilities they get, and also the leeway they have to operate. I think there’s some interesting models there…I think lacking that, you know, for most companies, it is a difficult path to get down and there are only a few companies, I think, that are ready to do that and I do believe we’re one of them.

Peter: Sure, okay we’re just about out of time, but one question before I let you go. We look at Lending Club’s position in the industry and you’ve had a leadership position and a very clearly defined leadership position for many years, but this move is something that is going to reposition yourselves. Maybe you can share with the audience how the fintech industry should really think about Lending Club going forward.

Scott: Yeah. I mean, we will continue to stand apart, you know, we’re going to have a new peer set that we’re amongst, but we’re not going to, you know, we’re not going to look like they do, we’re going to be faster growing, high margin and, again, have a business model in which the success of the company is really aligned with the success of the customer. We’re looking forward to bringing that same, you know, innovation and customer-centric product development to the deposit, checking and transaction side of the house that we brought to the lending side of the house.

Peter: Okay, we’ll have to leave it there. Good luck with everything, Scott, I’m sure it’s going to be a fascinating journey over the next 12 to 15 months and we’ll be all be paying attention. Thanks for coming on the show, and best of luck!

Scott: Alright, thanks, Peter, and watch the space.

Peter: Indeed, okay, see you.

You know, I have to admit when I first heard the rumors that Lending Club was acquiring a bank, I didn’t immediately think of Radius Bank. I clearly should have because I feel like they really are a great fit. I’m excited for Lending Club and what it means, I think, for fintech. This is the first of its kind, having someone who has really become an established lender, in fact, the largest personal loan lender in the country.

Going down that route before becoming a bank has never been done before, it’s going to be super interesting to see how it all plays out. I think this is not going to be the last of this kind of acquisition that we’ll see in this industry, but, I think, everyone is going to be watching closely to see how the acquisition goes, how the regulatory approvals go and what comes out of it. As Scott said, it’s an exciting time, there’s a lot of things that they can do with this.

Anyway on that note, before I sign off, you’ll be able to hear more about this at LendIt Fintech USA where Scott Sanborn will be a keynote speaker on our opening morning.

Anyway, thank you very much for listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking. It’s happening on May 13th and 14th, at the Javits Center in New York City. Lending and banking are converging and LendIt Fintech immerses you in the most important trends of the day. Meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Go to lendit.com/usa to register.

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LendingClub Continues Quest to Reimagine Banking with Radius Bank Acquisition

LendingClub will be the first fintech in the United States to acquire a bank

February 19, 2020 By Ryan Lichtenwald 5 Comments

Views: 542

Yesterday LendingClub announced as part of their Q4 2019 earnings call that they are acquiring a bank, something no other US fintech has done. The move may not be all that surprising given LendingClub has long shared their vision of becoming a full service financial institution, but their path is unique.

What’s interesting about this announcement is LendingClub didn’t pursue just any bank, they are buying the leading digital only bank Radius Bank. Radius Bank is frequently listed among the top digital bank offerings on various comparison sites for consumers (for a deep dive on Radius listen to Peter’s recent podcast interview with CEO Mike Butler). For example, Bankrate named them best online bank of 2020 thanks to their mobile app, unlimited ATM fee rebates and competitive interest rates. The bank currently has around $1.4 billion in assets.

CEO of LendingClub Scott Sanborn spoke about why they chose Radius and why they are pursuing acquiring a bank now. Sanborn noted that Radius has an ethos and culture of bringing tech into banking. It will be a marriage of two digital innovators bringing together both sides of the balance sheet, asset generation from LendingClub’s perspective and the online deposit gathering from Radius. Radius as noted earlier is a digital only bank with no legacy branch network but has a national footprint. LendingClub has been executing on their plans which has put them on a path to sustainable profit, a critical metric for approval of this acquisition.

LendingClub is paying $185 million in cash and stock for Radius Bank, a transaction that they believe will pay for itself in two years. Sanborn shared that when surveyed 90% of LendingClub customers said they would consider opening up a LendingClub bank account. While not a guarantee of success, it demonstrates the rapport LendingClub has with its customers. The deposit base will be a new funding source for LendingClub and they will no longer be beholden to their current bank partners which will reduce costs. In addition, they will no longer need their warehouse line. LendingClub also plans to balance sheet some higher interest rate loans in order to generate additional interest income. One of the benefits to new and existing investors will be the comfort of an established regulatory structure. It is expected that the transaction will officially close in 12 to 15 months.

Moving on to LendingClub’s Q4 2019 results, the company achieved GAAP profitability by a small margin though fell just short of expectations for revenue. LendingClub is still seeing strong consumer demand but credit tightening across the market will likely slow the personal loan market growth. They also see the economy growing more slowly with increased recession concerns.

Looking forward LendingClub is focused on profitable growth and investing in their infrastructure as they prepare for the bank charter.

Conclusion

LendingClub caught many by surprise with this announcement particularly when it came to the bank they were acquiring. They were well positioned to buy a bank with significant cash reserves but many did not expect it to be a big brand like Radius Bank. This was apparent during the Q & A section of call where many analysts expressed enthusiasm for the transaction. Clearly LendingClub thought this was the best route to take in their quest to reimagine banking so it’s going to be interesting to see how this plays out over the next two years.

Filed Under: Fintech Tagged With: digital bank, lendingclub, marketplace lending, online bank, Radius Bank

Views: 542

Marketplace Lending & Personal Bankruptcy: Cause and Effect

We highlight an interesting academic paper released last summer that studies the link between personal bankruptcies and marketplace lending

January 22, 2019 By Mike McEnaney Leave a Comment

Views: 508

Perhaps it’s true that money can’t guarantee a lifetime of happiness, but one thing that is fairly certain, personal bankruptcy can guarantee a slew of negative emotions including sadness, grief and shame.

A national wave of personal bankruptcies that began in 2008 reached a peak in the year ending September 2010, when nearly 1.6 million bankruptcies were filed. So traumatic was the emotional impact of all these bankruptcies an entirely new field emerged – financial therapy – to provide counseling to people in need of emotional support due to a monetary crisis.

While the numbers have dropped significantly since the 2010 peak, personal bankruptcy is still a significant issue in the U.S. Filings fell by 1.8 percent for the 12-month period ending March 31, 2018, compared with the year ending March 31, 2017. The data continues a national trend of declining bankruptcy filings since 2010-2011. The March 2018 annual bankruptcy filings totaled 779,828, compared with 794,492 cases in the previous year, according to statistics released by the Administrative Office of the U.S. Courts.

However, the numbers are still substantial and the rate of people 65 and older filing for bankruptcy has tripled according to a recent study from the Consumer Bankruptcy Project. According to the study, the median wealth for over 65 bankruptcy filers is -$17,390. Non-bankrupt Americans of the same age recorded a median wealth of more than $250,000.

Fintech: A Way Out or Gateway to Deeper Debt?

An interesting white paper (The Real Effects of Financial Technology: Marketplace Lending and Personal Bankruptcy) co-authored by Dr. Piotr Danisewicz, University of Bristol and Ilaf Elard, Assistant Professor of Finance at Shanghai University of International Business and Economics was released last summer. It examines how today’s financial technology is affecting household hardship when it comes to personal bankruptcy.

The paper explores how the advancements in fintech are making it much easier to control finances and provide more access to funding, but also suggests that little is known about the risks vs benefits regarding the long-term effects on household financial health. The main question the white paper examines: is the increasing availability of credit pushing individuals to over-indebtedness, default and bankruptcy?

Citing  a number of landmark court cases, the co-authors explore both the risks and benefits of fintech lending, claiming, “To the extent that individuals prefer to avoid bankruptcy, rather than default strategically to discharge debt, marketplace lending has the potential to lower debt refinancing costs and provide households with liquidity in the face of income or expenses shocks, thus reducing the incidence of bankruptcy.”

However, Danisewicz and Elard also suggest that the rapid expansion of marketplace credit could increase the number of bankruptcy cases by increasing consumer debt.

“Besides marketplace lending possibly throwing borrowers into a debt-trap of over-borrowing, the concern is that marketplace loans worsen the risk-composition of borrowers by providing credit to less creditworthy households,” the co-authors point out.

The Madden/Midland Effect

Perhaps the case that has garnered the most attention regarding the yin and yang of the fintech lending world, and the case Danisewicz and Elard spend the most time on in their research, is Madden vs Midland Funding LLC. We have covered this ruling extensively on Lend Academy – see articles here, here and here.

The white paper documents a persistent rise in personal bankruptcies following the Madden ruling and a severe decline in marketplace lending, particularly among low-income households. Danisewicz and Elard also document that marketplace loan defaults and consumer credit by banks and finance companies have remained unaffected, suggesting that increases in personal bankruptcy arise principally from reversing access to new lending technology.

Among the many additional conclusions Danisewicz and Elard reach in the white paper are:

  • The Madden win triggered Lending Club and Prosper, the two largest U.S. marketplace lenders, to reduce lending in the states affected by the verdict.
  • Using monthly data from the U.S. Courts Administrative Office, the paper cites that there are 8% more personal bankruptcy filings in Connecticut and New York relative to other states following Madden.
  • The co-authors attribute the increase in the incidence of personal bankruptcy following Madden to the reduction in marketplace lending. This hypothesis is supported by a number of further results.
  • The consequences of Madden are limited to the enforceability of marketplace loans and suggest that the increase in bankruptcy rates following Madden arises predominantly from changes in marketplace lending.
  • Danisewicz and Elard also rule out that the rise in bankruptcy following the verdict could be the result of an increase in defaults by marketplace borrowers in the affected states. This may occur if marketplace borrowers are over-indebted and default after being unable to obtain additional marketplace loans in the affected states.

Danisewicz/Elard Conclusions

The research in the Danisewicz and Elard white paper suggest in the absence of a clear regulatory framework for fintech lending, the Madden vs Midland verdict also had the unintended consequence of raising personal bankruptcies.

As the co-authors conclude, “Understanding the real effects of financial technology helps to inform the intense regulatory deliberations on the wider fintech industry currently taking place at the OCC, FDIC, Federal Reserve, Treasury, and the Basel Committee on Banking Supervision.”

The Danisewicz/Elard research ultimately concludes that restricting marketplace lending increases personal bankruptcy filings persistently.

“Our findings have urgent policy implications,” the co-authors summarize. “While this paper does not imply that marketplace lending or the fintech industry is void of risks and should be left unregulated, our findings suggest that improving fintech lending regulations may improve access to marketplace funding and help alleviate financial hardship in terms of personal bankruptcy among low-income households.”

There has been bipartisan support in Congress for a Madden fix bill but as yet nothing has moved to a full vote. With a new Congress in place, we hope this legislation can be passed in 2019. As the white paper points out this will be a good thing for consumers.

Filed Under: Peer to Peer Lending Tagged With: Madden v Midland, marketplace lending, Personal Bankruptcy

Views: 508

Cross River Bank Raises $100 Million Led by KKR

Fintech pioneer Cross River Bank has closed a large funding round led by one of the world's leading private equity firms

December 6, 2018 By Peter Renton Leave a Comment

Views: 819

Today, Cross River Bank (CRB), one of the leading banks supporting marketplace lending platforms, has announced they have closed a significant funding round, $100 million, led by private equity firm KKR. This is by far their largest funding round, dwarfing the $28 million they raised in 2016 and is a validation of the unusual path the New Jersey-based community bank has taken.

Chairman and CEO Gilles Gade shared his comments on this funding round in their press release:

We are very pleased that our growth and progress has the endorsement of leading investors such as KKR. We also welcome new investors CreditEase and Lion Tree Partners and are especially grateful for the continued confidence of our previous investors Battery Ventures, Andreessen Horowitz and Ribbit Capital. This is a very strong signal that we continue to execute on our plan and are poised to take Cross River through its next phase of successful development here in the U.S. and across the globe.

Started in 2008, which in itself was an interesting time to start a bank, CRB first got involved in fintech very early on when they partnered with GreenSky on home improvement loans. They have since become the go to bank supporting many leading marketplace lending platforms including Marlette, Upstart, Affirm and RocketLoans just to name a few. While maintaining their community banking roots they have become one of the driving forces in the growth of the marketplace lending space with their banking-as-platform solution. They have also become a significant player in broader fintech working with leading players such as Coinbase and Transferwise on payment processing.

CRB is also a founding member of the Online Lending Policy Institute,  a nonprofit public policy organization based in Boston, MA whose mission is to encourage responsible innovation in online lending. Their leadership in that organization has helped the industry connect with regulators and lawmakers in Washington.

It is interesting to me that in his quote in the press release Gilles ends with “and across the globe”. I don’t know of any other community bank in America that has global aspirations but with CRB’s success in this country it seems that global expansion is on the horizon. However they choose to grow the company they now have a well funded war chest with which to attack any new market.

Filed Under: Peer to Peer Lending Tagged With: banking, Cross River Bank, marketplace lending

Views: 819

How to Open Up a New LendingClub Account in 2018

In this post we share the process of opening up a new LendingClub account, the first in a new series we will be sharing over the coming quarters.

April 5, 2018 By Ryan Lichtenwald 10 Comments

Views: 336

Peter Renton, the Founder of Lend Academy opened his first LendingClub account in mid-2009. I opened my first LendingClub account in early 2013. While we are intimately familiar with the platform and the changes over the years things are on autopilot from the investment perspective. It has been a long time since we have gone through the process of opening a new LendingClub account.

Recently LendingClub reached out to us offering to fund a new LendingClub account so we could go through the new investor experience step by step. We wanted to take this opportunity to take a fresh look at opening and investing through LendingClub as a complete beginner. As outlined after the video below we’ll be sharing video content and blog posts along the way as this account matures.

Opening up a new LendingClub Account

The new LendingClub account setup is a simple, straight forward process, taking less than five minutes. As you’ll see in the video below LendingClub asks for some basic information during the signup process and then asks for information for the initial funding of the account.

Although I had to link my bank account manually in the video below, LendingClub now has the ability to connect your bank account quickly, simply by using your bank’s login credentials. Up to 15,000+ banks are available for linking, including USAA, Citi, Bank of America, and Chase.

New LendingClub Experiment

As mentioned earlier, LendingClub is funding our new account with an initial deposit of $5,000. This is part of a new program they are launching this year with a small subset of bloggers in the investing space. While they paid to fund this account we have complete freedom to write whenever and whatever we want. We considered this a good opportunity to start a new account from scratch and share the experience as both my and Peter’s accounts at LendingClub have been open for many years.

Once we invest this initial capital all principal and interest payments will be reinvested in new loans. Every quarter we will detail what is going on with this account, much like Peter shares his own returns.

In this series of posts we hope to answer several questions new investors may have such as:

  • What does signing up for a LendingClub account entail?
  • How do I setup automated investing?
  • How long does it take to deploy funds?
  • What returns could a potential investor expect starting in 2018?

Stay tuned in the coming weeks for our next video as we outline how to setup automated investing.

Filed Under: Peer to Peer Lending Tagged With: account, lendingclub, marketplace lending, opening, p2p lending, review

Views: 336

Credit Analysis and Valuation Methods for Marketplace Lending Loan Portfolios

We dig in to the complex topic of valuation with this Q&A piece conducted with Houlihan Lokey

March 14, 2018 By admin Leave a Comment

Views: 5,883

[Editor’s note: Many of us have questions on marketplace lending loan valuation so when we were approached to see if we would be interested in a Q&A post on the subject we jumped at the chance. The Lend Academy team created the list of questions and Gunes Kulaligil, Director in Houlihan Lokey’s Financial Advisory Services business provided his answers.]

As Marketplace lenders continue to lend at a fast pace, there has been a significant increase in the past several years in non-bank consumer, student and small business lending. Although these platforms operate in a similar fashion, there is a wide variety of underwriting guidelines thereby producing loans with notably different credit profiles and terms. As a result, prepayment and default performance vary significantly based on the platform originating the loan and the credit grade of the loan as determined by the platform. Additionally, loan performance and platform performance have been mixed, with losses sometimes coming in higher than expected and governance issues shaking investor confidence in the sector.

Despite these challenges, origination rates have climbed back towards their prior highs, and funding sources have been expanded with increased interest from whole loan buyers in flow agreements as well as investors seeking to acquire tranches from securitizations. The recalibration of performance expectations has hit many platforms and continues to be an ongoing process, thus highlighting the need to determine the relevant default and prepayment drivers necessary for accurate fair value analyses. While a robust and liquid secondary whole loan trading market has not emerged as some market participants had hoped, secondary transactions are occurring, especially as loans are aggregated into securitizations. Many of these transactions occur at a premium to par and can provide meaningful insight into pricing and relative credit performance of one platform versus others over time.

1. What are the most prevalent methods of valuing loan portfolios today?

Discounted cashflow (DCF) methodology at the loan or cohort level is the most prevalent valuation methodology used today to value marketplace loan portfolios and related assets, including tranches in securitizations and servicing rights, regardless of the lending vertical. I emphasize “today” because marketplace lending is an evolving corner of consumer & business lending that is small and fragmented in general, with over a hundred lenders, both small and large, with a handful of large lenders accounting for the lion’s share of the issuance. Despite its still nascent nature, marketplace lending has caught the eye of nimble credit-focused alternative investment managers and the relatively risk averse large bond funds alike. Credit investors usually acquire whole loan portfolios or subordinate bonds off of securitizations on a levered basis, whereas many of the larger bond funds focus on the senior bonds in securitizations.

The investment thesis from the credit funds’ perspective is the opportunity to achieve mid single to double digit returns on a levered basis with a short duration versus the bond funds’ thesis which could essentially be described as a yield pickup strategy where the buyers expect to achieve unlevered single digit returns with shorter duration than whole loans and ample structural credit support present in securitizations in the form of subordination and excess spread. Non-bank lending owes its ability to attract the attention of such a diverse group of investors not only due to the sector’s capacity to offer a wide range of credit exposures and duration, but also due to its future growth potential with a confluence of support from increasingly tech-savvy borrower demographics, a de-regulatory environment and innovative partnerships in the Fintech ecosystem.

2. Are valuation methods standardized? If not, why not? How does this lack of a valuation standard affect investors?

[Read more…]

Filed Under: Guest Post Tagged With: Houlihan Lokey, loan portfolios, marketplace lending, Valuation

Views: 5,883

Peer IQ Releases Q4 2017 Marketplace Lending Securitization Tracker

Cumulative issuance for marketplace lending securitization now totals $28.2 billion across 106 deals.

January 16, 2018 By Ryan Lichtenwald 2 Comments

Views: 83

The easiest way to get insight into the marketplace lending securitization market is through PeerIQ’s quarterly reports. It feels like every quarter brings more good news for originators and the fourth quarter of 2017 was no exception.

Issuance in the quarter totaled $4.4 billion, which is another record and represents a 100% increase over Q4 2016. Total issuance is now $28.2 billion and PeerIQ expects issuance to grow by 30% annually to $18 billion in 2018. PeerIQ shares that investor appetite for these securitizations continues to grow.

All deals for the quarter were rated by at least one rating agency. Kroll Bond Rating Agency leads in rating consumer deals while DBRS leads in rating the student lending deals. SoFi continues to impress as they issued the largest consumer and student lending deals ever in marketplace lending. Upstart issued their second securitization and is expected to be an annual issuer. Besides their standard securitizations, LendingClub also completed a whole loan pass through security to a single investor which is listed at the bottom of the below table.

PeerIQ also shares the breakdown of issuance by company across 2016 and 2017. Not surprisingly, we’ve also seen the average deal size increase over the years.

Conclusion

What’s fascinating to me is to think about how far the securitization market has come since the early days of the industry. I still remember back in 2014 when Eaglewood was awarded LendIt’s Innovator of the Year Award for putting together the first securitization in the marketplace lending space the previous year. It’s impressive how robust the market is now and how it has grown in such a short amount of time.

If you’re looking for more details of the securitization market you can download the full report for free on PeerIQ’s website. We also recently interviewed Rosemary Kelley from Kroll Bond Rating Agency on the Lend Academy podcast who shared her perspective on the securitization market.

Filed Under: Peer to Peer Lending Tagged With: marketplace lending, PeerIQ, Q4 2017, securitization, tracker

Views: 83

Bills Being Introduced to “Fix” Decision in Madden v. Midland

We report on the updates to the Madden v. Midland case and get perspectives from a top law firm and the Marketplace Lending Association.

August 30, 2017 By Peter Renton Leave a Comment

Views: 998

The Madden v. Midland case has been a topic many lenders have been following closely for over two years. Our last update was in June 2016 when the Supreme Court denied a petition to hear the case which left the case unresolved. Now bills are being introduced in hopes to fix the ambiguity around this case.

For a historical perspective you can read our coverage of the case at the below links:

  • Supreme Court Denies Petition to Hear Madden v Midland (June, 2016)
  • An Update on Madden vs. Midland Funding (May, 2016)
  • Madden Tells SCOTUS That Marketplace Lenders Should Not Worry About Madden (February, 2016)
  • Madden 2015 Has Nothing to Do With Football (August, 2015)

An article in American Banker this week from Adam Levitin, professor of law at Georgetown University, provides his perspective on what the bills mean for the case. Levitin expresses concern over the bills, believing that the bills being introduced are overly broad and will facilitate predatory lending.

Nat Hoopes, Executive Director of the Marketplace Lending Association disagreed with Levitin’s assessment. Here is what he had to say:

These bills are strongly pro-consumer. They will help ensure that consumers can continue to refinance their higher interest rate debts, saving consumers significant amounts of money through lower interest costs.  Furthermore, these bills clearly cannot facilitate predatory lending because they do not change the rate or terms on which any entity in this country (regulated at the state or federal level) can lawfully lend money.  The language of the bills simply reaffirms one of the fundamental principles of contract law — that valid loan contracts can be sold on the secondary market.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: legal issues, legislation, Madden v Midland, marketplace lending

Views: 998

Lending Club Q2 2017 Earnings – Back to Growth

Lending Club grew originations 10% for the quarter, originating $2.15 billion in loans.

August 7, 2017 By Ryan Lichtenwald 6 Comments

Views: 928

Lending Club’s second quarter earnings marked an important milestone for the company – a return to growth. It seemed as though there was a general consensus that this was a make or break quarter for the company. Originations have been hovering around $1.9 billion since Q2 of last year. This quarter Lending Club announced originations of $2.15 billion for the quarter, up 10% from the prior quarter of $1.96 billion. While this is still down from their previous highs, it shows that the company is back on a growth trajectory.

Also of significance was net revenue of $139 million, up 35% year over year. The second quarter marked the second highest revenue generating quarter for the company. Lending Club anticipates that the third quarter will be their best quarter yet from a revenue perspective. Below are the other financial highlights for the company.

The earnings call focused on a couple of initiatives for the quarter. One was Lending Club’s first sponsored securitization of near prime loans. This brought in 20 new investors and is an additional revenue source for the company. Many of the analysts on the earnings call were interested in learning more about the financial impact of the securitization program. Lending Club anticipates they will do one securitization per quarter with the next one being a prime securitization.

The other initiative was focused on borrower take rates. Lending Club redesigned their website and developed testing infrastructure to better understand what prompts borrowers to say ‘yes’ to a loan. This included analysis on many different factors including testing pricing sensitivity as well as experience tests.

Bank participation has been an important part of the turnaround story for Lending Club. Last quarter the company announced banks were funding 40% of loans, but that reached higher in the second quarter to 44%. Lending Club was able to land new banks in the quarter and cited that the asset class continues to be attractive in the low interest rate environment. With bank funding stable, Sanborn stated that they would be increasing their efforts on the retail investor.

On loan performance the company continues to be vigilant due to high debt levels of consumers. However, early signs of delinquencies on recent vintages are in line with expectations which has resulted in no significant changes to pricing. With respect to auto loan refinancing, Lending Club is still working on ramping that business up and it is not making up a meaningful part of originations.

Given that Lending Club beat expectations the company adjusted their earnings outlook upwards.

Conclusion

What struck me the most in the earnings call was that this was the second highest revenue generating quarter. To close out 2017 the company expects to generate between $585 and $600 million. That is substantial revenue. Now, the company is not profitable yet, they generated a GAAP net loss of $25.4 million but they are making progress and they have come a long way since last year. Lending Club CFO, Tom Casey and CEO Scott Sanborn believe Lending Club will be able to deliver on margins while also investing in the business for further growth. It seems as though the new securitization program could be a big driver of additional revenue in quarters to come.

Disclosure: Peter Renton, the founder and CEO of Lend Academy, and Ryan Lichtenwald, the author of this article both own LC stock.

Filed Under: Peer to Peer Lending Tagged With: Earnings, Lending Club, marketplace lending, Q2 2017

Views: 928

PeerIQ Reports on Q2 2017 Marketplace Lending Securitizations

Nine securitizations took place in Q2 2017 totaling $3 billion with each deal rated by at least one agency.

July 10, 2017 By Ryan Lichtenwald 1 Comment

Views: 42

Every quarter PeerIQ releases a Marketplace Lending Securitization Tracker and every quarter there are new developments on the securitization front. Q2 2017 was no exception with nine securitizations taking place totaling $3 billion, a 76% growth over the second quarter of 2016. This is in line with Q1 2017 where issuance was the same, but there were only seven deals. Total issuance is now $21.9 billion across 92 deals.

Other highlights provided by PeerIQ include:

  • Multi-seller club deals and self-sponsored deals have emerged at several leading platforms.  All deals were rated in this quarter, including record-sized consumer deals from SoFi, large multi-seller deals from Marlette and Prosper, and the first self-sponsored, near-prime deals from Lending Club and Upstart.
  • Dealer and rating agency participation continues to intensify. Fitch rated its first Consumer MPL ever, Prosper’s PMIT 2017-1, indicating broadening acceptance across ratings agencies. Goldman Sachs, Morgan Stanley, and Deutsche Bank lead over 47% of MPL ABS transaction volume. Noteworthy is the rising presence of BNP Paribas, which co-managed CLUB 2017-NP1. DBRS leads the rating agency league table, and Kroll dominates the unsecured consumer sub-segment.
  • New issuance spreads continued to tighten and flatten—a credit friendly environment for securitization.  In Q2 2017, we saw spreads tighten in riskier tranches of consumer ABS, indicating strong investor appetite for MPL ABS paper in the market.
  • Delinquency rates have continued to increase across several verticals—such as subprime auto, student, and personal loans—due to exposure to riskier borrowers, a re-leveraging of consumer balance sheets, “loan stacking,” and shifting payment priority trends.
  • Initial pricing is near record tight levels. Lending Club’s inaugural deal priced at Libor + 110, second only to Marlette’s MFT 2017-1 (L+100) in execution on the Class A bond. Overall, spreads have tightened with greater investor acceptance in an overall “risk on” environment.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: marketplace lending, PeerIQ, ratings, securitization

Views: 42

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