CEO reveals plans for LendingClub’s unique Fintech + Bank model
“We made unsecured loans so easy that people didn’t have to download a mobile app – just name, address, date of birth, boom.” Scott Sanborn talks about the online lending experience that made LendingClub into an unsecured lending phenomenon.
Now, deep in the implementation of its acquisition of Radius Bank, LendingClub is no longer an app-less fintech.
“We now have a mobile app where people will engage with us, ideally, several times a week,” says Sanborn. “This will generate additional data and provide us with a new platform to communicate with our customers. While this capacity is significant, it is small potatoes compared to the potential for marketing insured deposit accounts to much of LendingClub’s 3.5 million member base.
This prospect should inspire many competitors to stand up and take notice. Not only traditional banks and credit unions, but even successful neobanks like Chime and Varo which until now only offer limited or no loan products beyond payday or cash advances.
What this means:
LendingClub wants to adapt and improve its in-depth customer database and sleek decision-making platform to turn its 3.5 million members into top checking account customers.
For competitors, the good news is that the combined company is not yet fully incorporated. But building a new hybrid marketplace-banking model is what LendingClub is working on now after restarting its lending engine as the U.S. economy recovered in the first half of 2021.
The company’s second quarter numbers confirm that the engine is running at full speed again after leadership put the brakes on lending in 2020. According to Sanborn, the company’s first full quarter as a digital bank has been the most profitable. of its history. Highlights of the second trimester include:
- Marketplace revenue increased 86% sequentially, reflecting 105% growth in origination fees and a 132% increase in earnings on loan sales.
- Overall, the consumer loan portfolio grew 145% to $ 795 million.
- Net interest income increased 148% sequentially to $ 45.9 million (excluding PPP loans).
- Deposits reached $ 2.5 billion.
In a podcast conversation with Jim Marous, co-editor of The financial brand and CEO of the Digital Banking ReportSanborn discusses in detail the reasons for the acquisition of Radius and the company’s short- and long-term plans to capitalize on the deal, which became final in February 2021. Marous also polled Sanborn for information on the importance of scale and LendingClub’s potential for expansion of its product platform.
Three big pluses for a FinTech with a bank
For LendingClub, the pursuit of a bank acquisition was driven in large part by financial reasons. But the decision also had structural and strategic elements.
Since its inception in 2006 as a peer-to-peer lender, LendingClub has grown significantly to the point where it is, in Sanborn’s words, “the largest provider of unsecured personal loans in the country”. Without a bank balance sheet, however, the cost of operating on such a scale – which involved withholding banks to make loans on behalf of LendingClub as well as paying warehouse lines to allow them to pool loans – was raised. The cost of those two factors alone was around $ 60 million, Sanborn reveals.
As a bank issuing its own loans and using deposits instead of warehouse lines, LendingClub sees a 90% reduction in its cost of funds.
There is also an income component, adds Sanborn. Whereas previously LendingClub sold all loans to banks, investors and other players, as a bank it will now keep 15-25% of loans on its balance sheet, adding net interest income as a new stream. of income.
“The income we add for the loans we hold is three times that of the loans we sell” States of Sanborn.
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Why regulation means more freedom
Structurally, the bank’s acquisition means that LendingClub no longer depends on third parties to enable them to issue loans, nor are they vulnerable to a political change in Washington in which the partner banking / fintech model is doomed.
You would think that as a fintech, LendingClub would not be limited in its ability to innovate. But Sanborn explains why this is not the case:
“When you are not a directly regulated institution, each innovation must be approved by your partner banks because it is their regulatory risk. And then you have to convince your investors. The company’s new hybrid marketplace-bank model, as Sanborn calls it, allows them to have a direct conversation with regulators about any new innovation.
Strategically, and most importantly, says Sanborn, the acquisition of Radius Bank “gives us the opportunity to do more for our customers.”
“We had been successful in acquiring clients on a large scale,” says the CEO of his unsecured loans. Most of the company’s 3.5 million customers are happy with LendingClub, he says. “They want to do more with us, and having a banking charter allows us to do more for our customers. “
About half of LendingClub’s clients come back to them for an additional loan within five years.
Building the relationship
During the podcast, Jim Marous asked Sanborn about the cross-selling possibilities of this fintech-banking combination. Sanborn said he is still in the early stages of exploiting the possibilities, so what he describes is more “where we are going than where we are today”.
Their first task is to adapt their lending technology platform, which enables them to provide transparent, simple, and efficient decision-making and personalization to several new product categories that a bank is opening up.
Beyond that, Sanborn describes a possible message line they can use with their past customers: “Hey, we saved you some money on your credit card bills, why not put some of it in. on a savings account? Why don’t we reward your good spending behavior to help you stay out of debt, instead of rewarding you for getting into debt with your credit card? “
What Sanborn envisions plays right into the basic Radius checking account, which he describes as a rewards checking account that gives you cash back for using your debit card.
To bring this new model of market banking to life, says Sanborn, “we’ll have to find out what trade-in value people are looking for to move their main checking account.” In other words, how to get those 3.5 million ready customers to open a checking account with LendingClub. “It’s about moving from a single product transaction to a relationship,” says the CEO, “as we start to think about the customer beyond,“ Do you want another personal loan? “”
Ultimately, if LendingClub is successful, it will have a big advantage over other neobanks, Sanborn believes.
“If you compare us to some of the other competing banks, we come into the market from where the profit is made, which is the loan. Adding checks and savings to this mix creates a much deeper engagement platform from which to grow.