I have been both a borrower and an investor on LendingClub.com and quite fascinated with its website and services. There are many companies that are trying to emulate LC’s original business model. However, what LC does today, for the most part is actually quite different from what it started out to do.
The original idea was to offer a Peer-to-Peer platform for crowd‐funding small unsecured installment loans for any purpose (medical expenses, big purchases, a wedding, vacation, home improvement etc.) at relatively low rates and earn a small fee for doing so. While this is still a functionality of the website, it is far over‐shadowed by the utility that LC now offers of replacing Credit Cards as a ‘credit instrument’:
- LC funded $6.4 Billion unsecured personal loans in 2015. 87% or $5.6 Billion of this was for Credit Card refinancing and Debt Consolidation
- LC recently disclosed that it has been using ‘Credit Card Revolving Balance’ as a key driver for its acquisition marketing and estimates that there is a $465 Billion market out there for its services
Unless there is a big shift in US consumer behavior, ‘Credit Card Revolving Balances’ are not going to go away any time soon and neither is Lending Club’s market opportunity. Consumers use charge cards to make purchases in Japan and Scandinavia too, but unlike the US, this is generally not used as a credit mechanism ‐ it is promptly paid off in full within 30-45 days.
What is unique about LC’s business model is that it has built a simple, user friendly online convenience that offers cash wired to one’s bank account within 48 hours of completion of the application process, which generally takes minutes. A couple of key criteria to be eligible include – having good credit and relatively high cost Credit Card revolving balances. Moreover, this financing is significantly cheaper than carrying a revolving balance on one’s credit card. This is more so for relatively lower FICO but above prime borrowers. LC also states in its direct mail marketing communications, that borrowers on its platform reduce their interest rates by an average of 32% and improve their FICO scores by an average of 20 points. Interestingly, no such benefits are associated with personal loans taken for purposes other than debt consolidation which also tend to have higher defaults.
The fundamental question is, if one could pay for a big ticket purchase through a swipe on one’s credit card, get cash‐back bonus or reward points and have 30 odd days to explore options (including a balance transfer) to finance the purchase, why would one go to an online/market place lender, and wait for 48 hours or more and pay an origination fee for doing so? This would probably only happen if one did not have good credit, or adequate credit limit for the purchase, which is the other business model – that sub-prime lenders and companies like AVANT, with highly sophisticated credit models operate in. On the other extreme is SoFi that offers high dollar value consumer loans targeted at high net worth individuals at variable rates linked to LIBOR.
To sum up, it may be worth noting that marketplace lending related to Consumer Loans can be broken down into the following mutually exclusive categories:
- Refinancing revolving balance on credit cards
- Extending credit to consumers who do not have adequate or cannot extend credit card limits
- Extending credit to consumers who do not have credit cards or poor credit
As of now, Category A seems to be dominating this new industry i.e. ‘consumer loans’ marketplace lending is essentially refinancing high cost credit card revolving debt; which may have originally been taken for big purchases, medical expenses, a wedding, vacation, home improvement among other purposes.
Disclaimer: The views and opinions expressed in this article are solely those of the author. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information.
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