Insights|Why LendingClub Is About to Take FinTech Lending Into the Mainstream

Why LendingClub Is About to Take FinTech Lending Into the Mainstream

The peer-to-peer (P2P) lending business model is about to take a major step into the U.S. financial mainstream. So why do concerns still exist about how fit these FinTech firms are for the future?

    Share on
P2P lending
by Sitel staff March 10, 2020 - 6 MIN READ

The peer-to-peer (P2P) lending business model is about to take a major step into the U.S. financial mainstream. So why do concerns still exist about how fit these FinTech firms are for the future?

Is LendingClub’s proposed acquisition of online-only Radius Bank the shape of financial things to come? One is the country’s leading FinTech marketplace lender and the other is a digital bank that has mastered the art of collecting customer deposits despite not having a single physical branch.

Together they will be able to substantially cut the cost of borrowing to provide loans, offer a host of new products and services to an increased and increasingly diverse customer base and crucially, will meet all criteria needed to qualify as a chartered bank; something which until now has been out of reach of the overwhelming majority of FinTechs.

P2P lending in the U.S. has enjoyed a 32.5% annual growth rate over the past five years. And their popularity continues to surge. LendingClub itself started life as a Facebook app in 2007, but at the end of 2019 it announced it had facilitated $16 billion in loans for the year and had over 3 million customers – making it the biggest company in the FinTech marketplace lending space.

P2P lending – a platform for growth

It’s estimated that P2P lenders currently supply 38% of all unsecured personal lending in the U.S. When one considers their business model, which emphasizes revenues with ease of use, it’s clear to see why they’re experiencing growth. 

Like Airbnb, Lyft or Instacart, the leading FinTech lenders are built on a platform connecting two parties – the borrower and lender. The FinTech is the facilitator, removing friction and accelerating the process. This faster service is due to algorithms, APIs, AI and big data crunching capabilities powering their creditworthiness scoring. They can analyze more data points and risk factors than a traditional lender can – banks use the FICO scoring system – and do it faster. It also means they have a larger potential market – their scoring approach is more inclusive extending the possibility of a loan to consumers who might have been declined by a traditional establishment.

Speed to market for P2P business lending

A 2018 Federal Reserve Bank of New York study authored by Andreas Fuster found that thanks to their hi-tech competitive edge, P2P lenders are 15-30% faster at processing and validating a mortgage application than a traditional lender. As any business in any industry should know by heart, convenience is a cornerstone of modern customer experience (CX).

A new channel for customers

Traditionally banks have been consumers’ only avenue for business or working capital loans; but incumbent lenders’ understanding of different industries or business trends isn’t keeping pace with the reality of being in business. For example, different banks specialize in different verticals – such as retail or hospitality – and tend to focus on businesses of a certain size or existing market capitalization. Their risk modeling tools are too rigid to flex further.

We also have to take a macro view. FinTech is everywhere, but the countries where the impact is greatest – the U.S. and the U.K. – have economies where the average adult income is high and where competition between established lenders is at its lowest.

The perfect P2P lending conditions

Now take into account the fact interest rates are constantly falling and the stock market is volatile. Investors are looking for new ways to make a return that delivers more than a savings account but without the risks inherent in the Dow Jones.

Our economy has created the perfect breeding ground for these types of businesses as they exist today. Yet, even with year-over-year growth, questions still remain around the P2P lending business model and whether it can continue to meet customer expectations in the future.

Is it a model for success?

One reason is that detractors view them as data companies first and financial institutions second. Therefore, when traditional lenders have finally succeeded in transforming their own businesses so their systems are connected and the silos eliminated, P2P lenders will lose their advantage.

However, this is only true if P2P lenders stand still. But the diversity we’re already seeing in the market shows this will not be the case.

Another, more well-founded criticism is that P2P lenders could end up taking on too much risk resulting in a high percentage of defaulted loans and too many angry investors. Don’t forget the first thing that happens as a country approaches a recession is the rate of loan repayment delinquency rapidly increases. Since 2014, 17 major P2P lenders around the world have gone out of business because of a poor approach to risk management or because regulatory changes have meant they’re no longer fit to continue doing business.

But again, these failures have served as a warning to the leading players, all of whom have taken the lessons learned and applied them to their own business – whether through spreading risk, diversifying portfolios or building stronger partnerships with banks. 

The proposed acquisition of Radius Bank should be viewed in this light. LendingClub was already building investment portfolios with a spread of prime and subprime loans that were aimed at institutional investors and hedge funds. But even taking this approach, much of its lending capital was raised through warehouse credit lines. By becoming a bank it would have a balance sheet and will be able to use the deposits and investments flowing into Radius Bank to offset its own borrowing costs. This will make a huge difference to its bottom line.

A real risk for FinTechs and beyond

There is still no clear regulatory path for FinTechs to follow if they want to be recognized as banks. To date, the only digital startup entity to manage to tick every box has been Varo Money. After a two-year uphill struggle, it is in the final stages of being approved for federal deposit insurance, meaning it will be able to operate as a bank. 

However, if LendingClub’s proposed acquisition is greenlit, it could open the floodgates for a number of similar deals. This in turn could panic the establishment into being overly competitive. If this happens there is a genuine risk of a lowering of creditworthiness standards across the industry simply to attract more customers. 

This, in turn, could create a bubble that bursts and a potential run on these platforms with investors demanding their money back. And, as we saw in 2008 with consumer attitudes towards banks, this could destroy the trust P2P businesses have built up.

Yet, this potential scenario would hit the entire industry, not only FinTechs.

As the economy currently stands, P2P leaders are in a prime position to meet many customers’ financial needs. And, because they understand data, plus the fact that long-term investment in innovation is their USP, as long as they remain agile and customer focused, they are the organizations best placed to continue moving and diversifying in line with changing customer trends.

How will they keep the customer connection?

In my opinion, there are several caveats. Sustained success will be decided on how well FinTechs communicate potential risks to borrowers and investors; how well they remove unnecessary complexity from their business models; how well they mitigate and spread risk as their products and services diversify; and, increasingly, how well they handle cybersecurity.

With all of this in mind it will be fascinating to see how Radius Bank and LendingClub combine their offerings and expand the customer experience around them.

Everyone’s a winner with the P2P lending business model

The country as a whole is already benefiting from the greater financial inclusion that P2P lenders deliver. People who would have traditionally been unable to access credit are now in control of their lives. As the larger companies are diversifying or targeting traditional banking segments, new specialized platforms have arrived on the market specifically targeting micro businesses and the self-employed. This again has created a greater number of opportunities for a greater number of people to build their own companies and in doing so stimulate our economy.

These new paths to finance are diversifying the credit market and if the pattern continues, it will spread the country’s financial risks even further, strengthening the economy and minimizing the possibility of another domino-effect-style credit crunch or recession.

So as long as they keep their eyes on their customers, rather than their competitors, and as long as they keep on top of their data and within the confines of regulation and governance, the P2P lending business model will continue being a platform for growth and one that could potentially benefit everyone. 

Recent posts

Outsourcing and the Future of Customer Experience Delivery

A new Sitel Group® whitepaper puts forward a bold new blueprint for the future of customer experience (CX) delivery and…

Read on

How to Increase Self-Service Success Rates

How can companies achieve self-service success? The answer lies in usability: a good user experience, powered by effective content, designed…

Read on

Why Successful Technology Companies Focus on Customer Effort

Monitoring and lowering the customer effort score is crucial to delivering the type of customer experience that leads to loyalty.

Read on

Connecting Your Brand Promise to Customer Experience

What is a brand promise, how do you write one and why is a pledge that an organization makes about…

Read on