LendingClub (NYSE:LC) is the leading online consumer lender in the US and the first big Fintech lender to go public on the NYSE. Over $50 billion in lending has been originated on the platform that claims more than 3 million customers.
The last few years have been tough for the Fintech due to multiple reasons. The COVID-19 pandemic then hammered the platform, just as it did to all other online lenders. Yet in the most recent earnings call earlier this month, LendingClub CEO Scott Sanborn expressed his ongoing optimism and determination to see his company succeed in a tough environment and thrive once the c0untry has turned the corner on the health crisis.
LendingClub said that while lending was down, loan investor demand was showing early signs of recovery. Sanborn said that LendingClub has remained focused on the things they can control and are successfully executing against their strategic priorities.
A key strategic move in LendingClub’s future is the acquisition of Radius Bank – an event that will enable the company to transition from a top online lender to a full-stack digital bank or “marketplace bank.”
Crowdfund Insider recently asked Sanborn for additional insight into how LendingClub is performing during COVID, what he anticipates further on down the road, and his opinion on the overall Fintech ecosystem. Our discussion is below.
LendingClub announced during its last earnings call that loan originations had declined dramatically due to the pandemic. How did LendingClub adapt to the rapidly shifting environment?
Scott Sanborn: Lending Club has been preparing for an adverse environment for the past several years by lowering our expense base, shifting to a more flexible cost structure, developing self-service options for borrowers and implementing a new loan servicing system to enhance our capabilities. So, we felt we were in a good position when COVID hit, and then moved quickly to:
- Ensure the safety of employees by moving everyone to work from home
- Support our members by expanding our servicing capacity, broadening our communication channels and self-service payment options, and deploying new hardship plans tailored for the current situation
- Protect investor returns by raising prices, tightening underwriting and focusing new originations on higher quality credit to existing members with a demonstrated successful payment history.
- Preserve our liquidity by reducing our costs to the tune of more than $70mm in Q2
We have also continued to work toward completing the acquisition of Radius Bank and believe that the acquisition will improve our profitability while enabling us to better serve our members.
We feel good about how we have positioned the company to ride this out and have seen the early signs of green shoots as we enter Q3 with recent sales of multiple loan portfolios at or above their carrying value and five of our Top 10 investors now back on the platform purchasing new issuance, albeit modest levels.
Taking a step back, we believe that the current environment is allowing us to demonstrate the resilience of personal loans through a steep recession. We have leveraged data on more than 3 million LendingClub members to continually improve our digital underwriting and servicing capabilities. With a gradual resumption of investor activity and our restructuring and associated costs behind us, we are appropriately sized to preserve our cash while maintaining the capacity to rebound when it appears prudent to do so. We believe we have positioned ourselves to effectively navigate an extended period of uncertainty.
Once the acquisition of Radius Bank is complete, we will become a leading digital bank with a strong balance sheet and a proven record of effective underwriting through a steep downturn.
Recently, LendingClub said it is experiencing a “thaw” in loan activity and “platform resilience.” Can you elaborate on what your metrics are indicating?
Scott Sanborn: When COVID first hit, we anticipated that investors would freeze up as they took stock of their own financial health and dealt with market volatility. We proactively pulled back on personal loan originations to give them time to assess the issues they faced as the economy worsened. We also took measures to increase loan pricing and tighten loan underwriting on post-COVID vintages to reflect the weaker economic backdrop.
Now that we are off of the peak in unemployment and have seen the strong performance of LendingClub borrowers, investor confidence is starting to build. Investors are seeing that even through such a steep recession, members have prioritized payments to us, with payment deferral requests decreasing significantly and borrowers largely resuming full payment. As investors continue to evaluate the performance of post-COVID vintages, we believe that they will be drawn to the attractive yields and returns these loans should generate.
Given how unique the current environment is, we’ll be watching performance closely in the next several months. To learn more, read this recent update to our investors.
LendingClub rapidly moved to adapt operations to the Coronavirus reality. Which changes do you anticipate will remain once the virus has moved on?
Scott Sanborn: I think it was President Obama’s chief of staff, Rahm Emmanuel who said “never let a good crisis go to waste” back in 2008. We are using the current downturn to increase testing of new marketing and underwriting approaches which will become a cornerstone of our strategy as we emerge from this recession. We have also accelerated many initiatives that were on our product roadmap to support our members during this time. We anticipate that some of the changes we’ve made to improve our digital underwriting and servicing capabilities will continue post-COVID.
Additionally, to keep our employees safe, we proactively activated our crisis management plan and implemented a work-from-home program in early March. All our employees have successfully made the transition and have been working productively since then. We also extended crisis pay to all hourly employees, so they would not have to choose between working or taking time off to care for themselves or a sick family member.
As COVID-19 continues to spread, our ability to support our employees working virtually and to alleviate as much of their stress as we can means that they are better able to support our customers who need us now more than ever. We have extended work from home through at least the end of this year and take the lead from local officials on when it’s safe to return. However, let’s be honest, when we do go back it definitely won’t be the same office environment that we were accustomed to pre-COVID.
In general, Fintechs are seen as more agile in their ability to rapidly change. What are your thoughts on traditional finance and how incumbent platforms are managing the COVID-19 pandemic?
Scott Sanborn: Traditional finance companies like banks initially faced some hurdles but were eventually able to get back on track. For example, many traditional banks were overwhelmed by the inflow of PPP loan requests and could not handle those volumes effectively. Those with stronger digital and Fintech capabilities were able to manage through that much more efficiently.
Providing personalized financial solutions, and rapidly adapting to changing market conditions is not in a traditional finance company’s DNA. Traditional financial institutions today function more like warehouses for your money. The relationship is predominantly transactional with many profiting off of high-interest loans and high fees leaving many Americans unable to build wealth or stabilize their household balance sheets.
Traditional financial institutions like banks are also encumbered by the high fixed costs of operating bank branches and also have older, less efficient technology platforms. They have to charge more in interest and fees to cover their high level of fixed costs.
As a fully digital, technology-enabled company, LendingClub does not have those issues and is focused on using its platform to help members rebuild their finances.
Taking a step back, the problem is that it’s hard for traditional finance companies to be the hero when they’ve helped contribute to the overwhelming debt load that American households carry on a daily basis. Pre-COVID-19, more than half of Americans were considered financially unhealthy and consumer debt levels across mortgages, auto loans, credit cards, and student loans were at all-time highs – almost at $14 trillion. Many Americans spend over half their income servicing the debt they carry and that’s on top of grappling with higher costs of living, rising cost of health care, and income reductions caused by this pandemic. All of this has contributed to the inability of Americans to save and achieve traditional financial milestones.
We believe that financial services need to be reimagined in a way that is free from legacy systems and practices, one where the success of the institution aligns with the success of the customer. With our acquisition of Radius Bank, we plan to be at the forefront of that re-imagining, with a brand that champions members’ financial success with fairness, simplicity, and heart. We will enable consumers to both pay less when borrowing and earn more when saving, helping them make better decisions to manage their cash flow and give them seamless access to fair and transparent credit.
Many people believe that the Coronavirus has accelerated digital transformation across all industries. In general, how will this impact the Fintech sector?
Scott Sanborn: Although Fintech companies don’t have legacy infrastructure costs and physical branches, this is the first recession they have faced. Weaker Fintech companies, who are unable to demonstrate the effectiveness of their business models through a downturn, will fail. For example, one of the concerns people had about LendingClub was whether our ability to price and underwrite loans would withstand a recession. Well, we are now seeing that our personal loans have held up relatively well through this very steep recession. Several other Fintech companies, on the other hand, have had to sell themselves or are seeking buyers as their business models have failed. I anticipate that we’ll see more partnerships between traditional banks and Fintechs as they will both recognize what they have to learn and gain from each other.
The Coronavirus will only accelerate what the successful Fintechs are able to do. Many companies like LendingClub are digitally native. We don’t have physical branches and legacy infrastructure so we’re able to quickly adapt to changing market conditions. We’ll continue to meet the needs of consumers where they are today.
With Radius, we will have a re-imagined bank with the power to truly champion improvement in the health of consumers. The bank of the future breaks down the complexity and customer inertia in banking today and offers a seamless way to optimize the way consumers spend, save, and invest. That is what we’re working towards at LendingClub.
And what about LendingClub’s acquisition of Radius and your “marketplace bank?” Do you anticipate that LendingClub will be even more fortified against exogenous shocks like COVID once you start providing banking services?
Scott Sanborn: Yes. We continue to believe that the economics of the Radius acquisition are compelling and expect a cash payback on the transaction within two years.
On top of that, there are very clear strategic benefits including access to stable, low-cost funding and the ability to deepen our relationships with our customers through additional products and services. The combined entity will form a digitally native marketplace bank at scale with the power to deliver an integrated customer experience. Once the acquisition of Radius is complete, we will become a leading digital bank with a demonstrated track record of effective underwriting through a steep downturn and have a clean balance sheet to assist in our recovery.
By expanding member relationships beyond personal loans and extending access to credit, we will generate higher revenues per member for LendingClub with lower customer acquisition costs. This new entity will enhance LendingClub’s ability to serve its members, grow its market opportunity, increase and diversify earnings, and provide resilience and regulatory clarity.
This acquisition will really be a springboard for us to usher in a new era of banking, one where LendingClub’s full potential is realized.
Recently, the Comptroller of the Currency went out of his way to clarify the Madden v. Midland case. Thoughts on this?
Scott Sanborn: The actions of the OCC and the FDIC to reassert the Valid-When-Made Doctrine has powerful ramifications for the American consumer. Our marketplace shows that the more investors can feel confident in the validity of the loans purchased from banks, the more the price of credit can be reduced for consumers.
Thankfully, with the Madden court case rectified, this consumer benefit can extend throughout the financial system, regardless of whether a bank sells a loan, a Fintech sells a loan, or if a loan is securitized.
What about the OCC’s announcement of an “advance notice of proposed rulemaking” regarding digital banking activities? Do you anticipate a regulatory environment that is more willing to support Fintech innovation?
Scott Sanborn: The trend at the federal level for a few years now has been to embrace tech-enabled lending in order to promote access to responsible credit. That trend started way back when the OCC first proposed its charter for Fintechs. It continues today with regulatory issuances that demonstrate an understanding that Fintech innovation helps the traditional banking system make loans cheaper, more efficiently, and to more people.
This interview is part of an ongoing series looking at the evolution of the Fintech industry with particular reference to the changing landscape in light of Covid-19.
The series has been initiated in support of The Global Covid-19 Fintech Rapid Assessment Survey being carried out by the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School, in partnership with the World Bank and the World Economic Forum. The empirical data collected will be used to understand the pandemic’s impact on the FinTech markets, how the global Fintech industry has responded and some of the immediate regulatory and policy implications. Crowdfund Insider is proud to be a research partner for the survey.