{"id":6695,"date":"2018-03-03T14:37:32","date_gmt":"2018-03-03T19:37:32","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-digit\/submission\/lending-club-platform-success-but-p2p-failure\/"},"modified":"2018-03-03T14:42:27","modified_gmt":"2018-03-03T19:42:27","slug":"lending-club-platform-success-but-p2p-failure","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-digit\/submission\/lending-club-platform-success-but-p2p-failure\/","title":{"rendered":"Lending Club: Platform Success but P2P failure?"},"content":{"rendered":"<p>The service that the Lending Club platform provides is an incredibly compelling one that we can all get behind: let\u2019s all lend money to each other and keep the profits of those nasty big banks and credit card companies to ourselves.\u00a0 Who doesn\u2019t want that, right?<\/p>\n<p>In fact, at scale \u2013 the platform has the ability to drive significant value for all sides:<\/p>\n<ul>\n<li>In a short period of time and at a rate that is on average 24% lower than typically available commercially<a href=\"#_ftn1\" name=\"_ftnref1\">[1]<\/a>, <strong>loan recipients<\/strong> can refinance their credit card debt, take out loans for unbankable initiatives (either too small or too risky), etc.<\/li>\n<li>At the same time, <strong>investors<\/strong> can earn much higher returns than available in traditional marketplaces, and manage that risk through rich credit data and diversification.<a href=\"#_ftn2\" name=\"_ftnref2\">[2]<\/a><\/li>\n<li>As a broker, <strong>Lending Club<\/strong> takes on no loan risk and enjoys a nice cut for bringing these interested parties together<\/li>\n<\/ul>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-6693 size-large\" src=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1-1024x406.png\" alt=\"\" width=\"640\" height=\"254\" srcset=\"https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1-1024x406.png 1024w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1-300x119.png 300w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1-768x304.png 768w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1-600x238.png 600w, https:\/\/d3.harvard.edu\/platform-digit\/wp-content\/uploads\/sites\/2\/2018\/03\/Showing-how-the-lending-club-works-and-makes-money-1.png 1077w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p>There are clearly both direct and indirect network effects here.\u00a0 Recipients directly benefit from having more investors on the platform and vice versa and everyone benefits from more data leading to more confidence in executing transactions.\u00a0 For these reasons, the story is much harder to sell before scale \u2013 all this value is only created if:<\/p>\n<ul>\n<li><strong>Loan recipients<\/strong> can clear their loan quickly through a deep investor pool<\/li>\n<li><strong>Investors<\/strong> have enough data to identify good investments and there enough good investments to spread their risk around (a key component of the model is to be able to spread risk across individuals in $25 increments)<\/li>\n<li><strong>Lending Club<\/strong> doesn\u2019t have to take on significant balance sheet risk itself<\/li>\n<\/ul>\n<p>So how did founder Renaud Laplanche get Lending Club past these initial hurdles?<\/p>\n<p>He started with the borrower side of the platform \u2013 this choice makes sense as it\u2019s the easier sell. \u00a0For the borrowers, the service only adds benefit whereas investors take on benefits <u>and<\/u> risks by joining the lending club platform. Because the speed of execution desired by this group would not be ready on day 1 \u2013 he went to those who were desperate and had literally no other choice: college students.<\/p>\n<p>Laplanche launched the service in 2007 on Facebook \u00a0as one of the site\u2019s first applications (when the social media site was primarily geared towards college students).\u00a0 Because there was not yet any investors, he served those loans with $12m of funding raised from Angels.<a href=\"#_ftn3\" name=\"_ftnref3\">[3]<\/a> While this turned out to be an excellent marketing move and buzz generator more broadly, ultimately it turned out that college students weren\u2019t the best borrowers.<\/p>\n<p>However, that quickly became the least of their worries as SEC negotiations restricting outside investors for 6 months put a stop on building out that side of the platform and a massive strain on the balance sheet of Lending Club, almost toppling the entire effort.<a href=\"#_ftn4\" name=\"_ftnref4\">[4]<\/a> Eventually, the regulators sorted themselves out and the company continued to focus on the borrower side of the platform and building out the data and loan grading system necessary to bring in outside investors.<\/p>\n<p>Ultimately, the investors came and the platform continued to grow, but at a measured rate.\u00a0 The reason for this is that <strong>at the end of the day, while the platform can deliver a lot of value to the \u201cpeer\u201d investors \u2013 it also demands a lot from them<\/strong>. Even armed with the best data in the world, it still takes time, confidence, conviction, and patience to invest in these loans. Most everyday people, even if they have the money to lend, don\u2019t necessarily have the time to figure out how to do it well.<\/p>\n<p>For this platform to take off and reach dramatic scale, it really required a different kind of participant on the other side. In fact, Lending Club didn\u2019t start to have hockey stick growth that made it a household name until 2011 when a third party professional investor raised a fund solely to invest on the platform.<a href=\"#_ftn5\" name=\"_ftnref5\">[5]<\/a>\u00a0 Today, while there is still true \u201cpeer to peer\u201d lending that occurs, for the most part it is \u201cinstitution to individual\u201d lending happening. In fact, the now disgraced founder of the site has moved on to start another similar site that is exclusively focused on this institutional lending.<a href=\"#_ftn6\" name=\"_ftnref6\">[6]<\/a><\/p>\n<p>For me, this begs the question \u2013 <strong>is the peer to peer model I described at the outside of this post something that is truly achievable<\/strong>?\u00a0 Or is it simply too challenging to build scale off the backs of every day people lending money for fun?<\/p>\n<p>&nbsp;<\/p>\n<p>Resources:<\/p>\n<p><a href=\"#_ftnref1\" name=\"_ftn1\">[1]<\/a> <a href=\"https:\/\/www.lendingclub.com\/public\/how-peer-lending-works.action\">https:\/\/www.lendingclub.com\/public\/how-peer-lending-works.action<\/a><\/p>\n<p><a href=\"#_ftnref2\" name=\"_ftn2\">[2]<\/a> As an example, in the early days of the service newly issued five-year B-rated corporate debt was paying around 7.5%, with defaults averaging 3.4%. In comparison, creditors could earn 14.5% annually on five-year Lending Club notes, of which 4.9% have defaulted over the first three years. <a href=\"https:\/\/www.forbes.com\/forbes\/2010\/1220\/investing-lending-club-credit-cards-personal-loans-for-fun.html#34858732ea0f\">https:\/\/www.forbes.com\/forbes\/2010\/1220\/investing-lending-club-credit-cards-personal-loans-for-fun.html#34858732ea0f<\/a><\/p>\n<p><a href=\"#_ftnref3\" name=\"_ftn3\">[3]<\/a><a href=\"https:\/\/www.forbes.com\/forbes\/2010\/1220\/investing-lending-club-credit-cards-personal-loans-for-fun.html#34858732ea0f\">https:\/\/www.forbes.com\/forbes\/2010\/1220\/investing-lending-club-credit-cards-personal-loans-for-fun.html#34858732ea0f<\/a><\/p>\n<p><a href=\"#_ftnref4\" name=\"_ftn4\">[4]<\/a> <a href=\"http:\/\/www.nvp.com\/blog\/perseverance-pays-off-the-lending-club-story\/\">http:\/\/www.nvp.com\/blog\/perseverance-pays-off-the-lending-club-story\/<\/a><\/p>\n<p><a href=\"#_ftnref5\" name=\"_ftn5\">[5]<\/a> <a href=\"http:\/\/www.nvp.com\/blog\/perseverance-pays-off-the-lending-club-story\/\">http:\/\/www.nvp.com\/blog\/perseverance-pays-off-the-lending-club-story\/<\/a><\/p>\n<p><a href=\"#_ftnref6\" name=\"_ftn6\">[6]<\/a> <a href=\"https:\/\/techcrunch.com\/2017\/04\/06\/lending-club-founder-renaud-laplanche-is-back-with-a-new-startup-and-60-million-in-funding\/\">https:\/\/techcrunch.com\/2017\/04\/06\/lending-club-founder-renaud-laplanche-is-back-with-a-new-startup-and-60-million-in-funding\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Lending club founder was able to build a robust lending platform against significant headwinds, but it&#039;s unclear if the resulting product matches the initial vision of a &amp;quot;peer to peer&#039; marketplace.<\/p>\n","protected":false},"author":1938,"featured_media":6703,"comment_status":"open","ping_status":"closed","template":"","categories":[753,1885,146,1264,2013,755,555],"class_list":["post-6695","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-crowdlending","category-digital-platform","category-fintech","category-lending","category-lending-club","category-peer-to-peer","category-peer-to-peer-lending-networks-fintech","hck-taxonomy-organization-lending-club","hck-taxonomy-industry-financial-services","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/growing-businesses-in-the-age-of-platforms-2018\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Lending Club: Platform Success but P2P failure? 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