San Francisco, CA, United States (4E) – In the olden days, getting a loan meant dressing up, putting together proof through documentation and then going to the bank to ask for a loan. Nowadays, with the growth of the Internet of everything, borrowers and investors are given the opportunity to meet and decide as to transacting or not.
The leading company in the online peer to peer lending industry had recently announced plans it would go public. The company is Lending Club and is the first entity to do an IPO and is the litmus test on the popularity and durability of the industry’s business model.
Online services have especially become popular for the IPO market, with Twitter and Uber drawing special considerations when it was listed publicly. Lending Club has carved out a very special niche, which is lending and has drawn interest from Wall Street investors and Silicon Valley tech heads.
The Lending Club operates as a peer to peer lender, allowing an individual with funds to loan out extra cash in a similar fashion as a bank does. The Club then helps to monitor payments for a service fee. The interest rates are at a robust 10% for its lenders, compared to 9% interest for borrowers. The earnings come from smart algorithms as well as online only business model avoids much of the costs associated with lending.
Now, it has filed an IPO amounting to USD500 million. The lead underwriters for the transaction are industry heavyweights Morgan Stanley, Citigroup and Goldman Sachs. In documents filed with the SEC, in 2013 alone, it had earned USD86 million in sales while turning a USD7 million profit. In 2012, it had USD30 million in sales and USD7 million in losses. Overall, it had already transacted more than USD2 billion in loans.
According to Lending Club CEO Renaud Laplanche, the secret to their success was shared during an interview, where he said, “We operate at 400 to 500 basis points lower than the banks, and have customer satisfaction rates that are multiple times greater than the banks. If you look at the history of tech-driven innovations, there aren’t a lot of examples where the incumbents could compete with the innovator—look at Amazon vs. Borders or Netflix vs. Blockbuster. J.P. Morgan Chase would have to close down 8,000 branches to get down to our costs and even that wouldn’t be sufficient. And it’s not just branches but technology processes and automation… The types of folks who work on our Web applications come from Facebook, Google , PayPal, Amazon-they don’t come from banks.”
The Lending Club does not loan out its own capital, as it only pegs fees on the loans that have come from its platform for both individuals and investors on the site. The higher the volume of loans through the Lending Club platform, the more money the peer to peer lender is able to facilitate and peg fees on. The fees are between 1% and 6% of the loan amount. Investors are also charged a 1% minimum management fee as well as have a service fee of 1% on transacted payments.