​Is Lending Club a Cautionary Tale for Fintech Startups?

Henry Truc  |

The deteriorating situation over at LendingClub (LC), the largest marketplace lending platform in the US, has left the company reeling in recent weeks. As a result, major questions are now being raised about the company’s business practices, credibility and even the long-term viability of the online lending model. Even worse, Lending Club’s drastic fall from grace could potentially create a stumbling block for the rest of the Fintech industry, which, up to this point, had been enjoying considerable momentum challenging traditional financial institutions.

What Happened at LendingClub?

To start, let’s recap LendingClub’s rough month: first, CEO Renaud Laplanche resigned after the company knowingly sold $22 million in loans that failed to meet the investor’s criteria. The announcement came as part of the company’s latest earnings report. Shares fell by half in the ensuing days. Shortly after, the lending platform said it received subpoenas from The New York Department of Financial Services and the Department of Justice regarding the interest rates it charges borrowers. LendingClub has also been contacted by the Securities and Exchange Commission.

Even further, it was revealed that Laplanche had been buying up LendingClub loans through a third-party firm in which LendingClub had invested in—none of which was disclosed properly, if at all--raising major concerns over the lack of transparency on potentially shady dealings. The fact that LendingClub was in essence taking on credit risk contrasts starkly with what the company was telling investors: that LendingClub operated solely as a marketplace for investors and borrowers seeking better alternative sources than what the traditional financial industry had to offer.

But the platform had been increasingly relying on that same traditional financial industry. In order to be able to continue to grow its business and fund more borrowers, LendingClub began securitizing its loans to sell to large financial institutions, moving further away from its original concept of peer-to-peer lending. When the demand from large institutions began to waver, it increased the pressure on LendingClub to find other sources of capital.

For LendingClub, which had already seen its market cut in half since peaking immediately after its IPO in December 2014, the avalanche of negative news invoked flashbacks in the public to the same questionable practices and faulty decision-making that led to the subprime lending crisis and the Great Recession.

A Fallen Champion of the Fintech Movement

Once the gold standard of sorts for the wave of innovative financial technology companies encroaching onto Wall Street’s territory, LendingClub’s problems are threatening to reflect a negative light onto the promising industry. According to KPMG and CBInsights, global investment in fintech companies reached a record $19.1 billion in 2015, representing a 106% increase from 2014. Of that, $13.8 billion came from venture-backed deals. The pace hasn’t slowed in 2016 either, with Fintech companies raising another $4.9 billion in the first quarter of this year.

Granted, not all Fintech companies are in the marketplace lending space. There is a vast diversity of categories within the space, from online lending, to digital payments, to blockchain, to investment research and data, and even the newly instituted equity crowdfunding. All of which are leveraging new technologies and business models to alter the financial and economic landscape of the future.

But none of that can happen if the industry attracts a crisis of confidence, which is a threat the LendingClub debacle presents. Granted, LendingClub’s issues are not systemic, nor are they necessarily indicative of the wider marketplace lending industry, let alone the rest of the Fintech space. And despite the steep drop in its stock price and uncertainty surrounding the company's growth prospects, LendingClub itself remains a profitable company.

But confidence, especially that of the consumer, is very fickle and if poorly managed, can spread like a pandemic virus. Arguably, the biggest advantage that Fintech companies have had against their legacy competitors is the goodwill born out of the deep mistrust people had for Wall Street coming out of the financial crisis.

For that reason, Fintech companies need to emphasize transparency and best practices now more than ever before, and show a commitment to putting the interests of its consumers above all else, even—dare I say–its stakeholders.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Symbol Name Price Change % Volume
LC LendingClub Corporation 3.60 0.19 5.57 2,068,366 Trade


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