Why it pays to become a bank for LendingClub


Loan Club acquisition of Banque Radius – a $ 185 million transaction that closed in February – ensures a sustainable revenue model and positions the company to deliver personalized products to its $ 3 million customer base, CEO Scott Sanborn told Banking Dive .

Becoming a bank reduces “value leaving the building” by eliminating the need to share income with partner institutions and reducing the cost of funds, he said. It also opens up new sources of income, including interest income.

LendingClub saw 93% sequential revenue growth in the second quarter, according to a July Results Report, in part thanks to the cost savings it achieved by bringing Radius Bank together under its umbrella.

“We were in partnership [with banks], and these banks, in 2019, made about $ 30 million from our business, ”Sanborn said. “Work with [capital] suppliers, we had to pool the loans. We had warehouse lines, and we paid the Fed Funds [rate] plus 330 basis points on a billion dollars.

Using deposits to pool loans – the cost of deposits for Radius Bank, when it was acquired, was around 28 basis points – reduced LendingClub’s cost for this business by 90%, Sanborn said. LendingClub was also able to reduce compliance costs, because despite working with a partner, the company built a significant infrastructure to support the approximately $ 1 billion loan volume it generated each month. On top of that, becoming a bank means adding interest income as an income stream. The bank plans to hold 15 to 25 percent of the loans on its balance sheet, Sanborn said.

“We are basically cutting expenses and having income to do the same activity,” he said. “What is powerful about it is that it is independent of the loan arrangements.”

By becoming a bank with its own balance sheet, LendingClub benefits from regulatory clarity around its operations, given the recent challenges of the third-party partner model. This is important because it gives lenders – in the case of LendingClub, institutional investors like banks, hedge funds and asset managers – a vote of confidence.

“It puts us in control of our own destiny,” he said. “The partner bank model has faced multiple challenges at both state and federal levels. Nobody asks questions [the concept of] when a national bank grants a loan, that loan is valid.

“Not well served”

LendingClub Bank’s long-term vision differs from brands, like Current, Chime or Varo, which cater to a disillusioned or underserved younger clientele, Sanborn said. Rather, LendingClub aims to focus on what it calls the “not well served” – customers who are typically banked, a little older than those in other neobanks, and who have accumulated assets.

About half of LendingClub’s clients return in five years to take out a second loan. At this point, the company aims to expand additional offerings tailored to their situation, Sanborn said.

“The affinity is very strong, and they, for the most part, come right back to us,” Sanborn said. “But imagine, when we add a banking platform that we can not only help them with their loans, we can help them with their expenses and their savings, and we would have a much richer engagement platform that generates revenue. data to help us subscribe [and] help us create value for them.

The company said it intends to use customer data to personalize interactions and product offerings.

“About half of these customers give us access to their checking accounts,” Sanborn said. “We effectively monitor, with the permission and support of our customers, their income and expenses and provide tailor-made offers to help them save money. “

Using what it knows of customers’ transaction patterns, the bank could proactively suggest new products and measures that could help them save more effectively, including aligning bill payment days with direct deposit deadlines. , said Sanborn. As the company expands its product line, new priority product areas include auto loan refinancing and point-of-sale financing. (The company acquired Springstone purchase finance company in 2014.)

‘Double-edged sword’

John Popeo, partner at banking consultancy The Gallatin Group, acknowledged that becoming a bank benefits LendingClub from a regulatory compliance perspective.

“Being able to create the loan rather than relying on a partner bank is beneficial to them,” he said. and regulation, is also beneficial, rather than having to comply with different state laws and regulations.

And while fintechs that become banks can engage with regulators as they evolve their products, there is an additional burden of responsibility, he said.

“It’s a double-edged sword,” Popeo said. “You now have the option of directly engaging review staff, but you need to be careful what you do so that you engage in permitted activities that banks are permitted to perform, rather than you. engage in a wider range of business activities that are not banking activities.

Completing the transition from a single product offering to a broader financial platform will be a major focus for LendingClub, Sanborn said.

“The focus is on quickly executing the transition from a single-product business to a multi-product business,” he said. “What keeps me awake at night is, are we doing all the right things, in the right order around organizational design and tool investment, and do our business processes follow this? big, big change? I think we have a huge opportunity ahead of us. “

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