Do you worry we’ll see Lending Club repeats in the industry?What happened at Lending Club could have happened at any company. I don’t have any inside information, but that sort of thing could’ve happened at a bank, an insurance company. The problem started with bad incentives, so we’re not necessarily going to see it elsewhere. Lending Club has particularly bad incentives because it does not have skin in the game. It’s a public company with very high targets for origination growth. A consequence for the space, however, is a more challenging funding environment. And the next thing that’s likely to happen is a shake-out. There’s been a lot of noise in this space but, unless you’re differentiated and, in my view, unless you’ve built a balance sheet, you’re going to have a hard time.
Unlike Lending Club and many of your competitors, you use a hybrid model – meaning you sell half the loans you originate, and keep the rest on your balance sheet.
Why do you think this model is going to keep the upper hand?It is hard to accept the fact that you’re not a P2P marketplace. But I think it’s the right way to go.
We view ourselves as the first of what I’ll call the credit 2.0 companies, and I use the analogy of the first internet companies that never really succeeded. So before Facebook there was Myspace, before Google there was AltaVista. You can capture the market early and move fast, but you’ll miss specific things and have flaws that newer players can capitalise on. Unfortunately, some marketplace lenders missed some of the opportunity. Another good example is Ebay versus Amazon. Ebay was the darling company early on. They were the pure marketplace, but Amazon has won by a factor of fifty. Amazon is, in a lot of ways, what we’re trying to do. It has its own inventory and warehouses. It really focuses on logistics and distribution. And yet it also has vendors that work with it. That’s a hybrid model, and the way forward in this industry. We clearly are seeing our key competitors stumble. We haven’t had those issues; we’ve had what we think is the benefit of a better model. So now is a great opportunity to grow market share with our core product, and then develop more products over time. With hybrid lending, the first benefit is that you actually have a balance sheet and skin in the game. If you have an originate to distribute model, your incentives are misaligned with long-term sustainability. You’re never going to be the lender that pulls back when you should be pulling back. And if the capital markets are shaky, as they have been for the last six months or so, you don’t have sustainability and that balance sheet to lean on. Read more: Does the alternative lending industry need more than just transparency? Second, in the old model, you also have no recurring revenue – it’s all fee based. You originate a loan; you charge a fee. In the credit 2.0 model, you actually have a substantial amount of recurring revenue, so if you slow down origination growth, it’s okay – you can sustain yourself. Third, the product in the old model is largely a fee-based one. You charge the consumer an upfront fee, then further fees. With our product, there are no fees. Your interest rate is effectively your APR, your cost of interest. Finally, instead of some basic underwriting that you mask as something quite novel, you actually have to be able to enterprise risk management, which was obviously what was missing at Lending Club. What’s needed is an institutional-level compliance culture, controls, and risk assessment through your whole organisation. Our view is that, if you can nail that, you can build a gigantic financial institution which has the best technology. And that’s really my view of the path forward. And the market has very quickly showed us that this needs to happen now.