Their business model makes sense borrowers connect online they get lower rates and lenders receive higher rates than deposits (see below). The problem with all finance companies is that they need trust to operate properly. Management actions last and the fact the industry is lightly regulated likely mean much more scrutiny and problems ahead.
High risk, high returns? Maybe for banks
With no branches, approvals in days instead of weeks and the matching of borrowers and lending in theory peer to peer should be a much more profitable and less risky business than banking. But with all the economic volatility earlier in the year demand for loans decreased. Without any deposits this mismatch is an issue. Regulatory scrutiny will be sure to increase these companies could end up looking like banks with reserve requirements leading to a more capital intensive model. At these levels we think it would make sense for banks to buy into marketplace lending companies not just their loans. Ownership/support by a bank will give the lenders a backstop. For us Lending Club is tricky the resignation of the CEO and other executives over faulty loan disclosures creates too much uncertainty. If lenders can't believe/trust what they are investing in they will take their money elsewhere. History would say trust will take time to recover and unfortunately there is hardly ever only one cockroach!
At the time of publishing Decisive had no position in Lending Club (LC). The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
