LendingClub is Well Positioned for Future Growth

Jim Marous:
Hello and welcome to Banking Transformed, I'm your host Jim Marous owner and CEO of the Digital Bank Report and co-publisher of The Financial Brand. In February this year LendingClub closed the acquisition of Radius Bank becoming a full spectrum FinTech marketplace bank, and among the first fintech companies to buy a bank. LendingClub's long-term vision to pursue a platform strategy, attracting users of all financial products and services and providing transaction integration and processing capabilities is unique in the marketplace. This is similar to the strategy being used by Amazon, PayPal, Marcus and other tech firms. To understand what makes this combination of digital bank and lending platform unique, we're joined by Scott Sanborn, CEO of LendingClub. Scott shares his perspective of how the power of the LendingClub platform and the vision of helping consumers with their financial health is unique and important.

Jim Marous:
So welcome to the show Scott, we have definitely worked hard to make this interview happen, trying for over a year to coordinate our busy schedules and everything else that was going on in the world. I'm glad we finally were able to pull it off. So for audience who may not be aware LendingClub is not really a new fintech firm bursting into the banking ecosystem as a small player. In fact, your company debuted actually in 2006 as a marketplace lending site where consumers could actually lend money to other people rather seamlessly. After several years, LendingClub became an online lender that mostly sold it's loans to banks. And in fact, you're one of the largest providers of personal loans in the US. In February you finally received regulatory approval to buy $2.4 billion Radius Bank, becoming a full fledged challenger bank in both deposit taking and lending. So first the obvious question, what prompted you to acquire a digital bank and go through the lengthy process of getting regulatory approval, by the way during the COVID crisis?

Scott Sanborn:
That last part we didn't plan on, we predict. Their undertaking, the transformation to acquiring a bank charter is certainly not something we did lightly. However, the number of reasons that stack up as to why strategically it not only made sense for us but was an imperative are so... any one of the reasons alone is enough to this is a worthwhile endeavor for LendingClub. Structurally, financially, strategically, all of them pointed to this being the next move for the company. The big ones were just on the financial side, we'd become large enough. As you mentioned, we were the largest provider, we are the largest provider of personal loans, of unsecured loans in the country, so we're operating at a really massive scale. And we had both expenses we were incurring that as a bank we don't incur. We retain issuing banks to make the loans on our behalf. And we were paying for warehouse lines to enable us to pool loans.

Scott Sanborn:
So those two costs alone you're talking about on the order of about $60 million annualized expenses that as a bank issuing our own loans, we wouldn't incur the issuing bank costs and using deposits in the place of warehouse lines is a 90% reduction in our cost of funds. So the financial side of that eliminating the expenses and then there's a revenue piece, which is, as you mentioned, our model historically had been to sell all loans through a marketplace, to banks, asset managers and a diverse range of players, by choosing in a bank framework to keep a percentage of the loans between 15 and 25%. We're actually adding a new revenue stream, which is net interest income, which provides stability to our... and provides a recurring revenue stream.

Scott Sanborn:
So continuing to do the same activities we were doing before, we're lowering costs, we're adding revenue and the revenue we add for loans we hold is three times as much as for loans we sell.

Jim Marous:
Wow.

Scott Sanborn:
So that was the financial side of things just a real transformation, not an overstatement to say a transformation in our financials. Structurally we have control over our own destiny. We're not relying on third parties to enable us to issue loans. We are not relying on the prevailing winds coming out of DC as to some of the regulatory and legislative risks around the partner bank model. And then strategically and most importantly, most significantly it just gives us the ability to do more for our customers. We had cracked customer acquisition, efficient customer acquisition at scale acquiring more than 3 million customers, extremely satisfied with LendingClub. They want to do more with us and having a bank charter enables us to do more for that customer base, so lots of reasons.

Jim Marous:
So obviously the pandemic impacted consumer lending, especially personal lending in a dramatic fashion, not all good. How did LendingClub do during the COVID crisis and how is your firm now positioned in an economy that's actually making a recovery.

Scott Sanborn:
Starting from today the outcome has been fantastic, during COVID extremely difficult. With unemployment going up at the rate they were going up. And when you don't have your own balance sheet to lend and you have to sell loans to investors in that uncertain environment we pulled back, we basically moved to a 100% verification of employment and income. Pull back on lending and really put all of our energy and resources into a couple of key things, which was supporting our members, our existing borrowers, making sure that we were supporting them through sufficient staffing in the call center, payment plans tailored to the unique situations. And then protecting our investors returns while we were working on approval for the bank acquisition.

Scott Sanborn:
The outcome of that has been the loans have performed exceptionally well. We recently released data that we are outperforming our peer set by about 35%, meaning 35% lower delinquencies on... And again, when we're the largest provider, you would think we would revert to the mean, but we actually have 35% better performance both for the pre COVID loans, as well as loans made during the pandemic.

Jim Marous:
What do you attribute that to? Because as you said, you're not going after subprime, that you're not going after the prime lending consumer and it's personal loans. What do you attribute a better than average performance to?

Scott Sanborn:
I think there's a couple things there. Let me make sure your listeners understand who do we serve? One of the benefits of being a platform is we serve a lot of people because we make loans to an 800 FICO borrower that's funded by a community bank or a regional bank, and we'll make a loan to a 600 FICO borrower that's funded by a large asset manager. We do say yes to a lot of people and that's what drives part of our platform efficiency and marketing acquisition costs. But on average you're right, on average, our average FICO score to the extent an average is meaningful in this case, you're talking about the low seven hundreds. This was a real test and we viewed it as a test going into this. The question hanging over LendingClub's head had always been, "Great your loans are performing well. Investors are getting a very solid return on... It's unsecured credit. They're getting a high return, it's a compelling asset, but you've never been through a recession at this scale."

Scott Sanborn:
And there were a lot of naysayers who said that personal loans would underperform, "You've already given the money out, so why would consumers be incented to pay you back?" So as a category, as an asset class, what we saw during the pandemic, not unique to LendingClub for the category as a whole, what we saw is consumers prioritized personal loans above many other asset classes, student loans and even credit cards as a whole. Within that, LendingClub outperformed the asset class and why do we think that is there's a couple reasons I'd give, one is we've been very focused on our customers, our members and have tailored... When you look at on its surface, why do people come to us?

Scott Sanborn:
The number one reason they come to us is they've built up credit card debt, they realize that it's effectively a loan and it's not a very good one. They'll get a loan from us instead pay off the credit card debt at a much lower rate. On average they're saving 20, 25% versus their credit card rates. So you would think of that as say, "Okay, so they paid off their credit card debt, and they sail off into the sunset. But unfortunately for most Americans that isn't how it works, their cashflow is very volatile, their expenses are volatile and they come in and out of this need. And so we really tailored our experience for our customers to come back, for our members to be able to come back and easily access credit on a repeat basis, on a repetitive basis, so about 50% of our customers come back within five years.

Scott Sanborn:
And when they do because we know them and we recognize them, the process is even more seamless and the offer is better than they can typically get elsewhere because we know they stand a good chance of paying us back. So because of that we have this existing member base who've used us not as a transaction but as a relationship. So that's one reason is they really see the utility of, "LendingClub's there for me when I needed it. I'm going to make sure I maintain this relationship," that's one. The second thing is we moved really, really quickly to support our members with payment plans, deferrals. We made it very easy to say, "Hey, if you're in stress, you're in trouble, we'll help you get through this by allowing you to defer payments." We were criticized by many in the industry early on.

Scott Sanborn:
People looked at the percentage of our customers differing and said, "LendingClub's portfolio is not looking good. Look, they've got a higher percentage than average of people who are deferring payments." And so there was a lot of prediction that what that would result in was defaults down the road. And that's not what we saw at all. What we saw is we helped bridge our customers through a period of uncertainty, they came out the other side and resumed full payment. And those that made it more difficult to get through this, paid the price in the form of higher delinquency. So this was one of those occasions where doing what's right by the customer also ended up doing what's right by the performance of the loan portfolio.

Jim Marous:
So it's interesting with the acquisition of Radius Bank, there was clearly a move to expand beyond the services you previously provided to be positioned as a platform player. What advantages besides the logical ones is there to be in a player versus a traditional lender in financial services today?

Scott Sanborn:
So there's a couple pieces to the strategy that we're excited about and what makes us unique. One is the one I mentioned, which is by being a platform we serve a broad range of customers. When you buy an ad on Google, you buy an ad on Facebook, you don't know if they're a 600 FICO or an 800 FICO. And if you're a bank that only has a product for the 800, half of your money is wasted. If you're a specialty finance player and you only have a product for the 600 FICO, half your money is wasted. So we say yes to both, it allows us to build an inclusive brand, it allows us to drive marketing efficiency, so that's one key advantage to the platform play. The other advantage is if you look at it structurally this hybrid marketplace bank model we have is that we have the ability to grow in a way that is capital light because we can just choose to sell loans to investors.

Scott Sanborn:
However, we have the ability to hold loans, which means we are not a price taker. We can say to investors, "Look, this is the price for this if you don't want it, we'll take it." Which it gives us a lot of power in that relationship, it also gives us the ability to innovate. When you have to sell all of your loans and you are not a directly regulated institution, every innovation needs to be approved by your partner banks because it's their regulatory risk. And then you need to sell it to your loan investors and convince them that what you're doing, you understand the risk and, again, right now our marketplace bank model allows us to say, "Here's an innovation. We have a direct line to the regulators to talk about why we believe in it and we can engage in that conversation."

Scott Sanborn:
And then we can go to investors and say, "Look, we're eating our own cooking here. You don't just have to believe our words, we're putting our own money at risk, so you can come and we'll take risks alongside you and partner alongside you to get these programs off the ground." So I think there's a lot of advantages there. And then in terms of our approach to the market, the big thing for us, if you look at us versus some of the other challenger banks, if you will, is we're coming at the market from the place where the profit is made, which is lending. We have cracked unsecured lending, which is amongst the most profitable assets available in banking. We're doing it massive scale. We're acquiring customers through that. And so for us we're going to take that relationship, which is a high value relationship to the customer.

Scott Sanborn:
I am giving you money at a better rate than anyone else is and I'm making it really simple for you to do it. And we're going to approach the other side of the bank balance sheet from the point of that relationship, which is you can imagine a world where we say, "Hey, when you deposit your loan into a LendingClub checking account, you get the following advantages." Or, "We're saving you money off of your credit cards. Now that we can monitor your spending with your permission, we can also help you keep that debt manageable. And if it comes back again, we can make it very easy for you to just swipe that over into another installment loan." So we're coming at the relationship from a different place than the rest of the market and we think it's a position of strength.

Jim Marous:
It's interesting because the use of the checking account was initially or originally a payment device. And now more of the payment is being handled by credit cards and the consumers really building relationships around the payment tools, as well as the borrowing tools. So this all takes into account the fact that in acquiring Radius Bank, you acquired all the ability to build the relationship from a perspective of where they were to begin with and then cross sell. I know it's still rather new and I know that you've been quote unquote out of the office for quite some time. I'm wondering as far as the ability to cross sell and penetrate deeper, what does Radius Bank acquisition give you and how well is it working.

Scott Sanborn:
We are early stages of that, so I'll talk about where we're going versus where we are today. What we have right now is the ability to help people with their lending, the capability we pick up is the ability to help them with spending and with savings. The ideal way that we'll build that relationship is simply, "Hey, we saved you money off of your credit card bills, why don't we put some of that into a savings account? Why don't we reward your good spending behavior to help keep you out of debt, as opposed to rewarding you for going into debt with your credit card?" So the core Radius checking account is dead on brand for us, which is that's what it is, that basically that it is a rewards checking account which gives you cash back rewards for spending on your debit, as opposed to spending on your credit.

Scott Sanborn:
And we know because we've done a lot of testing with our customers that they're interested in this, so that's the capability we get. In terms of how do we harness that and build a platform to do more, that's the investments that we've got to make as we transform the business. Job one has been, "Okay we got the charter, let's fire back up our growth engine," we pulled back during COVID both due to the pandemic and the risk associated with that. But also due to the fact that we had to keep our capital dry and available for when we got regulatory approval. So job one has been fire up the growth engine and smoothly integrate the bank operations, that's what we're underway with now.

Scott Sanborn:
Job two will be getting the product into the market and then building that technology infrastructure that allows us to take this, I call it more very, very seamless access to unsecured credit for our member base and build a platform that allows us to do more with that across multiple categories. So there'll be a lift there to enable the data infrastructure, the personalization infrastructure to support all that, but we're very excited to do that and we think our customers want it from us.

Jim Marous:
Well, it's interesting because a lot of the FinTech startups, a lot of the companies have tried to grow in their scale. Number one, they didn't have scale to begin with. You have that. Number two, the loyalty factor around a checking account is not nearly as strong as loyalty factor around somebody that provides me money, be it a mortgage lender or a personal lender. And actually I will test the fact that the loyalty is even great with a personal loan than it is with a car loan or a home loan, because you're usually giving me money to do something I need to do and not taking something in return. You're not taking a house, you're not taking a car as security. So the loyalty's there and I would think that from your perspective, that the ability to play off that loyalty and build the checking account, the credit card, the investment account, the savings account is a whole lot easier because you have people that tend to like you. You've saved them or you've provide them access.

Jim Marous:
And I take my own example of PayPal where on my business account I would say that while a bank holds my deposits, my relationship is really with PayPal by the fact that they process my credits and they also process my payments to my contractors. So they know more about me because of how I work and act during that period. They also offer me pre-approved lending all kinds of other things, so they have more data. You have a lot of data because you open your accounts with more insight into the customer's financial wellbeing than an organization that opens a checking account. I'm answering your question before I even ask it, but basically the beauty of this whole combination is you're starting from a position of strength as opposed to one that is weak and unsure. What has been the biggest challenge in meeting customer's expectations with this combined platform? Or what do you see it being because again it's relatively new.

Scott Sanborn:
I think what we'll see it being is what we've got to come up with is the product market fit that creates this seamless integration where the customers see value. At the end of the day we've seen this over and over again, customers are willing to engage, customers are willing to give data. If they understand what they're going to get in return and they see a benefit for an-

Jim Marous:
A value transfer.

Scott Sanborn:
Value transfer. So what we see today, almost half of our customers give us their bank account credentials today as part of our process. Why? Because it's faster, easier approval. If I need to verify your income we determined that that's required. You can either if I can't connect to your payroll electronically because it's not available, "Gosh, am I ever going to get payroll stubs from you? Or do you just want me to take a look at your bank account and I can see what your regular deposits are and I can impute that." So customers are willing to give value in exchange, what we're going to need to do as we bring this thing to life is find out what is the value exchange people are looking for to move their primary checking account?

Scott Sanborn:
Is it discount off their loan? Is it access to a small line of credit, what are the features and benefits there to look for to make this integrated offering really, really valuable to them, that'll be what we need to get off the ground. And we need to build, again, this infrastructure that supports this multi-product offering. And this is all about you go from a single product in a transaction, you go to a relationship, this opens up mobile for us. Unsecured lending we made the process so easy you didn't need a mobile app. Name, address, date of birth, boom. You didn't need to download an app. We now have a mobile app where people are going to be engaging with us ideally several times a week, that's going to be generating additional data and it's going to provide a new platform for us to communicate with our customers.

Scott Sanborn:
And so how we integrate the messaging, where we identify opportunities for driving further value for customers, how we help them manage their spending and their savings, that'll be all the work that we need to build out. We recently announced a bunch of new hires that kind of give you a sense of the capabilities we've got to build. We hired a new head of deposits, we hired a new head of membership, so that we start to think about the customer beyond, "Do you want another personal loan?" And, "I'm looking at your financials and I can see what you actually need is this. I see you bought a car. Can I help refinance that and save you money there. I see your payment date changed, but your bill date hasn't changed. You might need to move your bill date to make sure you don't get hit with overdraft. We've got to build all those capabilities.

Jim Marous:
So let's take a short break and recognize the sponsor of this podcast then we'll get back to talk about some other things. This episode of Banking Transformed is sponsored by FIS. The way we move money is changing. We want to send money in real-time to the other side of the world. We want everything in one place, integrated, seamless and on our devices. Embedded, fast, standardized and frictionless as well as secure these are our financial futures. The Financial Futures podcast by FIS explores fintech innovation and the trends that are already transforming the way the world pays, banks and invests across the globe, and the mechanisms we'll need to prosper in this new brave landscape. Is the world's technology up to the challenge? Are we? Are those around us? FIS advancing the way the world pays banks and invests.

Jim Marous:
Welcome back to Banking Transformed. So I am joined today by Scott Sandborn, CEO of LendingClub that recently received government approval to acquire Radius Bank and move further down the path of being a financial platform. So Scott we were talking a bit about how the two organizations came together, the integration and the cross sell potential. But one interesting thing is that Radius Bank was really known for their speed and simplicity of engagement. But of course they were mostly focused on the deposit products and products that didn't need as much information. How much focus do you have in the LendingClub arena on making borrowing easier?

Jim Marous:
Because it's really, it's a challenge, but it's one that because of the pandemic, the consumer's expectations of what you can do in data, what you can do with digital, what you can do with a mobile device has certainly escalated to a point that most organizations are failing. I talked about faking digital, that organizations say, "I can open accounts and get a loan on a digital app," and we find it takes 15 to 20 minutes. So how much of your focus is on really simplifying and speeding up the process of borrowing?

Scott Sanborn:
It is an enormous focus of the entire organization and it's really simple to automate a no, the question is how do you deliver a frictionless yes. When we started if you looked at what does a personal loan application look like and it's this forum and it's this long. And you look at what information is required of a typical applicant for us today. What's remarkable is question number one is do you need that information for all people? The answer is no. You're a 800 FICO, you've been working at whatever UPS for the last 15 years. Your email address is UPS. You've got X amount of available credit to you on your cards and you want $5,000. This is a good risk. We can bypass a lot of the questions there.

Scott Sanborn:
But for where you do need the information the question is do I need to ask you to get it, or are there ways for me to get that information without requiring you to do the work? And what you find is the easier, the more seamless you make it for the borrower, not only the more people get through the process but the better people get through the process, because the better credit says, "Forget it, this is too much of a hassle." So it is an enormous focus for us. And we've got dozens and dozens of models powered by as you pointed out, we've got 15 years of history on 60 billion in loans, and we've got models that are who are we targeting in marketing? Can we make them an offer? What are we pricing the offer at? Are they who they say they're going to be fraud models. What do we expect the take rate to be?

Scott Sanborn:
How does that drive pricing? So all of that is informing this entire dynamic process that on its surface looks static. You would think, "Oh, everybody goes through this." But the reality is based on how you came to us, how you've behaved in the process, what we know about you, you're going to get a very dynamic experience. It's going to be as seamless as we can possibly make it for you and for your particular journey. But it's an enormous focus and frankly it's how you win in the same space.

Jim Marous:
Well, it's interesting because I went to China right before COVID actually in January of 2020 and went to Shenzhen and saw that. The power of data to bypass them as you mentioned, a lot of the components that we take as being required, which isn't required to know your customer. They were taking data off mobile phone engagement to make credit decisions. Now mind you, in some cases the credit decision is for $500 US. In other cases they're taking a little bit more information, but as you said, if we keep things in our mind about what is expected and we build it on the old platform mentality then you're thinking every personal loan is a $2,000 personal loan, I need every bit of the same information.

Jim Marous:
Well, number one, I don't need every bit of the same information and by the way, it may not be bad saying, "We can offer you $500 on your mobile device today just by pushing one button. By the way, if you need more push this button." Well, if I get them engaged they're going to stay a lot longer for that additional information, knowing that I've at least been approved for something. And I would imagine that that's the platform going forward. But when you look at this and you look at the potential overall, it's really the potential of data. And when you look at what your customers you're expecting, when you look at what's happened during COVID, what organization, what kind of platforms or what companies have you really liked the speed of engagement and this simplicity of actually... it maybe a loan or maybe something else. What companies do you look and say this is kind of what we aspire to feeling like?

Scott Sanborn:
Take unsecured, which is the space we're in. Our goal is if you go back in history, an unsecured loan is the original loan, "I need money, can you lend me money?" It completely went out of fashion and vogue with the advent of credit cards because all of a sudden, "Well, if I need money, I just use this piece of plastic." And what happened was banks essentially got out of the business. And those that stayed in you often needed to be a bank customer, the pricing was generally not risk-based pricing. So that category it shrank, it shrank, it shrank. When we came into the market, I think the entire category was... I joined in 2010, the entire category in 2010 was 10 billion in annual issuance. LendingClub alone pre COVID did 12 billion in 2019 and the category is close to 150 billion.

Scott Sanborn:
And where is that growth coming from? It's us basically saying we need to create the utility people get with a card, but actually have a better product for the customer. So for us it's, "Hey, you just swipe your card. Bam. It works. You got what you needed. That's the ideal utility." Now the customer knows, "I got money. But if I can't pay it back this month, I have a loan and it's not a good loan. It's a floating rate, it's a high rate." And so our target experience is how do we make this as seamless as a credit card, but actually a better product for the customer. And the addition I mentioned for our members is that much easier because I already know you, I already have all your information. And so I can make that easier when you add the banking platform, our ability to have ongoing visibility right into what's happening in their financial life, it takes it to yet another level.

Jim Marous:
Looking at the next three to five years, which is way too long I now realize that, let's say one to three years. How is LendingClub trying to grow? And what do you really aspire to be when you grow up? Because again, when you're at a transitional point that you probably thought was going to happen a little bit sooner than it is, but you're really at a pivot in the road where you're becoming a completely different organization with different goals and aspirations. How do you see LendingClub growing and where do you see it in one to three years.

Scott Sanborn:
We are building the digital bank of the future centered around our very specific customer base. And so for us, who is that customer base, they are not the under-banked, which is a big target of a lot of the neobanks. In fact, our customers are universally in the banking system and almost a 100% percent of them have credit cards, and what they also have is they over-index to most forms of debt. Over index to credit cards, over-index to auto loans, over-index to student loans so that's our customer base higher income, but unfortunately in America higher income basically means higher debt. For that customer, what we want to do is serve an increasing broader range of their needs. And over the next one to three years, the timeline you laid out, what does that look like? Regain market leadership position in personal loans, continue to expand the category, it's expected to grow at about 20% CAGR over the next several years.

Scott Sanborn:
Pre COVID was one of the fastest growing categories of credit. We expect that to resume for the reasons I gave. If you look at the space we're competing against credit cards, there's close to whatever, 900 million to a trillion dollars in outstanding credit card balances, that's the market we're going after. So we expect to continue to expand that market by increasing the utility and ease of access to unsecured credit. We plan to get a checking and savings accounts into the hands of our customers and to really find that value proposition that gets us the primacy of that relationship, and forms a membership and an engagement platform for us to continue to serve customers.

Scott Sanborn:
And we will be working to grow our auto refinance category. Same value proposition, "You have a loan, it's not a very good one. We can save you money." We've got a good product there. And with the addition to the bank balance sheet, that's a product we believe we can grow.

Jim Marous:
It's interesting because you mentioned a couple of times earlier that really what we're looking at is we're looking at building a greater amount of engagement. If you got a personal loan, I don't have to engage with it very much. But if I get your checking account and if I get your everyday balances and I'm working towards financial wellness, where from both sides of the balance sheet of the consumer, you really are moving into a play that they go to your site more often, they check your app more often. It's kind of like what PayPal has done with crypto, where they point blank said, "The only reason we got into it was because it made people go into the mobile app more frequently." And embedding it within the mobile app is obviously something in the future as well for credit availability, credit lines.

Jim Marous:
So Scott, great talking today. I really appreciate it. I think it's exciting to see where your jury's going to go. Obviously there was a detour in the road caused by COVID and everything you had to focus on as a result of the lending environmental role, but it's really exciting to see where it's all going. You look around the corner, you see all kinds of competitors that you didn't expect, the buy-now-pay-later's of the world and everything like this. The whole world of credit is changing, but it's all built around simplicity and ease of use. And I think that having two digital organizations, yourselves and Radius Bank coming together really takes the best of two worlds that already understood digital, understood financial services and simply brought it together in a way that can serve the consumer better. So best of luck on your future and the future of LendingClub.

Scott Sanborn:
Thanks Jim. I'm glad we could finally catch up. Great to see you.

Jim Marous:
Great to see you. Thanks for listening to Banking Transformed just raised to the top five banking podcast. If you enjoyed today's interview, please be sure to follow the show on your favorite podcast app and please provide a review of our show. Also be sure to catch my recent articles on The Financial Brand, and check out our amazing research we doing for the Digital Bank Report. This has been a production of Evergreen Podcasts. A special thank you to our producer Leah Longbrake, audio engineer Sean Rule-Hoffman and video producer Will Prince. I'm your host Jim Marous, until next time, stay safe and stay healthy.