LendingClub's Vision for the Future of Digital Banking

Jim Marous (00:11):

Welcome to another episode of Banking Transformed, the podcast that dives deep into the trends, innovations, and strategy shaping the future of banking. I'm your host, Jim Marous, owner, and CEO of the Digital Banking Report and co-publisher of The Financial Brand.

Jim Marous (00:26):

Today, we have the privilege of revisiting Scott Sanborn, CEO of LendingClub, the leading digital marketplace bank in the U.S. Since its inception, LendingClub has challenged the traditional banking model, leveraging technology and data to deliver better rates and products to its members.

Jim Marous (00:44):

Scott shares his insights on the company's journey since acquiring Radius Bank in 2021, and the future prospect for growth since successfully exiting from the three-year operating agreement required of new banks. Finally, Scott shares his vision for the future of banking and how he sees LendingClub’s role in shaping that future.

Jim Marous (01:05):

Through a combination of technological innovation, data-driven decision-making, and a relentless focus on member success, LendingClub has challenged the traditional banking model and has emerged as a market leader despite economic uncertainty and changing customer expectations.

Jim Marous (01:22):

We catch up to Scott as LendingClub recently released 2024 Q1 results after the bank exited from their three-year operating agreement.

Jim Marous (01:31):

So, Scott, it's been a couple years since we last caught up, and at that time you had just acquired Radius Bank. Can you talk a little bit about what the company has been up to since then? Also, what are some of the highlights from your recent operating results?

Scott Sanborn (01:45):

Yeah, great to chat again and connect Jim. It's been busy the last few years. Certainly, we planned on having a lot to do, but there was a lot to do and a lot to kind of react to and get in front of. So, since we acquired the bank which we just passed our three-year anniversary of two key areas of focus. One, transform the financials, and two, transform the strategy.

Scott Sanborn (02:13):

On the financial side, it's really been about leveraging the bank charter to build a more resilient and profitable company. We've nearly doubled our book value enabled by the bank charter 12 quarters in a row of profitability despite all of the kind of macroeconomic pressures and uncertainties.

Scott Sanborn (02:37):

So, we were able to really leverage the bank charter to lower our costs because we could eliminate the cost of issuing bank partnerships, eliminate the cost of warehouse financing, and we were able to increase our revenue, which was by building a balance sheet and a new revenue stream, which is interest income.

Scott Sanborn (02:56):

And our former model was selling the loans that we sourced. Now, we moved to selling some and keeping some, and we earn three times as much on the ones we keep as we do on the ones we sell. So, that was the financial piece.

Scott Sanborn (03:10):

On the strategy piece, it was really being able to better serve our customers, both through continued innovation and lending, which is really hard when you don't have your own balance sheet.

Scott Sanborn (03:21):

Because new products and new features require learning and testing and doing that on someone else's dime is challenging. But it's also about moving beyond lending to spending and savings and really trying to create a full set of banking services and experiences that we can win when our customers win.

Scott Sanborn (03:43):

And so, we've evolved our mobile technology platform, believe it or not, we did not have an app prior to acquiring the bank. We have built award-winning banking products. We've added mobile servicing to our app, and we're creating a full mobile first ecosystem. So, it's been busy.

Jim Marous (04:01):

So, it's interesting, I would think just in your role, you've gone from a lending specialist to really a banking specialist and doing it in different ways, you don't have very many models that you can rely on out there that say, "Oh, I'm going to follow their model, or I'm going to build it based on what this organization has done."

Jim Marous (04:18):

You've actually benefited from, I would say, leading with lending, but even leading with lending, it’s not easy given uncertain economic times that we've been going through. So, how have you had the position LendingClub to weather the ups and downs of a macro environment over the last few years where even the prediction of interest rates has been hard to do?

Scott Sanborn (04:42):

We've had to do a couple of key things. One is really lending is our key revenue driver remains. So, to this day, even as we add other services, we have the benefit of having being certainly market leading and one of the highest yielding assets, which gives us a good amount of cushion to play with.

Scott Sanborn (05:05):

But we've had to stay on top of credit in a really, really dynamic environment. Go back to COVID, how do you handle that and how do you adapt your servicing strategies and your underwriting strategies for that environment to post COVID to this inflationary high-rate environment.

Scott Sanborn (05:24):

So, we've really tried to stay in front and not just rely on our data and our models, which are extremely powerful, built on 17 years of history and 90 billion in loans. And we got models that guide everything from who we're marketing to, to what message we're giving, how much can we offer them, what price, what questions do we need to ask. That's all great when your environment is stable, but in this environment, how it's been over the last four plus years, you can't drive by looking in the rear-view mirror.

Scott Sanborn (05:55):

So, making sure we're getting in front of changes in credit, how do we think about rent increases, outpacing mortgage increases, and how you need to think about those populations or the resumption of student loans inevitably coming, and how do you prepare for that because people haven't been paying them since COVID.

Scott Sanborn (06:14):

So, we've really had to stay in front of credit, that's one. And I think we've done a really good job. We released in our recent earnings called 12 quarters of history showing LendingClub's performance by FICO band versus our competition. And we show that we're 40% on average lower delinquencies for the same kind of FICO credit band as the market. So, that’s one.

Scott Sanborn (06:40):

Say two, we've had to really lean into our costs, and we made the difficult decision to reduce head count. I think we took the view that the market had consistently been wrong on rates, and we couldn't just hope that they were going to be right the next time. I think that’s served us well because we set ourselves up to be comfortably profitable without help from the Fed.

Scott Sanborn (07:10):

And then the third thing, and it kind of goes to the point you made, which is we don't really have anyone to point to that has exactly our model is we've had to innovate even in how we're operating the model.

Scott Sanborn (07:19):

Four years ago, every loan that we identified and underwrote and serviced, we sold. And then our model went from, okay, sell a percent to hold a percent under CECL accounting, amortized cost accounting. And then when the rate environment shifted, we introduced yet another structure, which is our structured certificates program.

Scott Sanborn (07:41):

Where we leveraged our bank capabilities to effectively create an in-house securitization where the bank, we could hold the A note and we could effectively finance our buyers efficiently and keep asset managers purchasing and help them be able to participate and continue to grow portfolios in this asset class.

Jim Marous (08:06):

So, I mean, certainly interesting because acquiring a bank gave you the ability, especially in a rising rate environment to fund your own loans as opposed to not having control over interest rates. And you can, you really, really do an alco at the instant, by instant level unlike most traditional financial institutions that make adjustments, a little adjustment here, a little adjustment there, and they're not a prime player in either deposits or lending.

Jim Marous (08:34):

You would need the deposits to fund, or it's best to use the deposits to fund lending but that's a completely different environment. And you're looking at not just growth metrics, but resilient metrics which is hard to know what those are until those resilience things come to bear. But how do you do that? How do you grow at the same time keep an eye on am I building resilience in the process?

Scott Sanborn (09:03):

So, one of the key things from a resiliency perspective we were trying to get to, obviously deposits are both cheaper and more stable than warehouse funding or marketplace funding, capital markets. So, one of the goals was, and continues to be, to build a balance sheet that is large enough to deliver a solid return for shareholders, such that the marketplace is, let's call it, icing on our cake.

Scott Sanborn (09:36):

Because the balance sheet is something we can control and it does some geopolitical firestorm or something that spooks the markets that might have nothing to do with the macroeconomic environment or the performance of our loans, kind of blunt the impact of that on our core operating. And so, we tripled the balance sheet, in three years, we quadrupled our deposit base, and we were well on our way until the environment shifted.

Scott Sanborn (10:01):

And what we were doing is we were taking the earnings that come off the marketplace, which are high, low capital usage, very capital light because we're selling the loans and we're getting high end period earnings. We get an origination fee when the loan issues we recognize that in period, and we then get a ongoing servicing fee as we service the asset.

Scott Sanborn (10:25):

But that high end period earnings we're using to offset the CECL charges. We have to take the lifetime of losses, which on an unsecured loan is high compared to whatever auto or mortgage or any other consumer credit classes. And so, those two things is kind of a flywheel.

Scott Sanborn (10:42):

High end period earnings allows, enables high balance sheet bill balance and absorption of the CECL charges. So, that's how we were able to add a billion a quarter to the balance sheet.

Scott Sanborn (10:54):

When the rate environment shifted and cost of funding went up and the banking crisis happened, banks were historically, 50% of our markets was banks and our loans went to banks and then do one last year. We did not anticipate the banking crisis to be clear.

Scott Sanborn (11:14):

We had anticipated pressure on asset managers who represent the other half of our buyers, and we pivoted to banks and anticipated on that. And when the banking crisis hit, we said, “Uh-oh, we're going to have to pivot back to asset managers." And that's when we launched that structured certificates program which has the benefit of no in period CECL.

Scott Sanborn (11:35):

So, it was basically a third way. We weren't selling the whole loans at prices we liked, we didn't have the earnings capacity to keep building the balance sheet. So, rather than let the balance sheet run down, which over time would've diminished our earnings capacity, we're building the balance sheet through a lower risk weighted and effectively lower risk product, which allows us to continue to grow the balance sheet and maintain our interest income.

Jim Marous (12:06):

So, looking at traditional growth numbers, what has gone on since we last talked around growth of customers, just traditional retail customers?

Scott Sanborn (12:17):

So, I mentioned we've more than quadrupled the deposits. We're getting close to 5 million customers now, which I'm not sure where we're at when you and I last spoke, but it would've been well south of that.

Scott Sanborn (12:34):

Tripled the balance sheet and we've also continued to enhance our product suite and how we're able to serve customers in their core use case. So, despite all of this transition there's a lot of momentum that we've been able to continue to carry forward.

Jim Marous (12:55):

You've been actually doing a whole lot of things at the same time while looking over your shoulder and saying, "What's going on behind me with regard to rates?" I mean, it's an interesting dilemma because again, it's not a model that you could look over the last 20 years and seeing how has it performed and how do I do this in this kind of environment?

Jim Marous (13:13):

And we went through a very long spell of close to zero interest rate. So, it completely changed everything about how you did what you did in a sense still in a different rate environment.

Scott Sanborn (13:25):

It was true on both the deposit side as well as on asset and liability side because it's the same thing. It's like the market had been conditioned for a very long time to operate a certain way. And this change came fast and hard and I'd say we were criticized. In ’22 we were delivering record results.

Scott Sanborn (13:47):

Every quarter was new record loan originations, record revenue, record profit. And we came up and we kind of said, "Yeah, this year's probably going to be a tale of two halves. First half's going to be great," and it was. And the second half things are going to get weird. The market's going to change.

Jim Marous (14:08):

It did.

Scott Sanborn (14:08):

And one of my shareholders called me EOR and well, it turned out that thankfully we had kind of seen that. And as I mentioned, we were kind of early to pull back on credit. We were early to try and position ourselves for that. But I think even we underappreciated the ripple effects through the broader banking system.

Jim Marous (14:32):

So, one of the things I mentioned in the introductions that you basically had an exit from your three-year operating agreement that's required of all new banks. What does it mean for your future as an organization and for the flexibility that it may give you?

Scott Sanborn (14:46):

So, the way the operating agreement works is, it's basically you draft a business plan that is approved by the regulators, and you can effectively call that plan concrete. And so, imagine we drafted a plan. We acquired the bank in 2021.

Scott Sanborn (15:02):

So, we drafted in February, but we made the bid for the bank in 2020. So, our plan, we drafted in 2019, pre COVID, pre interest rate shock, or whatever we want to call it, pre banking crisis. So, you can imagine like, wow, you wrote a plan, any changes to that plan, you can obviously make changes, but it requires an approval process.

Scott Sanborn (15:27):

It requires a written approval and a process for them to come back. So, it slows you down. And it slows you down a little bit by design. Because this process forces you to think through every action you're taking, what are the risks embedded in the action you're taking, and how are you mitigating those risks?

Scott Sanborn (15:46):

And this is true across all aspects. You want to hire a new board member or executive, requires approval, you want to launch a new product, requires approval. So, it slows you down and I think for good reason, but it is slower.

Scott Sanborn (16:02):

There are also restrictions on your capital. So, our binding rate was a tier one leverage ratio of 11%. So, think I'm adding 20% risk weighted securities to my balance sheet, and that doesn't count because I'm not looking at my risk-based capital ratios.

Scott Sanborn (16:23):

So, exiting the operating agreement gives us now the freedom to say, "Yeah, I know we agreed to the tier one three years ago based on the business plan we wrote five years ago, but our balance sheets change, the environment's changed, we can now determine appropriate capital levels and how to manage the business based on our own stress testing." And so, then they come in and verify that, they think we’re doing a good job.

Scott Sanborn (16:47):

So, as you think about what I mentioned, which is we're currently growing the balance sheet through this different asset, it's got some real benefits in terms of, depending on your view of where the economy's going. Are we hitting a soft landing or not? It is de-risking our balance sheet, and we can now take that into account when we're setting our capital ratio. So, it’s going to allow us to be more efficient in how we deploy our capital.

Scott Sanborn (17:10):

Also frees up other things like we can dividend up from the bank to the Holdco if we wanted to make a decision to return capital to shareholders. So, it just gives us more operating flexibility.

Scott Sanborn (17:22):

Note, we believe, at least that we're aware of we're the first fintech who is now a bank who's actually exited their operating agreement. So, I think we viewed it as an important milestone in our maturity and our ability to demonstrate that we're operating well.

Jim Marous (17:43):

And it's interesting because having acquired a bank, as much as it's painful at times, it brought some discipline into the world of being a bank as opposed to being simply a lending organization. So, I wouldn't say you felt like it was a benefit all the time, but it did give you that flexibility and understanding of what you're going to do next.

Jim Marous (18:05):

So, one of the things that you referenced as LendingClub is the marketplace model, and that's somewhat a definition that you provided. And I'm wondering how is the marketplace model different from a traditional bank model, and what advantages does that model give you?

Scott Sanborn (18:21):

So, I mean, the marketplace model effectively, which is, as I've mentioned, we're just not holding all of our loans, we're selling a portion, why does that matter? I gave you that, the economic difference, no capital usage, high end period earnings.

Scott Sanborn (18:41):

And so, that financially allows us to be, if you look, especially at our results post, in the more normal environment, we're able to both be high growth and high profit, which is hard with CECL accounting to be high growth and high profit. So, that's financial.

Scott Sanborn (18:55):

Strategically, it does a lot of things. It allows us to serve a customer base that we wouldn't put on the bank balance sheet. So, in a normal environment, 15 to 20% of what we issued, for example, is near prime 600 to 660. We're not going to put that on the bank balance sheet, but there's a good return to be had there for investors who understand the risk of that.

Scott Sanborn (19:19):

Our ability to offer that makes for a better operating business because you don't know in all your advertising channels what the credit quality of the people responding is going to be.

Scott Sanborn (19:32):

You put an ad on Google, and I don’t know, some percentage of people are going to be non-prime. And so, your ability to not only make them an offer but make them a compelling offer is going to mean your marketing's more efficient.

Scott Sanborn (19:44):

And that's why if you compare us to the other public comps, direct to consumer, you'll see we have amongst the most efficient marketing in the business. It also allows you to leverage different views of different investors to drive the price down to borrowers. So, we get feedback.

Scott Sanborn (20:05):

These are sophisticated buyers who are buying from us, and they have different perspectives. So, we'll see that certain loans people have a higher interest in, we can say, "Hey, maybe we should price those lower and make more of them or certain loans people have less interest in, we say, "Hey, do we have a credit issue here? Or is it just a returns issue and we need to raise price or trim credit."

Scott Sanborn (20:27):

And what it also allows us to do things like, we've had investors say, "Hey, we want you to raise the price to borrowers to get more yields." We would say, "We're always testing price points 25, 50, 75, 100 basis points higher by segment by channel to see what is the customer response rate, what's the profile of people we're getting through. And so, we think we've got that optimized."

Scott Sanborn (20:52):

And investor says, "No, we think you could raise prices, 300 bps and the risk return trade off would be worth it." We say, "Okay, we'll create a pool for you using that logic. And I hope for you, you're right." And so, that allows us to test our way in. So, there's a lot of benefits in addition to the pure financial ones that we see.

Jim Marous (21:16):

Well, certainly you become the mass of your data. I mean, since we last talked over the last three years, you've been able to almost test every single model, every single rate environment, every single variance between deposits, lending, and marketplace deposits versus funding money. You've almost, in real life tested almost every version of what could happen, I would imagine. And that information doesn't go for naught.

Scott Sanborn (21:47):

I do not … that it’s true. It sure feels like it. But I think given our experience over the last four years, I can only assume we still haven't seen it all.

Jim Marous (21:58):

But the data you've collected allows you to model more accurately with different scenarios. You had no scenario like we have today back, three years ago. Now you're able to test those different items. I'm wondering, from a growth perspective, do you have any growth or is there any push marketing otherwise for the Radius Bank net of lending?

Jim Marous (22:21):

In other words, are you still generating new customer relationships outside the lending environment or is it almost all based on lending now?

Scott Sanborn (22:28):

No, I mean, we're obviously still acquiring deposit customers. We built, we used the LendingClub expertise for online acquisition, fraud model, funnel optimization to develop a really great online banking product. And so, we are acquiring customers through banking into our savings and our checking products.

Scott Sanborn (22:56):

And we did acquire a couple of businesses within Radius, the one we held onto. So, Radius was in the commercial real estate business. We, again, I'd say timed it right. We exited that business pretty quickly, but we held onto and are growing the SBA business, the government guaranteed lending business and that's been a nice business for us.

Jim Marous (23:27):

So, if you take, what I'm going to say a traditional banking portfolio, I would think there's been a great potential for building products that allow a personal line of credit of whatever amount as part of the overall traditional banking relationship.

Jim Marous (23:43):

Do you have that currently with, I'm going to call it the Radius Bank, and I know you don't separate the two, but I mean, is there the potential, because you do go further down in the FICO scores and things of this nature.

Jim Marous (23:53):

You understand the customers better than virtually any financial institution out there. Is there the potential to have every traditional banking customer have a line of credit on their account?

Scott Sanborn (24:06):

Yeah, so you can call it LendingClub Bank now, Jim. But yeah, we actually talked in our last earnings call that we have installed a revolving platform which is new for LendingClub and we are testing a revolve product.

Scott Sanborn (24:24):

Our first use case of that product is kind of building off of our core competency, which is, we're working on an experience to help people monitor their credit card debt. Because we know that it's one of the things that's requires the most active management because people have the flexibility to min pay, full balance pay partial pay, different dates of the month and all that.

Scott Sanborn (24:50):

So, to help them monitor and manage those payments, and we're going to pair that with this thing we call clean sweep, which is, if you don't have the ability to pay off that balance in full, you can sweep it into a line at LendingClub, it will behave like an installment loan, fixed payment, fixed payoff date.

Scott Sanborn (25:08):

So, that's our first use case that will be in testing of this year with potential other applications for revolve as we go. We have a purchase finance business where there is both an installment aspect as well as a promotional revolve aspect.

Scott Sanborn (25:29):

99% of our customers have credit cards on average, they have five cards, so you could see us exploring and we know what those cards are and what they love about them and what gets them into trouble.

Scott Sanborn (25:40):

So, you can imagine us exploring that when the time is right, which isn't in the immediate future, but it's certainly on our medium-term roadmap. So, very much pushing forward on that.

Jim Marous (25:52):

So, speaking of the immediate future or the long-term future, what is the opportunity for LendingClub when rates come down? What channels will there be from a funding perspective, but overall, what does LendingClub Bank look like in what I'll call more … I don't know what normal is, the word normal doesn't mean anything anymore, but on a lower rate environment?

Scott Sanborn (26:13):

A lot of good happens. A lot of good happens. So, immediately we will get the benefit in marketplace pricing because the asset managers, they are pricing off of a forward curve. And rates don't even have to move. Just expectations of rates actually moving results in a higher price, and we get that in period right away.

Scott Sanborn (26:41):

So, the more the expectations of rates come down, the higher the price we get on marketplace loans, that benefits us right away. As prices come down, we also have the ability to bring down our deposit costs and create more NIM because our primary driver is high yield savings.

Scott Sanborn (27:04):

And the big thing is as our margins expand, it opens up the most significant opportunity we've had in the history of the company, which is one of the primary uses of our flagship product is to pay off existing credit card debt.

Scott Sanborn (27:22):

If you use your rewards cards and you pay them off, that's great. It's convenient and you're getting benefits. But if you're the currently half of all Americans that don't pay off their cards and are carrying a balance, you're carrying them at what is an average interest rate of like 23%.

Scott Sanborn (27:40):

It's the highest it's ever been since the Fed began measuring this. And the total amount of outstanding balances are also the highest they've ever been getting close to like 1.3 trillion.

Scott Sanborn (27:49):

So, that opportunity to reach out to that audience, like one out of every two card holders and say, "You don't realize it, but you have a loan and it's a crappy one, we can save you a lot of money, on average, we can drive up your FICO score by 40 or 50 points by paying off your cards for you, come to LendingClub."

Scott Sanborn (28:07):

And then once they come in, say, “Great, well, you're also approved for a bank account and if you bank with us, we'll help you pay down your loan faster.” That's the opportunity on the other side.

Scott Sanborn (28:18):

There'll be improvement really quickly in the financials that translates into our ability to increase our marketing costs to go after more of these customers which will ideally get us back on the kind of flywheel that we were running at prior to this rate environment really shifting.

Jim Marous (28:39):

It's interesting, even in today's rate environment, higher rate environment, the gap between what people think they're paying or what the high interest is on almost any credit card, if you hiccup and what you could afford to do for people is insane. It's getting the message out there and finding buyers for loans and all the other elements of that. But I think what's interesting-

Scott Sanborn (29:03):

47% of Americans do not know the interest rate on their cards. They do not know it. So, it's like one out of every two people doesn't know what they're paying. And the answer is, it's a lot, especially right now. Credit card margins are at record high.

Jim Marous (29:20):

And so, your real journey is not just the loans, it's the wellness component of what you're doing. I mean, you have a message that everything's going in your direction. I would think, number one, you have the benefit of understanding the credit markets as well as any organization.

Jim Marous (29:42):

And Simon Taylor wrote on your behalf, I think it was last weekend or weekend before, maybe it was a little bit before that. The fact that it's great to start a company with lending being your foundation because that's the money maker.

Jim Marous (29:55):

It's also the best way to show your wellness chops with consumers because you can help them manage their credit and still make a profit, which is crazy, but it is true.

Jim Marous (30:09):

And most organizations just don't have not just the ability, but they tend, too many organizations tend to just accept what I'll call A, credit, which is not where the money is. It's further down the FICO score. So, I would think that the message becomes pretty strong all the way around.

Scott Sanborn (30:28):

There's a lot of trends that are all in our direction, including consumer behavior and consumer interest. I mean, if you look at first, how do people choose banks? For decades, forever, you've been in this world longer than I have and for decades you chose a bank based on the branch location.

Scott Sanborn (30:51):

And they knew that. And then they said, "Well, great, since I know you're not shopping around, you're only walking in here, I'm going to pay you less for your deposits statistically true, and charge you more on your loans, also, statistically true, then I'm going to charge a new customer."

Scott Sanborn (31:07):

And now COVID really accelerated this, people are prioritizing the quality of the mobile experience. Well, guess what? We played right into that. Second thing is people are comfortable entering their information online. They're comfortable comparison shopping. And so, you actually got to deliver value. We're able to do that.

Scott Sanborn (31:28):

And so, we have not been created around product silos, optimizing individual economics. We're really creating … a the more business you do with us, the bigger an advantage you get. If I'm not paying marketing, when you come back for a second loan, I need to be able to pass that back to you in the form of value I give you. And it creates trust that we’ve got your back.

Scott Sanborn (31:54):

We didn't issue you the loan to buy your car new but when you drove off that lot, you were paying more than you should. I can refinance that for you, save you money.

Scott Sanborn (32:09):

And to your point, our future state here is help you take the savings we're generating and actually create savings. Create a nest egg so that next time you have an unexpected expense, it doesn't go into credit card debt, or you've got the ability to cover it.

Jim Marous (32:24):

Well, it's interesting because there's such a difference in the marketplace between organizations that are risk adverse, which is almost every legacy financial institution. And those that manage risk such as yourselves and a couple other competitors out there, the difference is you can do a lot more for the consumer because you can hit a broader range of consumers as well.

Jim Marous (32:45):

It's crazy the way that works, but again, your legacy financial institutions are so used to doing things the way they've always done them, that it's hard to build a good portfolio that customers will not leave.

Jim Marous (32:58):

So, on that as a lead in with the desire to expand services on what you can offer obviously lending is still the bread and butter. How do you work with a consumer across their journey of the engagement? Once you get members inside the door, how do you engage them more broadly right now?

Scott Sanborn (33:20):

So, our focus is basically we've identified this core customer of ours based on our primary use case. And the good news is it's a very valuable customer who really — we efficiently acquired them just on the one loan and they want to do more with us.

Scott Sanborn (33:41):

So, basically, right now, core bread and butter, when you come in, we make it very easy to get the first loan. It's 80% automated, no impact to your credit score, to check your rate. FICO score goes up, that's all amazing. Now that you're in-

Jim Marous (34:01):

And you love us, by the way.

Scott Sanborn (34:03):

And you love us, is it a one and done? Well, no because download our mobile app and that improves your servicing experience. And what can we do? Well, we have the ability to offer up as you go for one, we can offer you up, can we save you money on your auto loan with auto loan refi?

Scott Sanborn (34:23):

Two, can we support you with your banking services? Three, can we help you manage and monitor your credit and your debt? So, we're live already with the credit experience, and we're seeing if you bank with us or if you sign up for our credit monitoring, your engagement levels with us are significantly higher. You’re just visiting more often. Significantly more often.

Scott Sanborn (34:52):

So, the basic goal is, “Look, let's get them in with a great product experience, create an engagement product platform for them, whether it's through credit and debt monitoring, banking, or both.” And then I have the ability to see what's going on in your financial life.

Scott Sanborn (35:06):

And when I find an opportunity to create value for you is another thing that we've done that we believe it's unique in the market, is we're also, what we're not doing is the spray and pray. Like, "Here we have all these products apply for them. Apply for a mortgage, apply for this, apply for that."

Scott Sanborn (35:25):

What we are doing is we are using our own data to say, "I see you have an auto loan. I can impute what your payments are, and therefore your interest rate is. I can run whether or not I can beat that rate. And if I can, I will present an offer to you that I know is compelling in value, and I have a high degree of certainty you're going to get approved for."

Scott Sanborn (35:48):

And what we see is doing that, sending an email, or popping up an ad in the mobile experience that says, "Jim, you're approved for $10,000 at 10.99." Doing that to a subset of people creates more pull through than saying, "Jim, apply for a loan." And doing that to everybody.

Scott Sanborn (36:14):

So, we have created a foundation, as anyone in my circle here will tell you, I sure wish we were going faster but we've had to pull back on our investments. But we have created a really good foundation here with a data platform and a mobile platform and an experience layer that we know who this customer is, we know what we can do for them, and we can keep them coming back so that we can generate more value in the future.

[Music Playing]

Jim Marous (36:42):

It all seems to work. So, let's take a short break here and recognize our partners.

Jim Marous (36:49):

Welcome back to Banking Transformed. So, I'm joined today by Scott Sanborn, CEO of LendingClub. We've been getting an insider view into the transformation of LendingClub since it’s acquisition of Radius Bank Court in 2021, and what the future holds for this very unique financial institution.

Jim Marous (37:06):

So, Scott, with the extensive amount of data collection you're doing, and the rigorous testing informed to this approach, how do you see AI and generative AI actually enhancing what you're doing today?

Scott Sanborn (37:20):

Well, the list is long. It's early days, but it's really got a potential application across so many aspects of what we do from how you are screening for fraud, to creating more efficiency in your compliance processes, to creating more efficiency for your agents and your customer interaction models to helping you better select credit variables in your data.

Scott Sanborn (37:55):

So, there's an enormous amount of excitement, I'd say, across LendingClub and proofs of concept and testing pause. It is still early days for a highly regulated area like financial services and making sure that you've got privacy and security and is it internal facing or external facing, and making sure you've got all the right guardrails set up.

Scott Sanborn (38:20):

But we're at the cusp of I think the next wave of really tremendous and exciting change that I think one of the benefits of being at a scale like what LendingClub is at, is you can reap those benefits. You've got the data to power those models and you've got the scale where a 20% boost in efficiency can mean meaningful bottom-line impact.

Jim Marous (38:46):

It's interesting, even from a cultural standpoint, it's not a major leap to go from where you are today with the use of data, the deployment of data, understanding the customer, understanding the channels, understanding all this to what generative AI can give you.

Jim Marous (39:01):

It simply adds that, what I'm going to say, a question-and-answer component to this, where you can dig even deeper and as a consumer benefits, which your model really is a consumer beneficiary model, you can ask additional questions, they'll answer it because they've already experienced the good news, but that allows you to even leverage data better.

Jim Marous (39:22):

I mean, if you look at the financial institutions that I watch, because it's just amazing the data they can collect and deploy against their solutions. You have the competitors that are very much in your space, but you also have scenarios like Bank of America with their Erica platform.

Jim Marous (39:35):

You go, “Geez, they got seven years of interactions with consumers about everything on a voice platform.” That is just a head start that nobody else can catch up with on the data side and the deployment of solutions. You've gone through a lot. You referenced my age, I'll reference yours.

Jim Marous (39:57):

You're relatively young in this game, even though you have a lot of experience. But over the last three to four years, how has the lessons you've learned changed your vision and leadership style at LendingClub? Or has it?

Scott Sanborn (40:13):

Yeah, no, it has. I would say a lot. And I think the discipline that we have incorporated to constantly be pivoting or evaluating short-term, long-term, short-term, long-term, we've created a real operating rhythm for us, which is, “Okay, let's nail our operating plan. What are the key initiatives we need to get done this year? What are they going to deliver for the business over what timeframe? Okay, what's our level of confidence??

Scott Sanborn (40:51):

Great. Now stretch that out over three years or four years, and what does that look like? And what things do we need to solve for? Now come back in and say, "Where could we be wrong? And how wrong can we afford to be? And if there are places where we can't afford to be that wrong, what are we doing to mitigate for that risk and that downside."

Scott Sanborn (41:17):

The experience of when I took over as a CEO which was a period of great turmoil and change COVID, and now the interest rate environment, I'd say it's a good part of our DNA. The executive team, something we adopted when COVID hit was even when none of us were in person, and we were all wiping down our groceries and our mail.

Scott Sanborn (41:39):

We still got together once a quarter for three days to say, "Hey, let's stay aligned, short term, long term. Let's make sure we're on top of all the big issues." And now we're all back in the office. We're still doing that, making sure we are staying aligned, balancing short term and long term keep being cognizant of the risks, placing our bets, and knowing how much we can afford to bet at what time.

Jim Marous (42:06):

You look back and I'm sure it wasn't the most fun to be the three-year operating agreement plan, but that kept you a little bit centralized, you weren't able to go wild on anything. But I would imagine also the change in the marketplace can keep you humble.

Jim Marous (42:23):

Because when we last talked, you were coming off a really good high with some cynicism about, "Okay, what's going to happen with all these change that are going on in the marketplace?" But the reality is, when things are all going well, everything looks good. And you start to get a little gutsy and you say, "Hey, you know what, I'm feeling pretty heady."

Jim Marous (42:44):

I make fun of … I was not going to say it, but I am making fun of legacy financial institutions that most of the leadership was in place 30 years ago, but they were just out playing golf with new management trainees, and they have not had a negative financial year ever.

Jim Marous (42:59):

So, you start getting the point of saying, "Well, why do I have to change?" Well, your model's almost the exact opposite, but with the same impact going, "We're built for change, we're built for continuous evolution and revolution."

Jim Marous (43:10):

But the other side of it is, we know now better than ever what could happen if we're wrong. And so, you almost bet against yourself sometimes in a good way, but the consumer benefits, no matter which way it goes.

Scott Sanborn (43:24):

One of our values is evolve with purpose, and it's a key thing that we hire against, which is like, how much change can you absorb? And if you look at our executive team, one of the things you see that stands out is I think virtually all of them have had both experience in large institutions, and they know what good looks like, and they've also either been in a startup or they've been in some kind of a crisis and they've tested their metal through that.

Scott Sanborn (43:54):

And so, we really hire for that. It's for people who know how to pivot and know how to react and don't get too comfortable. To your point, don't get too comfortable and assume everything's going to be great forever, and we don't need to change a thing.

Jim Marous (44:12):

It gets you humbled real quick, but it's interesting just because you've experienced it on the macro and micro level so much. Again, I'll keep on falling back to the fact that you have data and analytics in everything you've done puts you in an advantage at least to know what could happen and quickly in an instant. So, that works pretty good.

Jim Marous (44:33):

So, as we look at the future and look at your ability to grow, and you've referenced in a couple of the answers around the expansion of services and offerings. What do you see as the future within a product and services set? What do you see coming out possibly not making any major broad claims, but where do you see it going?

Scott Sanborn (44:55):

So, our roadmap from here is both exciting and I will say pragmatic. We've got this core use case we're very good at. People love the opportunity to deliver against that is the best it's ever been. We're building a set of new experiences that will make our ability to tap that experience more powerful. Leveraging the data and our current user experience. That's all stuff we're building this year.

Scott Sanborn (45:26):

We plan to exit this year with all of this in place, which is, you come in, it's easy to get a loan. We pay off your credit cards for you. We help you monitor your credit card debt. You can ideally even pay your credit card debt through a lending club checking account and that forms this foundation. From there, we start to layer in other credit products.

Scott Sanborn (45:53):

When the rate environment comes more in our favor, we think the auto refi product has legs. We've got the opportunity we believe to offer consumers credit cards and then other consumer credit products, I see very much in our future. Our goal is to be a direct to consumer, member focused bank with a full set of products and services.

Jim Marous (46:17):

It's interesting, there's a lot of opportunity out there. At the same time, you say, "Let's stick to what we do best also," it's a balancing act. It's interesting because I'm going to ask you a question that's kind of like, I use the analogy you can give people all the ingredients for a great cake but doesn't mean you can make a great cake.

Jim Marous (46:36):

So, when you look at traditional financial institutions, what are most financial institutions missing from the perspective of what you've learned from a marketplace opportunity that you can see that most just don't get? Now I'm not trying to help you help the competition.

Scott Sanborn (46:56):

Look, there are great people at all of these companies, smart people doing good things. There is a structural disadvantage to having built up a branch-based ecosystem that you are now counting.

Scott Sanborn (47:10):

There is a structural disadvantage to having built an income statement that relies on certain fees and/or behaviors that don't reflect consumer behavior today, the regulatory framework today, so starting with a relatively clean slate.

Scott Sanborn (47:28):

I mean, you and I were talking during the break about incentive alignment. It isn't just having the data to power AI models. It's that a credit card company is not incented to say, "Hey, hey Jim, you're getting close to your full credit line when you max out your utilization, your FICO score is going to go down.”

Scott Sanborn (47:48):

Or “Hey, you should have used this other card when you bought gas because you would've got double the rewards." They're just not incented to do that. They’re incented to do the opposite, let you max out and then carry it forever.

Scott Sanborn (47:57):

So, there is an incentive piece that comes from your legacy business practices that it's the innovator's dilemma that the newer startups don't have. And it's an advantage for the incumbent.

[Music Playing]

Jim Marous (48:13):

The infrastructure on top of the brand structure, there's a lot of costs that you have to pay before you give it back to the consumer.

Scott Sanborn (48:22):

That’s right.

Jim Marous (48:24):

Scott, thank you so much for being on the show again. I will promise you or threaten you that it won't be another three years before we visit. Because you have a very interesting organization to watch and also to watch the growth because when you see what's happening, consumers are taking notice. It's just a matter of scale and as always is.

Scott Sanborn (48:44):

Great. Well, thanks Jim. I'll hold you to that.

Jim Marous (48:46):

Thanks. Thanks for listening to Banking Transformed, the top podcast in retail banking and the winner of three international awards for podcast excellence. We appreciate your support. If you enjoy what we're doing, please take some time to show some love in the form of a review.

Jim Marous (49:01):

On that note, thanks to Valentine for his kind review. He wrote, "Banking Transformed is a must listen to podcast for anyone in fintech."

Jim Marous (49:10):

He goes on to say, "With everything moving so fast in the financial services in fintech, it's sometimes hard to stay abreast of all the trends and filter out the noise to identify real shifts in the marketplace. This podcast helped me do exactly that with thoughtful and provocative commentary from the host as well as knowledgeable guests from the innovative companies in the industry. I highly recommend it."

Jim Marous (49:33):

Thank you again, Valentine, for your review. This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage, audio engineer Chris Fafalios and video producer Will Pritts.