Up until a few weeks ago, Lending Club was one of the darlings of the fast-growing fintech sector.
Fintech firms, who promise to revolutionize financial services with more intelligent and more efficient ways of using technology, have won plaudits from many, even if not all of them will prove to be deserved.
And within the sector, peer-to-peer lending companies – who use online platforms to match willing lenders with credit-scored borrowers – have seen a lot of success, including Lending Club who listed its shares in 2014 “to a clamour reminiscent of the 1999 tech boom,” according to The Economist.
But in early May all this came crashing to a halt for the San Francisco-based firm. As has been widely reported, Lending Club’s problems began when it was discovered that the application date on a series of loans had been altered in the company database to comply with an investor’s requirements. Lending Club subsequently re-purchased the loans and, after fixing the discrepancy, was able to sell them to another investor.
The internal investigation also uncovered another issue related to CEO Renaud Laplanche’s undisclosed investment in a Lending Club customer. Shortly following these events, Laplanche was asked to resign.
No Time to Breathe a Sigh of Relief
Most of the wider financial services industry will be familiar with the news, and have read the flurry of commentary about what this means for the future of fintechs.
But for those who think that this is a sign that the growth of disruptive fintechs is waning, think again. Lending Club itself may or may not survive – but the last thing incumbent banks and other financial service providers should do is breathe a sigh of relief.
Many in the industry are jumping to the conclusion that peer-to-peer lending is inherently unsustainable, since it relies on a constant stream of available investors, which Lending Club was unable to maintain. Some have even gone so far as to say that Lending Club’s potential demise will slow growth and investment in retail banking disruptors as a whole.
But these diagnoses are misplaced. Yes, mistakes were made at Lending Club. But this is unlikely to be the downfall of marketplace lending, and certainly not of fintechs.
Lending Club’s Compliance Mechanisms Ultimately Worked
To those who argue the events reveal a deeper instability and lack of transparency within marketplace lenders, it should be noted that ultimately, Lending Club’s compliance mechanisms appear to have worked. An internal investigation into the matter uncovered the loan errors and shared its findings with the board, who re-purchased the loans and requested the resignation of senior managers involved.
While peer-to-peer lending will likely evolve to include more transparency – and scrutiny – let’s not forget that these marketplace lenders have arguably benefited consumers and investors, and have acted as an important source of credit for small businesses and individuals alike. Marketplace lenders have been attractive to both borrowers and investors since the recession, and should continue to draw investment despite this misstep.
Fintechs are Here to Stay
This is because what ultimately matters is not the mistakes of a single company, but something more fundamental — namely, the success of Lending Club and its peers in using technology to respond to customer needs in a new and innovative way. And this is true across all types of fintechs: they are successful because they have developed better ways to address customers’ financial needs than many traditional providers.
The business models and operating practices of these disruptors will continue to be refined, but their approach finding and addressing customer needs is here to stay. Leading banking providers recognize this and are working to stay competitive by adapting to the new paradigm.