LendingClub’s Digital Marketplace Bank | FinTech Magazine

The financial health crisis is here. People are suffering from rising costs of living and debt is increasing as disposable income shrinks to cover rising living costs. Saving money and reducing expenses for millions of households, globally, is now a necessity.

Innovation in finance is driven by disruption, and a challenger leading the charge began life as a technology company specializing in data but has now transformed into one of America’s fastest-growing digital banks.

LendingClub defines itself strictly as a technology/financial services company. Founded in 2006, innovation and market disruption are built into its core, says CEO Scott Sanborn, who joined the company in 2010. Sanborn is a passionate advocate for the work LendingClub does, saying its services have never been needed more than they are now , as consumers are pushed to – and in some cases beyond – their financial limits.

Lower financial options for borrowers

At its core, LendingClub offers more affordable lending services to borrowers than traditional banks. It is able to do this because it acts as a broker that connects institutional investors with potential borrowers. Customers can take advantage of a range of lending products from personal and business loans to auto finance and patient solutions.

The system is remarkably efficient—and, Sanborn says, routinely cuts loan repayment rates significantly because it puts the customer’s interests first over their financial needs.

He explains: “Imagine you are going to buy a car from a dealer. Currently, in the majority of sales, you are going to pay more for the financing than the risk warrants. The dealer adds a mark. There is no limit to how big that marking can be. And they are not required to pass you on to the lender who gives you the best deal. They may also refer you to the lender that gives them the best fee break or rate or incentive. So you spend all this time choosing a car, negotiating the price, but you don’t negotiate the cost of the financing. You drive off the lot and pay more than you otherwise should.

“That’s where LendingClub comes in: using its technology platform, it can match borrowers with the best loan plans, making them important savings in the process.”

Sanborn says that at the customer level, LendingClub makes significant monthly savings on expenses. “On average, we save customers about $80 a month compared to their car loan. Imagine – you drive the same car, pay it off in the same time frame, but have $80 more a month in your pocket.”

Expand financial services through M&A

Clearly, the formula works. To date, fintech has helped more than four million customers and is the market leader in the US in one of the fastest growing categories of lending: credit.

In 2021, LendingClub also entered the banking sector through the acquisition of Radius Bank, where they obtained their bank charter. This event has seen the company expand significantly, transforming its identity within the fintech industry. So, is it a fintech, a digital bank or something else entirely?

“I would say we are a technology company … but we are a technology company with a banking charter that makes us a fully digital marketplace bank. We are something completely different. There are some direct to consumer banks, but we become a digital marketplace bank in a time when there is a lot of change in consumer preferences.”

Sanborn points out that a decade or more ago, what drove customers’ banking preferences was the location of a bank branch. The landscape is now significantly different. “Consumers now see banking as something you do, not a place you go, and they are increasingly saying that the strength of the mobile experience should be the driver of choice. So our transition to digital banking is at a time when consumers are valuing the digital experience and we can therefore provide tremendous value to our customers.”

The disruption of traditional lending

LendingClub has a history of disruption in lending, and Sanborn believes the disruption to traditional credit models has been long overdue because it initially burdens the customer far more than it should. “If you look at credit cards as an example, the credit card companies divide customers into two categories. Revolvers – there are people who don’t pay down their credit card balance; they have a loan. And then there are transactors – those who use the card as a convenience mechanism , and they pay it off every month. These transactors get benefits. They get rewards, miles, cashback and all these things. The revolvers have to pay for that.

“So you have one half of the customer base paying for the other half of the customer base. That’s structural inefficiency. If you just looked at that customer and said, ‘Hey. What’s the true cost of credit that you need?’ it’s lower. That’s what we do with personal loans.”

Meeting customers’ needs

In addition to having a dynamic approach to lending, LendingClub is unusual in that its core business model increases financial inclusion by expanding access to lower cost credit. The company takes the approach that current customers and the system are ripe for a renewal. While LendingClub’s marketplace model allows it to seamlessly serve a wide range of customers, its core customer has a relatively high FICO score of around 700 and an annual income north of $100K. The team focuses on giving borrowers who are charged above the odds by lenders, such as women and minority groups, a much better deal.

“Our client has a high bank,” he says. “In fact, they’re 100% banks. They’re just not well served. The banks are doing better than them. What we’re doing for them is providing a nationwide digital solution that disproportionately helps people who live in areas where bank branches are closing, because more and several bank branches close every year.”

Sanborn points to the number of global bank branch closures and the fact that certain demographics are penalized by the current system of auto loans as examples, even though it applies to all credit. “It has long been documented that women and minorities end up paying a higher price at the used car dealer for their financing than others. So we’re addressing some of these systemic inequities. But above all, we make it easy to get access to low-cost credit that is structured in a responsible way.”

Becoming a digital marketplace bank has driven this process forward. “We don’t need to support bank branches, which is another structural inefficiency. We have none of that – and that creates savings in our model. We also have the very profitable marketplace and can pass those savings back to the consumer and still be very profitable. The combination of our bank, marketplace and large and loyal customer base is truly unique in banking.

The importance of digital partnerships

LendingClub’s stratospheric success has been bolstered by the fintech’s robust network of partners. Currently, they work with a handful of partners, including Persado, Experian, Narmi, TransUnion, and Quad, all of which provide essential services that help LendingClub as it disrupts traditional banking.

“The amount of innovation happening everywhere, including in financial services, means that being effective requires constant surveying of the landscape to see where innovation is happening – and how you can take advantage of it. Persado helps us unlock it with personalized language and content that drives incremental activity, which is good for the company and—given the nature of the products—it’s also good for the customer,” says Sanborn, who embraces the notion that a digital ecosystem serves the needs of an evolving environment.

“No one company can do everything. There is so much happening in optical character recognition of documents, fraud prevention and data aggregation using differentiated sources. Part of excellence is being able to have your finger on the pulse of where innovation is happening, while creating a culture, a structure that can identify partners and implement with them to drive the business.”

Essentially, Persado offers a powerful platform that helps LendingClub find out what motivates customers, so they can find the right product and deliver the right message tailored to the right audience. “Persado enables us to be predictive in what we do, to get the right result,” he says.

LendingClub has been partnered with TransUnion – which serves as LendingClub’s primary credit bureau – since its founding. Recently, they have also added Experian to the area where they are embarking on the next growth horizon with a focus on providing transparency, trust and relevance to the consumer.

Other partners include Narmi, a provider of digital banking technology, and Quad – which provides a mail marketing service – which, Sanborn says, is remarkably effective. “Some analog marketing is still very important. People are often surprised by it, but it’s a great consumer experience.”

Banking outlook for the future

As fintech and all-digital banking continue to expand globally, there is no shortage of opportunities for companies offering disruptive services. LendingClub, since the acquisition of Radius Bank in February 2021, is now perfectly positioned for growth. At this point after the acquisition, the digital marketplace bank has all its lending products in-house and now issues them through the bank. “We finance personal loans, auto loan refinancing and our purchase finance business through the bank,” Sanborn says.

“We have also launched high yield savings accounts and CDs. It is collecting deposits to finance the loans we have on our balance sheet. The next big frontier will be working on a core set of banking experiences that are truly focused on our consumer.”

It’s a bright future—not only for LendingClub, but also for their customers, who are reaping the benefits of choice in a climate where controlling spending has never been more critical to daily survival.

“Our core consumers are highly banked with a high income, typically over 100,000. They have a high FICO score, between 700 and 710. But they also have high debt. We help them reduce the cost of their debt, manage their expenses and help them find savings.”

He adds: “We are moving towards a banking experience that makes it easy for people to see where in life they can find extra savings. If they take away these savings, they won’t have to use the credit card if an emergency arises. That’s our core goal – and the big series of investments we’re going to make next.”