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Digital Lending
Puneet Gupta
Forms of Investor Exposure to Lending
Retail
Customer
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Marketplace Lending
Early P2P in India
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Lending Club
Lending Club: Case Introduction
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Lending Club: Key Questions
1. Should investors value Lending Club as a marketplace technology
company, or a specialty finance company? Why?
2. What were the costs and benefits of Laplanche’s growth strategy,
particularly in relation to Lending Club’s competition?
3. How concerned should Laplanche be with the growing number of
competitors, especially since these were private companies, not publicly
held ones? How can he best position Lending Club, given this competition?
4. How defensible is Lending Club’s business model? How would a potential
rise in customer acquisition costs influence profitability and the
sustainability of the business model?
5. What should Laplanche do to convince Wall Street and others that
Lending Club would remain the market leader in the peer-to-peer lending
space?
Lending Club (Marketplace vs Specialty
Finance)
1. Specialty Finance (aka NBFC)
• Use balance sheet for capitalization
• Valuation (1-2x Rev)
• Commoditized?
• Growth Rate? (Slow – Fast)
• Biz Model (NIM)
• Others
• Impact on rising interest rates?
• Continuous need for capital (Equity Dilution?)
2. Marketplace
• Like Ebay, Etsy etc.
• Valuation
• Growth
• Others
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Future of Digital Lending
Tech ENABLERS
• API (Aggregators) / OCEN (Open Credit Enablement Network) / Others
• Alternative Credit Scoring
• Flow Lending
• Opening of data sources like GST (MCA – In process of building API for Stmts)
• Secure consent based real-time layering
Business Impact - Move from Traditional
• Collateralized to Non-Collateralized
• Decision time – Real-Time
• Tenor – Fixed to Variable – Small to Large
• Product Type – Dramatic Expansion
• Pricing – Risk based Pricing
• Segment Expansion (Rural to Large)
• Lower Cost of Operations for Banks, NBFC’s (Enabling better NIM’s)
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Alternative Credit Scoring (Perhaps
Rural Lending Driver)
Alternative Data
• Phone Data
• Payments on post-paid bill (on-time / or not)
• Pre-Paid – Frequency of recharge, usage patterns, or number
consistency (they typically don’t keep number)
• Usage (Incoming vs Outgoing)
• Usage (Time of usage)
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Leading Niche Alternative Players
MSME Lending
Imagine a scenario where a company provides their CIN Number – And gives
consent
- Through API you can access
- Director Data (For credit and background)
- Run DIN (Director ID # Checks) through MCA
- GST
- MCA (In future – Financial Statements)
- Income tax documents (Detailed tax filing + Withholding information)
- THIS IS A NEW PARADIGM TO ASSESS CREDIT AS YOU WILL HAVE
TREMENDOUS AMOUNT OF DATA THROUGH API IN A FRACTION OF A
SECOND AT EXTREMELY LOW COST
- BETTER UNDERWRITING DECISION MAKING
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New Segments
New Alternative Startups
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Cash Flow Loans (Perhaps Non-
Collateralized)
MSME Loans ()
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Notes 1 – Class Discussion
Person A Person B
(Give a Marketplace (MK) (take a
Loan) Loan)
Where is the Risk?
Person A gets the interest payments and decides to take
the default Risk as a lender
Person B is the borrower and makes the interest
payment or decides to default
MK – Which is the marketplace – Does not have any
direct liability of ensuring lack of default
Notes 2 – Class Discussion
Person B
BL (Give a
Balance sheet lender (BL) (take a
Loan)
Loan)
Where is the Risk?
BL gets the interest payments and decides to take the
default Risk as a lender
Person B is the borrower and makes the interest
payment or decides to default
BL– Which is the Balance sheet lender – has direct
liability of ensuring compliance
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Podcast
2021 Credit where it’s due – The Ken
https://the-ken.com/story/2021-credit-where-its-due/?r_edition=2
Appendix - Notes
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Lending Club
Lending Club
• Established in 2007
• Mission – To transform the banking system to make
credit more affordable and investing more rewarding
• Operates fully online without any branch locations to
keep operating costs low and focus more resources on
customers. Transforming the banking system into a
frictionless, transparent, and highly efficient digital
experience.
• Business – Personal loans, Business loans, Education
loans, Patient solutions
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LC – Business Model
LC – Marketplace Technology or
Specialty Finance Company?
• Specialty Finance Companies :
• Use balance sheet to loan money to customers.
• Trade at 1 to 2 times revenue.
• Do not grow fast.
• Business model is based on spread between lending and
borrowing rates.
• Need to borrow more to grow and hence, need to raise more
equity.
• Lending Club wants to be known as a Marketplace Technology
company and not Specialty Finance company.
• But LC’s investors are 80% institutions / funds and only 20%
individuals (Ex. 3).
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LC – Marketplace Loan Origination
LC – Growth Strategy
• Purposefully controlled and maintained a
steady-growth strategy.
• One quarter of tremendous growth followed
by a much slower quarter of declining sales
causes stock prices to jump sporadically, which
LC management wanted to avoid.
• Controlled growth strategy helped the team
ensure that LC was growing healthily by
making sure that the proper regulatory
controls were in place to avoid issues like
fraud.
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LC – Competition
• LC’s meteoric rise had validated the P2P marketplace
for other companies to move into, which steadily
increased competition among the various industry
verticals like auto and student funding.
• The competitors, mostly private sector players, were
growing faster.
• Higher growth meant that the valuations were higher
than LC, which also meant that they were no more
acquisition targets for LC.
• That means that LC would be defenseless should any of
such competitors begin to capture market shares
rapidly.
• LC believed that steady growth helped LC establish best
practices regarding regulation and auditing.
LC – Business Model – Profitability and Sustainability
• Oct 30, 2015 – LC stock has experienced a difficult twelve
months. It closed at $13.62, down 53% from its post-IPO peak
of $29.29.
• Investors have become increasingly worried about
marketplace lenders' ability to continue robust growth,
manage acquisition costs, manage credit risk exposure and
generate earnings.
• Lending Club proved the skeptics wrong on almost all of those
concerns.
• Robust loan growth – 92% higher YOY in 2015; Acquisition
costs under control at 1.92% (can charge 1-5%); Credit risk
underwriting model seems adequate with 8-9% return on
loans in the current low rate environment; LC reports
profitable operations.
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LC – Business Model – Profitability and Sustainability
• Investors considered three big risks on the horizon.
• Increased regulatory scrutiny could result in increased
costs. Marketplace lenders are nonbank entities, and many
regulatory agencies are starting to ask questions. Regulators
could require changes in the business model that would
diminish the cost advantage of marketplace lenders.
• Institutional investors could lose their appetite for consumer
loans. Large, traditional banks still have one big advantage:
sticky, low-cost consumer deposits. LC has an abundance of
capital to lend, but that could change depending upon the
environment.
• The credit cycle could change, pushing up losses. When
delinquencies increase, LC would lose its 1% management fee
on those accounts. But the bigger threat is that the
institutional investors decide to dial down their consumer
loan exposure when the cycle turns.
LC – Remain Market Leader in P2P Lending
• LC had to satisfy the public market investors of four
major concerns:
1) The company has strong regulations in place.
2) LC will continue to grow at a healthy rate.
3) LC will be able to keep customer acquisition costs in
check.
4) LC is truly a P2P marketplace. It is not “bank to
customer” lending vehicle.
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Appendix – Class Whiteboard
Risk Pool
1
Borrower
Borrower
Risk Pool Borrower
Borrower
2
ep Zopa
e
Borrower
Borrower
Risk Pool
3 Borrower
Borrower
Borrower
Borrower
Borrower
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Lender 1 Lender 2 Lender 3 Lender 4 Lender 5 Lender 6 Lender 7 Lender 8 Lender 9 Lender 10
Lender 1 100 Borrower 1 Borrower 1 10 10 10 10 10 10 10 10 10 10
Lender 2 100 Borrower 2 Borrower 2 10 10 10 10 10 10 10 10 10 10
Lender 3 100 Borrower 3 Borrower 3 10 10 10 10 10 10 10 10 10 10
Lender 4 100 Borrower 4 Borrower 4 10 10 10 10 10 10 10 10 10 10
Lender 5 100 Borrower 5 Borrower 5 10 10 10 10 10 10 10 10 10 10
Lender 6 100 Borrower 6 Borrower 6 10 10 10 10 10 10 10 10 10 10
Lender 7 100 Borrower 7 Borrower 7 10 10 10 10 10 10 10 10 10 10
Lender 8 100 Borrower 8 Borrower 8 10 10 10 10 10 10 10 10 10 10
Lender 9 100 Borrower 9 Borrower 9 10 10 10 10 10 10 10 10 10 10
Lender 10 100 Borrower 10 Borrower 10 10 10 10 10 10 10 10 10 10 10
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