Lending Club has a great business model. Its primary target segments are small loans for individuals, SMB’s, and students. LendingClub provides an online platform where borrowers can apply for loans, get evaluated through the LendingClub’s proprietary algorithm, and then be matched to lenders who are willing to make funds available. The technology platform that LendingClub utilizes enables it to automate better servicing, reduce overhead expenses, and evaluate the borrower’s creditworthiness. According to the company, through this technology, it brings transparency and efficiency to the process of investing; hence, generating attractive risk-adjusted returns (Adrian, 2010). Consequently, the company claims to find cheaper rates for borrowers compared to banks and short- term credit card loans. From this benefit, the LendingClub increases the access to less complicated and more affordable loans that were previously not available to the borrowers.
Furthermore, LendingClub gives investors the access to asset classes that diversity the credit risk for individual investors across a portfolio of loans (Adrian, 2010). Other than the basic business model of matching borrowers to lenders, LendingClub provides banking services to specific business categories, unlike the traditional banks that consist of many separate businesses. The company handles trade and project financing, credit cards, mortgages, term deposits, current accounts, car financing, and more. By splitting up along business lines, LendingClub solves most of the sector’s systemic- risk problems (Adrian, 2010). The biggest difference between the LendingClub’s business model to that of traditional banks lies in funding. The difference comes in how the loan is issued and funded. For instance, for a personal loan made by a bank, the funding of the lad comes from deposits, the bank maintains credit card risk and holds the loan or its balance sheet. On the other hand, LendingClub connects investors to borrowers, without the intermediation of traditional financial institutions (Adrian, 2010).
LendingClub offers brokerage services. Despite not allowing any loan broker or other services to charge any fee on its behalf, the company authorizes advisors and broker- dealers to offer Peer- to- Peer lending investments to their pool of customers, without necessarily operating their own lending marketplace (Adrian, 2010). The company can do this through the Lending Club Open Integration (LCOL), which is an API that online advisors and broker- dealers can use to integrate on their websites and platforms, LendingClub’s lending marketplace. From the integration, advisors and broker- dealers can offer their pool of customers the ability to invest directly to borrowers on the platform. The API allows trading analysis platforms and websites to add broker services to their products. It also offers qualitative asset transformation by providing better alternatives for borrowers and lenders to transact (Adrian, 2010).
Operating a shadow bank, LendingClub faces various risks. One of the greatest risks that the company faces is that of bankruptcy due to larger systemic risks. LendingClub’s bankruptcy could be caused by various reasons such as poor operational management, internal scandals, or increased competition. If bankruptcy occurs, there is high likelihood that the investors would lose their entire investment …