Lending Club’s data about their borrowers could help them more efficiently price risk in future P2P lending markets
An interview with Lending Club CEO Renaud Leplanche by Zack Miller at Tradestreaming brought up an interesting point about the data that Lending Club has about each of its borrowers. Over time Lending Club will collect large amounts of data about each of their borrowers, and they could incorporate this data to more efficiently price the risk of each borrower when they apply for future loans. It will be interesting to see if the use of this data about their borrowers could be applied to more efficiently price risk in other consumer credit markets that Lending Club says they will eventually expand into, such as mortgages and auto loans.
Below are some highlights from the interview by Zack Miller at Tradestreaming.com with Lending Club CEO Renaud Leplanche.
- Future markets include car loans and mortgages: Lending Club intends to tackle the car loan, mortgage, and small business financing markets when the time is right
- What could be really interesting is the data around each borrower’s profile: Over time Lending Club will collect large amounts of data about their borrowers, and could possibly use this data to make loans that more efficiently prices risk for that borrower over their lifetime, including their mortgage and car loans.
- Incorporating social information into the risk pricing metrics is more important for sub-prime borrowers, where the borrowers have a less robust credit file, less transactional data and a shorter work history. For prime borrowers with robust credit profiles, traditional metrics have been working well.
- “Banks were invented as a really useful way to aggregate capital and redistribute it. Now, technology and the internet make banks unnecessary. We can make capital flow more efficiently and directly from the sources of capital to the users of capital.” – Lending Club CEO, Renaud Leplanche
- Two reasons why Lending Club is more efficient than the traditional banking model:
- Banks have large overhead costs as a result of using physical branches and thousands of employees to collect capital, which is much more expensive to run than a website like Lending Club
- Most credit card issuers don’t apply risk based pricing: Most credit card issuers charge an average interest rate of 18% across the board to all borrowers, and don’t assign a lower interest rate to less risky borrowers and a higher interest rate to riskier borrowers. Lending Club realized that the best borrowers didn’t default at a rate that warranted such a high 18% interest rate, and that they could offer a lower interest rate to those higher credit profile borrowers by only offering loans to the top 10% of borrowers and offering them a lower rate through a tiered interest rate system (7% to +20%), rather than a flat 18% for all borrowers.
- Growth: Lending Club will continue to grow at 8-10% m/m and will likely break $1B in loan originations this year, and do another $1B next year. Given that the consumer credit market is $2.5T they do not see downward pressure on the rates that they offer investors anytime soon and believe they can continue to grow at very high rates for the next 5-10 years.
Link to the full interview on Tradestreaming: http://www.tradestreaming.com/2012/07/02/investing-in-people-with-peer-to-peer-loans-with-lending-clubs-renaud-laplanche/