Why LendingClub Stock Is Crashing
LendingClub Corp (NYSE:LC) is getting pummeled this year. The latest hit on LC stock came from Deloitte, which put out a scathing report on the entire premise of marketplace lending. If it’s right, then LendingClub stock is in serious trouble.
The report says marketplace lending, which links retail investors and borrowers, “will not be significant” and is “unlikely to pose a threat to banks in the mass market.” (Source: “Deloitte just trashed the hype around a $180 billion fintech market,” Business Insider, May 23, 2016.)
That must come as a blow to many investors who were hopeful that LendingClub could disrupt the entire banking industry. Their model gave retail investors a chance to do what they could never do previously: lend directly to borrowers.
Traditionally, banks sit in between savers and borrowers, doling out loans to whomever they deem creditworthy. LendingClub figured it could change the game.
Instead of just a FICO score, LendingClub uses advanced analytics and metadata to find creditworthy borrowers. That also reduced its costs significantly.
Those savings got passed on to borrowers. Rather than paying ~20% rates on their credit cards, they simply paid about seven percent to retail investors. It was a win-win for both sides.
Or at least that was the idea.
According to Deloitte, these firms could sustain a profitable business if, and only if, they stay niche. The audit firm doesn’t think marketplace lending can challenge banking on a broad scale.
The report argues that when LendingClub attempts a mass-market product, banks will simply undercut them on price. After all, they have the scale to do so, so why wouldn’t they?
That would imply the industry’s much-touted $180-billion price tag is overvalued.
Deloitte doesn’t seem to think that LendingClub and its peers can justify that kind of valuation. The competitive advantage is too narrow, they say. If the banks really feel threatened, they can easily imitate the most successful features of marketplace lenders.
They too can use metadata and advanced analytics to price creditworthiness. They too can improve technology until the speed and convenience equals MPLs. The only difference remains cost and even that is only temporary according to Deloitte.
The report suggests that as LendingClub grows bigger, when its “loan portfolios are likely to more closely resemble those of the market as a whole, MPLs will have no material source of cost advantage over banks relating to collections and recoveries.” (Source: Ibid.)
Unfortunately for all LC stock fans, these reasons may help explain why LendingClub stock is down 60% from the start of the year.