Withe the recent partnership with Alliance Partners, which controls over 200 community banks under BancAlliance, it gives LendingClub a business advantage. Here is my take on its implications:
- Lower and more stable borrower acquisition costs – The details of the partnership terms aren’t public, but I assume that LC is sharing some of the originations revenue with the Alliance. My guess would be up to half since that’s closer to the market average for borrower acquisition costs (50%* 5% fee * $15k avg. loan size = $375). This is a good deal since it’s increasingly competitive to acquire new borrowers given the new competitive environment. Prosper, up until very recently, were seeing losses because their borrower acquisition costs were higher than originations revenue. Also, the bread-and-butter borrower lead generation has been mostly using mailers (snail-mail solicitations), but with players aggressively coming into the game, this strategy will become ineffective in the long run (cost-benefit).
- Wider borrower network reach/more loan dollars/future opportunities – Partnerships generate 40% of Prosper’s new loans, so partnerships are a also big part of borrower lead generation. This is significantly more so for Small Business loans due to targeted solicitation costs. BancAlliance’s 200+ banks make up the 4th largest bank when measured by the number of branches/banking centers. This may be equivalent to $200-300 billion in customer assets. New community banks ($100M-$10B in assets) may also join the BancAlliance network and provide additional growth over time. Ultimately, this relationship allows LC to penetrate further in the consumer loan market share. It also sets them up for small business lending in the future through this ecosystem/existing partnership.
- More stable/institutional investor dollars – One of the harder things to do in marketplace lending is to find investors on the other side of the market. More importantly, institutional dollars have historically been fickle, but this type of partnership from a bank would be a more consistent provider of capital to fund loans. Many of the smaller marketplace lending platforms struggle because the lack of investor dollars, which hinders the borrower’s experience as loans don’t get funded. So, any large scale partnership that aids borrower acquisition probably will continue to be coupled with the other side to provide capital.
- Higher availability of riskier loans – Typically, banks as investors focus on investing on lower lower risk loans (grades AA, A, and B). This works out well for the other investors in LC’s marketplace because of an increase in availability of riskier loans (grades C, D, E, F/G). As of today, there’s a short supply of these loans for investors that I often see new loans in this tranche snatched up within 15 seconds of a new loan cycle.
- Small Banks are on LC’s Side – Though LC’s disrupting the traditional banking model, smaller community banks will side with LC because consumer lending has been a declining business for smaller banks against the big banks for over the last two decades. Smaller bank partnerships with LC offers a competitive advantage against the big banks in consumer lending, all while enjoying higher margins on both the originations and investing side of the transaction (due to LC’s business model efficiency) than their native consumer lending operations.
- Market share exclusivity – LC’s partnerships lock up potential partnerships from Prosper and other marketplace lenders in the future. This could translate to stronger market share retention (stickiness) and higher borrower acquisition costs for LC’s competitors.