Renaud Laplanche was two weeks into a planned year-long sabbatical in August 2006 and found himself with a little too much time on his hands.
Reduced to reading his credit card statement, he noticed that if he didn’t pay off what he owed by the end of the month, he would be charged 18.99% interest on the balance. But at the same bank that issued the card, he was getting just 0.4% interest on the money in his bank account.
"When you see such a big spread and you’re an entrepreneur, you start scratching your head and saying, ‘Okay, [is there] a better way?" he says.
That head-scratch was the catalyst for San Francisco-based Lending Club, a peer-to-peer lender that connects investors with people and small businesses that need money. Instead of following a banking model with high overhead, Laplanche’s vision was to create a marketplace where investors could lend money to creditworthy individuals and collect interest at rates that provided an attractive return.
Because the process would be streamlined, it would be less expensive to the borrower. He incorporated the business in October 2006 and launched Lending Club in June 2007—just months before the Great Recession.
"I’m not sure whether it was the worst possible time or the best possible time. There are arguments on both sides," he says.
From the start, Lending Club faced two sizeable obstacles: finding investors in the midst of a financial crisis and creating a new business model in a heavily regulated sector. While attracting borrowers was relatively easy in a climate where it was increasingly difficult to obtain credit, attracting investors during the recession was tough, he says.
Laplanche worked his personal network and targeted investors who were comfortable with risky investments. He made "several different arrangements" with early investors to sweeten the opportunity. For example, someone who ponied up $200,000 or more was eligible for an equity stake in the company.
Early investors were either friends or friends of friends, but the word started to get out that Lending Club investments were paying off and more investors signed up. In spring 2009, Laplanche got his first $50,000 check from someone he didn’t know. That’s when he knew the business was gaining traction.
The other issue Lending Club faced was that it had to comply with strict financial regulations that were written for a different type of business. In addition to consumer protections such as the Truth in Lending Act, Fair Credit Reporting Act, and Fair Bank Collection Act, Lending Club had to operate in accordance with Securities and Exchange Commission (SEC) regulations. The problem was that there were no rules for this type of investment-based lending platform.
The Lending Club team was actively involved in working with regulators to create an appropriate framework. Based on SEC regulations at the time, Lending Club borrowers would have to produce audited financial statements—something that would be prohibitive for someone who just wanted a $5,000 or $10,000 loan.
Laplanche says SEC regulators were very open to finding solutions. Ultimately, they allowed Lending Club to become the issuer of the securities, taking on the burden of producing audited financial statements, while allowing investors the right to receive payments from consumers. Currently, only residents of 26 states are permitted to invest directly in the Lending Club platform.
Since facilitating its first loan in June 2007, Lending Club has more than doubled annual loan volume each year, with more than $4 billion in loans funded through the platform. The company has grown at a pace of more than $750 million per quarter, and Lending Club says it saves borrowers an average of 29% compared to typical bank interest rates.
Laplanche says that today, the solid returns have actually attracted banks as investors. He says it’s possible to have a loan funded completely or in part by a bank at a lower interest rate than if you had borrowed from the bank itself.
Bottom Line: Laplanche launched a capital-intensive business during a severe recession in a sector where the regulations need to be rewritten to accommodate his business model. Even though the obstacles seemed overwhelming, he struck deals to get investors and reached out to regulators directly to work toward fair governance for his fledgling business model.
"We really believe that we can really help transform the entire banking system. We think we can make it more efficient, more transparent, more consumer-friendly, and really make credit more affordable for consumers and businesses," he says.
[Image via Simon Cunningham]