Just over five years ago LendingClub announced the launch of their small business lending operation. It was their first major vertical outside of personal loans and it generated considerable excitement in the industry. Here was the leader in online personal loans going into another underserved vertical and one without a dominant online market leader.
Today, the company announced that effective immediately it will stop originating small business loans themselves and move to a co-branded experience with both Funding Circle and Opportunity Fund. LendingClub is creating a new ecosystem that will allow more small businesses to be funded.
On Friday of last week, I spoke with Steve Allocca, the President of LendingClub, Bernardo Martinez, the U.S. Managing Director of Funding Circle and Luz Urrutia, the CEO of Opportunity Fund. I first asked Steve why they are making this move. He said, “This move is part of a proactive shift in the evolution of the business model at LendingClub. We want to move towards offering a multi-sided platform to our members with several offerings, some of which we fulfill ourselves and others will be fulfilled by third parties.”
When it comes to the types of small businesses it serves Funding Circle has a similar target market to LendingClub. Although Bernardo pointed out that Funding Circle offers larger loans than LendingClub and a broader range of loan terms. When I asked him for his thoughts on this change by LendingClub Bernardo said, “This move will be critical for Funding Circle’s growth going forward. We have been working with LendingClub on the policy front for many years and we are very much aligned on our values and support of small businesses.”
The Opportunity Fund is the leading non-profit small business lender working with underserved borrowers, often women or minority owned businesses. They have had a relationship with LendingClub since 2016 where LendingClub has sent companies that did not fit their underwriting credit box to Opportunity Fund for a second chance. This pilot program will be expanded dramatically under this new relationship. Luz Urrutia said, “We have been incredibly pleased with the repayment rates we have received on the LendingClub referrals during our pilot program. Rolling out this program will help us achieve our goal of growing lending to 45 states and $1.2 billion by 2023.” Luz went on to say that she expects LendingClub referrals to eventually yield one-third of their loan volume.
So, this change does not mean LendingClub is getting out of small business lending. In fact, Steve Allocca said they will continue to invest in marketing activities around small business loans and will maintain their web page at www.lendingclub.com/business. But these loans will no longer be available to their investor partners as all borrowers will be funded by either Funding Circle or Opportunity Fund.
When I asked about other products that LendingClub might bring to this new marketplace approach Steve was non-committal. Although he did say they will be pursuing both lending and non-lending opportunities for their members going forward. But no other products are close to an announcement yet.
Two years ago, in his keynote at LendIt Fintech USA 2017 LendingClub CEO Scott Sanborn first suggested the idea of partnering with other providers and offering their products on the LendingClub platform. He talked about unleashing the platform potential like Amazon did in opening up their marketplace to third parties. This could be the first step in that direction.
Having said that, I don’t think LendingClub would be making this move if they were really happy with the way their small business loans have been performing. If this was a growing and profitable niche providing strong returns to investors then I don’t see them changing the model like this.
Small business loans seem to have become something of a forgotten vertical at LendingClub. I went back and searched the transcripts of the last four earnings calls and there was not one mention of the term “small business”. Also, the “other” category of loans that LendingClub shares in its quarterly earnings presentations, that loan volume number (which includes small business and auto) has been stagnant at around $200 million a quarter for the last several quarters. So, while we have no direct insight into how the small business loan segment is going I think it is safe to say it is not performing as well as the company had hoped.
With that in mind it is not a surprise that LendingClub has decided to move to a co-branded small business lending operation. And Funding Circle and Opportunity Fund are the logical partners for this. There is a long history with Funding Circle and they were co-founders (along with Prosper) of the Marketplace Lending Association back in 2016. The partnership with Opportunity Fund also fits in nicely with LendingClub’s mission on financial health.
What will be most interesting will be LendingClub’s next move. Here is what Steve Allocca said on that, “As LendingClub continues to scale, it will add high quality partners that align with its mission to meaningfully contribute to its customers’ financial health, by providing them with additional ways to save, while simultaneously providing opportunities to grow its business.” This leaves the next move wide open. But I wouldn’t be surprised to see a move from LendingClub that is something completely new, potentially outside of lending. Stay tuned.