On 22 April Renaude Laplanche, founder and CEO of US peer-to-peer lending giant Lending Club, received a ‘Disruptive Innovation’ award in New York, alongside such luminaries as Richard Leakey and “Hamilton” creator Lin-Manuel Miranda. Two weeks later, he was pulled into a meeting with two directors of the San Francisco Company and was told to resign. A drastic one-hundred and eighty degree turn for the man who founded America’s largest online lending platform, yet Laplanche’s decision to oversee the sales of a total of $22 million in near-prime loans to a single investor was very much at odds with Lending Club’s business MO.
Stating that the deal was made in a way that defied the investor’s instructions, Lending Club declined to elaborate on the specifics of the deal or the identity of said investor. However, regardless of the specifics it is clear that Laplanche’s misstep may spell disaster for international P2P lending.
Mistrust And Economic Impact
The charismatic Laplanche was, in many ways, the acceptable face of marketplace lending, with Lending Club seen as a pioneering titan in the industry. As such, this surprise indiscretion on his part has lowered confidence in the online platform, with Lending Club’s stock plummeting by 25%, despite assurances from the platform’s financial officer that the $22 million was an “isolated” incident. The incident could not have come at a worse time as Lending Club’s position on Wall Street is also in peril, with the company struggling to find funding for its loans in the capital market thanks to investor unease.
Shockwaves Through The British Lending Industry
It’s not just Lending Club that are feeling the strain. Britain’s peer-to-peer lending market was in a position to go mainstream, with the UK government deeming loans made via online platforms viable for tax-free investment, an enormous boon to Britain’s burgeoning lending industry. Cormac Leach, senior analyst at Liberum Capital Ltd. has given a grim prognosis as to the health of the industry: “Lending Club is the leading light in the sector so if it’s not following best practices to the letter, then investors are going to assume that second- and third-tier platforms are doing the same thing.”
And indeed, P2P Global Investing Plc, a publicly traded fund that investors use to bet on British online loans, is down 8 percent since news broke of the Lending Club fiasco. Deloitte LLP published a report this week predicting that marketplace lending may amount to just 1 to 6 percent of Britain’s £600 billion pounds in total loans by 2025.
However, luminaries of Britain’s lending, such as RateSetter’s Rhydian Lewis, feel that greater restrictions and transparency will prevent Britain from following in the US’ footsteps. “Everything we’ve done is in contrast to what’s happening in America,” Lewis assured, “The fundamental benefits of peer-to-peer lending haven’t changed overnight – this is still a good business.”
Lewis goes on to elaborate that Britain’s main saving grace seems to be its greater emphasis placed on smaller investors. While the US has been skewed towards institutional investors, UK platforms are more accommodating to SMEs which makes regulation and transparency a significantly more realistic goal. Britain has also pioneered a regulatory regime for P2P lending business models, which requires a platform to fully explain the level of risk in investment, while the US is still operating under a system set up for banks and other forms of lending.
The FCA also includes the safety net of redress for unsuitable advice given to lenders. The authority’s Financial Ombudsman is also on hand to field complaints from borrowers and lenders against the platform, creating a culture of self-regulation in which SMEs can thrive.
Learning From Lending Club
Lending Club’s actions have, undoubtedly, engendered a degree of mistrust for the online P2P lending platform, but we at Boost Capital aren’t ready to write off P2P lending as a vital platform for economic growth. It’s heartening to see that Britain seems to be committed to learning from the discrepancies of the US’ lending model by placing more of an emphasis on helping SMEs develop than merely keeping money cycling through the same, financially bloated channels as many US platforms have done. As small business lenders, we feel that the nurturing of SMEs is vital to a healthy economy, so it’s good to see the rest of Britain’s lending industry agrees and has committed to culture of regulation that we hope will become the benchmark for P2P lending’s international model.