put your money into individual notes, or into a bucket of notes. You have a choice of whose notes you fund and what your credit risk criteria are. There wasn’t a way, before this, for investors to get access to consumer notes. The return for the investors has been anywhere from 5.8 percent to 12.7 percent on an annualized basis, which is pretty phenomenal from an investment perspective. Instead of parking your money in a savings account or a CD you can put your money into consumer loans.
X: This is a naïve question, I know, but why would anyone want to put his or her money into consumer loans? Isn’t consumer lending the very thing that blew up the economy back in 2008? What’s in it for both sides?
RL: There are a couple of things to understand about Lending Club. They don’t underwrite subprime consumers or people with shaky credit histories. About two-thirds of their consumers are taking their credit card debt, which usually has a revolving rate of 13, 14, or up to 18 percent, and putting that into a fixed-rate loan that they are paying off. Those consumers are drawn to the platform because it helps them pay off their credit card debt. On the management side, we see that the default rate is about 3 percent, compared to the industry average of about 5 percent.
The unique thing about Lending Club is that they are essentially a public company—they had to register with the SEC to offer bonds, so the platform itself is completely transparent. You can see the return rates and how the market actually performs, and all of that draws in additional investors. One interesting thing that we’re seeing is that there has been more and more institutional interest in the platform. When it started out, it was more small investors, people putting a couple thousand dollars into the platform. Twelve to 18 months ago, we had about five people on the platform who had over a million dollars invested, and that was a big deal for us. Today we have over 65 people with over a million dollars, and some of those have tens of millions of dollars on the platform—family offices and large investors who see this as a great place for returns and who believe in the model itself.
X: What are the biggest challenges Lending Club faces as they scale up? If they are indeed a technology platform, then I imagine they have to solve a lot of the same problems as other Web-based platform providers—security, reliability, customer acquisition.
RL: I think the challenge they face is that they are creating a whole new category, a whole new vehicle. They have a dual marketing and acquisition challenge. It’s the chicken-and-egg thing. You have to acquire the borrowers, and those people have to be aware of the option of a Lending Club loan as opposed to taking out a high interest rate credit card or going to a bank. But they also have to acquire investors—those two things have to be balanced. What we have seen is a fabulous management effort within the company, where they are doubling year over year in terms of revenue and loan origination. They’ve been doing a really amazing job of predicting where things will come out, and the market is beginning to have its own internal balance.
X: How does Lending Club make money?
RL: They have two types of fees. They charge a one-time origination fee that is paid by the borrower, and a small fee that the investors pay from their side that covers the cost of servicing the note itself. The origination fee is roughly 4.5 percent and is collected up front. The servicing fee is about 1 percent and it’s collected monthly over the life of the loan. The maximum loan size is $35,000, but the average loan is around $12,000. They have been increasing the maximum loan size as they learn. They are doing things in such a smart way—that is why I love the company.
X: Lending Club just recruited former Morgan Stanley chairman and CEO John Mack to join its board of directors. How did they pull that off, and what does Mack bring to the board?
RL: Renaud is a fabulous networker, so all credit goes to him for actually getting an introduction to John Mack. Yes, he was at Morgan Stanley, but he is retired now and he is at the phase of his career where he wants to reinvent how things are done on Wall Street. He was in the saddle at Morgan Stanley long enough to know where the big opportunities lie. That in itself was a big validation for Lending Club. Also, John Mack knows a great deal about fixed-income products—he was a bond trader and what he really knows is the investor side of the equation, which is 50 percent of the equation at Lending Club. And the huge advantage is that he knows Wall Street. As the platform matures and we see larger and larger investors coming into it, I think John will be a great asset. That’s the value he brings.
X: You have other financial services investments at Morgenthaler, right?
RL: The other company where I lead the investment is Pageonce. It’s a mobile wallet play. I’d been tracking the company for a little while; we were watching where Steve Schultz, who was the general manager at Yahoo Finance, was going to land. He was a rising star there and we felt like he had his pulse on
