This story broke on Wednesday 15 November.
The story is that the founder of Lending Club, Renaud Leplanche, who was ousted in a scandal in May was creating a new venture to compete with Lending Club called Credify. Headlines talked about 2nd Act or Comeback.
The story came out in the Wall Street Journal (WSJ) and appeared to be good old-fashioned journalism – digging around for a scoop by looking at corporate filings.
I do not think there is much of a story about Credify itself. The chances of success for that venture are slim (more on that later). The story hangs on 3 threads:
– What does this tell us about the state of online journalism?
– Does this justify selling Lending Club stock?
– What does this story tell us about the transformation of consumer lending
What does this tell us about the state of online journalism?
News drives markets and digitization is changing news, so this is indirectly a Fintech story.
As a media entrepreneur this aspect of the story interests me.
This was either a non-story done under time pressure that had a big impact or an old-fashioned scoop from hard core investigative journalism. The latter is to be celebrated because the economics of digital media don’t allow much budget for hard core investigative journalism. Imagine All The Presidents Men today.
The time pressure on journalists today is intense, because the online ad model post search, social and adblockers, does not allow time for hard core investigative journalism.
There is no site for Credify (various spellings and .tld urls end up in a blind alley) and nobody is talking on the record. Let’s assume the story is true. It certainly appears that a company called Credify was created by Renaud Leplanche. Without a famous name impacting a public stock, this event would have gone unnoticed – just one out of 1,000,000 new businesses created each year in America alone.
So I incline to this being a non-story done under time pressure. Of course, only time will tell and events may prove me wrong. Credify may launch and quickly get to the $50m in revenues mentioned in the WSJ article as the target for 2017.
A non-story done under time pressure unsettles markets because, if it comes from an authoritative source such as WSJ, other publications repeat the story citing the original post as evidence. That is what happened in the Credify story, which was briefly on the technology front page (Techmeme).
Does this justify selling Lending Club stock?
$LC stock did decline a bit the day after on the 16th and by more than 5% a day later on the 17th and a bit more on the 18th. Over $125m of market value evaporated. Nobody knows for sure why a stock moves – in this case there were also options expiring, the stock had gone up sharply and may have needed a correction, there was a negative post on Zero Hedge (do they have positive posts?) and a story about Lending Tree that defined them as competitors (incorrectly in my view).
Disclosure; I bought LC stock after the May crash (got in at 3.51). That is why I was paying attention to the Credify story. My investing approach is to do a lot of fundamental analysis before buying so that I have context to look at news as it comes in and make a Buy/Sell/Hold decision. This story was a Hold decision – it was “noise on the line”.
Reactions of retail traders on stock forums mostly also did not think that the story was significant. This was a sample reaction:
“Not sure why Laplanche startup would be more concerning than Goldman’s market entry.”
Which brings us to the final part of this story.
What does this story tell us about the transformation of consumer lending?
Lending Club is the bellwether of MarketPlace Lending. It may well be bellwether of the whole Fintech market. If Lending Club fails, investors will tell Fintech entrepreneurs “stop trying to compete with banks, go back to the old model of selling software to banks”.
I am calling this market the transformation of consumer lending, because so many of the names don’t quite fit any more:
– P2P Lending. This is what it was called when early visionaries such as Renaud Leplanche were getting started about 7 years ago. Individual lends to individual via the platform – beautifully simple and revolutionary concept. Whatever else Renaud Leplanche does with his life, the world owes him a debt of gratitude for making that work.
– Market Place Lending. This name evolved when fast moving credit hedge funds and other institutional lenders in moved in. Now the value chain got longer. Individual lends to Institution which lends to individual via the platform.
– AltFi. In this iteration, the market place disappears. The credit hedge fund buys or builds the digital loan origination technology so that they can lend directly to individuals from their own balance sheet. This is also sometimes called balance sheet market place lenders. There are also hybrid models with some balance sheet lending and some market place lending. Examples include Avant and SOFI.
– Digital Lending. In this iteration, the credit hedge fund disappears. Banks buy or build the digital loan origination technology so that they can lend directly to individuals from their own balance sheet. As Banks have a lower cost of capital they can beat the credit hedge fund. First out of the gate is Goldman Sachs with Marcus. They will beat the AltFi Lenders because of lower cost of capital.
Consumer Lending is such a massive market and we are still in the early days, but it is an utterly different market from when Renaud Leplanche was doing his pioneering work in the founding days of Lending Club.
One thing that gives me confidence in Lending Club (and Prosper but they are still private so I cannot buy their stock) is that the original P2P Lenders are still there. They may only be one lender, along with Banks and other Institutions, but they are still there. The humble retail lender has confidence because they get good risk adjusted returns compared to any other credit avenue (if they are careful). That confidence gives me confidence as an equity investor.
There is some news that would prompt me to sell LC stock. If the new CEO was also caught doing something wrong my take would be “once means nothing, twice is coincidence and three times is a trend and I am not waiting around for the third time”. The Lending Club Board proved in May that they are vigilant and decisive, so I think this is unlikely.
Fintech is fundamentally about the democratization of technology. Given the right tools, smarts and hard work, a retail lender can do what a credit hedge fund does. There has never been a shortage of people with smarts and hard work. Now they are also getting the tools. That is the revolutionary promise of Fintech in a nutshell.
Given that analysis, what would a smart entrepreneur who knows consumer lending do today:
– P2P Lending. Building consumer trust and network effects is a long game and the consumer lending market is no longer in the nascent phase that rewards a long game.
– Market Place Lending. Building Institutional trust takes time. The May scandal that led to Laplanche being fired broke that trust. This would be a hard sell.
– AltFi. This was a good play a few years ago, but with Banks like Goldmans getting into the game, this would be highly risky today.
– Digital Lending. Only an option if you are a licensed deposit taking bank.
That analysis told me that it was not time to sell LC stock and that the next iteration of this market is back to the original P2P Lending model of empowering retail lenders on a mass scale.