It is a really good article and echoes the concerns raised on this forum at one time and another. I wouldn't discount any of the concerns raised.
The common denominator in these is the idea that rapid loan growth leads to pressure to loosen credit standards which in turn leads to people getting loans who can’t pay them back.
We have already seen LC loosening the credit standards that resulted in increased loan volume.
The 2008 financial collapse added another twist that applies with LendingClub — the delusion that so-called advanced computer algorithms will protect investors from risk.
Most of the LC data is from the time period of economic recovery. The loans haven't gone through full business economic cycle. The algorithm developed using data from recovery period tend to fail when economy stagnates or decline.
Is each dollar of LendingClub revenue really worth $43? If you annualize its $144 million in reported revenue, you get $192 million — and if you divide that by LendingClub’s $8.3 billion market capitalization you get 43. As a point of comparison, WellsFargo’s revenues are worth $3.50 and Facebook’s go for $17.73. I am not sure I understand how investors can justify paying so much for a dollar of LendingClub’s revenues.
This is a very good point. Is each dollar of LC revenue worth $43 to stockholders? He makes a good comparison with Wells Fargo and Facebook. Another relevant matrix to consider are Revenue per loan and borrower and Sales and Marketing cost per loan and borrower.
LendingClub is only going to make money if the big hedge funds and other institutions that make loans on its platform enjoy above-average investment yields. But one reason LendingClub just went public may be that now is the ideal time to sell since investors realize that in 2015, the Fed will start raising short-term rates. This will mean that these fast-money providers of funds for LendingClub borrowers will get more ways to make an attractive yield. So they could be less likely to keep funding new loans — especially as the higher interest rates put the squeeze on the economy and make it harder for borrowers to repay those loans.
Very good point about what will happen to LC or marketplace lending platform when interest rate rise. I answered on Quora to a similar question about impact of interest rate rise on such platforms. Both borrowers and lenders may head to the exit. IMO, only reasons borrowers are on such platforms are because of interest rate spread between the platforms and other traditional lending sources and only reasons lenders are on such platforms are because of yield spread between the platforms and other traditional fixed income sources. Once that spread narrows, the incentives decline on both end. Such platforms will have to find another value prop than just interest rate and yield spread to survive.
If the Fed raises interest rates, how will that affect the market for consumer loans on P2P sites such as LendingClub and Prosper?
http://www.quora.com/If-the-Fed-raises-interest-rates-how-will-that-affect-the-market-for-consumer-loans-on-P2P-sites-such-as-LendingClub-and-Prosper.
I agree with author this was the right time for Lending Club early investors to head to the exit. Growth in revenues, loan volume, and costs for next 3-4 quarters will be critical to the success of LC in public market.
