Lending Club Custom Case Solution & Analysis

Case Evidence Brief

1. Financial Metrics

• Total loan originations reached 8.36 billion in 2015, up from 4.38 billion in 2014.
• Revenue grew from 213 million in 2014 to 429 million in 2015.
• Reported a net loss of 81.4 million in the second quarter of 2016 following the resignation of the founder.
• Institutional funding dropped from 34 percent of total originations in early 2016 to 26 percent by the second quarter of 2016.
• Marketing expenses as a percentage of revenue increased to 48 percent in Q2 2016 to attract hesitant capital.
• Loan yields for Grade A notes sat at approximately 5.3 percent, while Grade G notes reached 25 percent.

2. Operational Facts

• Operating as a marketplace lender connecting borrowers seeking unsecured personal loans with individual and institutional investors.
• Internal audit in 2016 revealed 22 million in loans sold to a single institutional investor failed to meet the specific investment criteria of the buyer.
• The platform uses a proprietary credit scoring model based on FICO scores, debt to income ratios, and credit history.
• Headquarters located in San Francisco with a workforce focused on data science, engineering, and loan servicing.
• Secondary market platform allows investors to trade notes, though liquidity remains limited.

3. Stakeholder Positions

• Renaud Laplanche: Founder and former CEO, resigned under pressure after disclosure of internal control failures and personal interest in a fund the company invested in.
• Scott Sanborn: Appointed CEO to restore stability and repair relationships with the investment community.
• Hans Morris: Chairman of the Board, focused on governance reform and regulatory compliance.
• Institutional Investors: Banks and hedge funds that provide the majority of capital; currently demanding higher yields and greater transparency.
• Retail Investors: Smaller individual lenders who value the democratized access to consumer credit but fear platform instability.

4. Information Gaps

• The precise default rate performance of 2015 and 2016 loan cohorts during a potential macroeconomic downturn.
• The specific cost of capital for Lending Club if it were to pursue a banking charter versus maintaining the marketplace model.
• Detailed breakdown of customer acquisition costs across different marketing channels during the 2016 crisis.

Strategic Analysis

1. Core Strategic Question

• How can Lending Club re-establish institutional trust and stabilize its capital supply while navigating a transition from a growth-oriented tech startup to a regulated financial institution?

2. Structural Analysis

The marketplace lending model faces a structural crisis of confidence. Using a Value Chain analysis, the primary weakness is the Inbound Capital component. Unlike traditional banks with sticky deposits, Lending Club relies on fickle institutional capital. When internal controls failed, the supply of capital contracted immediately, creating a liquidity trap. The bargaining power of suppliers (investors) is currently absolute because the platform has no balance sheet to fund loans during a capital flight. Competitive rivalry is intensifying as Goldman Sachs (Marcus) and other well-capitalized banks enter the digital lending space with lower costs of capital and established regulatory frameworks.

3. Strategic Options

4. Preliminary Recommendation

Lending Club must pursue the Institutional Pivot as a bridge to a long-term Bank Charter Acquisition. The immediate priority is capital permanence. By securing committed funding lines from banks, the company can signal stability to the market. The marketplace model is too fragile in its current form. Relying on retail investors is insufficient for the scale required to achieve profitability. A banking charter is the only way to compete with traditional lenders on the cost of funds over a full credit cycle.

Implementation Roadmap

1. Critical Path

• Month 1: Finalize the comprehensive internal audit and publish a transparency report to address the 22 million loan discrepancy.
• Month 2-3: Renegotiate terms with the top five institutional investors, offering temporary yield incentives to lock in capital for 12 months.
• Month 4-6: Launch a revamped compliance framework that automates loan-to-investor matching criteria to prevent future manual overrides.
• Month 7-12: Initiate the application process for a bank charter or identify a small community bank for acquisition.

2. Key Constraints

• Regulatory Scrutiny: The SEC and state regulators will likely limit growth rates until compliance systems are proven effective.
• Capital Availability: The ability to fund the transition depends on maintaining a minimum level of origination volume to cover fixed operating costs.

3. Risk-Adjusted Implementation Strategy

The strategy assumes a moderate economic environment. If interest rates rise sharply, the spread for investors will compress, making the platform less attractive. To mitigate this, the implementation plan includes a contingency to pivot marketing toward high-quality Grade A borrowers to maintain lower default rates, even if it slows total volume growth. Execution will prioritize operational accuracy over speed for the next four quarters.

Executive Review and BLUF

1. BLUF

Lending Club must transition from a marketplace intermediary to a hybrid financial institution. The 2016 governance failure exposed the fatal flaw of the pure marketplace model: the lack of capital permanence. Survival requires securing committed institutional funding and eventually obtaining a bank charter. Without the ability to hold loans on the balance sheet via deposits, the company remains vulnerable to capital flight during every period of market volatility. The focus must shift from origination volume to credit quality and regulatory excellence.

2. Dangerous Assumption

The analysis assumes that institutional investors will return at previous levels once compliance is fixed. There is a significant risk that the 2016 scandal was not just a governance issue but a signal that the underlying credit models are unproven in a high-rate environment, leading to permanent institutional withdrawal.

3. Unaddressed Risks

• Adverse Selection: As traditional banks launch digital products, they may use their lower cost of capital to cherry-pick the best borrowers, leaving Lending Club with higher-risk applicants.
• Regulatory Overreach: New federal regulations on fintech lending could impose usury caps or reporting requirements that make the current business model unviable in several states.

4. Unconsidered Alternative

The team did not fully explore a White Label Strategy. Lending Club could pivot to becoming a pure technology provider for traditional banks, selling its credit scoring and origination software rather than managing the marketplace itself. This would eliminate capital risk and regulatory burden while utilizing the core data science assets of the firm.

5. MECE Assessment

• Funding sources categorized as Retail, Institutional, or Balance Sheet (Exhaustive).
• Risk factors separated into Governance, Macroeconomic, and Competitive (Mutually Exclusive).

VERDICT: APPROVED FOR LEADERSHIP REVIEW