Lending Club Custom Case Solution & Analysis

1. Evidence Brief — Business Case Data Researcher

Financial Metrics

Loan Origination Volume: $1.2B in 2013, up from $159M in 2011 (Exhibit 1).
Revenue Sources: Transaction fees (1%–5% of loan amount) and servicing fees (1% annually) (Paragraph 12).
Operating Margin: Company reached profitability in 2012; 2013 net income $7.3M on $98M revenue (Exhibit 2).

Operational Facts

Model: Peer-to-peer (P2P) lending platform connecting retail/institutional investors to individual borrowers.
Credit Risk: Lending Club does not hold loans on its balance sheet; investors bear credit risk (Paragraph 15).
Funding: Shift from 90% retail investors in 2011 to 60% institutional investors by 2013 (Paragraph 22).

Stakeholder Positions

Renaud Laplanche (CEO): Focus on scaling volume through institutional partnerships to lower cost of capital.
Regulators (SEC/State): Concerned with securities registration for notes sold to retail investors.

Information Gaps

Default correlation data during economic contraction (all growth occurred during a bull market).
Customer acquisition cost (CAC) vs. lifetime value (LTV) for repeat borrowers.

2. Strategic Analysis — Market Strategy Consultant

Core Strategic Question

How to maintain platform growth while transitioning from a retail-centric P2P model to an institutional-heavy capital market model without triggering regulatory intervention or credit quality degradation?

Structural Analysis

Value Chain: The platform acts as an information broker. The primary risk is adverse selection if the underwriting algorithm fails to account for institutional demand for specific risk-adjusted returns.
Five Forces: Rivalry is low (first-mover advantage), but the threat of substitution from traditional banks adopting similar digital underwriting is high.

Strategic Options

Option 1: Aggressive Institutional Scaling. Prioritize large hedge funds and banks to provide liquidity. Trade-off: Dilutes the P2P ethos; increases regulatory scrutiny on securitization.
Option 2: Hybrid Retail/Institutional Balance. Cap institutional share at 50% to maintain community branding. Trade-off: Slower growth; higher CAC as retail acquisition is costlier.

Preliminary Recommendation

Pursue Option 1. The platform business model relies on liquidity. Institutional capital provides the stability required to scale underwriting volume, which in turn optimizes the algorithm.

3. Implementation Roadmap — Operations and Implementation Planner

Critical Path

Phase 1: Automate API integration for institutional bulk buying.
Phase 2: Develop secondary market liquidity tools to allow institutional exit.
Phase 3: Formalize compliance reporting for SEC requirements on securitized notes.

Key Constraints

Algorithm Sensitivity: Over-optimization for institutional risk tiers may alienate retail investors.
Regulatory Ceiling: The transition to institutional funding risks reclassification as a bank, triggering capital requirements.

Risk-Adjusted Implementation

Establish a 12-month pilot program for institutional volume caps to monitor default rates against retail cohorts. Maintain a manual override for underwriting parameters until Q4.

4. Executive Review and BLUF — Senior Partner

BLUF

Lending Club is a data company, not a bank. The transition to institutional funding is not a choice; it is an existential necessity to secure the liquidity required to refine underwriting algorithms. The current strategy is correct, but the team ignores the primary threat: credit cycle sensitivity. If institutional capital flees during a downturn, the platform has no secondary liquidity mechanism. Focus must shift from origination volume to building a robust secondary market for loan notes to retain institutional participants during volatility. Execution of this secondary market is the only way to ensure platform survival beyond the current credit cycle.

Dangerous Assumption

The assumption that institutional investors will remain in the market during a liquidity crunch. The model lacks a mechanism to prevent a run on the platform.

Unaddressed Risks

Default Correlation: The current algorithm has not been tested in a high-interest rate environment. Probability: High. Consequence: Catastrophic loss of institutional trust.
Regulatory Reclassification: Treating institutional note-buying as traditional securitization invites oversight that would kill the low-overhead model. Probability: Medium. Consequence: Severe.

Unconsidered Alternative

Vertical integration into a bank charter. By becoming a regulated entity, Lending Club could access cheaper funding (deposits) and gain legal certainty, albeit at the cost of higher capital requirements.