Since we last had Renaud Laplanche, the CEO and founder of Lending Club, on the Lend Academy Podcast in the summer of 2014 a lot has happened. Lending Club has gone public and they have grown to a scale where they are now issuing billions of dollars in new loans every quarter.
In our first podcast of 2016 (actually recorded just before Christmas) Renaud reflects on his first year as a public company CEO. He also discusses some new initiatives they have planned, we talk about customer acquisition, regulatory oversight and much more.
In this podcast you will learn:
- His perspective on the past year and what has surprised him most.
- What Renaud has been working on specifically in the last 12 months.
- Lending Club’s approach to the large amount of cash on their balance sheet.
- How Lending Club is able to achieve decreasing customer acquisition costs.
- How the transition is going with their new Chief Risk Officer.
- Renaud’s view on the San Bernardino shooters and the Prosper loan.
- Their LCOI product and what it means for their focus on retail investors.
- The status of their small business lending operation and their plans to make these loans available to all investors.
- The kind of regulatory oversight that Lending Club sees today.
- Renaud’s thoughts on any potential new regulatory oversight.
- The new CFPB program for oversight on large consumer lenders.
- Where Lending Club stands on self-regulation today.
- His thoughts on his 4th annual keynote presentation at LendIt USA 2016.
Transcription Options
Download a PDF of the transcription of Podcast 54: Renaud Laplanche of Lending Club.
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PODCAST TRANSCRIPTION SESSION 54: RENAUD LAPLANCHE
Welcome to the Lend Academy podcast, Episode No. 54. This is your host, Peter Renton, Founder of Lend Academy.
(music)
Peter Renton: Well, first let me say, Happy New Year everybody! I hope you had a great holiday season. For the first podcast of 2016, we are actually coming to you from the brand new, soundproof room here at the Lend Academy offices in Denver, Colorado. I hope you notice the sound quality will be a little bit better. We’ve got a pretty cool setup here, we’ve had a sound engineer working on getting us a room that has no background noise and higher quality equipment so, hopefully, you will hear the benefit of that.
For our first guest of the new year we’re probably going with the highest profile person in our entire industry. That is the CEO and Founder of Lending Club, Renaud Laplanche. Now, Renaud doesn’t need much of an introduction for those of us who have been around the industry for a while, but I wanted to get him on the show because it’s a new year and Lending Club had a fantastic 2015 and I wanted to find out what was in store for 2016, talk about some of the issues of the day. We cover acquisitions, we cover partnerships, we cover risk, we talk about regulations, self-regulation and more. I hope you enjoy the show. Thanks.
Welcome back to the podcast, Renaud.
Renaud Laplanche: Thank you.
Peter: I want to start off with just talking about your year, I mean, you went public in December last year, just over a year ago, and I wanted to get your take on how this year has been, it was the first year as a public company and any surprises that you have encountered during your reign, so far, as the CEO of a public company?
Renaud: Yeah, thank you, Peter. It has been a great year, I mean, we are almost twice as big now as we were a year ago. We continued to report extraordinary growth rates and over 100% or close to 100% year over year growth every quarter since we went public while being more efficient on our spending margins. I think that the main thing that the IPO has done for us was helping us establish a brand and the reputation of the company. I think operating as a public company with all the transparency that comes with it has really helped us establish new partnerships and build the reputation of the company publicly. So all that’s been good, in terms of surprises…I think I’ve been surprised with how, with an inside baseball in the first year as a public company are more dependent on supply and demand and particularly not just the consideration and distribution of shares from (inaudible) than it is dependent on the actual fundamental result. What we’re hoping in our second year as a public company all that will normalize and the stock performance and the company performance will start converging.
Peter: Right, right, that makes sense because your company has had a great year and pretty much any metric you want to look at, hopefully, that will be reflected at some point. I should disclose too, I am a stockholder in Lending Club as well. Anyway, I just want to…
Renaud: Good for you!
Peter: (laughs)…I want to talk a little bit just personally what have you been focusing on yourself in the last twelve months?
Renaud: A lot of fundamental company building activities. I think I spent a lot of my time on strategy, product and design. We were really setting up the operations, the technology platform and the product road map in a way that prepares us for fast growth not just next year, but over the next three to five years, it took a big lift from the team this year. I think we’re at a place that has really set us up for the next few years.
Peter: Okay, so you have a lot of cash on your balance sheet. I think many people, myself included, were expecting you to start making more acquisitions particularly acquisitions that are sort of additive to the loan book and you obviously have not made any this year. So what is your approach to the cash in your balance sheet? I know you’re not going to give anything away, but what can we expect from you going forward with regards to acquisitions?
Renaud: Yeah, certainly we have a lot of cash from the IPO and we are generating additional cash every quarter so we don’t need that cash as a matter of funding the operations and certainly the most likely use of IPO proceeds is going to be acquisitions that are also accretive to the growth of the company and essentially help us accelerate the road map. We have looked at a few potential targets this year. We haven’t seen anything that meets our criteria or our standards, but we certainly continue to be active in that area.
Peter: Right, but it doesn’t sound like you’re only focused on acquisitions because in your last earnings call, I think the last two earnings calls, if I am correct, you mentioned that you’re launching a new product in the first half of next year. I think you mentioned recently it was a consumer lending product, but for those people who were not on the earnings call can you just give us a little bit of information about that?
Renaud: Yeah, we’re gearing up for a major product launch that has been on track, happening the first half of next year, of 2016. We said that we will be entering an entirely new large consumer credit category. We have not disclosed which one yet and it’s not just for the matter of keeping it secret, it’s really because we want to be ready to give more details behind it when we launch and it’s a little bit premature to do that now, but we’re very excited about the potential there and about continuing to make credit more affordable for consumers in areas where they need it the most, where it really matters for their daily lives.
Peter: Okay, okay, so also on your earnings call there was a big discussion, a bit of a discussion in the industry the last few months about customer acquisition costs. A lot of the newer companies are seeing their costs rise, it’s more expensive these days to start a marketplace lending platform it seems and yet looking through your costs in your public filings and you mentioned on your earnings call that your acquisition costs are actually going down. Can you explain how you’re able to do that?
Renaud: Yeah, I think it comes to the network effect as we’ve described in the past and the fact that the larger marketplace becomes more attractive and more efficient all the time, there are a number of areas where the network effect manifest themselves in terms of rate, in terms of credit box, in terms of online reputation, and the size of the existing consumer base and in terms of rate…we’ve seen Lending Club investors, platform investors, willing to take a lower return on average than what they would demand from a newer or smaller platform and that really helps us lower the rates to borrowers and generate not only greater marketing efficiency but also greater quality and positive selection in terms of borrower quality which helps reinforce the track record which continues to make platform investors more confident with a really nice flying wheel there.
We have a highly diversified investor base on the platform, we also have a broader range of credit spectrum we can say that certainly helps with marketing efficiency. The last point is the reputation. The IPO had helped us raise brand awareness which has done the most for our online reputation and really continuing to deliver a great service, we continue to report a Net Promoter score in the high 70’s, 78 was the last reading, and I continue to see a lot of word-of-mouth and a lot of positive reviews online and we know, customers check interest rates, but they also check reviews so they can understand what their experience is going to be before moving forward. The brand and reputation of Lending Club is really helping us convert prospects at a higher level and generate marketing efficiency.
Peter: So, it’s not just one thing, I guess, you’re saying that all these things move together. People recognize your brand above your competitors, your own marketing channels are getting more efficient. The fact that you’re driving cost down where others are actually feeling it rise, it’s been quite a fascinating story. I guess what you’re saying is every little piece helps, it’s not like one of the major things you’re saying like our borrower channels are suddenly twice as efficient as they were twelve months ago, you’re saying it’s a combination?
Renaud: Yeah, it’s a combination of things and each of these things really fit on each other and create this marketplace dynamic and platform effect that make things better over time. I mean, the other factor we’ve seen in the last two quarters is seasonality as we’ve said before, specifically we have a better seasonality in Q2 and Q3 than we do in Q4 and Q1.
Peter: Right, okay. So let’s talk about risk for a little bit here. Your longtime Chief Risk Officer, Chaomei Chen is retiring at the end of this month and I wanted you to sort of give the listeners a little bit of background on how the transition is going, who is going to be running your risk operations going forward and just talk a little bit about that.
Renaud: Yeah, so we are very lucky to have Sandeep Bhandari join us from Capital One just a few months ago. We have planned for this transition over many months and we were able to transition smoothly the operation and the credit policy and the risk strategy over that period. We are really happy with how that has been going. Sandeep was a pretty sort of high profile Risk Officer at Capital One spending the last 15 years there, mostly on unsecured consumer credit and I think he has the required experience certainly to take over the risk function so we are pretty satisfied with where we are.
Peter: Okay, so another question on risk and this is around identity and fraud and that sort of thing. There’s been a lot of talk in the last month about the San Bernardino shooters and the loan they got from Prosper so I’d like to take this opportunity for you to explain what exactly you do to identify your borrowers and what steps you take to prevent fraud.
Renaud: Yes, to be clear, the findings of the case is not an identity fraud issue.
Peter: Right.
Renaud: Mr. Farook did not pretend to be someone else so his identity was verified by Prosper, according to their processes. I think the question was the additional checks and verifications…I think it’s hard to imagine a process with what happened. The person had a pretty stable employment, had been around for a while, the person had bank accounts, they actually used their bank accounts to withdraw cash just a few days before the event and there was no identity fraud being committed. It feels like the process, the procedures have worked they way were designed to work. The same loan could have been made by any other bank.
As far as we’re concerned, our BFA and AML procedures are very much bank grade and as robust as the processes that would be carried out by a bank. In fact, it is reviewed not only by WebBank, but also by all of our bank partners and the fact that we have so many banks including some of the larger banks in the country like Union Bank and Citibank working with us and purchasing loans from us in varying BSA and AML credit on Lending Club is very comforting, I think it’s a big question on what more can be done that could this particular case been avoided with any additional checks (inaudible) on top of what we have.
Peter: Right, okay, makes sense, that makes sense. So another thing on risk, I just want to talk about briefly…you know, there’s been a lot of chatter, I know, on the Lend Academy forums about your…seems to be a spike in charge offs recently, particularly in your higher yield 36-month loans, is there any reason you’re finding for that, can you give any color to that?
Renaud: I don’t think so, I mean, there is more volatility in the higher yield, some vintages under perform and over perform, we adjust risk and interest rates in a way that preserves the high returns in exchange for investors over the last several years so we continue to manage this particular bucket accordingly. There has been no systemic shift there, we certainly haven’t seen any overall degradation of the economic environment or the credit quality overall.
Peter: Okay, okay, fair enough. So I want to switch gears a little and talk about partnerships. It was reported that you guys are doing a small business loan pilot with Google for their AdWords Program. You’ve, come out with a ton of other partnerships this year like Alibaba and others. Obviously, Google AdWords is a…that’s massive, I’d imagine there would be massive demand there if you were to roll that out, I mean, can you comment on the pilot that you’re doing with Google Adwords.
Renaud: Peter, I probably won’t surprise you (laughs) that I can’t. We don’t comment on partnership discussions either way. I can’t deny or confirm.
Peter: Okay, we have…there have been screenshots taken of Lending Club’s loans that are appearing for AdWords customers.
So, anyway, we will stay tuned on that one. What about your LCOI product, you launched that a few months ago trying to attack it seems like the advisor market, can you explain a little bit about what problem you’re really trying to solve with making it easier for third parties to open up accounts and that sort of thing.
Renaud: Yes, so it’s really a distribution channel for us. As you know, we’ve been very active in preserving the share of retail as a percentage of total funding, we’ve been very successful in preserving that in the 20 to 25% as far as our self directed retail is concerned and then another 40% for managed retail. Some retail investors want to come directly to our website and then manage their Lending Club accounts with the Lending Club user interface. Others are happy using intermediaries and look for an additional layer of analytics or different UI and we want to make sure these customers benefit from the same level of service from us and we want to make it easy for customers to buy Lending Club notes, whether it’s from the Lending Club website or from any other financial advisor or online brokerage operations that they are already familiar with so we launched a very robust set of APIs that help financial advisors and online brokers integrate with the Lending Club loan trading and notes trading and notes reporting platform in order to enhance that experience.
Peter: Okay, it seems like it’s a really big market that hasn’t kind of embraced marketplace lending yet. It’s interesting to see how that evolves. So what about your small business lending operation? It has been almost two years since you started it, can you give us an update there and also any plans to add these loans available to retail investors?
Renaud: Yeah, I think we see that as part of the expansion into the next few years. We said that when we are going to launch a new product it will not be immediately available to retail because we want to get a really good handle on performance before we expose retail investors to that risk and I think with small business we’ve made a lot of progress over the last…almost two years in terms of predictability of performance. We’ve made a couple of iterations of the credit policy already. The next step is probably the creation of a fund to diversify and aggregate individual investors into a fund before it goes to self directed retail and the way we see the funding cycle is to use a few institutional investors to launch the product, gain some level of predictability in performance then the second step is creating a fund or opening up an existing fund to buy in small business loans and third step would be retail only at a point where we’re really confident on performance.
Peter: Right, so will this be a fund like the LC Advisors Fund that will be run through LC Advisors or are you talking about doing some kind of public fund, I mean, can you elaborate a little on that?
Renaud: Yeah, I think both are possibilities. We have talked in the past about the fact that we are exploring public funds. I think the small business…the next step in funding small business could be using either a private fund like the LCA Fund or a public fund when that’s available.
Peter: Okay, okay, so then let’s talk about regulation and your efforts in Washington. You had a very detailed response, I think yours was the most detailed response actually, to the Treasury RFI and I think there was a lot of really interesting stuff in there. When you are talking with the regulators today, I mean, what is the mood in Washington and what are the efforts you’re making around regulation and any possible regulatory changes?
Renaud: Yeah, I think there is no question that as we get bigger, as the industry gets bigger there will be more and more oversight from regulators. I think we welcome that oversight and we believe the level of oversight will really depend on the type of products we offer and the way banking regulators approached us and the discussions we’ve had with them continues to be centered around making sure that we continue to be as consumer friendly, as transparent and as responsible with our credit products and credit policies as we’ve been, so far.
I think as long as we continue to design our products in a way that’s fundamentally good for customers and small business owners, I think the level of oversight will be more in sort of the checks and balances than anything that would create undue friction to us or for our customers. I think what we’ve done for example after the Springstone acquisition is immediately terminating that deferred interest product that Springstone was offering and replacing it with a full no interest product. It was one of the moments where we showed regulators and consumer advocacy groups, the public in general, that we were serious about running a consumer friendly, transparent program. Even though the new product has a 40% lower margin than the old product as we really put our money where our mouth is. I think that’s the kind of move that will establish our brand and our credibility in Washington and I think that as long as we continue along that strategy, we’re really not hearing any new regulations that has undue cost on the business.
Peter: Okay, I just want to have a follow-up here. I was speaking with somebody at the American Bankers Association and they were saying, you know, the regulations…they don’t think there’s really any need for major regulatory reforms, but what banks have that marketplace lenders don’t have is oversight. You don’t have the OCC coming into your offices, at least I imagine you don’t, maybe you can share, but there’s no government agency coming in and making sure that you’re doing everything that you say you’re doing. I imagine for Lending Club it’s not that much of a big deal, but I’m thinking about the newer platforms who might want to cut corners and do things the regulators don’t like and it would be bad for the industry. I guess the question is do you have any agencies coming into Lending Club for oversight and secondly, what are your thoughts on it?
Renaud: Yeah, so I think that’s right. So far, the FDIC, there is WebBank at least the program of WebBank, so there is certainly some oversight there, but the FDIC hasn’t been on premises at Lending Club at this point. The CFPB already has enforcement powers over many consumer protection rules, anything that has to do with fair lending, truth in lending disclosure and so on. I think that’s about to change and be reinforced when the CFPB announced the rules on larger participants in consumer (inaudible) lending which will happen in the first half of next year and that will give additional…provide additional oversight and assuming Lending Club is named as one of the larger participants we will need to have the CFPB to have site visits, like any other bank regulator would have on site due diligence and quality examination process.
Peter: Right, sounds like you would welcome or you wouldn’t be against such oversight.
Renaud: No, not at all. I think in that matter, as in any other matter, we go back to our competitive advantage against the banks which is the ability to use technology to reduce cost and automate that would otherwise be manual at a more traditional bank and compliance is an area that really lends itself well to our automation and processes program which tend to be fairly repetitive tasks where automation actually works, but also increases the level of compliance because there is less of a risk of human error, human mistakes with the process. We think we can continue to build compliance as a competitive advantage, with lower cost and higher level of compliance than you would see at a more traditional bank.
Peter: Right, right. Before I let you go, I want to just touch on…self-regulation has been…several initiatives have come across my desk for some kind of industry association, can you give us an update on where Lending Club is on the whole self-regulatory idea?
Renaud: Actually, the Small Business Borrowers Bill of Rights’ was a first attempt at self-regulation. We participated in that effort and there have been other companies joining that effort since it was launched over the summer and it will measure the effectiveness in terms of adopting best practices for small business lending. Within the next two quarters we’ll see how effective that effort has been… But in terms of creating a new industry association, I think that’s probably going to be inevitable as the industry becomes bigger and more complex. There are several rounds of discussions happening now and it is just a matter of understanding who the different players are and what approach will be the most effective in Washington.
Peter: So you haven’t backed one particular initiative over another as of yet?
Renaud: That’s right.
Peter: Okay, last question, you’re going to be doing the opening keynote at LendIt USA which will be in your neck of the woods in San Francisco in April, can you share what you’re thinking about sharing in your keynote this year.
Renaud: Not in great detail, so far, but the certainly the LendIt Conference has become the largest industry event and we’re really looking forward to opening the conference again this year. I think we’re generally trying to talk about things that matter for Lending Club and for the industry, in general, and trends that we’ve seen around technology, around compliance, around products, around user behavior, around credit quality. All these would probably be the talk of the keynote because we’re trying to make it entertaining. Last year we shared a new product concept that was very well received and also had a drone on stage.
Peter: That’s a tough act to follow. (laughs)
Renaud: Yeah, we raised the bar quite a bit. We are thinking maybe live animals on stage (laughs) will be part of it if the organizers will let us.
Peter: (laughs) Oh, we’re fine with that, but you have to check with the hotel. That will be interesting to see. Anyway, I really appreciate you coming on the show, Renaud, all the best for 2016 and we’ll talk again soon.
Renaud: Right, thank you for having me, Peter, have a good day.
Peter: Yeah, you too. Bye.
I think 2016 is going to be a fascinating year for Lending Club. We’re talking about a new consumer credit vertical coming up. We don’t know what it is, I mean, I said in my predictions post right around the new year that I think it’s going to be an auto lending operation. I have no inside information whatsoever, it’s just a hunch I have and Lending Club…it’s very, very hard to get any information out of anybody there in advance. They run a very tight ship so I don’t know, but I think that’s going to be fascinating.
I think we’ll see a couple of acquisitions as well. I think Lending Club is in a great position, they are the number one in the industry and they’re getting bigger and they have a lot of cash. They can pretty much do what they want, but they can certainly have a lot of flexibility in who they want to work with and how they want to launch new products, whether they want to acquire them, whether they want to build them themselves. I am very much looking forward to 2016 and seeing what it entails for Lending Club and the industry as a whole.
On that note, I’ll sign off. I very much appreciate you listening, we’ve got a lot of great things in store for you here in 2016. There’s going to be more podcasts than ever before and I think we’ll try and get as many great guests on as we possibly can. Thanks for listening, I’ll catch you next time. Bye.[/expand]
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