Proponents and players in the P2P lending industry can be forgiven for arriving at work with a gloomy attitude today after a week-long stumble for an industry that had been gathering positive momentum across the globe.
San Francisco-based Lending Club has been dealing with nearly-daily fallouts from the decision by Founding CEO Renaud Laplanche to step down amid questionable lending practices.
There were two core reasons for the Laplanche step-down. The first was the discovery of US$22 million worth of below-standard loans knowingly sold to an institutional investor. The second error was Leplanche’s decision not to disclose his own personal stake in a fund Lending Club was debating as an investment.
The result was 200 community banks no longer purchasing loans from the company, a stock that has plummeted by nearly 50 per cent in a week and the entire industry hoping the troubles are a one-off for the community.
The Telegraph captured the mood perfectly in its Saturday headline, “Is Lending Club the canary in the coalmine for peer-to-peer lenders?”
Well, for P2P lending agencies in Southeast Asia, the the Silicon Valley startup’s stumble may be more akin to a rooster rather than a canary. Waking up the industry and warning companies to stay alert.
Dipo Ramli, CEO of Indonesian student loan lending platform DanaDidik, said his company was keeping an eye on the news but had yet to consider it a big concern.
He did, however, consider the news to be a reminder.
“Fintech companies must never underestimate the importance of transparency. After all, banking is one of the most regulated industries,” he told e27.
He explained that in Indonesia, DanaDidik must do more than what is required by local regulators, not only to remain in-bounds but also to attract customers.
Which may be the biggest issue created by the Lending Club debacle, creating a dip in consumer sentiment.
For full disclosure, I believe in P2P lending as an institution. I see P2P — and its Crowdfunding cousin — as a legitimate alternative for the ‘little man’ (Startup Founders, SME owners and young real estate investors) to raise capital when bank loans, venture capitalist funding rounds or racking up credit card debt are not options.
But, perception is reality and as the industry works to scale beyond the techies, professional investors and innovative bankers it may find that the Lending Club mess will spook potential investors or borrowers.
For example, the Wall Street Journal made the comparison between Lending Club and the blood testing company Theranos as an example of another “disruptor gone awry”. (Not entirely a fair comparison as Lending Club has made a large ethical error, which in my mind is far different from the institutionalised deceit in the Theranos accusations).
As the media reaction has made clear, Lending Club is not some ‘random’ company running into trouble. It is the industry giant, and a global leader in the space.
So for Founders that are already fighting an uphill battle educating the average person, the inevitable Google search results from the news will not help on-board mom and pop investors.
There are many cases of fallacies and corruption in the banking industry, hell, Wall Street’s junk bond manipulations brought the world economy to its knees in 2008. But the industry has been around for centuries and has a solid ground to handle controversy.
Lending Club does not, and in an effort to at least slow the fire, Executive Chairman Hans Morris issued the following statement.
“A key principle of the Company is maintaining the highest levels of trust with borrowers, investors, regulators, stockholders and employees. While the financial impact of this US$22 million in loan sales was minor, a violation of the Company’s business practices along with a lack of full disclosure during the review was unacceptable to the board. Accordingly, the board took swift and decisive action, and authorised additional remedial steps to rectify these issues. We have every confidence that [new CEO Scott Sanborn] and the management team are well-positioned to lead Lending Club forward.”
Assuming Lending Club recovers and the Laplanche turmoil is a bump along the road, maybe this is a blessing in disguise for the industry as a whole. The news was a nice little jab to the face, it hurt, but it certainly did not come close to knocking out the sector.
It’s possible to adjust after getting hit with a jab, not so much when the punch becomes a KO.
As The New York Times correctly pointed out in an article over the weekend,
“Compared with some of the corporate shenanigans we’ve seen lately, these disclosure failings look relatively minor.”
Interestingly, the company released the resignation news in the same press release as its Q1 2016 financial results, and by the standards of many startups, they were not half-bad.
Its operating revenue grew by 87 per cent year-on-year to US$151.3 million and its adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) was US$25.2 million, a 137 per cent increase from Q1 2015.
The other notable metric was its servicing portfolio almost doubled between year-on-year, from US$5.6 billion in Q1 2015 to US$10.2 billion in Q1 2016. The company also paid out US$1.5 billion in principal and interest returns in Q1 2016.
The point is, while articles may spell doom-and-gloom for Lending Club, the company has far from collapsed.
And the fact that Lending Club may wade through this mess is a testament to government regulations, and a lesson we can learn in Southeast Asia.
Vishal Tulsian, Director of Tunaiku, an Indonesian lending company targeting the country’s middle class, explains,
“Not only [with] Lending Club but all across the globe there is a common thread for P2P players that have faced some issues. Be it China, US, UK or Sweden the common thread is lack of regulatory oversight.
“While banking regulations may not encourage the innovations required in the industry, lack of [regulations] is also not good for the industry. So we should find a middle way to regulate without stifling innovation, “
Lending Club’s success came in large part because it set a precedent for the type of registration on the US Securities and Exchange Commission (SEC) that allowed for the loans to be split up into tiny pieces. After a period of wondering if the SEC would approve of the registration, the company was given a green light, and with it, a vote of confidence from one of the most powerful institutions in America.
That is one way to boost consumer confidence.
One the flip side, according to a recent Straits Times article, China’s P2P lending industry was loosely regulated and was plagued by fraudulent companies. Now, rather than ’empower but regulate’ the Chinese government is ‘cracking down’, and thus painting the industry as a sham.
So for individual companies, as Ramli was correct to pinpoint, transparency is essential to P2P lending success and the downfall of the ‘Godfather’ of the industry is the perfect example.
Average consumers will naturally be dubious about the P2P lending strategy, and it is the company’s responsibility to convince them it is a legitimate enterprise, which requires intellectual honesty (possibly — actually probably — a naive sentiment, but fraudulent lenders will only hurt themselves in the long-run).
In the meantime, believers (like myself) in the idea and the system need to cross our fingers and hope Lending Club has sutured the wound and that this is not the tip of a much larger iceberg.
Photo courtesy of Gratisography.