Why Did Lending Club Go To Market so Fast and Other Asset Creators Struggle?

Was the Lending Club just in the right place at the right time? For sure, a whole bunch of secular trends have gone their way, including the financial meltdown, bank regulation, improved data analytics and processing power, greater public comfort with online finance and most likely excellent management. But, perhaps most of all, LendingClub got to grow up while interest rates are at historic lows and investors are just so hungry for assets that yield more than a few basis points.  In this case, the assets Lending Club creates are consumer and business loans.

Why have others that have been in the financial supply chain finance space much longer not provided an equity exit for their backers? I will tell you why. So many vendors have not figured out a model to bypass Banks. Tungsten Network sure has, they became a bank. But others, especially those that create receivable assets for sale, are still beholden to banks for a number of reasons, chiefly capital, but also they need the banks distribution channel. Banks sit on what seems to be an infinite supply of cheap deposits (I’ve told Jason that deposits may become an insurance product if rates stay close to zero, meaning we pay the banks to keep our money). It is already happening with Institutional clients.

But the likes of Orbian, PrimeRevenue, and others have not cracked the non bank code. They continue to make effort with PrimeRevenue’s recent announcement with ApexPeaks about a relationship and also AGC Advance Global Capital in Mexico. Orbian has a capital markets model that still is funded primarily by banks.

Other vendors are moving into the non bank space and trying to figure out the best way to structure. 2015 should be very interesting.

What the Regulators want to see in any of these models is consistent funding. No regulator wants to see these new forms of finance achieve receivable penetration and take up that cannot be funded. Regulators want to ensure financing is always available. Recall the 2008 financial crisis was driven by liquidity – the repo market evaporated because no financial institution trusted each other because they didn’t really know what was on their books so they stopped making short term loans.

The truth is recent news of the additional capital requirements and shortfalls at major banks (JPMorgan mentioned to have $21 billion capital shortfall) are going to force many of these vendors to figure this out sooner than later.

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