Liquidity is the lifeblood of lending. And liquidity exists only when lenders and borrowers are easily able to find one another, agree on terms, access the capital that’s needed — and distribute that same capital quickly while enabling repayment.
As LendingClub Vice President of Member and Investor Strategy Jessie Garton Szymanski and lending platform Edge Focus (a LendingClub partner) Managing Partner and Chief Operating Officer Hirak Biswas told Karen Webster, the future of lending is increasingly digital as platforms replace the manual processes that have marked lending, where once borrowers and lenders found one another through phone calls and applications, credit checks and paper checks.
Platforms, said Garton Szymanski, render obsolete the age-old exchange of spreadsheets with thousands of lines of data and ease the burden of finance teams examining and evaluating that data.
“To the extent that it used to take weeks to close a deal previously, now it takes seconds to place a trade,” she said.
Data, not surprisingly, can underpin the digital buying and selling of loans pre-issuance or post-issuance, driving transparency, and for the lenders, profitability.
That same information on consumers, on pricing and on investors allows firms like LendingClub to test new programs and new aspects of existing programs. The platform model, by nature of its extensibility, can conceivably expand access to retail investors or institutional investors who have not traditionally played in the credit space.
Garton Szymanski said the pandemic has underscored the flexibility of platforms such as LCX, which had initially launched to broaden LendingClub’s presence in the secondary markets. Amid the pandemic, LendingClub enabled pre-issuance on the platform.
“That really enabled us a period of acute crisis to assess the characteristics that folks were looking for — the prices at which they were willing to purchase those loans,” she said, no matter if they had been active or passive investors, and even into a period of rising rates as has just started to be in evidence. Technology can be a vital aid in navigating rocky economic shoals, and she added that LendingClub was able to grow through the recession.
The Paycheck-to-Paycheck Borrower
The granular data has been especially helpful in extending loans to borrowers that elsewhere might have been considered credit risks and would have been unable to tap into loans or credit products. That includes roughly 54% of consumers who live paycheck to paycheck. As many as 39% of consumers who make $100,000 or more annually are defined as living paycheck to paycheck. The paycheck-to-paycheck individuals, said Garton Szymanski, are in fact qualified borrowers with qualities (such as cash flow and some credit history) that are attractive to investors.
At a high level, said Biswas, “a lot of the friction and a lot of the borrowing costs that have typically been higher are eroding — in the right direction.”
Speed has become a hallmark, and the cost of capital is cheaper for borrowers. Institutional investors have their own high-tech credit models or use LendingClub’s LCX platform to run those models, present attractive borrowers, and price loans at above or below par from LendingClub’s balance sheet. In short, a lot of fat is cut out from the process.
Garton Szymanski noted that recent improvements to the LCX platform have involved removing the requirement for investors to use an application programming interface (API) to connect, which in turn opens the platform to even more players to purchase loans and for partners such as Edge Focus to expand secondary market activity using its own credit models.
“We want the platforms to be able to come to us and say, ‘Does it fit your credit box?’” said Biswas. “And this creates that rare win-win when the borrower gets funded, where they otherwise wouldn’t have gotten funded. The platform has another customer now, and they can collect fees, and we can accurately and effectively select a loan that we want. So, we want to see the evolution of the market going that direction.”
Edge Focus, which has traditionally been focused on market making, now is aiming to become a two-sided market as its own technology allows the firm to price any loan (or basket of loans) instantly and simultaneously. Thus far, the company has underwritten 3.5 million members on LendingClub, and depending on the duration of the loans, is getting 5% to 10% of capital back on a monthly basis.
As Garton Szymanski told Webster, “There’s a ton of blue ocean. There’s a ton of space for us to continue to innovate both in terms of the types of assets that are offered on the platform as well as the features and functions that investors are looking for.”