Only a few years after the subprime crisis aftermath that brought the world to its knees, consumer financing is back.
This time the innovation comes from Silicon Valley and consumer financing is poised to become again a North American favourite.
The new twist is crowdsourcing and peer-to-peer financing and Lending Club, finance 2.0’s head of the pack, is expected to graduate in a much-anticipated IPO soon under the ticket symbol “LC.”
Pre-IPO backers of Lending Club, which includes Google and Kleiner Perkins, might see valuations of up to $5 billion, up from $3.8 billion in May, as the company plans to raise $1 billion to $2 billion at its NYSE debut.
The principle of Lending Club is similar to many disruptive innovations brought by peers like eBay, Uber and Airbnb: to just cut the middleman. The San Francisco Company operates an online lending platform that connects lenders to borrowers.
Peer to peer is becoming big business. Lending Club and Prosper, the two largest companies in the financial innovation space, have originated more than $7 billion in loans since inception about seven years ago. Similar companies overseas have lend more than $2 billion.
The company is the brand child of Renaud Laplanche, a French entrepreneur, who rightly observed that credit card carried an 18% interest rate, while he was only earning 1.5% from the bank.
Cutting the middleman, Laplanche thought, would be a way to create an arbitrage that would allow everyone (except the banks) to make money. Lending Club launched via Facebook to allow trusted parties to lend money to each other. As a matter of fact, Lending Club was one of Facebook’s first apps.
As America is getting ready for another hot IPO, a Vancouver based start-up has quietly launched a similar service in Canada this fall. Grouplend’s founder and CEO, Kevin Sandhu, has spent much of last year adapting the business model to Canada and navigate the country’s specific regulatory requirements.
The Canadian banking system is more conservative than the American one but, as the level of personal credit card debt in Canada is similar than the US, Grouplend, which will mainly target borrowers looking to avoid carrying expensive credit card balances, might strike gold by offering better and more choices to consumers on this side of the border.
As Lending Club will be investing its IPO proceeds in fine-tuning the ways big data (read: Facebook likes or number of career switches in LinkedIn) could be a predictor of credit-worthiness, Grouplend will have the challenge to convince early-lenders that it can protect them from bad loans at the expense of un-inhibited growth.