Let's face it, we love LendingClub (NYSE:LC) but hate their stock. LendingClub has funded billions upon billions of loans quarter after quarter. Their origination technology and underwriting experience is market leading. Looking at LendingClub's Q3 2015 financial results, they have finally managed to break-even.
By all measures, LendingClub should not have lost 67% of its IPO value, hitting a 52-week low. What's wrong with this picture?
I'm going to focus on some macro level issues facing LendingClub.
Compliance risk looming
LendingClub operates under a model where the loans are not issued by LendingClub. All loans LendingClub originates are from WebBank, a Utah state chartered industrial bank. Although the Consumer Financial Protection Bureau (CFPB) has not securitized the "rent-a-bank" model, it would be a devastating blow to the entire LendingClub model if the CFPB starts to snoop around.
The "rent-a-charter" model has been around for a while now. Most of the co-branded credit cards or retail credit cards use this model. Payday lending has used this model for more than a decade. But it does represent a huge binary risk for LendingClub. This is one of the reasons why investors are divesting from LendingClub.
Undifferentiated business strategy
A long time ago, someone I know that watches the tech sector said this to me: Intel (NASDAQ:INTC) needs to realize that they are just a factory. It is their manufacturing process that is superior than all else.
I think it's the same with LendingClub. The sooner they realize that they are just a LendingTree (NASDAQ:TREE) copycat, the better off they would be. But there's a huge problem. LendingTree, CreditKarma supplies leads to LendingClub. LendingClub is spending massive amounts of cash to compete with their originators. That's a losing proposition by definition.
What if we think of LendingClub as an online lender? Their credit models are just a conglomerate of credit reports that they do not own. They are leveraging data from traditional credit bureaus such as TransUnion (NYSE:TRU), Experian (OTCQX:EXPGY) and Equifax (NYSE:EFX). On top of it all, they must report the bank's loan performance to the credit bureaus. It feels like there is not much secret sauce left.
What if we judge LendingClub as an excellent asset management firm? Well, LendingClub doesn't have any loans on their books and thus they don't get to keep any of the yield. The bank partners sell off these loans to hedge funds just a few days after. Because of that, there's not much in it for LendingClub to service these loans.
LendingClub has one product, an installment loan. Their business loan product is in a competitive environment with OnDeck (NYSE:ONDK). Their Patient Solutions financing is sensitive to economic cycles.
In some ways, LendingClub is stuck. There's no money in credit cards. The cost of origination and retention is unsustainable. Processing credit cards require massive technology investments to process transactions and prevent fraud.
Auto lending is tough and needs a tremendous amount of staff to handle titles and collaterals. Student loans face stiff regulation and most banks have exited that business. And this is the worst credit cycle to be in mortgages.
What LendingClub's struggling with is not unique. Most fintech companies are contemplating these three strategic issues daily. But from an investor's perspective, it is a tough call to join the club.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.