Lending Club’s party is over: Why the stock will collapse from another software entrepreneur that should know
By Scott Tucker
CEO, Sentient Technologies
Drunk from the staggering Lending Club IPO, investors and underwriters will launch a slew of positive reports and reviews this week in an effort to capitalize on the stock’s record growth as the quiet period finally expires. But, behind the scenes, trouble is lurking. You have to wonder how long the good times will last.
The lessons from banks’ foray into short term lending and the 90s tech bubble have long been forgotten. I survived, had a unique idea, pursued a patent and went on to develop software and systems that supported the largest online loan transaction system in the world, unmatched in its processing volume. Thus, I’m in a unique position to comment on Lending Club’s ability to scale. In addition to all the reviews and reasons you’ve already been reading about, there are two massive problems that will prevent Lending Club and its Gen X CEO from fulfilling Wall Street’s lofty expectations: regulation and psychology.
Lending Club professes to be an online marketplace that facilitates loans to consumers and businesses and offers investors an opportunity to finance the loans. Its goal is to transform the banking and consumer finance industry to make it more cost efficient, transparent and consumer friendly. It wants to replace traditional bank operations with an online marketplace that uses technology and a more efficient funding process to lower operational costs and deliver a better experience to both borrowers and investors. This all sounds good, but, they can neither escape the bank’s place in the business nor banking regulators.
I am sure Lending Club spent a fortune on its due diligence and strategy regarding the legality of its p2p lending business, but it will not prevent the scrutiny nor the destruction of its valuation that will be caused by these inevitable attacks. Bank regulators will simply not allow sponsoring banks to continue in their current role with Lending Club. They will require a significant increase in risk-management and compliance systems and carrying additional capital. Add to those requirements the mounting pressure from both state and federal regulators and you have a recipe for disaster. I should know. My ideas have resulted in me personally being made a party to several significant legal actions against my firm’s clients by both state and federal regulators.
Other players in the sharing economy, like Uber and AirBNB, have revolutionized opportunities for e-commerce, value exchange and logistics and, thus far, each has overcome its regulatory hurdles. One should expect that Lending Club’s hurdles will be much higher and more difficult to overcome. That is why this is not an $8 billion business. Investors might compare Lending Club stock to that of Twitter or other yet-to-be-profitable tech play, but nothing could be farther from the truth. I’m here to tell you that the sea of regulation will swamp this business. It will sink on its own or from a savvy investor forcing a short sale play.
Lending Club CEO Renaud Laplanche cut his teeth first as a securities lawyer and later as a technologist focused on algorithms and decisioning engines that ultimately attracted the attention of Oracle in 2005. His idea to connect borrowers and investors directly, cutting out banks, ultimately evolved into Lending Club which launched on Facebook back in 2007. While I applaud Laplanche’s entrepreneurial spirit, and no one can argue with the fervor his sales pitch has generated, what Renaud has forgotten is that individuals, like school teachers with a marginally performing investment accounts, don’t like to loan money. VC’s don’t like to loan money either. But since the banking meltdown in 2008, they have at least faced the truth that their antiquated business model must evolve. There is a psychology to lending that Benjamin Franklin summarized best: “creditors have better memories than debtors.”
Scott Tucker is founder and CEO of Sentient Technologies, a technology firm that publishes insight and analysis each week on the world of online finance, risk management and decisioning solutions.
Tucker’s ideas and technology helped to pioneer online lending with instantaneous loan approval and decisioning, rendering the fax machine obsolete in the 1990s. He helped sovereign Indian nations launch nationwide online businesses. His concepts spurred economic development activities often compared to the $30 billion Indian casino industry boom. These ideas have been heavily scrutinized by state and federal governments and agencies including California, Colorado, and the Federal Trade Commission.
Scott, Sentient and his affiliated companies provide leading enterprise transaction software for online lenders. For nearly two decades, Scott and his entities have supported leading and emerging lenders with the prevailing enterprise software solution unsurpassed in its processing volume. His firms also provide application integration. They do not provide loans, loan servicing, marketing, or collections services.