After over around 6 months of closely monitoring Lending Club’s activity we have observed that it behaves as a borrower’s market.
Virtually all loans issued by Lending Club get funded… and rather quickly. At the interest rates set by Lending Club, there has been clearly more offer than demand. As proven by their track record, Lending Club does a great job filtering loan applicants (with an acceptance rate of around 20%), which makes yield-hungry lenders willing to take whatever Lending Club shows them. Lending Club therefore focuses on offering rates that are competitive when compared to the borrower’s alternatives… counting on the lenders to fund anything they issue. They focus exclusively on attracting borrowers, to the extent that they even tend to offer “x.99%” rates to make them appear lower.
This borrower dominance of the market can also be seen in the issued loan rates and their correlation -or lack thereof- with the markets. While classic (corporate and government) bonds react instantly to changes in interest rates or credit risk premiums, Lending Club’s rates remain impassible to economic conditions. As an example, during January’s turmoil, with interest rates dropping sharply, equities plunging and credit spreads shooting up dramatically, most of Lending Clubs effective rates remained unchanged, and those who did move showed only a minimal response. This probably can happen only because the usual retail lender’s alternative, bank deposits, are just as impervious to short term market conditions, so they will continue to take their money to Lending Club.
However with Marketplace Lending growing its borrower base at an extraordinary rate, and with institutional investors entering the scene, this may all change some day.
As huge sophisticated investors increase their participation in the marketplace, they will easily become the main source of loan funding, The difference will be that they will not be comparing rates with deposits or other stable, market-independent retail alternatives… they will be looking for something to beat the bond market.
Lending Club at some point might have to addapt to the maturing of the asset class, shifting some focus from borrowers to lenders when setting their rates by keeping an eye on the market. If they don’t keep rates competitive against bonds at all times, a credit spread spike in the bond market could cause an instant drought in their platform, as these huge, ruthless players take their money to more productive assets.