Fintech: Laplanche looks to Upgrade marketplace lending
Ex-Lending Club chief poised to retry securitization; technique ‘essential’ to online lending business.
|Renaud Laplanche: founder and former chief executive of Lending Club
What do you do when you have been ousted from the firm you founded amid accusations of compliance failure? If you are Renaud Laplanche, the founder and former chief executive of Lending Club, you head for the hills for a while and then come back and essentially do it all again.
Laplanche launched a new consumer lender, Upgrade, this April – almost exactly a year after he was forced out of Lending Club in May 2016.
The new firm started operations in August 2016 and closed its first round of funding in March this year, raising $160 million.
It is hard not to see Upgrade as Lending Club 2.0. The firm is backed by many of the same investors that backed the marketplace lender and the loans are issued through WebBank again.
The founding team includes Soul Htite with whom Laplanche founded Lending Club in 2006. The team includes many ex-Lending Club members, including the CFO and CTO – but not the head of compliance.
Euromoney catches up with Laplanche as he is due to speak at Europe’s Lendit conference in London. “The last 10 years were full of learning – the last couple of years in particular,” he says, in something of an understatement. “A lot of things that we were trying to get right have proved critical, such as compliance and risk management, but this didn’t entirely protect us from mistakes getting made.”
Those mistakes included the sale of $22 million of loans that, according to a subsequent statement by the company, certain Lending Club personnel were "apparently aware" breached investment criteria. The loans were sold to Jeffries, which was working on a securitization deal for the firm. They also included the failure by Laplanche to disclose a personal interest in Cirrix Capital, a fund in which Lending Club was actively considering a stake.
No hard feelings
There certainly don’t seem to be any hard feelings at Jeffries: the firm is advising Upgrade on its capital markets strategy and will participate in loan purchases to establish the company’s securitization programme.
It was the sale of loans into a prospective securitization pool that started all the trouble at Lending Club. But far from being discouraged, Laplanche is eager to try again.
“It took us too long at Lending Club to recognise that securitization is essential to this business,” he tells Euromoney. “It is very efficient. It provides access to a low cost of capital and the ability to create a senior level in the pool and have it rated. It is super useful and part of our strategy will rely on securitization.”
Upgrade is, however, talking to banks, unlevered asset managers and credit unions about buying loans as well.
“The marketplace approach has a lot of benefits, including the velocity of transactions in real time and the velocity of capital,” Laplanche says. “The marketplace model is so powerful because you have access to so many sources of capital.”
He seems chastened by the Lending Club debacle. “This experience has enforced the knowledge that at the end of the day in financial services a lot of success depends on trust – it is hard to get and easy to lose. A single event can set you back years.”
He seems anxious to prove he has understood this. “The business model at Lending Club had worked really well – using technology to lower costs and make for a better customer experience. But if we had to do it again, we would do a lot of things differently. A lot of things could be improved upon – some differences were on the margin, others were not,” he says.
“Our relationship with customers was pretty transactional. We would make a loan, nothing would happen for three years and then we would make another loan. The Upgrade product is a combination of a personal loan and credit monitoring and credit education features. It helps the customer be better informed and make better credit decisions – which translates into better credit performance.”
He will also diversify the product offering. “A mistake I made at Lending Club was to run it as a single product company for seven or eight years,” he reveals. “The Upgrade platform is designed as a multi-product platform. We launched the personal loan in April and we will launch our second product next year.”
Perhaps conscious of the concerns around marketplace lending that were only exacerbated by the problems unveiled at Lending Club, Laplanche emphasises the improvements in the process and technology that his new venture embodies.
“The main difference at Upgrade is the introduction of an analysis of FCF [free cash flow]. Instead of just using credit, credit history and debt-to-income ratios, there is now an additional measure of free cash flow looking at the tax rate, housing costs and the cost of living. The impact of making $50,000 a year is very different in North Carolina than it is in New York,” he says.
Technological progress is an important factor. “Data security is also now a big focus. There hasn’t been any data breach at a marketplace lender yet but we are making even more investments in these areas. We are trying to use new technology that wasn’t available before. We have built a mechanism which enables us to create a time-stamped, immutable record of every transaction using blockchain. This is a very efficient mechanism. We can establish a record of every document within 10 minutes of that document being created.”
He has a lot to prove and a reputation for integrity to rebuild – and he is very cognizant of this. “Technology can solve a lot of problems,” he says, “but what is even more important is process, culture and people. You need to make sure that everyone in the company understands how critical trust is and that there must be perfection in compliance.”