For the area of participatory finance, which holds its sessions at the Ministry of economy on Thursday, December 11, introduction to Wall Street Lending Club, the leading US loans between individuals on the Internet, sounds like a consecration.
The success of Lending Club – and its $5.4 billion (€4.3 billion) valuation – has set the standard for all French startups that launch this niche. And there are many, since, on 1 October, the government relaxed the regulatory framework of the “crowdfunding”.
Individuals can now lend remuneration to SMEs. By giving this (small) penknife to banking monopoly, the government created a new market. A dozen companies have already rushed into the breach and others prepare for battle.
What is their job? Linking small companies seeking financing and individuals in search of lucrative investments. And it works. “It took us less than three weeks to borrow from a loan service 100,000 needed to open our store in Paris, for which our banker made us for a year,” says Erwann Goullin. Since then, the CEO of 727 Sailbags reimburses each month the 161 individuals who granted him credit at a rate of 7.1%.
“Every year, banks lend between 80 and 100 billion euros to VSBs [very small businesses]. Eventually, the platforms online lending should pick up a quarter of that,” enthuses Olivier Goy, CEO for Lendix.
Remunerate the risk taken
This optimism is based on the explosion of the sector abroad. In the United States, of course – Lending Club alone will generate $4 billion in loans in 2014 – but also in the UK where the volume of credits this year should skim a billion euros, 3.5 times more than in 2013, according to research firm Nesta.
“The “FinTech”- contraction of financial and technology companies – will upset the banking sector. Platforms loans are part of these breakthrough innovations,” says Bernard-Louis Roques, its Director General.
These sites are presented as an alternative to the banking sector. “We plug a hole in the racket of funding: that of all small companies seeking small amounts and low interest banks,” says Polexandre Joly, founder of Finsquare. Besides these platforms are drowning in files. “In one year, more than 2,000 companies have approached us,” says Nicolas Lesur, CEO of Unilend, which opened before the legislature specifies the rules.
One must say that their arguments are unstoppable: an ability to pay in record time and especially low requirements, since the borrower boss does not need to stand surety or pay guarantees and other insurance.
This flexibility is expensive: rates may seem prohibitive as compared to those charged by banks.
“It is further necessary that they lend us! It took our advisor two months to deny us the loan. In six days, I got 50,000 euros on a site. This speed is crucial,” says Sandrine Duffaud, the leader of Spokes’n Motion Europe, a Toulouse company, which distributes disabled sports equipment.
If the interest is high it is that they are supposed to pay for the risk taken by the lenders, because in case of bankruptcy, the individual cannot turn against the intermediate site. Moreover, the platform Unilend has just announced its first default.
What is the catch? On this crucial issue, start-ups have honed their arguments: all say they have hired experts in credit and collection. As for borrowers, they have to show their credentials at least two years of existence and sufficiently strong balance sheets. “In the UK, the default rate on these platforms is lower than that of the banking sector,” says Vincent Ricordeau, founder of Kisskissbankbank, which has just started in this business with Lendopolis.
Nevertheless, launching such a site is, by the admission of certain players, too simple. “Getting status via crowdfunding is very simple, with all the dangers that drifts entail,” warns Mr Poly.
While the government has put some railings – the individual, for example, cannot lend more than 1,000 euros per company – but is it enough? “These companies are subject to extensive reporting requirements and in particular must implement a solution to ensure continuity of loans if they were to close. We will control all this,” says Fabrice Pesin, deputy general secretary of the CARP.
The public trust is essential. These sites function as marketplaces, supply and demand must be balanced. Or if the interest of SMEs is easy to understand, lenders must also find their attractions.
“That’s why we are working on a European scale, establish more transparency, to adopt common rules so that individuals meet there,” says Oliver Gajda, President of the European Crowdfunding Network.
An indispensable work, because that trust is not decreed. In the United States, it took Lending Club three years to find its audience and swallowed $50 million before being profitable. Companies must therefore have a strong back.
“This job requires technological investment, recruitment teams… despite our growth, we will not be profitable until 2017,” says Lesur, who is preparing a fundraiser.
At this game, Lendix, which has 7 million in cash, is, for the moment, the best endowed. Its CEO is between 30 and 50 million of appropriations in 2015 and at least double the following year. To quickly inflate its stock of loans, institutional investors will come to play the role of lenders alongside individuals.
Facing him, Lendopolis seeks to create a brand by focusing on the general public. To establish its reputation, the company has an agreement with the daily Les Echos, which gives it a major promotion in exchange for 10 to 15% of capital.
Behind them, the future entrants will need to redouble their efforts. Because in this business of “marketplace” there is a premium on size. Leaders offering more choices attract more people, and virtuous self-reinforcing.
Finance of the Google era
The startup Lending Cluble, American pioneer of lending between individuals on the Internet, has raised $870 million after its entrance on the New York Stock Exchange, according to the final terms of the transaction reported on the evening of Wednesday, December 10. Fundraising could reach one billion dollars in case of exercise (possible in 30 days) an over-allotment option for 8.7 million additional shares.
The price set for the IPO, which values the entire company at $5.4 billion, is also higher than the expected range until 12 to 14 dollars, already noted earlier in the week compared to the price originally envisaged from October to December dollars. This suggests a strong investor interest.
Founder of Lending Club, Renaud Laplanche, 44-year French runs Lending Club. “I feel closer to Google’s philosophy than that of banks,” he says. As a symbol, his office is located in the South of Market (SoMa) district technology start-ups in San Francisco, which also houses Twitter, Zynga, or Uber Airbnb, and not in the Financial District neighborhood, which is notably based in Wells Fargo, the largest US bank by market capitalization.
Eight years after its inception, Lending Club still practices the dedication that has not faltered after the time of its introduction on the New York Stock Exchange (NYSE). But Renaud Laplanche, it is “merely a step in the company’s growth.” “To operate as a listed company is a strong signal that the platform will be there for the long term to transform banking system, “he continues.
Lending Club was founded in 2006. A business lawyer in Paris and New York in the firm Cleary Gottlieb, a graduate of HEC just leaving Oracle he joined a year ago, on the occasion of repurchase of his first company, TripleHop Technologies, the giant enterprise software. Founded in 1999, just before the bursting of the Internet bubble, TripleHop was designed as internal search engine, intended primarily for law firms and adopted in other sectors, including major US media.
“Initially, this was to be a sabbatical between six months and a year to travel, remembers Mr Bolton. But after fifteen days, I had the idea of Lending Club.” It’s a credit card statement which is at the origin. “I realized that the interest rate was 18%, he says. I then opened a statement savings account where I earned a little less than 1%. When you are an entrepreneur and you see such a rate differential, there must be an inefficiency in the market somewhere.”
To reduce this gap, Mr Bolton then wants to connect individuals who save to those who need money. “He was determined to impose a new model at a time when hardly anyone was still talking about the sharing economy,” recalls Loïc Le Meur, who invested in the company. But he had this ability not to listen to anyone and to engage in a world that was not his.” The contractor starts first on Facebook, but it is constrained, a year later, to close up shop for six months pending approval by the SEC.
Google in capital
In early 2010, Lending Club passes the loaned $100 million. Since then, growth continues unabated. By the end of 2012, the company skimmed its first billion. By September 30, it was more than $6.2 billion, of which almost half was earned since the beginning of the year. “The volume of loans doubled every year,” says Laplanche, who provides voluntarily limit of this growth to better manage the development of the company. “We are four to five times larger than our rivals and we continue to grow faster, he added. There is a real advantage to being the market leader, just as was the case with eBay online auctions.”
The platform allows today to borrow up to $35,000, repayable over two, three or five years. The average is just over 14 thousand dollars. Interest rates start at 6.8% for the least risky profiles. They can reach up to 30%. The average is 14%. Using Lending Club is advantageous for people already in debt, who must repay such purchases made with their credit cards at rates exceeding 20%. This represents over 80% of loans on the site.
“We use a lot of data online and with credit reporting agencies to identify potential customers, people who have a good credit standing, a steady job but who are paying too much to repay their loans,” said Mr Bolton. There remains only to solicit them by promising significant savings. This is the magic formula behind the success of Lending Club.
80,000 investors enticed
The platform has attracted nearly 80,000 side investors. They were paid $595 million of interest. The service is not open to everyone: they must meet income and asset conditions. Investors can choose from seven risk categories, with rates that vary in the same direction. To limit potential losses, Lending Club “securitizes” loans: it is not a single individual who lends $10 000 to another, but hundreds who pay tens of dollars each.
“Diversification is the main protection for our investors,” says Laplanche, while the company claims 99.9% positive return on investment when the sum is allocated by at least 100 loans. Once defaults are considered – which concern a little less than 4% of borrowers – and commissions, the average annual return was 7.2%. “Most of those in the world of finance, who advise you not to invest in Lending Club do not save you 7% per year,” says Mr Le Meur, who invested several million dollars in the platform.”
Lending Club experienced in May 2013 a great spotlight with the arrival in the capital of Google. The Web giant invested $125 million, through one of its two investment funds. “We learned a lot from Google, says Mr Laplanche. They gave us a lot of advice on security and marketing.”
Six months later, it was the turn of the Russian billionaire Yuri Milner, who made his name in recent years in Silicon Valley investing in Facebook, Twitter, Zynga, Groupon or Airbnb. The company has also attracted big names in the US venture capital funds such as Kleiner Perkins and Union Square Ventures. Since 2007, she has raised nearly $400 million for its development.
Transform the traditional banking system
To enhance its reputation, Lending Club also recruited big names. Its board of directors and members includes John Mack, former CEO of Morgan Stanley, Larry Summers, Treasury Secretary under President Bill Clinton and Mary Meeker, star analyst Internet sector. “Lending Club has the potential to profoundly transform the traditional banking system over the next ten years,” enthused Mr Summers at the end of 2012.
“The goal is not to replace the banks, says Laplanche. We believe that we can ally ourselves with them to participate in the evolution of the system.” The company and works with several banks that invest the savings of their customers on the platform. They also have the Lending Club loans to their customers. “We started with small local banks, but we have recently entered into partnerships with larger institutions,” says the entrepreneur.
Lending Club is beginning to diversify. In March, the company opened its platform for small businesses, allowing them to borrow up to $100,000. The following month, it bought Springstone Financial, specializing in student loans and health. But it is not yet planning to operate outside of the United States.