The reaction to Lending Club’s failings should come as no surprise. Journalists and industry sceptics are quick to jump on any flaws and faults exposed by the nascent peer-to-peer and crowdfunding sector and the American lending platform, once the alternative Wall Street darling, offered up some damning errors for them to feast on.
Recently it came to light that ten-year-old Lending Club, which made its stock market debut in December 2014, improperly sold $22 million (£15 million) of loans to an institutional investor that the buyer wasn’t happy with. The sale was reversed and the loans were sold on to other investors. However, that was not the only questionable move made by the platform.
Founder Renaud Laplanche allegedly pushed Lending Club to take a $10 million (nearly £7 million) stake in a separate fund for Cirrix Capital. He omitted to tell his board that he had personally invested into Cirrix. Laplanche resigned earlier this month. Since then the company’s share price has plummeted. It seems to me that honesty and transparency had been put aside in favour of growth and greed.
In Britain, Lending Club’s misfortunes are being viewed as a harbinger of doom: the Californian company’s cock-ups have led commentators to accuse platforms here of the same poor practices, or say that the same issues are bound to arise in future.
In a previous column for Crowdfinders I wrote that this year is a crucial time for peer-to-peer and crowdfunding. In what is now a very saturated market if platforms can’t ‘go large’ to survive they would have to ‘go home’. The glory days fuelled by hype are over.
This pressure to grow fast and survive the next 12 months or so will undoubtedly lead some platforms to make poor choices in pursuance of bumping up their numbers. Even though loan books are available for all to see, it’s not always a clear picture of what is going on.
Of course, it wouldn’t be fair to tarnish the entire industry with the same brush. I’ve known the founders of Britain’s biggest peer-to-peer lending platforms since they started and many have struck me as cautious about lending decisions and tenacious about transparency. There have been some, however, who have not appeared to demonstrate the same care for their sustainable growth and reputation in the long-term. Thanks to Lending Club’s shortcomings we can expect more scrutiny, which is no bad thing.
The industry is still young and everyone is learning, which is why failures like this should be celebrated however morbid that may seem. The more mistakes made, the greater the lesson. Investors are slowly but surely being forced to wake up and do their homework.
Kiki Loizou is the Small Business Editor at The Sunday Times