This fintech lender's shares surged nearly 390% in the past year. Its CEO sees 'sustained growth' ahead

Published Tue, Nov 23 202110:55 AM ESTUpdated Tue, Nov 23 20214:05 PM EST

LendingClub had been left for dead. Shares of the fintech pioneer had stagnated for years after the 2016 ouster of its co-founder Renaud Laplanche, trading under $5 per share as recently as July 2020. But LendingClub, which offers online personal loans so users can pay down credit card debt, is in the midst of a renaissance. The company's decision to purchase an FDIC-backed bank in early 2020 has reduced costs and created new sources of revenue, a transformation that CEO Scott Sanborn says is still in its early stages. LendingClub's shares have rebounded by nearly 390% in the past 12 months as the company exceeded analysts' estimates for three straight quarters. "We feel good that the trajectory we're on is very durable," Sanborn said in an exclusive interview. "We have the ability to deliver sustained growth in revenue and earnings in a way that I think is pretty unique in the market, because we've got the same large opportunity to go after in terms of disrupting retail banking that others are pursuing, but the fact that we've got this resiliency of funding and earnings is pretty unique." Higher revenue The biggest new source of revenue for LendingClub stems from the fact that, similar to larger banks, it now holds onto some of the loans it creates. This generates a stream of net interest income. At the same time, expenses fell because LendingClub stopped paying bank partners to issue or warehouse loans, Sanborn said. LendingClub still operates a marketplace in which loans are sold to banks, but because it now retains a portion of its loans rather than passing on all of them, demand has increased, said Sanborn. That's because investors have greater confidence in the quality of the loans now that the issuer is keeping some of them, he said. "The demand for these loans is up, so the effective price we're able to get when we sell them to investors is also up," he said. The firm also updated its lending algorithms to be able to react "much more quickly" in terms of adjusting its loan parameters, helping it recapture market share it had ceded. And an expense reduction plan Sanborn had initiated before the pandemic struck in 2020 is beginning to pay off; it involved moving operations staff for San Francisco-based LendingClub to Utah. The changes helped LendingClub boost revenue by 20% and profit by 190% in the third quarter on a 14% increase in loan volume, Sanborn said. The "compounding benefit of the new revenue streams is just starting to kick in," he said. The right model The industry is starting to taking note. Fintech firms are increasingly looking to acquire banks or apply for bank charters: A year after LendingClub announced its acquisition of Radius Bank, SoFi said it was buying its own institution. Other players including Square and Revolut have applied for their own charters. The resulting model is that of a fintech-first player with the advantages in funding, payments and product reach of a regulated bank, but without the burden of maintaining a physical branch network. "I think you're going to see others attempt to follow in terms of bank charters and acquisitions," said Ian Ferry, a portfolio manager at Jackson Square Partners , an investment firm with $18.7 billion in assets under management. "The industry is moving toward this converged disruptor bank model, a hybrid model which we think is the right one within fintech going forward." These new players have cost advantages versus existing lenders, so they can offer lower interest rates on retail loans or better terms on savings accounts, eating into the dominance of traditional banks. That's the main selling point of LendingClub's loans, which are typically used to consolidate and pay down higher-interest credit card debt. Next, Sanborn plans on finding other ways to help Americans save money. That will include auto loans and a "buy now, pay later" product for big ticket expenses like private school or medical procedures, he said. Down the road, LendingClub will more closely resemble a full service bank, with checking accounts and debit cards that are integrated with the firm's loans. "You're going to see us over time become a really formidable competitor that takes this entry wedge of loans and really spreads out," Sanborn said. 'Something much better' Jackson Square, a San Francisco-based growth-oriented investment firm, started buying shares of LendingClub in the first quarter, according to Ferry. By midyear, Jackson Square was the fintech firm's biggest holder with about 9 million shares; filings from late September show that it is now the second largest holder after Vanguard. "What we saw with the acquisition of Radius Bank is an opportunity for the company to effectively remake itself in the public markets into something much better and bigger," Ferry said. "You sometimes find these companies that are just not well covered or researched, or they're not liquid enough to show up on screens for a lot of other money managers," he added. "If you've done your work, and you're right, they can go up for a very, very long time."

Scott Sanborn, CEO of LendingClub

Ari Levy | CNBC

LendingClub had been left for dead.

Shares of the fintech pioneer had stagnated for years after the 2016 ouster of its co-founder Renaud Laplanche, trading under $5 per share as recently as July 2020.

But LendingClub, which offers online personal loans so users can pay down credit card debt, is in the midst of a renaissance.

The company's decision to purchase an FDIC-backed bank in early 2020 has reduced costs and created new sources of revenue, a transformation that CEO Scott Sanborn says is still in its early stages. LendingClub's shares have rebounded by nearly 390% in the past 12 months as the company exceeded analysts' estimates for three straight quarters.