Risk and reward are the cornerstones of any asset class.
Clarke Roberts, senior vice president, Electronic Trading Services at LendingClub, told Karen Webster that whole loan auctions — where institutional clients buy and sell LendingClub’s bundled personal loans — are due for a tech-enabled, digital overhaul.
The process itself has traditionally been filled with friction. Institutional investors, committing millions of dollars of capital, look at the markets, determine whether buying loans across online platforms would be attractive investment opportunities and create spreadsheets.
They’d send those spreadsheets over to LendingClub, which would pass those sheets over to clients, facilitating the transaction.
Excel spreadsheets have been the tools of the trade, and at their most efficient, the process could take weeks and even months to complete.
But as Roberts said, with a nod to LendingClub’s announcement this week that it has added client-to-client sales to its LCX Automated Loan Auction Platform, which has been operational since 2019:
“Now clients are able to interact and see their purchase and sale interests directly for a variety of loans, and can come to an agreement with automatic settlement.” Automation takes the manual work out of the equation and shortens the weeks-long time to settlement to mere days.
Positive Ripple Effects
That has the positive ripple effect of increasing liquidity for this market-leading asset and secondary markets.
Streamlined loan auctions improve price discovery and enable the actual volume of loans issued across the platform to increase — with more options available to the end consumers who take out those loans to navigate living in the paycheck-to-paycheck economy.
“This will ultimately lead to better products and more financial inclusion,” he said.
Indeed, PYMNTS’ research with LendingClub shows that the majority of Americans, even higher earners, live paycheck to paycheck and in some cases, struggle to make ends meet. They’re turning to alternative forms of credit, including personal loans, to consolidate and manage those obligations across a single point of contact.
By automating loan auctions and making them more direct, he said, this asset class will become more attractive to investors that may not have entered the space yet and will create more dynamic competition for those loans as there is a better understanding of risk and return.
There are advantages that accrue to LendingClub, too, Roberts said. Automation means that more loans can be issued across the platform without having to add additional staff at the company itself — and throughput improves too.
“What this technology allows us to do is to have fewer ‘hard stops,’” said Roberts. Those hard stops previously were a hallmark of the manual friction in the marketplace, where changes in member demand and risk profiles can create imbalances. As he explained it, a hypothetical temporary increase in demand now can be handled by digital tools that allow sellers to offload those loans and find a market-clearing price without making a phone call.
The announcement of client-to-client sales is the latest iteration of the marketplace. It comes on top of recent bids by LendingClub to increase its LCX capabilities over the past three years through the use of application programming interface (API) technology, well beyond its initial focus on the secondary markets.
The Next Evolution
Roberts predicted that LendingClub competitors would likely follow suit in building out and automating their lending marketplace capabilities.
“This is the next evolution for issuers,” he said, “in reducing their reliance on certain channels — not to replace them, but to help diversify their funding and distribution.”
He said that LendingClub would look to continue to add new investors to the pipeline for new loans or loans already trading in the secondary markets. And, he said, end-consumer demand for those loans will increase as they seek to manage their debt in different ways amid soaring inflation.
The overall consumer credit space, he said, remains dynamic, and the institutional markets play a vital role in the lending industry.
As he remarked to Webster on the client-to-client feature:
“We believe this will lead to more investors — and different types of investors — becoming more attracted to the marketplace, with competition for the loans and better pricing.”