In the wake of all the economic and interest rate turmoil since the pandemic, some promising young AI fintech start-ups went bust. However, one of the older and established fintechs, LendingClub (LC 0.28%), has been scooping up several bankrupt start-ups’ intellectual property on the cheap.
LendingClub is using this IP in addition to its own investment to build a potentially powerful financial ecosystem with lots of growth potential in the years ahead. Investors should take note.
Scooping up Cushion and Tally
In recent months, LendingClub scooped up the intellectual property of two defunct AI start-ups: Cushion and Tally.
Tally’s technology enables customers to see all their debt and credit card payments in a single interface, along with associated interest rates and other data. Its intelligence tools give beneficial insights to customers, such as how long it would take someone to pay off their credit card loan if just making minimum payments.
In my recent conversation with CEO Scott Sanborn, he noted that many credit card balance holders actually don’t know their credit card interest rate, or how long it would actually take to pay off. By helping consumers calculate and automate their debts, LendingClub helps them become better stewards of their finances. Since LendingClub’s personal loan product’s main use is to consolidate credit card debt, it’s also a good marketing tool.
LendingClub followed the Tally acquisition with Cushion last quarter. Cushion’s AI tool intakes bank transactions and payment information to help customers get a 360-degree view of all their spending. And like Tally, it then applies intelligence to help consumers better manage their obligations.
In addition to IP, Cushion’s founder, Paul Kesserwani, also joined LendingClub as Senior Director of Product, Digital Engagement.
These two acquisitions will be plugged into LendingClub’s evolving DebtIQ tool. On the recent conference call, Sanborn noted that customers who use LendingClub’s new DebtIQ intelligence features have a 60% higher log-in rate and drive a 30% higher rate of loan issuance.
Customer-friendly tools are driving results
The more LendingClub attracts not just borrowers but full banking customers, the better its financials should become. Obviously, if a borrower signs up to become a depositor, that grows deposits and LendingClub’s ability to hold more loans on its balance sheet. That balance sheet was a great asset over the past couple of years, when both asset managers and banks paused buying LendingClub loans as interest rates shot up.
Beyond this, depositors help LendingClub’s cost of capital. For instance, last quarter, LendingClub was able to replace one very large “legacy” and high-cost deposit account with new customers taking on LendingClub’s new checking and LevelUp savings accounts.
The result: overall funding costs fell 83 basis points, from 4.74% to 3.91%, resulting in net interest margins rising to 5.97%, up from 5.75%.
Image source: Getty Images.
LendingClub quietly building a powerful flywheel
With a better ecosystem, LendingClub’s costs come down. Lower costs, like price increases, lead to higher margins, which in turn open up more growth opportunities. For instance, because loan sale prices have improved for five straight quarters, LendingClub can now afford to return to certain marketing channels the company abandoned over the past three years. That enables the company to grow even more.
The company is starting to see those green shoots after two long years of austerity. In the first quarter, management exceeded its origination goals of $1.8 billion to $1.9 billion, instead originating $2.0 billion, leading to revenue growth of 20%.
While net income technically decreased, which hurt the stock, that was due to two items. Because LendingClub was ahead of its origination plan in Q1, management decided to hold more loans on its balance sheet. According to Sanborn, the company had forecast holding $550 million to $600 million in loans, but wound up holding $675 million.
That’s good in the long run, but when LendingClub more aggressively grows loans, it has to take something called a CECL provision (Current Expected Credit Loss), accounting for all losses over the entire life of the loan, even though LendingClub receives interest income over time. So, the higher number of loans held resulted in a bigger near-term CECL provision, hurting profits now but increasing them later.
Second, in the wake of “Liberation Day” tariffs on April 2 and economic concerns, LendingClub then thought it prudent to take an extra qualitative provision of $8.1 million on its loan book. This was purely due to economic uncertainty, even though LendingClub’s underwriting was excellent. Last quarter, charge-offs declined to just 4.7% in Q1, from 8.1% a year ago. And it now looks as if there will be some relief on tariffs.
If not for the provision, net income would have been $19.8 million, which would be an increase of 61% relative to last year, instead of the slight decline as reported.
A big opportunity
As long as banks and asset managers continue buying more loans, as they seem to be, LendingClub’s growth opportunity is vast. There is $1.32 trillion in U.S. revolving credit, which LendingClub and its competitors can refinance at lower rates. Meanwhile, LendingClub’s total servicing portfolio was only $12.2 billion as of last quarter.
With its growing tech-enabled ecosystem aimed at attracting low-cost deposits, better-than-industry underwriting, and loan buyers returning, LendingClub stock still seems like a bargain trading at just 94% of book value.