LendingClub and the limits of FinTech disruption

By Aaron Back for wsj.com

LendingClub’s new arrangement with its partner bank is a reminder that FinTech can’t disrupt everything.

LendingClub showed Friday that it can respond nimbly to regulatory challenges. But in tweaking its business model, the online lender also reminded investors that there are limits to how much newcomers can disrupt the old rules of finance.

LendingClub arranges loans between lenders and borrowers. It doesn’t itself originate the loans – that job is largely left to a partner bank called WebBank based in Utah. LendingClub then packages the loans in various ways and sells them to investors.

Now, a legal case making its way through the courts threatens that arrangement, by questioning whether loans made by national banks and sold to third parties fall afoul of state anti-usury laws. LendingClub’s response is to preserve a link between WebBank and the loan products by giving the bank a stake in how the loan performs afterwards. The catch: LendingClub would pay a higher fee to WebBank in exchange for taking on this new risk.

The arrangement’s full financial details haven’t been disclosed. LendingClub Chief Executive Renaud Laplanche says the higher fees won’t be material to LendingClub’s financial results.

The added risk, though, may be material to WebBank. Banks generally may become more cautious about originating loans for marketplace lenders if they bear more risk. That could slow the industry’s growth near term. But it could also put it on firmer footing if banks are incentivized to ensure sound underwriting practices by their online partners.

What’s increasingly clear is that FinTech companies won’t get away with too much regulatory arbitrage. Rules laid down for old-school financial companies will eventually reach new-school ones as well.

The article first appeared in WSJ.com