Lending Club, one of the greatest financial innovations of the 21st century has been my private experiment for the last year. It facilitates the interaction between those with money and those needing money, bypassing a significant handicap of the federal reserve system, using a state sponsored banking intermediary.
My three thousand dollar experiment in lending club was a success, not a single default, though my account was 90 percent 'A' rated loans, and ten percent 'B'. There were some laggards in payment but lending club is quick to bring these individuals back into the fold. The platform is simple to use for lenders, and shopping for borrowers is highly entertaining for this amateur banker. Additionally, Lending Club provides a secondary market for the loans, where notes may be bought and sold.
Now, I am positively bearish on the U.S. economy. Having much needed cash locked in loans for two more years was not very appealing to me for testing the platform, so I began to shed my loans in their secondary market. Initially, fifteen hundred dollars worth of loans sold immediately. The last few months however, it has become impossible to divest the remainder unless I discount the notes significantly. Something is wrong in the Lending Club marketplace. I believe there is a very real lack of liquidity.
Lending club may have given a nod to my contention,
"Lending Club is committed to the marketplace model and we do not plan to become a balance sheet or "hybrid" lender. Our mission of connecting borrowers and investors has not changed.
That said, there may be situations where the temporary use of our balance sheet makes sense. One example would be to enable test programs. Another situation would be to bridge imbalances on the platform. In plain English, this means that if there is a timing mismatch resulting in more borrower demand for loans than available investor capital, we'll consider investing in and holding the loans with the plan to sell them to investors in short order. Our borrowers expect a great experience, and bridging may occasionally help us deliver it while keeping the marketplace running smoothly." -Lending Club
Taking a lesson from modern macro, lending club has elected to act as a central bank to increase liquidity and purchase what the market has deemed unsuitable loans. If cash is unavailable to borrowers, then it is being deployed to the most productive use elsewhere.
An alternative solution may be entertained using basic supply and demand. If enough cash is not available in investor accounts to fund loans on the market place, the interest rates for these loans must go up. A shift in the supply curve will result, and fresh capital will be sent into Lending Club. Unfortunately, this still has lending club acting as the gauntlet that guides the market.
The solution that will save Lending Club, a revamp the platform to allow capital to be bid at auction, or capital bid under conditions the lender picks similar to preset filters when searching for loans. This will result in free floating interest rates where lenders and buyers will find one another and the most efficient use for money will be discovered.
Coincidentally, if the above solution is adopted, Lending club would be doing mankind the greatest service since the creation of the federal reserve by discovering the 'market rate' of interest. Collection of the data and making it publicly available would assist in market analysis for years ahead.
If lending club doesn't take heed of this suggestion, a very profitable entrepreneurship opportunity exists in the marketplace for a savvy programmer.