Why The Lending Club Scandal Cast A Shadow On Fintech

Why The Lending Club Scandal Cast A Shadow On Fintech

The news that Renaud Laplanche, CEO of Lending Club resigned has been generating a heat of debate and the future of peer to peer lending put to critical test..

The details are out and inditing to say the least. For a bastion of fintech with trust as its major currency, Lending Club must have breached the trust placed in the company. An investor was allegedly put in the dark on a loan deal and the execution was not the same as what the investor agreed with Lending Club.

The company has gone ahead to review the USD 22 million loan. People had to take the fall for it in the company. However, coming at a time when the hype about peer to peer lending is wearing out, the exit of Renaud has sent Lending Club’s sharing plummeting to their lowest ever.

Peer to peer lending aided by computer algorithm that provides credit score to people and connect them with investors ‘lenders’ who are ready to buy their debt became a big bet in Silicon Valley and big a shocker to Wall Street lenders.

[graphiq id=”w6Vgh3ddbv” title=”Lending Club” width=”600″ height=”403″ url=”https://w.graphiq.com/w/w6Vgh3ddbv” link=”http://peer-to-peer-lending.credio.com/l/16/Lending-Club” link_text=”Lending Club | Credio” ]

As at today, the company has funded over USD 7.5 billion in debt and it is still growing. Its average 6% APR is enticing to low income prime borrowers, but the risk of not getting investors to underwrite some debt is putting more pressure on the company.

Rocket Internet, an Internet incubator with varied eCommerce and other verticals has invested in similar business. Many other fintech startups are looking at implementing similar strategies to Lending Club. While fintech is not really going to fade away, what is at greatest risk is peer to peer lending and once investors and shareholders smell multiple rats, they are going to start deleveraging and getting out of the business entirely.

Fintech is still at risk. The failure of a business model cast shadows on other similar models. The case of Groupon has proven that in tech, the failure of an here-to-fore winning model can destroy other similar models even when they are foolproof and sustainable.

Why is this so? Because investors are more reactive and when they react, they can be very arbitrary with it. If Lending Club overcomes this scandal, nothing will remain the same.