LendingClub Corporation (LC) Earnings Call Transcript & Summary

All right. Good morning, and I guess we'll go ahead and get started. So thank you, everyone, for joining us this morning for another edition of Fintech Fridays. My name is Ebrahim Poonawala, and I head U.S. MidCap and Canadian banks research for Bank of America. As part of Fintech Fridays, we strive to invite institutions and leading industry experts to share their perspective on digital innovation within the financial services industry. Joining us today, we have the leadership team from LendingClub, a full-spectrum fintech marketplace. And with us from LendingClub, we have Scott Sanborn, CEO; and Tom Casey, Chief Financial Officer. So thanks, gentlemen, for joining us this morning.

Good morning.

And maybe just to kick it off, Scott, talk to us -- I mean, I think for those of us who are not as intimately aware of the day-to-day progress at LendingClub, you IPO-ed as a P2P lender, obviously, the business model has evolved significantly. You closed on your first or, I guess, the only bank acquisition earlier this year, that of Radius Bank. Just talk to me or talk to us about the journey and where the business model is today and what the strategic sort of plan is?

Yes. So we started out -- we made our kind of founding principle, if you will, was that retail banking was one of the last frontiers to be disrupted. And that by using data and technology, we could build a really significant franchise. And so our focus initially was on helping customers lower their cost of debt versus high-priced credit cards. So it's a really big market because pretty much -- almost half of all Americans who have cards carry that debt month to month and effectively have a loan. So we were targeting that market. And the thesis was correct. We achieved market leadership, issuing more than $60 billion in loans to a really -- and amassing a large customer base of more than 3 million customers that we call members. And most recently, as you added, we acquired a digital bank and the capabilities that go with that, which really significantly enhances what we can do for our customers, the services we can provide as well as the resiliency and profitability of the business model. So given where we are in the market, we couldn't be more excited. We don't -- we can't imagine a better time to be starting a digital bank than right now.

Got it. That's helpful. And I guess maybe delving into that a little bit deeper, you've talked about, I think -- I was reading your previous comments around data supremacy, data advantage. And in one of these calls that I've done, I think there's a lot of focus on -- like someone mentioned that client data is probably is the biggest asset the financial services banks or nonbank financials have. Just talk to us when you talk about the data advantage that LendingClub has, what that means, how you are able to translate that into a true competitive advantage.

Yes. So if you think about it, this especially online, right, all of the data is tracked and available. And if you look at this, we've been collecting data at a massive scale for more than a decade. So we recently showed that just since 2017, we've captured 148 billion cells of data. So it's about 2,000 attributes of data across our member base. And we use this in every aspect of the process. Just think about this from who are we targeting, what models are we deploying to guide our marketing. And proof in the pudding, we've got industry-leading marketing efficiency to how are we assessing fraud risk online, right? When somebody is applying and you're not meeting them, how do you prevent fraud. Again, we've got industry-leading fraud rates at just single-digit basis points. Who are we making offers to? How do we say yes to more people? And how do we price that effectively? And then getting into servicing, what collection strategies do we deploy through what channels? And you look at that, we recently shared that our credit results, our delinquency rates are 35% below our competitive set when you look at our -- both our pre-COVID and our COVID vintages. So you add all this up, it's just a massive data footprint that allows you to build intelligent models to do everything from your marketing targeting to your pricing to your underwriting to your servicing to unleash some of the latest analytical techniques to harvest that data and to turn it into a great experience for the customer.

Got it. But I think maybe just on that, like when I talk to financial institutions, it feels like a lot of tech investments that they're making are table stakes, right? Like everyone is doing that, you've got to do that to just have a seat on the table. When you think about some of the things that you mentioned, Scott, how much of that is meeting what's out there in terms of the offerings from other fintechs or banks? And how much of that do you think is really a USP for LendingClub?

Well, look, the -- there's the infrastructure and then there's the data itself that's housed in the infrastructure. I'd call the infrastructure is table stakes. That doesn't mean that everybody has it. And obviously, I think starting fresh, if you will, as a digital-first entity without the legacy systems that are often coupled together through multiple integrations gives us an advantage of having a relatively cleaner infrastructure base to start with. But then there's what you do with it and how you use the data that you have and whether the data you have is in and of itself an advantage. And there, we would say we've got a real material advantage, a significant advantage as you can hear in the results I just shared. And I'd add that this is a compounding effect, right? We are operating at such a large scale. We've got such a volume of people coming at us, we're constantly able to do pricing testing, experience testing and iterate. And on the surface, this looks easy. It's just a loan application that results in an offer. But that experience is quite dynamic in who you are, how you come to us, what behavioral traits you exhibit does change the experience you get. And that becomes very, very difficult to duplicate. And I think you see that in the number of people that have come into the space and then attempt to compete with us, and we've managed to maintain our leadership position and even grow share.

Got it. [Operator Instructions] But I guess just sticking to data, one last question. The one issue that at least regulated financial institutions, and obviously, you acquired the bank and closed on the acquisition recently has been a regulatory restriction around being able to use customer data. Like how do you overcome that? And can you do that in an effective way? And do you think like tech companies -- often tech companies have an unfair advantage when it comes to being able to use like social media platforms and how they use their data. Just talk to us, give us a perspective on that.

Yes. I mean look, I think this space is obviously rapidly evolving. And I think where it is rightfully getting some of the most attention is when there's data being collected and used that the actual owner or contributor of that data is unaware of it and is unaware of how it's being used. I think that it is -- again, going back to this point that data is everything in lending, and it is true that different entities are collecting orthogonal data to the bureaus that can be useful in underwriting. There are complications as you indicate and using that data can run a file of things like equal credit, fair credit, fair lending regulations. But that doesn't mean you can't use it. You just have to use it within the parameters of those rules. And if you look at within the banking space, we even as a bank are strong supporters of the fact that consumers own their own data and should be able to choose what to do with it. And we are -- for us, the principle is obviously protect that data and make it transparent what you're doing and have a value exchange. So roughly half of our customers give us access to their bank accounts via one of the integration services like a Plaid or a Finicity. And the reason they do that is because we can make the underwriting process far faster, more automated, smoother. We can increase the amount of credit we can extend and we can increase the amount of people we say yes to. So when you give people a choice, hey, do you want to do this? Here's what you'll get for it. We find they will do it.

Got it. And I guess just moving to client acquisition strategy. We've heard a lot about acceleration of digital channel and the adoption by customers across financial institutions over the last year during COVID. When you think about LendingClub, like tell us about your go-to-market strategy or how you're acquiring new clients and bringing them on to the platform.

Yes. So for us, it's -- we've obviously -- our customers have always been comfortable in a digital environment. That's where the company started and grew up. What's exciting for us is that the market is moving at an increasingly accelerating rate in our direction. And I think the pandemic has really accelerated that. And we know bank branches are closing, I think they're down 15% or so since 2008. And what used to be really the primary driver of the location of the branch and how convenient of that is that for me, I think during the recession and I don't think this will change, people understood that what really matters is how convenient is the mobile app and does it have the functionality that I need. So for us, the addition of an award-winning digital bank that has these core capabilities that consumers today are demanding from their bank is really exciting because it gives us another avenue to acquire customers in addition to another way to serve our existing customers.

Got it. And if I can press you a little bit more in terms of when -- what's the catalyst? Why is someone becoming a client of LendingClub? Is it because of lending -- borrowing needs? Or is it -- are they looking for a depository? Obviously, the deposit strategy, I assume, is evolving post the Radius Bank deal. But talk to me in terms of what would bring the customer in the door at LendingClub?

Yes. So our primary driver is -- our primary driver and profit source is obviously lending. That's where we excel. And so our value proposition is simply if you didn't pay off your credit card last month, you have a loan and it's not a very good one. It's a floating rate. It's a drag on your FICO score. We make it very, very seamless and frictionless to access credit through an unsecured personal loan, and we make it very easy for you to pay off that credit card debt using an installment loan, which has the benefit of lowering your monthly payment as well as boosting your FICO score. So that's our go-to-market strategy. And that's what -- we've created this very large funnel that allows us to attract customers at scale, at a reasonable cost through a profitable vehicle. Now with the addition of deposit services, the vision is, over time, we'll be able to do more for those customers. We can therefore track them longitudinally in an ongoing fashion to see what other expenses they have, see what's happening with their income, make additional credit opportunities available to them and also help them with their savings goals. What's different about that, if you think about some of the other neobanks is a lot of the neobanks are starting with the deposit account first. We are starting with lending first. And we're excited about that because we think that, one, it is a high-value exchange interaction, right, where people are coming to you for money and you're giving them access to credit, access to more credit or at a better rate than they're getting elsewhere. That creates a real bond with the customer, right? We've got NPS scores that are in the high 70s. And it also creates a lot of loyalty. Half of our customers come back to us within 5 years to do business with us again. And the vast majority of those come directly back to us. So we think this is a real profit flywheel that the addition of the deposit product is simply a customer lifetime value generator. It's an engagement vehicle as opposed to necessarily in and of itself the profit source for the business.

Got it. And when these customers come for like -- so you address their borrowing needs, is the goal -- and maybe it's not, but is the goal to cross-sell and further entrench them within the LendingClub platform ecosystem? Or are you okay with having that sort of one sort of transaction relationship and hope that when they have a future borrowing needs, they come back to you?

Yes. No. Our goal is certainly bigger than to be the largest unsecured lender in the country. Our goal is, over time, to do more for these customers and serve more their needs. So it starts with unsecured lending with the addition of the bank balance sheet. We have 2 other products that, over time, we're going to be able to offer to them. One is this checking deposit and saving suite of products. And then the second is we have the ability to help people with their auto loan as well through also lowering the cost of their auto loan by refinancing that and saving them there as well and more to come over a much broader time line.

Got it. Got it. And when you think about sort of growing the business where you're going to win market share from or where these clients are coming from, are the big banks, traditional sort of credit card companies the bigger competitor? Or is it the neobanks, fintechs even -- in big tech that you're looking at more in terms of where you're going to be most challenged from a competition perspective?

Yes. So I mean, overall, we're competing with both but in slightly different ways. I mean we are sourcing customers from the big 5 credit card issuers. And we are taking their most profitable customers and people who build a balance and then carry it sometimes for more than a decade. So that's where we're sourcing customers from. Who we're competing for those customers from are both traditional banks, people in our space include Discover, Citi as well as fintechs. And the fintechs are obviously gaining share. They're close to 50% market share, and that's obviously been rapidly changing over the last 5 years or so. And -- but we're competing against both. This has been a competitive space for quite some time now. And we're winning against both due to some of the reasons I gave earlier, just the data advantage, the member base advantage. And now we're adding the bank charter. So that gives us the best of both worlds because we've got the profitability and the resiliency we get by adding the bank charter, the low-cost funding. And we've got the broader approval rate and kind of the tech-first infrastructure of a fintech. So we feel really good about our position to win there. And something I haven't talked about is with the addition of the bank, we are going to be moving and have moved already since the bank acquisition was approved in February. We're holding between 15% and 25% of the loans we originate, we are keeping. And for those loans, we earn 3x as much as for the loans we sell. So all the activities that we've historically done, marketing, underwriting, servicing, we are continuing to do. Now we're just going to hold a portion of those loans and earn 3x as much revenue on the loans we hold as the loans we sell. So basically, without really adding to our activities basis by much, we're significantly increasing the profit for the business.

Got it. Got it. And just as a follow-up, hard to go off script, but buy now pay later, there's been a fair amount of chatter on BNP and what that means. One, just give me your perspective on that? Like do you think it has legs, it's here to stay? And does LendingClub have a role to play there or not?

I do think it has a role to play, and consumers are looking for transparent and easy-to-understand ways to finance what it is they're looking to accomplish. However, there's a range of players and a range of activities there. Some are better for the consumer than others. So I do think as that space grows, it will gain more attention and there'll likely be more kind of parameters put in place about responsible credit extension in that space as well. And we view buy now pay later as effectively another source of credit that we can refinance and lower the cost of. You may know that a lot of those vehicles are not particularly low cost. They're simple, but they're not particularly low cost. And we also view it as a potential for growth. We actually do have a footprint in that space today, which is we've got a purchase finance business that -- where we make it possible for people to afford treatments, elective medical treatments that aren't covered by insurance. So think about things like a fertility treatment, braces for your kid, teeth implants, those kind of expenses. So we've got a footprint in that space today that we're excited about growing, and we think that the addition of the bank helps us do that.

Got it. I guess just moving in terms of the operating outlook. Let's talk a little bit about lending. When I talk to the traditional bank side, I think just the liquidity that's sitting on customer balance sheet has been a big headwind to loan growth, add to that labor shortages, supply chain constraints. Talk to us in terms of what you're seeing in terms of loan demand, your pipeline. And has this -- all of these liquidity made you think differently or approach lending differently to -- in order to get growth?

Yes. For us, it's actually pretty straightforward. We -- last year, we pulled back on lending both because we were in a -- we were -- our primary activity last year was taking care of our customers and preparing for the acquisition. So we pulled back. We're simply post-acquisition of the bank resuming our market leadership position. So we grew loan originations quarter-over-quarter in Q4 56%. We grew in Q1 63% quarter-on-quarter. So we're simply resuming our market leadership position, which we did literally 1 month after acquiring the bank. And once we've done that, our market space is projected to grow at roughly 20% over the next several years. So simply maintaining our leadership position, that's what we anticipate for growth. In terms of the broader market, we do see consumer demand currently being a bit below where it was pre-pandemic. But we do anticipate as the economy opens up again a resumption in demand for credit and a normalization that we don't think will take too long versus previous recessions and recoveries.

Got it. And has this caused you to tweak in terms of how you underwrite these loans or the credit box in terms of who qualifies?

Yes. I mean I'd say we're not -- in response to liquidity on the balance sheet, we were fortunate with the acquisition of Radius. We actually acquired quite a bit of deposits, above what we anticipated when we initially announced the transaction, about $1 billion more. So we're well situated there. But for us, it's really a resumption of pre-COVID levels. So during the pandemic, we significantly tightened underwriting. We raised prices and we did income verification on virtually all loans that we sourced. So we're really just in the process of returning to normal pricing, normal underwriting. As the economy recovers, unemployment has stabilized and consumer demand picks back up. But we're not doing anything in response to the current market. We do expect that. We do anticipate it to be a very competitive market with banks looking to put their capital to work. Right now, that's actually a benefit to us because it's driving a lot of activity on the loan investor side since we are able to source assets at a large scale. It is bringing a lot of people to us, who are looking for yield, looking to deploy capital, and that's actually helping us on the marketplace side of our business in terms of who we sell loans to.

You mentioned, Scott, like the origination in the fourth quarter, 1Q. Are you seeing momentum just strengthening as the economy continues to reopen? Or do you think we have a quarter or 2 to go through before some of this liquidity gets absorbed and you really hit full speed?

Yes. I think both of those are true. I think we're seeing a resumption of normalcy. We're not there yet, but we are filling, building, but we do think it will take a few quarters for that to really get back to where it was.

Got it. And maybe I should have started with this, but if you take a step back, like remind us why Radius was the right partner for LendingClub? What does it solve for? And maybe we can take it from there in terms of some of the new capabilities that, that brings to LendingClub.

Yes. So if you think about the scale that we got to, in 2019, we issued about $12 billion in loans, highly regulated activity, the lending. And so we've built a control and compliance infrastructure that allowed us to sell half of our loans to banks, right, who treated us as an extension of themselves. So we had a lot of the costs of a bank without the benefits. So pre-COVID, we were paying issuing banks to make loans for us. And in 2019, that was between $20 million and $30 million. We were using warehouse lines because we had portfolio loans, structure, pools of loans for investors. So we had about $1 billion in warehouse lines pre-COVID. And we're paying, call it, 330 basis points in interest on that. So call that another $30 million. So we looked at these expenses and said, if we were our own bank, those would go away. In addition, as I mentioned earlier, we would have access to stable funding, low-cost funding, no longer be it the sort of the whims of the capital markets, would have an additional revenue stream in the form of interest income. That would not fluctuate with originations, right? It would be more stable. So we said, okay, we think it's time for us to add a bank charter to the mix. Another question was how. We saw an acquisition as a potentially faster and more sure path. Why? Because we could acquire somebody who was able to do the things we couldn't. We felt very good about our operations infrastructure and our control infrastructure on lending, but we didn't have anything around deposit operations, deposit gathering, deposit management. So we felt like acquiring somebody who had that built would help us to hit the ground faster. And then the question was, okay, where do you go to look for that? We got to find somebody who is for sale, who ideally is a cultural fit, right, is digital first, is -- we don't want a lot of branches. We don't want a bunch of large-scale businesses that don't fit into our model. And we actually met Radius through a potential partnership discussion. We were exploring bank partnerships to power a checking account experience for our customers. And when we met the leadership team of Radius, we thought forget partnering, these 2 businesses would be better together. We said it was a 1 plus 1 equals 5. And because they were -- they had already made the move to close all their branches but one, they had built an award-winning digital deposit infrastructure and they were very good at that side of the business, they've built a bank-as-a-service business that allowed them to raise deposits. But where they weren't as strong was in asset generation, and that's obviously what we had in spades. So that's how the conversation started.

Got it. Got it. And then talk to me about like if I go back -- like whenever I hear about this notion of an online bank, a digital bank, to me, it speaks to the only way they end up bringing in deposits is by offering attractive deposit rates, right? And this goes back 15 years, I would say, like an ING Direct and the other players back in 2004 or '05. Like tell me in terms of -- and maybe I'm missing something, but how does the platform -- a branch-less online platform acquire truly sticky relationship deposits?

Yes. So we've got a couple of things in the mix. One, we actually have an institutional and commercial deposit business. So with Radius, we acquired a government-guaranteed lending business, an SBA lending business, commercial real estate, a leasing business. And we've got the deposit accounts for a lot of those clients. Those also include trade union deposits. So these are large sources of pretty sticky, low-cost deposits. And we plan to continue to run those businesses and continue to serve those clients. That's one piece of the deposit business that we have. The second is, as I mentioned, this bank-as-a-service business where we are helping people offer banking services either for themselves or for their customers are both one-to-one and one-to-many type relationship. And so that's another source of deposits we have. The third will be tapping our own member base. Hey, congratulations you're approved for LendingClub loan, how about you deposit into a LendingClub checking account? And here are the benefits you'll get for doing that. And then the final would be we do have the capability of competing in the open market for deposits because of the fact that the asset that we generate is an incredibly high-yielding asset, right? It is amongst the most profitable assets in banking, unsecured consumer. We have the benefit of both the interest income, but we also have an origination fee on the loan. So those 2 things combined mean it is a very profitable asset that allows us to pay, to gather deposits. But that isn't the answer. We have a diverse portfolio of deposits that we're very happy with.

Understood. And then I guess talk to us a little bit about the nonconsumer lending business. You mentioned a few business lines that they already had, CRE, et cetera. Is the goal to expand on those or keep them as is, maintain this relationship but still be focused on the consumer lending, which has kind of been the bread and butter for LendingClub?

Yes. I mean consumer lending is clearly going to be the growth vehicle for us. It's going to be the source of a lot of the revenue and profit gains we see for the reasons I indicated. But we really are very pleased with the addition of these businesses because they are, for the most part, secured loans. So really add a lot of resiliency to the balance sheet and diversity to the balance sheet. So we do plan on growing those businesses, but we won't be growing them at the same pace as we're going to be growing the consumer business.

Got it. And I think the other thing you mentioned, Scott, was banking as a service. Radius Bank had a product, had partnerships. Is the goal there to increase partnerships? Like should we expect you to have and see press releases around a lot more partnership that LendingClub or Radius engages in? Or is it about just maintaining what they already have?

No. We plan to invest in that business. For the reasons I indicated, it is a another way of diversifying our deposit sources. It also keeps us really close to the innovation ecosystem. And we actually think there's more we can do there because the technology capabilities that we bring to bear are significant versus what Radius as a relatively smaller bank had available. But we plan to maintain the partnerships that we have there and the technology delivery infrastructure we have and invest in it.

And maybe I should have known this, but is the goal to sort of make all this one brand into LendingClub? Or do you expect to operate with Radius when it comes to the banking side?

No. We are well underway of integrating the brand. As you're probably aware, there's a limited amount you can do during the pending approval phase. You can do planning, but you can't do a lot of work. So the real work kicked off post-acquisition, and we're on track in the nearest future to have the integrated brand be in the market.

Understood. And I guess one more industry-level question. So you obviously acquired Radius. We've seen this be so far in Square. I mean I think they're all getting into or trying to get a bank charter one way or the other. As I think about it, like what is it do you think for a fintech that grows from an asset generation -- leading with an asset generation business, Is it the attractiveness of trying to get sticky core deposits that eventually leads them to there? And if you take that a step forward, do you see a little bit of a convergence structuring between pure fintechs and banks where there's a middle ground where both of them are kind of moving to that?

Yes. I mean I'll kind of try and take it out of the LendingClub frame and just speak a little bit higher level. I think it's an advantage for -- the way our system is structured today, getting started as a bank would be very, very hard. There's been a few people that have tried it, and it is a very, very arduous process, very difficult to get approved to have a bank charter, especially when you're just getting started and you don't having yet validated your business model, your product market fit. And so the amount of infrastructure you need to build to support the regulatory requirements is high. So it's -- that's why people are starting as fintechs without the banks, and they're partnering with banks to get access to those parts of the system that they need. However, as they get larger, the benefits structurally, strategically, financially of having a charter become stronger and stronger and stronger. And there's both -- there's the financial opportunity, which I think we've talked about at length of you're paying less out and you're capturing more in. There's also just from an operating risk perspective, controlling your own destiny, right? You are engaged directly with the regulators and you can have a conversation yourself about the innovations you want to bring to market, not going through a third party. You are no longer subject to some of the different changes in the regulatory atmosphere with things like risks around true lender that flare up on both a state and federal level fairly routinely, right, and can be an existential threat to some of these businesses. And again, then there's the strategic benefit, which is you have the ability to just offer a broader range of services that you can capture more data from and capture more value from that you can in turn give to the customer. So I -- when we started talking about it, it -- I think it was -- a lot of people thought, why would you do that? But I think you're seeing pretty much across the industry as players get larger, they're ready for that transition. And I think that's the right move for our regulatory system as well, right, bring these larger players in so that they can be directly supervised.

Got it. Got it. And I guess in terms of -- we talked earlier about data and technology, just talk to us in terms of once you get the Radius fully integrated and such from an investment spend standpoint, what are the top 3 priorities? Is it hiring personnel and sales force on the technology side? I'm assuming it's all of the above. But give us a little bit of flavor of where you're really spending investment dollars as you look out over the next year, over the next 2 to 3 years?

Yes. So as I indicated earlier, our starting place is the largest unsecured lender in the country with a much more profitable business model. That is not the extent of our ambition. And so with the addition of the digital bank, we have new capabilities. We've both got to invest in building out those capabilities and invest in the infrastructure that allows the delivery of those capabilities, right, and enables the data infrastructure, the targeting infrastructure that enables us to really deliver a lifetime value membership experience for our customers. So that's what we're working on the technology side and the infrastructure side. And we've recently put out, we are investing in some staff. We've hired a Head of Deposits. We've hired a new Head of Membership and Marketing, right, because we recognize we're going to be moving beyond sort of a single product experience to a multiproduct experience. So we really want to be really crisp about what is the value we want to provide to the customers and in what order. So we are starting to build out the team and the work structure to support that multiproduct feature.

Understood. And when you think about -- I mean it looks like you have a lot of white space in the U.S. as you think about growth, but is global expansion is part of the conversation today, whether you think about Canada or Europe? Or is it just too early to think about those?

No, for us, it's not a question of if, it's a question of when. And right now, to your point, I mean, the U.S. market is so massive and the opportunity is staring us right in the face. So large that our focus is on really delivering against that in the coming few years.

Got it. And just because you have -- obviously your hand's on the pulse of the consumer. Has the consumer changed in terms of the characteristics of what's going to drive the consumer post-pandemic versus pre-pandemic? Or once we get through some of this normalization, are we back to where we were pre-COVID when you think about how consumer spending, consumer priorities around spending could look like over the next few years?

I mean the consumer certainly fared quite well, right? And that is both due to some exogenous factors as well as their own behavior. I mean I think consumers came into this with much better balance sheets than in prior recessions. And then they were supported by the government and they were supported by lenders, right? I think just record amounts of forbearances and support plans to get people through. And as a result of that, people really were able to avoid getting into trouble, and that's why we've seen credit be such a strong performer. I think our view is that certain aspects of behavior will change in terms of what they expect from their bank and their partner and what services they want. But we do believe that consumer demand for credit, and I think you're seeing that -- you and I were talking in the precession about the explosion in demand for travel, restaurants. You can't get a reservation, you can't get a rental car, you can't get a plane ticket. So we do think consumer demand for credit is going to be coming back.

If it makes you feel better, the Jettas are a solid car, so you got yourself a good deal there. But I guess we had some questions come through from folks who are listening. So maybe if I can hit up on a few, Scott. The first question was in terms of your underwriting algos and models, how does LendingClub compared to Upstart and Upgrade?

So big picture, one, it goes a lot further in underwriting models. As I indicated earlier, you've got targeting models for marketing, you've got fraud models, you've got pricing, you've got underwriting, servicing and we've got dozens and dozens of models that are in place. And how do they compare, I would say we're the market leader with market-leading marketing efficiency and better delinquency performance than our competitive set. So I think the results are speaking for themselves.

Got it. Got it. And I think you mentioned the 2 lender rule. There's some chatter about -- I think the Congress reversed what the OCC had done, I think, last year, if I have it right. Does that impact in terms of what you're doing in terms of having a bit of -- did it impact on your ability to originate loans or grow the business?

This is -- this was one of the many drivers for us of having our own bank charter was effectively cauterizing and eliminating this risk because we are now issuing our own -- we are sourcing and underwriting and issuing our own loans. There's no question that we are the true lender. So this does not have an effect on our business.

Got it. And I guess just following up, you mentioned about the commercial, secured consumer business that came with Radius. I understand the driver is going to be sort of your consumer lending. But when you think about that business in terms of -- to nurture it, to grow it, like what's the plan there? Is it that it's going to grow but grow at a slower rate? Or is it just a -- give us a sense of how strategically -- because I'm just wondering in terms of if I'm a employee within that segment, like what's motivating me and what's the messaging to me from the top.

Yes. So we are going to grow it. In fact, the plans -- the growth plans they had in place, we are continuing to support and invest in. And so we're excited to have those as part of the portfolio. And one of the things that we view is also kind of our overall why are we here and what's our mission, and LendingClub has been very good at making credit accessible and affordable. There's been a number of studies done by Federal Reserve Bank and others that are showing that. And one of the things we really liked about Radius was they were able to do that last year with the PPP lending. They did a remarkable job making credit available, using the rails that they had in place and the infrastructure they had in place for SBA. And we want to continue to support those businesses and, again, invest in ways of making them more tech-enabled than they were under the Radius frame.

Got it. I guess just moving topics a little bit around capital management. You do have a fair amount of excess capital. Just maybe, Tom, if you want to jump in, give us your thought process around just capital management priorities, binding constraints in terms of when you think about regulatory capital ratios and how you're thinking about that?

Yes. Thanks. And I would say, first off, one of the things that we did with the acquisition, as Scott mentioned, we made a deliberate decision to capitalize the bank with the growth capital of about $250 million, so as part of our closing of the transaction. So the capital inside the bank is quite robust. We've indicated that we're going to maintain around 11% leverage capital. Our first objective, as we've indicated, is to put that money to work by adding about 15% to 25% of our origination volume onto the balance sheet. What that does is that it throws off a return -- risk-adjusted returns is about 7.5%, so significant ROE accretive to the income statement. So our first objective is to put that capital to work in the form of growing our consumer businesses, as Scott indicated. What that does then, it starts to generate a whole new revenue stream for us, one that we didn't have before, takes advantage of the low-cost funding that Scott mentioned as well. So the spreads that we're getting are quite significant. As that portfolio starts to generate more and more interest income, it starts to throw off additional capital, which then is further reinvested into growing the balance sheet. That's one of the unique things about having a very high return on capital asset growth, which then funds the additional capital needed to continue to grow that balance sheet. It's a unique business model because of that kind of high ROE business allows you to grow that much faster. With our repositioning of the -- getting back into the market and our market leadership, the volume then continues to improve and then also generates additional fee income that further enhances our capital. So we feel very good about our capital generation between the marketplace as well as the interest income we're going to get off of the loans that we put on the balance sheet. So from a capital perspective, we feel very, very good about our level of capital we invested. We kind of refer to it as priming the pump in 2021 to put that money to work that will continue to throw off additional cash and cash earnings in the future.

Got it. And one, if like you already talked about this and I missed it in prior settings, but the 15% to 20% of originations that you're retaining on the balance sheet, like what informs that? Like could that be 50% at some point? Just talk to me in terms of is it a capital allocation decision or is it dependent on where the interest rate environment is and what -- yes?

It's a balancing act. We went through quite a bit of scenarios to try to find the right balancing act between having sufficient volume to meet the investor -- the loan investor demand as well as participate with that income stream. And we feel that, that 15% to 25% is about the right number. It allows us to grow the balance sheet over 2021, 2022 nicely, allows us to put that capital to work. We think that's the right approach. Are there situations that allow us to go a little higher or a little lower? Yes, there are. But one of the things that is an additional benefit of having this capital deployed is it also improves our effective pricing with our investors. So the ability for us to decide to sell or hold also drives a lot of additional efficiencies in the income profile of the company. In the past, we -- as Scott indicated, as being a fintech without a regulatory frame and our own funding, we have to take the market price. And in this environment, we don't need to take the market price, we can actually hold loans on our balance sheet and drive price. And that's a very, very big difference than we've seen in other models and where we used to be. So for us, we think 15% to 25% is a good number to start with. Again, we've only been in this a couple of months since the acquisition. I would say that we're really encouraged. We've got immediate benefits as part of the acquisition. You don't see that very often, Ebrahim, is this issuing fee costs down, funding costs down and now growing the assets. We are very uniquely positioned compared to some of the other banks because the amount of assets that we originate allows us to grow our balance sheet, where what you're seeing now is a lot of banks having run down of assets.

So I mean I think it sounds like an exciting time to be a LendingClub, honestly, as I'm listening to you. But in terms of -- it's relatively recent, but in terms of the clients, the loans that you retain on the balance sheet, are the characteristics of the borrowers that inform which loans you end up keeping on the balance sheet versus selling? Or is that not even a factor?

Yes. We typically -- if you think about it, we're just another bank on the platform. So we get a random selection of loans, just like our loan bank partners do. It tends to be in the higher prime areas of the market, which reflects the same type of investment strategy we see for a bank. The banks are using their leverage to drive returns, where some of the higher risk credits are going to other institutions that are funding at a slightly higher and taking a little bit more credit risk. So that's how we choose those loans randomly and representative of the same loans that other banks are getting.

Yes. Just to talk about the model for a second because I think this is important to understand. One of the strengths of what LendingClub does is we have a product for everybody or not quite everybody, but we have a product for a very broad range of customers. If you're a 600 FICO, we have a great product for you. It's likely funded by an asset manager or a hedge fund. If you're an 800 FICO, we have great product for you. It's likely funded by a community or a regional bank. And so we say yes to this broad spectrum of people, which is what helps drive the marketing efficiency and helps us build a much more inclusive brand. And we grade the loans based on risk and effectively make those loans available to investors. Different investors play in different places on that grading spectrum. And as a bank, we're participating in the highest quality grades with other banks through a random allocation, random selection of that high-quality grade.

Understood. That's helpful, actually. And I know you mentioned the true lender rule doesn't have any impact on LendingClub. Does it become a competitive advantage now that you have a bank? Does it impact your competitors that we talked about?

Yes, it could. In fact, it could be an existential impact depending on where it goes and how these things wind through the courts. I think the way it can affect people in a real sense is investor appetite for the loans, right? Because if the loan you hold that you've purchased is deemed to come into question, that could create some pressure on the pricing and appetite for loans. So we do think it's a competitive advantage. However, I will say that it is -- we think it is a good thing for the consumer to have a clearly established regulatory framework. So while it is a competitive advantage that doesn't -- that we can benefit from, that it doesn't mean we think it would be a good thing for the broader consumer market.

Got it. We have only a few minutes left. So I wanted to squeeze a few last questions in. But in terms of when you think about -- so you did the Radius Bank acquisition. As you think about new lines of businesses, just talk to us in terms of if there are things that you can -- are already in the pipeline that you can talk about in terms of new lines of businesses and your approach when it comes to building these organically versus looking for additional M&A opportunities.

Yes. I mean the -- our first priority is going to be on getting the checking and savings products into the hands of the customer. So that will be step 1. Radius has won multiple awards from bank rate, CNET's, NerdWallet for their product. It's effectively a rewards checking account that rewards people for spending money they have as opposed to spending -- rewarding people for going into debt on their credit card. So it's a real fit for the brand. We think it will be interesting for the customers, but we need to create an integrated experience, right, where it's integrated with your loan and, hey, if you're going to get cash back, why don't we use it to go towards paying down your loan, right, and helping you reduce the cost of your debt. So that would be priority 1. Priority 2 will be the -- we have a great product in auto refinance, which is effectively going after the large part of the market that is people buying preowned vehicles, where you drive off the lot and you're inherently paying a higher price than your risk would indicate because the dealer has added a markup that could be anywhere from 150 to 300 basis points to help -- that's a source of profit for them and is also not necessarily incented to drive you to the lowest cost lender. There's other incentives in place for them. And you fast forward 6 months, and the person has demonstrated an ability to pay. And so their risk goes down, there is an opportunity there to save money. On average, we save our customers about $80 a month off of their car payments. So drive the same car, pay off the loan in the same period of time, save $80 a month. So that's a pretty compelling offer. We -- that offer is something we want to make available to our members now that we have our own bank balance sheet. So those are 2 things that we've got right in front of us that we'll be working on in the quarters to come.

Got it. Got it. And I guess when you think about from an investor -- as a public company, when you think about the strategic targets, like when you think about profitability of your business, maybe Scott or Tom, are there any strategic sort of hurdles, be it ROA, ROEs that you're looking to hit over the next few years? What should shareholders be measuring you on?

Yes. Tom, do you want to take that?

Yes. So I think the first thing is the revenue growth profile of the company is going to be pretty significant. Obviously, we have seen very significant growth in revenue this year as we recover. But again, as I mentioned, the ability to drive a whole new revenue stream and what Scott said that we earned 3x as much money on a loan we hold versus the loan we sell, that just allows us to generate higher levels of revenue. So first of all, top line, we expect to continue to grow nicely. With regard to earnings, again, in 2021, I said, we're going to actually invest in building the business. With regard to the investment, if you will, with CECL and deferring the fees that Scott mentioned, we are generating quite a bit of earnings that are being pushed into the future, which provides a much more stable, predictable, very high NIM margin business. And so we're very, very excited about the earnings potential. It's a balancing act, obviously, growth versus earnings, but we feel that this business model now with the capital-light marketplace and the high returning balance sheet, you have a business model that can generate significant high returns. We haven't provided specific guidance into 2022, but we feel very, very good about our profile. If you think about our cost of capital, we're earning significantly above our cost of capital. And we think that will drive significant earnings and cash generation to fund the future. So we're quite well positioned. We look forward to giving people more information. We have provided a lot of information in our -- in some of our previous presentations. If folks on the phone would like to see some of that, please come to our IR website and take a look at our banking supplement we did when we did the transaction. Lots of good information there about how the business model will evolve and how the earnings should emerge.

Got it. And I guess one last question. It's hard to have any of these conversations these days without talking about digital assets. So maybe, Scott, give us a sense, like, one, when you think about digital assets/currencies, tokenization, one, big picture, what do all of these mean in terms of financial services and what implications that could have? And for the foreseeable future, do you see LendingClub sort of overlapping with any of these as you think about executing on your business strategy?

Yes. So you are correct. Exciting time for the space. It's developing quickly. There's a lot to watch. When we think about it, I'd kind of divide it into 2 sides. One is on the consumer side, it is not something for our -- if you go back, who is our customer. Our customer -- these are very bankable customers. They are -- 100% of them have bank accounts and credit cards. They are relatively high income and solid FICO scores, call it, in the low 700s. But what they don't have is a lot of savings. And so introducing them to a high-volatility asset isn't the first thing we'll do, right? What we'd rather say is, hey, that $80 a month I saved you on your auto loan, take half of it and put it in a savings account so that next time whatever, a tree falls on the house, your fridge breaks down or you have to pay a deductible for your broken ankle, you've got your savings built up. So that's the consumer side. On the other side of the business, the institutional and commercial side, for us, it's a question of there are a lot of potential applications. It's a question of when does the industry get enough momentum and enough of a standard established where it could be used for things like securitization and other aspects of the transaction. And there, we'll be eager participants when there's enough momentum and footprint there. When BofA starts using it to interact with their clients, we'll be there.

Got it. And I know we completely run out of time, so I'd like to again thank you, Scott, Tom and Sameer for taking the time for joining us today, and thanks, everyone, for joining us for this call.

All right. Thank you.

Thanks, everyone.