How Lending Club plans to squeeze big credit-card brands

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Lending Club's December IPO raised more than $1 billion.
Lending Club's December IPO raised more than $1 billion.

The king of the peer-to-peer lenders is wooing a new generation of borrowers

MasterCard, Visa and other credit cards spend hundreds of millions to promote their cashback programs, shopping discounts, airline miles, and all kinds of financial and lifestyle bells and whistles.

What they don’t often mention is that if you don’t pay off your bill in full every month, you pay a hefty price for those goodies — anywhere from 11.5% to 19% annual interest, according to Bankrate. 

That’s where the Lending Club and other peer-to-peer lenders see an opening — treating your credit-card debt as nothing more than a pricey personal loan. Lending Club, the largest of the group by far, designs its marketing around little-discussed credit interest rates and claims to offer a simple, cheaper alternative.  If its pitch makes you think of other disrupters such as Uber and Airbnb, that’s all the better.

Alternate lending is part of the tech-fueled upheaval in banking that is challenging financial marketing, as Apple Pay and other platforms encourage people to pick and choose among "best of" financial vendors, say experts. "People used to choose a convenient, local institution and then figure out which products at that institution suited them best," said Rob Rubin, managing director at Novantas, a banking analytics and advisory firm. "But now 70% of consumers find it more convenient to shop for banking products online. And online shopping is product-centric." 

Peer-to-peer lenders digitally match up individual investors with borrowers who apply for a personal or small business loan. The lender uses credit scores and proprietary algorithms to reduce defaults. Operating with a low overhead, it takes a fee on each transaction, but doesn’t lend its own capital.

Eight-year-old Lending Club facilitated more than $1 billion in loans in the third quarter of 2014 and has evolved into a "marketplace lender," with less than 70% of loan investments now coming from peers and the rest from banks and institutions, including Google. 

The company’s marketing focus is on finding more borrowers with solid credit scores. Online and radio ads, direct mail and paid search get out the message that its loans are less expensive than credit-card debts and that its online approval process is faster and simpler than typical bank transactions. (A company survey of about 20,000 Lending Club borrowers showed they were paying 30% less in interest than what they paid for their previous credit card and personal loans.)

The target consumer has been out of college for five to 10 years, has a decent job and wants to pay off the credit-card bills she accrued when she getting established, said Scott Sanborn, Lending Club CMO and COO. "Trends are showing more people want to take their finances into their own hands. We offer a different experience and value offering aimed at the type of person who is looking beyond the traditional ways," he said.

Lending Club is likely to turn up the marketing heat this year, on the heels of an IPO in December that raised more than $1 billion.

It remains to be seen if online marketplaces can develop enduring brand equity, which has historically been tough for financial companies if their products aren't significantly differentiated, according to Kenneth A. Posner, chief of strategic planning at Capital Bank Financial Corp. "Without exceptional brand power, online marketplaces will end up fighting for incremental customers—just like everyone else."

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