Updated, 8:19 pm | Obtaining a loan was once a matter of heading down to the bank and applying. But the technology boom of the last decade has given rise to a new way, where web-savvy investors can connect directly with would-be borrowers.
Now, by filing to go public on Wednesday, the leader in the so-called peer-to-peer lending industry, Lending Club, plans to test how popular and durable the business model can be.
Though companies like Twitter and Uber draw a huge amount of attention in the consumer technology universe, the nearly eight-year-old Lending Club has carved out a special niche online: lending. And in the process, it has garnered fans across Wall Street and Silicon Valley.
Together with competitors like Prosper Marketplace, the company functions largely as an intermediary connecting those with money with those who want it. It is an industry that supporters say is becoming a robust alternative to traditional bank lending and largely sky-high credit-card interest rates.
Since it began making loans in 2007, Lending Club has become the clear leader in the field, overtaking older rivals like Prosper in the process. From its founding through the first half of this year, the company says that it has financed more than $5 billion worth of loans and paid nearly $494 million in interest to investors in those loans.
That success has fed into high ambitions for future growth, although it is not currently turning a profit. In its prospectus on Wednesday, Lending Club listed $500 million as a preliminary fund-raising target — but it could seek to raise even more, according to a person briefed on the matter.
That initial goal would still be enough to rank the prospective public offering as one of the 10 biggest stock market debuts of an Internet company. That would put it in the company of Groupon, Orbitz and other big online consumer brands. It also remains to be seen whether it can sustain the demand from investors when interest rates rise, which would make other investments like bonds more attractive.
The emergence of Lending Club and others reflects the Silicon Valley determination to shake up traditional industries using the latest technologies. Its chief executive, Renaud Laplanche, was partly inspired by reading through his mail years ago. His credit card statement listed an interest rate of 17 percent. His savings account disclosed a rate of just 0.5 percent.
“I believe we can transform the current banking system into a frictionless, transparent and highly efficient online marketplace that provides affordable credit to borrowers and creates great investment opportunities for investors, helping millions of people achieve their financial goals,” Mr. Laplanche wrote in a letter in the prospectus.
From the start, the company has focused on relatively safe loans, using advanced computer algorithms that measure borrowers’ creditworthiness. Customers with a FICO score of at least 660 can borrow up to $35,000 for three- or five-year loans. That is largely the kind of lending that big global banks have shied away from, since they are too small to pay meaningful profits.
Yet for Lending Club, the enterprise can prove lucrative. While rates on loans can start at below 7 percent, the average interest rate is about 14 percent, which still remains below standard credit cards. (The lenders can choose how risky of a loan they want to underwrite.) The company takes a small cut of that percentage and pays the rest to investors in the loans.
The demand for peer-to-peer borrowing has propelled Lending Club’s expansion in recent years. It originated $1.8 billion worth of loans in the first six months of the year, more than doubling what it did in the same time last year.
Its revenue surged 134 percent, to $86.9 million. And its adjusted earnings before interest, taxes, depreciation and amortization which excludes some noncash charges, rose 55 percent, to $5.9 million.
But marketing expenses and the costs of growth have weighed on the bottom line. The company slid to a $16.5 million loss in the first half of the year from a small $1.7 million profit in the same time last year.
Still, the promise of the peer-to-peer industry has attracted some of the very institutions that Lending Club and others have sought to displace. Drawn by the promise of returns as high as nearly 9 percent, big mutual funds and hedge funds have flocked to help fund loans on these online marketplaces.
So popular has peer-to-peer lending been among big institutions that Lending Club and its competitors have had to put limits on how many loans they can buy, as well as how quickly they can bid on coming loans.
The presence of Wall Street is also on its board, which includes Lawrence H. Summers, the former Treasury secretary; John J. Mack, the former chief executive of Morgan Stanley; and Mary Meeker, the venture capitalist and onetime star Internet analyst.
The company, which has already raised nearly $400 million in venture funding to date, counts among its backers heavyweights like Google, the venture capital firm Kleiner Perkins Caufield Byers and the mutual fund giants T. Rowe Price and BlackRock.
And anticipation over Lending Club’s impending IPO. had been so high that many of Wall Street’s biggest investment banks battled to claim a piece. The filing disclosed that the stock sale would be led by Morgan Stanley and Goldman Sachs.
As it has grown, Lending Club has moved beyond debt consolidation into newer, potentially more lucrative offerings like loans for small businesses, students and elective surgery.
Left unsaid in the filing were several crucial details about Lending Club’s public offering. Among them: the price range that the company will seek for its shares, which of its existing investors plan to sell their holdings, and on which exchange the company will list.