Case Study: Lending Club's Business Model and Financial Analysis

This case study examines the business model of Lending Club, focusing on its peer-to-peer lending operations and financial strategies. It explores how the company initially provided unsecured loans through indirect funding, utilizing promissory notes and online lending platforms. The analysis delves into the factors influencing Lending Club's profitability, including product and service offerings, return on loans, financial structure, and customer satisfaction. The study highlights the advantages of the peer-to-peer model, such as higher returns due to the absence of intermediaries. Furthermore, it discusses the importance of secondary market liquidity, its role in reducing transaction costs, and its impact on the company's ability to attract borrowers and generate revenue. The case study also references the types of borrowers Lending Club serves and its use of WebBank partnerships for competitive interest rates.

Case Study

1.
Business model
Under the initial business model, the qualified member is eligible to get the unsecured loans
through indirect funding with the specific members of the club. The members can indirectly
become the fund specific member by buying the promissory notes issued by the club. The club
provides lending facilities through online peer to peer lending in which the club operates. The
club is required to obey the lending guidelines according to the countries in which the company
operates. Then the company has entered into the arrangement with WebBank in the year 2007.
After that, the company is able to provide a beneficial rate of interest to the customers across the
operating countries. The loan is segmented into the notes under the current business model. The
bank endorses the note the club then the club further provides the note to the members. The loan
agreement is made between the bank and borrower then the bank possesses the loan in which the
money is managed by the by the bank.
Factors to determine the profitability
1. Product and services
The company is providing beneficial services to the customers in order to satisfy the needs
and demand of the customers. The product and services are the main indicators which show
that the profit will generate by satisfying the needs of the customers (Lee et al., 2015).
2. Return on loan
The return on loan of the company is increasing which indicates the profitability of the
company.
3. Financial structure
The structure is very effective which indicates the profitability of the company.
4. Customer satisfaction
The company experience is very high which shows that the company is profitable in the
future.
2.

Investor’s value
The investors will value the company as a finance company because the company is core
essence of the company is to provide financial services to its consumers.
3.
Reason of getting higher returns
The peer to peer model provides higher returns as the comparison to other models because there
is no intermediate between the lender and borrower due to which the lenders can get higher
returns as a comparison to the investment in the bank (Banerjee et al., 2014).
4.
Types of borrowers
The company has considered two types of borrowers, namely, subprime borrowers and Zopa
USA borrowers.
Cheap source of funding
The lending club is considered as the cheap source of funding because there are no
intermediaries between the borrower and lenders. The lenders get the source of funding at the
reasonable rate by accessing the peer to peer service electronically.
5.
Importance of secondary market liquidity
The secondary market liquidity provides the high amount of liquidity which declines the
transaction costs which reduces the risk premium. The market minimises the risk which increases

the value of traded financial assets. The presence of secondary liquidity market is very necessary
in order to develop the initial public offer market. It is a very effective tool for entrepreneurs and
venture capitalists in order to transfer the risk to the public (Fender et al., 2015). The investors
get the opportunity to take part in the growth of the promising company which enables to
generate higher returns on investment within the particular time period. The technological
companies are contributing towards the eradication of poverty, and they depend on the liquidity
of secondary market due to which the secondary liquidity market plays a critical role in the
development of economy and life of individuals. It is mainly used in the risk of business
investment. The market makers and speculators are very important in order to determine the
liquidity of a secondary capital market.
Purpose of generating secondary market liquidity
The purpose of generating secondary market liquidity is to develop the liquidity on the company
which enables to reduce the risk premium and increase the value of traded financial assets. It also
helps to reduce the transaction cost which increases the profit margin of the company within the
particular time period. It helps to increase the solvency ratio of the company which attracts a
large number of the borrower (customers), and it directly impacts on the sales volume of the
company. The liquidity of secondary market enables the company to sold its securities easily at
any time within the trading hours, and it also enables to sold the stock at the loss of value at a
minimum.

References
Lee, H. S. (2015). Factors influencing customer loyalty of mobile phone service: Empirical
evidence from Koreans. The Journal of Internet Banking and Commerce, 2010.
Banerjee, A. V., & Duflo, E. (2014). Do firms want to borrow more? Testing credit constraints
using a directed lending program. The Review of Economic Studies, 81(2), 572-607.
Fender, I., & Lewrick, U. (2015). Shifting tides-market liquidity and market-making in fixed
income instruments. BIS Quarterly Review March.