The recent Lending Club revelations have sent shockwaves through the nascent marketplace lending industry. Stock prices have taken a hit, capital partners are asking more questions and regulatory scrutiny could be on the horizon.
In an instant, the self-assured claims that online lenders would soon dethrone their stodgy banking forebears and bring about a tectonic shift in lending came to a halt. In their place, market analysts, bank executives and others have leapt at the opportunity to write the first lines of marketplace lending's obituary. Nothing like a whiff of scandal to bring about some good old-fashioned "I told you so's."
To be clear, there is no place in any industry for misrepresenting or falsifying documents to mislead investors and the public. Every company has a duty to its customers, partners, investors and regulators to maintain the highest standards of integrity. If we've learned anything in the past decade, it's that financial companies must be built on solid relationships and trust. A few employees at Lending Club allegedly fell short of these standards. To their credit, the directors at Lending Club discovered the alleged misconduct on their own, made it public and took swift action to begin to regain the public's trust.
Before we write off marketplace lending, let's remember: we are still at the relative beginning of this journey. There will be some bumps in the road, as there are for new companies in any field. Innovation takes time and so does building a great company.
All of the swaggering statements we've heard about destroying the banking model miss the mark. Marketplace lending is about enhancing the existing lending model. The opportunity to reach new borrowers and make smarter lending decisions means very little if these new companies fail to put in place the building blocks that position themselves for long-term success. You can't innovate your way past good management.
Marketplace lenders are just as laser-focused on building durable infrastructure as they are on growing origination volume, pricing risk and providing service to borrowers and investors. Fortunately, we are not recreating the wheel in this endeavor. Many successful (and not so successful) companies in finance have come before us. Their experience teaches us valuable lessons.
I believe there are four pillars upon which a great company in our industry is built.
First, there must be robust controls in place that extend beyond the minimal legal and compliance requirements. Internal policies and processes must emanate from a company culture that demands transparency and adherence to the highest ethical standards. We must hire people who fit well into a culture of accountability, and people who want to develop the most robust internal controls just as much as they want to provide the most flexible financial products.
Second, relationships between marketplace lenders and their partners are best when they are equitable, when both sides share a commitment to growth — prudent growth — and respect for each other's customers. We are not interested in maximizing short-term gain at the expense of strategic long-term value to both parties.
Third, if our industry is to reach full potential, we have to diversify our capital sources. It does not serve our customers, investors or partners well to depend on the short-term vagaries of the capital markets to fund our growth. This reality underscores my belief that partnership with — not animosity toward — banks and traditional financial institutions is the most fruitful approach for long-term success.
Community banks, in particular, are valuable partners as a result of their focus on strong credit quality and providing personal customer service. Many banks understand that there is much to gain from marketplace lending's successful reach into a younger, more diverse market. And many banks large and small have already participated in this market in some form.
Lastly, there must be open, honest and proactive lines of communication with the regulators who supervise our business today or who seek to understand us better. From the beginning, some of us in the industry have made the decision to engage federal and state regulators in order to explain our products and services, and to understand regulators' focus on consumer financial protection and the integrity of our investment offerings. We have since continued to maintain healthy relationships and engage in active dialogue with federal and state agencies.
The recent Treasury Department report on marketplace lending is a good example of public-private engagement in the industry. Treasury sought comments on the industry about a year ago. CommonBond submitted a thorough response. So did others. We engaged in live dialogue. So did others. The findings released by Treasury boil down to a "how to" guide on building a great and lasting company in finance. The bottom line was simple: ensure transparency with consumers and investors.
Innovation takes time. Building a great company also takes time. But with enough skillful and principled execution, marketplace lenders will build companies that continue to deliver on what we've been promising. There might be bumps in the road, but I believe that makes us better in the long run.
David Klein is the CEO and co-founder of CommonBond, a marketplace lender. He can be reached on Twitter @DavidXKlein.