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Lending Club

Matt Levine, BloombergView, Citigroup Joins the Lending Club, here.

I think there are two possible answers. One relates to a thing I like to say, including about Lending Club, which is that the purpose of banking is to conceal risk. This is why it seems unlikely that Lending Club could really disintermediate banks: People don’t want to invest their savings by picking out individual borrowers to lend to. They want to chuck their savings in a bank and not worry about them; they want the bank to do its job of transforming risky loans into risk-free savings accounts. Adding more steps helps attenuate and obscure risk; each intermediary siphons off a bit of the risk that would otherwise be borne by Citi’s depositors. Citi isn’t lending money to low-income families; it’s lending money to a rich hedge fund that’s lending money to low-income families. The money goes to the same place, but at a further remove, so it’s safer.

The other answer is a division-of-labor story, in which Lending Club is better at sourcing loans and algorithmically evaluating them, and Varadero is better at choosing which loans to invest in, than Citi is. So it’s worth it for Citi to incur the frictional costs of outsourcing that work. You can be skeptical of parts of that story — Dan Davies has his doubts about the theory that big-data-driven startups are smarter than banks at loan underwriting — but there’s a lot to be said for it. The Internet might well be a better place than a Citi branch to find borrowers, particularly lower-income borrowers in neighborhoods that are not full of Citi branches. And Varadero might well have better incentives to choose good loans than a Citi lending officer would.

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