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Yahoo Finance's Myles Udland talks with LendingClub CEO Scott Sanborn about the company's move to become a full-service financial institution, as well as trends in the U.S. economy.
MYLES UDLAND: There's been a number of different phases to the meme trade, but one stock that got caught up with a quick doubling of shares back in mid-march is LendingClub. Joining us now to talk about that and a lot more going on with that business is Scott Sanborn. He's the CEO of LendingClub.
Scott, thanks so much for jumping on with us this afternoon. And you've certainly heard us talking to some of your peers in the C-suite about how they think about their stock, whether it's as currency, as a distraction, as something to really capitalize on.
How have you guys kind of thought about that over the last year? I mean, if we had this conversation July of 2020, it would have been a single digit, 5, $6 stock. Today, closer to 17.
SCOTT SANBORN: Yeah. Well, look, for us it's really a reflection, of course, of the future potential, the future cash flow, of the company. And you look at the transition we've made from last summer, which is responding to COVID at a time when, of course, like many others, we had to constrict activity, to today, where we've announced the acquisition of a digital bank. And in Q1, delivered our first full quarter results showing a real return to strong growth, and an exciting outlook.
MYLES UDLAND: And Scott, you've been with LendingClub since the company went public back in 2014. I believe you were COO at the time. And I'm curious, as part of that management team, how your relationship with capital markets and public market investors has changed.
I mean, you look at, maybe, the story I think of what's happening over at Snap right? The discipline instilled by capital markets on the company. And as you mentioned, you guys are transforming your business. Maybe in response to that, maybe to forces you're seeing, and I'm curious how you think about that role as a public company leader.
SCOTT SANBORN: Yeah. It's been a journey, right? And it's been a journey where we were very, very early in the space, one of the first people to really transform lending. We said, hey, credit is a data problem. A technology company as well suited to solve that. And that's the market that we entered.
Over time, where we are today is saying, OK, now that we've got lending, which is where the profit really comes from in banking, we're adding the digital bank services, which is transforming our model. And so we've got to get back out to the shareholders in the capital markets and explain a new story, a very different story, a transformational story of really the entire operating model of the company. So it is a journey. It's a journey that requires significant investment of my time, and the time of the CFO, to make sure that people understand why we're excited, and so excited about the path ahead.
MYLES UDLAND: Yeah, and I think maybe we're talking around it here, or not filling in the audience. How would you explain what has happened at LendingClub over the last few years? What the model is today versus what it might have been, and how you see that evolving for the business in the years ahead.
SCOTT SANBORN: Yeah, so our initial model was as a marketplace, which means we took no credit risk, we sold all loans to investors. Our role was identifying customers, assessing credit risk, pricing the risk, and making the loans available to investors. What's great about that is you can scale in a way that is very capital light, and you can serve a broad range of customers by matching different investor types to different loan types.
Banks take the high quality loans. Asset managers take the higher yielding riskier loans. So you can say yes to a lot of people, have very efficient marketing, and grow quickly, which is what we did. However, you are actually distributing a lot of the value you're creating into the marketplace. So with the addition of the bank, what's changing is we'll hold a portion of the loans.
We'll maintain the marketplace, but instead of selling 100% of the loans, we'll sell 80%. So we'll keep 20% of the loans. That 20% of loans we keep, they will earn three times as much for LendingClub as the loans we sell. So a significant new revenue stream, and a durable revenue stream, that's independent of originations.
The other thing that happens in the new model is the significant fees we were paying to banking partners are now recaptured. So in our old model, we worked with issuing banks to make the loans for us. Totally, they captured pre-COVID about $30 million in revenue from our activities. We recapture that.
We also used to warehouse loans to sell to big asset managers, and we would borrow money to do that. Well now, we can use deposits to do that. That was about-- So the difference in those costs of borrowing money versus the cost of deposits is a 90% drop in our cost of funds. So the addition of the bank really does a lot to transform the financials. And that's not even covering the strategic benefits, which is, we've been helping customers with their lending. Now, we can help them with their spending and savings.
MYLES UDLAND: And Scott, finally before we let you go, I want to ask just how you guys see the state of the economy at this point in the recovery. Certainly you've seen a lot of PPP money come through your system, and you've worked with a lot of customers that way. And just what the economy looks like to you as we sit here, mid-July 2021?
SCOTT SANBORN: Yeah, I'd say we're starting to see those nascent signs of the recovery in the consumer. Like a lot of other institutions, we saw an influx of cash, deposits really grew. When we acquired the digital bank in February, they had $2 and 1/2 billion in deposits. Versus when we began the diligence on the year before that, it was about a billion dollars below that.
And consumer spending had been pretty moderate, and across many categories. Travel, retail fashion, those kind of categories. We are starting to see that recover.
You're starting to see spending in some of those key categories begin to tick back up. You're beginning to see credit card spending as a whole tick back up. But we're certainly not back to where we were yet. And obviously, we're following the news as intensely as I'm sure you all are, about what path the Delta variant's going to take, and what implications that will have for our full reopening.
MYLES UDLAND: Certainly something we've seen Wall Street get a little more interested in over the last couple of weeks. All right. Scott Sanborn, CEO of LendingClub. Scott, really appreciate you taking some time to talk with us this afternoon, and I hope we'll be in touch.
SCOTT SANBORN: You bet. Thanks for having me.