This Fintech Company Is Changing Its Brand. Here’s How It Might Boost the Stock’s Growth

The current landscape for fintech stocks is quite compelling. Over the last five years, these stocks have navigated a range of challenges, from the pandemic and its inflationary aftermath to the soaring federal funds rate and the banking crisis of 2023. Now, with interest rates on the decline and the economy hinting at a return to normalcy, some fintech companies might emerge as significant winners.

LendingClub (LC +3.50%) stands out as one of the oldest among these emerging lenders, showcasing impressive loan performance even amid economic challenges. However, its valuation still trails behind competitors like SoFi Technology and Upstart Holdings.

In a recent earnings discussion, CEO Scott Sanborn indicated that the company is considering a rebranding effort.

While new brand identities usually don’t drastically impact stock value, in this scenario, it could be particularly beneficial.

Time for a fresh identity

During a third-quarter call, Sanborn expressed caution over the rebranding, which is expected to roll out mid-next year.

We’ve built this brand up over nearly 20 years. A new identity could help us broaden our appeal and create fresh opportunities. Still, we must tread carefully to retain the positive reviews, accolades, and conversion rates we’ve achieved through these channels. There’s quite a bit of work ahead.

Seeking to explain the low valuation

It’s somewhat unexpected for LendingClub to be considering a rebrand given its strong customer satisfaction. Customers give it an average rating of 4.83 out of 5, and the Net Promoter Score stands at a commendable 81—showing high customer loyalty.

Still, LendingClub’s valuation lags significantly behind key competitors like SoFi and Upstart when assessed through various financial ratios.

Two potential reasons could explain this undervaluation. First, the original business model centered on connecting borrowers of personal loans with retail investors seeking attractive returns.

Though this retail strategy worked initially, it carried inherent risks. Since 2016, LendingClub has shifted from that model and streamlined its operations, primarily selling loans to banks and large investment firms. New for this year, it’s also entering into partnerships with insurance companies. Notably, it recently announced that BlackRock plans to purchase up to $1 billion in loans through 2026.

Another aspect contributing to the discount may be LendingClub’s relatively slower growth in loan origination compared to its peers.

While LendingClub reported a solid 37% growth in loan originations recently, it still falls short of SoFi’s 53% and Upstart’s startling 154% growth.

Despite these disparities in growth rates, a notable valuation gap persists. History shows not every bank is created equally, which adds another layer to the discussion.

Quality over quantity in loan offerings

While both SoFi and Upstart boast impressive growth rates, LendingClub demonstrates a more efficient conversion of loans into income.

It’s worth noting that SoFi’s numbers represent only its lending division, which is more diversified than LendingClub and Upstart. Its focus on credit cards and brokerage services contributes to its overall performance.

However, when focusing specifically on personal loans, LendingClub proves more effective in generating income per loan.

A prudent approach pays dividends

The reason LendingClub successfully transforms loan originations into profits more effectively is its emphasis on quality. The firm claims to reduce 30-day delinquencies significantly compared to competitors, thanks to its carefully crafted underwriting.

This effectiveness can be attributed to its extensive database of distressed borrowers and loyal customers built up over the years. Reaching out to repeat borrowers is cheaper and easier than finding new ones through costly marketing methods, plus these borrowers tend to be more reliable. Additionally, LendingClub’s new LevelUp Savings account incentivizes good repayment behavior.

Moreover, it has strategically avoided high-risk borrowers during economic downturns, focusing instead on quality clients.

I had a chance to discuss these insights with CFO Drew Ravenne, who shared that LendingClub’s loan performance during rough economic times is now paving the way for better pricing on loan sales. Their revenue growth aligns closely with origination growth, unlike their competitors, who might be offering loans at more significant discounts.

Several other factors may also be contributing to LendingClub’s robust growth. The company sells loans without providing “credit enhancement,” meaning it does not engage in financial arrangements that guarantee returns or mitigate risk for investors.

Is LendingClub poised for a new beginning?

While SoFi capitalizes on a broader range of services and Upstart harnesses the power of AI in underwriting, LendingClub seems to excel in borrower selection and understanding the nuances that matter to both borrowers and investors.

The company is set to host an investor day soon—an infrequent event, indicating it could be a pivotal moment. It will be interesting to observe whether they outline a long-term strategic vision that goes beyond their existing personal loan products.

Such a vision might awaken interest among average investors. If not, perhaps the upcoming rebranding in 2026 will do the trick. In any case, LendingClub could present itself as a more attractive investment relative to its current contenders.