Should Colleges Profit When Alumni Lend to Alumni?

New alternative to traditional banking says it is setting up "partnerships" with colleges' associations.
November 8, 2007

Many alumni associations profit from affinity credit cards, where colleges' names are linked to those of credit card companies. But at a time when colleges' revenue-sharing deals with various entities are drawing increasing scrutiny, a new company -- hailed by some as an alternative to traditional banking -- has announced plans to form "partnerships" with alumni associations.

So far these partnerships appear to be just advertising deals, but the company says it is currently negotiating revenue-sharing arrangements with other alumni groups.

The company is called Lending Club and it has brokered more than $2 million in loans since the business launched in May and is on track to hit $6 million by the end of the year. The concept is that there are many people with money to lend but who aren't themselves banks with the ability to review the creditworthiness of borrowers. And there are plenty of credit-worthy borrowers who would like to borrow at lower interest rates than banks charge. Lending Club uses social-networking software to match people up for the loans (without ever telling them who they are borrowing from or lending to). And the business gets a cut: 1-2 percent from the borrower and 1 percent from the lender.

Last week, the company announced that it had set up "partnerships" with the alumni associations of the Georgia Institute of Technology and Kansas State University and was in the process of doing so with the University of Michigan.

Renaud Laplanche, CEO of the company, said that alumni associations are key to the company's strategy of matching people with appropriate borrowers/lenders. He said that the first quality lenders look for is, of course, creditworthiness. And he stressed that the Lending Club isn't the place to go if you strike out at a bank. But once creditworthiness is established, Laplanche said that lenders and borrowers want to feel connected in non-financial ways, and alumni status is one such way.

So when a Kansas State alumnus finds Lending Club on the alumni association's "partners" page, and clicks, he or she ends up on a Lending Club page that also features a Kansas State box. Then the borrower or lender fills out information, but will be matched with a fellow Wildcat (although privacy rules will prevent them from knowing actual identities).

"Being an alumnus is one of the strongest connections you can establish," Laplanche said. "And connections matter a lot to lenders."

Alumni associations care very much about connections, of course. And they have for many years now relied on relationships with companies as sources of revenue. But do they want a connection with a lending arrangement when not every loan will go well?

The three alumni associations already involved are resisting the idea that they are in partnership with the Lending Club. Joe Irwin, the president of the Georgia Tech group, said "essentially they are an advertiser for us" and "we don't view this as an endorsement."

Asked if it could be problematic that the company identifies itself as a partner, Irwin said that "I guess we could address that with them."

Laplanche acknowledged that the three universities whose alumni associations are the first to work with his company are being paid to promote his services and that he does not share revenue with them. But he said that he is currently negotiating with other alumni associations -- which he declined to name -- that would be compensated in part through sharing revenue on the loans issued from and to alumni.

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