In The News

Analysis

• A bank acquisition provides a faster way for fintech companies to get cheap deposits
• Fintech firms that have considered a bank charter are likely next bidders
• Small and mid-sized community banks with digital initiatives are attractive targets

Financial technology companies looking for a national bank charter might follow in the footsteps of San Francisco-based LendingClub [NYSE:LC] and acquire a bank to secure that charter.

LendingClub, one of the earliest online marketplace lenders in the United States, announced it would acquire Boston-based Radius Bank, marking the first acquisition of a bank by a fintech company in a decade.

LendingClub President Steve Allocca called it “a strategic no-brainer” for other online marketplace lenders with a similar strategy to its own to seek a bank acquisition. While other fintech firms have taken steps to get a bank charter, LendingClub’s move to secure it through an acquisition could cause a wave of additional M&A activity in the sector.

Others that have expressed interest in applying for a bank charter — whether it be the Office of the Comptroller of the Currency’s special-purpose bank charter, an industrial loan company charter or a full-service national bank charter — are likely to now consider the acquisition route.

Logical buyers could be fintech firms OnDeck [NYSE:ONDK], Social Finance, Square [NYSE:SQ] and Upstart, or challenger bank Chime, said Aalap Merchant, senior managing director at strategic advisory firm Marlin & Associates.

OnDeck has said it is actively pursuing a bank charter, exploring both a de novo application and a possible acquisition. SoFi previously applied for an industrial loan company (ILC) charter, though it later rescinded its application. Square applied and withdrew its ILC application, refiling it in December 2018. Robinhood also applied for a full-service national bank charter, though it withdrew its application several months later.

An acquisition is likely faster than a de novo application.

Varo Money spent almost three years working on a national de novo charter, securing federal deposit insurance on 10 February.

LendingClub’s acquisition of the bank took about six months from start to finish, Radius Bank CEO Mike Butler said. The digital lender expects the deal to close in 12 to 15 months. Butler expects other fintech companies to wait until LendingClub receives regulatory approval before making the jump themselves.

Varo said it spent about USD 100m on its various applications and compliance activities, whereas LendingClub will spend USD 185m in its cash-and-stock deal. However, LendingClub will get a significant amount of deposits as well as Radius’s executive team that managed those deposits.

Banks’ deposits bases can bring fintech firms stable and cheap funding, and help the buyers diversify their products, said Jennifer DePalma, an M&A lawyer at King & Spalding. “The more deposits that bank already has, the better,” DePalma said, adding that access to customers’ historical activity in a deposit account is also “incredibly useful".

Interested buyers likely won’t consider banks bigger than Radius and may even look at banks with half of Radius’s USD 1.4bn assets to make a deal affordable, said Frank Sorrentino, managing director at Stephens. The most recent deal of this kind before LendingClub’s announcement was in February 2010, when Green Dot [NYSE:GDOT] agreed to buy Bonneville Bancorp, which only had about USD 37m in assets.

There are 4,579 federally chartered banks with less than USD 1.5bn in deposits in the United States, according to FDIC data.

Potential fintech bidders will also look at how their valuation might shift if they were to acquire and become a bank, according to a sector advisor. Companies such as Square and SoFi trade on revenues or adjusted EBITDA, while banks trade on book value.

Though DePalma was not surprised that LendingClub chose to acquire a bank, she has not heard of other fintech companies actively pursuing a bank acquisition. When they do, they are expected to pay typical bank industry valuations, though private unicorns have more flexibility to pay up, Sorrentino said. LendingClub agreed to buy Radius for 1.72x book value.

Radius has long partnered with fintech companies to build technology for fast online deposit gathering. It was “one of only 13 digitally native banks with a national footprint and no legacy branch infrastructure,” Allocca said, though LendingClub declined to name the other banks.

Green Dot and Utah-based WebBank are likely targets of a fintech acquisition, the sector advisor said. Other banks that readily partner with fintech companies include Cross River Bank, The Bancorp Bank and Utah-chartered Celtic Bank.

Some community and regional banks are struggling as regulatory changes over the past decade have made it more difficult to lend, DePalma said. Although fintech firms are less likely to want to acquire a distressed bank, some could take advantage of an acquisition as a cheap way to gain a national bank charter, she added.

However, not all companies may be able to bear the higher threshold of scrutiny that comes with a bank charter. Capital requirements would be high on regulators’ agenda in these cases, DePalma said.

Regulators placed high value on the strength of LendingClub’s compliance and enterprise risk environments, as well as its core credit risk management function, Allocca said.

“There are probably some bars to hurdle for fintech companies that are earlier in their lifecycle that LendingClub had already long surmounted,” the executive added.

by Rachel Stone and Xinyi Jiang in Charlottesville, Virginia, and Yizhu Wang in New York