SoFi, LendingClub sees bank charter benefit in decline

Manage the charter

Bankers, as the old joke goes, used to follow the 3-6-3 rule: Collect deposits at 3%, lend them out at 6%, and go to the golf course by 6 p.m.

Fintech lenders have long avoided the costly bank agreements required to lend from deposits and live the 3-6-3 life, growing rapidly by instead relying on banking partners and institutional investors to finance consumer loans. But a pair of fintech lenders that recently became chartered banks say the investment has positioned them well, as rising interest rates make marketplace funding more expensive and scarcer.

LendingClub says its banking business gives it the best of both worlds. “In a bull market, we can leverage the capitalized advantages of our pure fintech to gain market share,” CEO Scott Sanborn told analysts after the company’s July 27 earnings call. “And in a bear market, we can rely on the funding stability and benefits of a bank to drive resilience and profitability.”

• LendingClub last year completed a $185 million acquisition of Radius Bank, becoming the first fintech to buy a regulated bank. Deposits reached $4.5 billion at the end of June, up 78% year-on-year.
• That has allowed the firm to keep more of the loans it originates and, last quarter, collect $116 million in net interest income, compared with $25.5 million in the fourth quarter of 2019, before it had the bank charter.
• SoFi won approval to buy chartered Golden Pacific Bancorp for $22.3 million in January. It had deposits approaching $3 billion at the end of the most recent quarter, it reported in its earnings on Aug. 2, increasing net interest income.
• “The bank charter couldn’t have come at a better time,” CEO Anthony Noto told analysts, noting that it added customers through deposit accounts and is now able to access cheaper financing.

“Lending is an art” as Alex Johnson wrote in a recent Fintech Takes newsletter, and banks ramping up lending need to be smart about maintaining reserves and avoiding an increase in delinquencies.

• But the margins between interest paid on deposits and collected on loans tend to widen as interest rates rise, Johnson noted. That sets the banks up to be winners as the Federal Reserve commits to raising interest rates in the name of fighting inflation.
• By contrast, fintech lender Upstart recently reported that the investors funding its personal loans “reacted more quickly and abruptly” to the changing economy than expected, forcing the company to park some loans on its balance sheet. The company hopes to find a long-term partner to finance its loans.
• Affirm said last week it has enough funding capacity for its buy-now-pay-later products, but chief financial officer Michael Linford warned that the market for securitizations is “quite volatile and you’re going to see us be a bit more cautious and thoughtful about where and when we perform there this year.”

Don’t expect a rush of fintechs getting bank charters. First, they are hard to come by, with a long list of fintechs that have drawn applications in recent years. And they may not be equally beneficial for everyone.

• Upstart CFO Sanjay Datta recently told Protocol that the firm believes it can better serve its clients by partnering with banks, and doesn’t want to.
• Varo Bank in 2020 became the first US neobank to receive a national banking charter – but it doesn’t have a large lending business built on top of its deposits, which limits its advantage, and it has struggled.
• “For fintechs whose primary business is not lending, there are not enough clear advantages to go through the long and expensive process of securing a bank charter (through acquisition or de novo) and the necessary deposit insurance,” said Jason Mikula, a fintech consultant and author of the Fintech Business Weekly newsletter. “Fintechs where this made more sense — LendingClub and SoFi, for example — have already completed the transition.”

A charter can help boost a lending business, but it’s not an easy ticket back into Wall Street’s good graces. Share prices for SoFi and LendingClub have fallen by 63% and 48% respectively so far this year. But if they can show consistent returns and growth with charters in hand, the possibility of an early start time seems tantalizingly close.

– Ryan Deffenbaugh (e-mail | twitter)

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