Wielding the charter

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

Fintech lenders long avoided the costly banking charters required to lend from deposits and live the 3-6-3 life, growing fast by instead relying on banking partners and institutional investors to fund 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 scarce.

LendingClub says its banking operation gives it the best of both worlds. "In a bull market, we can leverage the capitalized advantages of our pure fintech to seize market share," CEO Scott Sanborn told analysts after the firm's July 27 earnings. "And in a bear market, we can lean on the funding stability and advantages of a bank to drive resiliency and profitability."

• LendingClub last year completed a $185 million acquisition of Radius Bank, becoming the first fintech to acquire a regulated bank. Its deposits reached $4.5 billion by the end of June, up 78% year-over-year.
• That has enabled the firm to hold more of the loans it originates and, last quarter, collect $116 million in net interest income, compared to $25.5 million in the fourth quarter of 2019, before it had the banking charter.
• SoFi won approval to buy the chartered Golden Pacific Bancorp for $22.3 million in January. It held deposits approaching $3 billion by the end of the last quarter, it reported in its Aug. 2 earnings, boosting net interest income.
• "The bank charter could not have come at a better time," CEO Anthony Noto told analysts, noting it added customers through deposit accounts and is now able to access cheaper funding.

"Lending is an art," as Alex Johnson wrote in a recent Fintech Takes newsletter, and banks that crank up lending must be artful in maintaining reserves and avoiding a spike in delinquencies.

• But the margins between rates paid for deposits and collected on loans tend to increase as interest rates rise, Johnson noted. That sets banks up to be winners as the Federal Reserve commits to increasing rates in the name of fighting inflation.
• In contrast, fintech lender Upstart recently reported that the investors that fund its personal loans "reacted more quickly and abruptly" to the shifting economy than expected, forcing the company to park some loans on its balance sheet. The company is hoping to find a long-term partner to fund its loans.
• Affirm said last week it has enough funding capacity for its “buy now, pay later” products, but CFO Michael Linford cautioned that the market for asset-backed securitizations is "quite volatile, and you're going to see us be a little bit more careful and thoughtful about where and when we execute there this year."

Don’t expect a rush of fintechs getting banking charters. For one, they are hard to obtain, with a long list of fintechs that have withdrawn applications in recent years. And they may not equally benefit everyone.

• Upstart CFO Sanjay Datta recently told Protocol the firm believes it can better serve its customers by partnering with banks, and does not want to become one.
• Varo Bank in 2020 became the first U.S. neobank to receive a national banking charter – but it does not have a large lending business built on top of its deposits, limiting the advantage, and it has struggled.
• "For fintechs whose primary business is not lending, there aren't enough clear benefits to going through the lengthy and expensive process to secure a bank charter (through acquisition or de novo) and the required 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 instance — have already completed the transition.”

A charter may help boost a lending business, but it’s not an easy ticket back into Wall Street’s good graces. The stock prices for SoFi and LendingClub are down about 63% and 48%, respectively, year-to-date. But if they can show steady returns and growth with charters in hand, the possibility for an early tee time appears tantalizingly close.

— Ryan Deffenbaugh (email | twitter)

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