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Fintech lenders flex their bank charters

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Friday: the benefits of bank charters, the sound of crypto and Binance’s mystery employee.

Off the chain

Are NFTs dead? The drop in Bored Ape floor prices and the collapse in OpenSea’s trading volume naturally raise that question. But the Bill Murray NFT collection previewed at NFT.NYC in June may be bucking the trend. Brant Boersma bid nearly $190,000 in a charity auction for an NFT offering a beer with the actor. Murray himself has a respectable NFT collection, including a CryptoPunk and a Gutter Cat.

— Owen Thomas (email | twitter)

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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On the money

Bankrupt crypto lender Celsius is hoping to give a small set of customers their assets back. The company asked for a U.S. bankruptcy judge’s permission to release about $50 million in cryptocurrency held in custody accounts. Those accounts, it argued, were designed to store digital assets rather than generate returns, and customers retained title.

Cash App users can now make payments outside of the Square network. The expansion into ecommerce payment via Cash App Pay could help Block in the race to make a financial super-app.

What does crypto sound like? The Washington Post recorded the hum of crypto mining fans heard from a neighborhood in North Carolina.

The FTC accused Credit Karma of tricking users into signing up for credit cards with dark patterns. Credit Karma told people that they had “90% odds” and had been “pre-approved” for credit cards that they actually did not qualify to receive, the Federal Trade Commission said in a new complaint.

Shopify is warning retailers against Amazon’s one-click checkout service. Shopify is cautioning merchants who try to install Amazon’s “Buy With Prime” button on their storefront that it violates Shopify’s terms of service. It also raised the specter of security risks.


“While I have you here, who's Guangying Chen?" The seemingly simple question from journalist Jacob Silverman about a Binance employee whose name showed up in some corporate filing provoked a surprisingly testy response from Binance communications chief Patrick Hillmann, who called it an “intimidation tactic.” The company finally offered an explanation of why it’s such a touchy subject in a Thursday blog post from CEO Changpeng Zhao, weighing in at more than 2,000 words.

The short version: Guangying Chen, who also goes by Heina, was a Chinese national and so Zhao asked her to serve as a legal representative for Bijie Tech, a precursor to Binance. (Zhao is a Canadian citizen.) She’s still an employee of the company, managing administration and clearing, Zhao wrote, though she now lives in Europe and holds a European passport. He criticized people who brought up her early role, saying they were attempting to paint Binance as a Chinese company. Binance left China in 2017 after local authorities banned domestic crypto trading.

The chart

Bitcoin and ether, crypto’s two biggest currencies, have taken huge hits from the market crash that wiped out roughly $2 trillion in value. But the summer buzz around the Merge, Ethereum’s much-anticipated transition from a proof-of-work to a proof-of-stake system, has meant more volatility for ether, the blockchain’s native currency. Speculation that the Merge would mean a boost to ether’s market value sparked a rally last month that pushed ether back above $2,000 before it slid back to around $1,500.

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Thanks for reading — see you Tuesday after the holiday!

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