Bank-Fintech Partnerships Enter Uncharted Territory

On Feb. 18, fintech LendingClub announced it had signed a definitive agreement to acquire Radius Bancorp and its wholly owned subsidiary Radius Bank. If approved, LendingClub will become the first company in the online lending sector’s history to purchase a traditional bank. The seminal deal has the potential to be a harbinger for the U.S. banking system, signaling the beginning of a new trend; LendingClub and Radius may be forging the path to insured deposits that fintechs have historically sought via national charter applications.

Opposites Attract
Customer service cultures and complementary products brought LendingClub and Radius together

LendingClub President Steve Allocca told American Banker the company spent the past year “scouring the earth” for a merger or acquisition partner in addition to applying for a national bank charter with the OCC. So, what made Radius an attractive target?

In several press interviews, Allocca mentioned seeking “stability.” Launched in 2007, LendingClub offers peer-to-peer lending, allowing borrowers to create unsecured personal loans between $1,000 and $40,000 with a standard period of three years. Investors search or browse loan listings on the LendingClub website and select the loans they want to invest in based on information supplied about the borrower, amount of the loan, and loan purpose (investors make money from interest). LendingClub’s income is derived from origination fees (for borrowers) and service fees (for investors). LendingClub is the number one provider of personal loans in the country, facilitating more than $12.3 billion in loans in 2019.

Buying Radius gives LendingClub a stable source of funding (insured deposits) for future loan growth, as well as expanding its product and service offerings. In 2014, LendingClub began partnering with banks to offer direct-to-consumer loans, including auto loans and mortgages. With direct access to funding, LendingClub will no longer need to share revenue with a partner bank. Radius was also an attractive target because the bank has a national online presence but no overhead from a physical branch network (one of only 13 such banks in the country, according to Sanborn).

From the bank’s perspective, LendingClub’s acquisition offer presented an opportunity to provide the bank’s deposit customers with consumer loan products. Radius CEO Mike Butler told American Banker the two companies were a good fit because they had zero overlap—LendingClub didn’t offer savings or checking accounts and Radius didn’t offer consumer loans. Both companies’ leaders cited customer service and experience as a motivating factor, as well. According to LendingClub’s press release, “combining Radius and LendingClub will create a digitally native marketplace bank at scale with the power to deliver an integrated customer experience, enabling consumers to both pay less when borrowing and earn more when saving.”

Leading Indicators
It’s a new M&A marketplace... Are banks the buyers or the product?

Could more fintech purchases of banks be on the horizon? It’s possible, though the fields of potential buyers and sellers are both small. Likely acquirers include fintech companies that have applied for bank charters, such as Square and Robinhood. The “Big 5” tech companies (Amazon, Apple, Facebook, Google, Microsoft) are more likely to continue partnering with the largest financial institutions, (e.g. Apple’s partnership with Goldman Sachs to provide the AppleCard) simply due to the challenge of scaling a smaller institution to meet their needs.

Another potential fintech buyer is Varo Money, which offers fee-free online savings and checking accounts and peer-to-peer payments. In early February, the FDIC approved Varo's application for deposit insurance, and Varo had previously received conditional approval from the OCC for a national bank charter, but then withdrew its application. Once the Federal Reserve and OCC sign off on Varo’s application, it will be the first fintech provider among several similar applicants to get the go-ahead from federal banking regulators. Purchasing a bank would be an expedient scaling strategy for the startup.

Target banks, like Radius, will have wide online footprints with little (or no) physical locations, and will also have robust technology platforms ready to integrate with the purchasing fintech’s systems. Radius’s platform offered not only online check deposit, bill pay, and card management, but also a personal financial management dashboard and open APIs to offer BaaS (banking-as-a-service) functionality. More importantly, those banks will need to be interested in selling, rather than growing through acquisitions of their own.

Though it has the potential to show fintechs a path to “bank hood” via acquisition, the LendingClub-Radius merger is—most likely—not the first pebble in a landslide of fintech-bank deals. Instead, it is a powerful reminder to banks that seamless technology and customer experience are critical for success in today’s financial services marketplace, and that partnering with fintech companies can be the best way for an institution to obtain them.

Seitz is WBA operations manager and senior writer.

Further reading: