What LendingClub and Radius saw in each other
LendingClub’s bid to buy Radius Bank, announced this week, was a real curiosity. Why does the online lender want to buy a community bank? What will the combined company look like? What are the regulatory hurdles? Following is a guide to these and other aspects of this intriguing deal.
Why LendingClub wants to buy Radius Bank
Over the past year, LendingClub has been pursuing a dual path, applying with the Office of the Comptroller of the Currency for a bank charter while “scouring the earth” for a merger or acquisition candidate that made sense, according to the company's president, Steve Allocca.
It has been widely reported that LendingClub's motive for buying Radius is access to a cheaper source of funding for its loans. Allocca said it is about that and much more.
“It's definitely a mix,” he said. “Deposits absolutely are a source of lower-cost funding that allows us to offer lower rates to borrowers and also stabilizes the model. We're probably the only company in the lending space that's gone from originally 100% retail funding, peer-to-peer, to almost entirely wholesale funding. This [merger] brings back a more appropriate, more sustainable balance and allows us to pass through more benefits to consumers.”
Another benefit to LendingClub of owning a bank is that it will be able to issue loans directly from within a regulated banking environment.
“That also stabilizes everything that we're trying to do at LendingClub and opens up other opportunities,” Allocca said.
LendingClub borrowers are typically looking to pay off their credit card debt with a lower-rate personal loan. The company has for some time wanted to help its borrowers take the next step toward financial health: saving more. This acquisition should help with that as well, he said.
“The thing I'm most excited about is that it opens up for us the ability to provide more of LendingClub's current and prospective customers more solutions to help them find, accumulate and grow more savings, get more financial stability and become more financially healthy,” Allocca said. “So it's almost a perfect complement when you think about bringing together the two sides of a bank's balance sheet at scale in combination with a leading online, digitally native deposit specialist like Radius.”
Mike Butler, CEO of Radius, pointed out that most bank mergers are about “synergies” — a code word for cost savings.
“Very few today talk about the client and the revenue opportunities associated with it,” Butler said. “This is a one plus one equals three type of opportunity for us to come together where we'll be plugging the Radius team into the LendingClub operation, and nowhere in the story are there synergies, cost cuts, elimination of dual systems, elimination of bodies, backroom operations, backroom people. This is all about the opportunity to bring a company that does some great things on the loan side with a company that does great things on the deposit side to create this great client experience.”
Radius and LendingClub have almost no overlap: Radius does not offer personal loans, and LendingClub does not offer checking and savings accounts.
Butler said the 10,000 people per month who apply for Radius checking and savings accounts will now be offered consumer loans.
LendingClub plans to launch a bank account later this year that will help more customers build up savings. The 50,000 customers a day who are applying for loans at LendingClub are an attractive market for that product.
“They've been pounding the table demanding it,” Allocca said.
Another driver for the deal, according to Butler, is the movement toward the “rebundling” of financial services.
“That is where fintechs have made these great strides in helping consumers get better products, but eventually circumvent circling back inside the financial network,” he said.
LendingClub chose Radius over others because it's "not a regular bank,” Allocca said. “There are thousands of banks, but Radius is one of only 13 digital banks featuring a national footprint and not having a legacy branch network.”
Coping with regulation
The deal will be subject to a regulatory review that could take 12 to 15 months. Allocca said he is cautiously optimistic about the process.
"It's not like we're starting from scratch here," he said. "We have been engaged with the regulators now for more than a year.”
The bar for regulatory compliance and scrutiny is higher for banks than for fintechs. That reality may be a large adjustment for LendingClub, observers said.
“Banks have not only the regulation, but also the responsibility of guardianship and transfer of money, and all that goes with that,” said Bill Harris, founder of Personal Capital and former CEO of PayPal and of Intuit. “It’s a complex and difficult business. Fintechs don't face that.”
Lane Martin, a partner at Capco, noted that LendingClub has never been under the Federal Deposit Insurance Corp.'s jurisdiction before.
“When you think about some of the state-by-state regulations that are associated with handling deposits, I think that's going to be new ground to cover,” he said. “LendingClub is known for its progressiveness with respect to being able to offer customer-centric products over the years. Our clients all the time struggle with how do you offer something progressive but then make sure that you deliver that in a controlled, compliant manner that meets all the regulations. That somewhat slows down the ability to get products out to market quickly.”
LendingClub and Radius executives argue that the differences between their companies are not as big as many outsiders would assume.
“I don't think most people understand the amount of regulatory oversight that a company like LendingClub is subjected to,” Butler said. “No. 1, they sell their loans to banks and therefore regulators have the rights to do reviews of LendingClub’s activities. Secondarily, the Consumer Financial Protection Bureau and others that oversee consumer lending have access to nonbanks. I can assure you that inside the LendingClub world, there is a very acute sense of regulatory compliance because it's what they're subjected to and what they have to do. So there's not that natural disconnect that you might see in a highflying fintech.”
For its part, Radius has at times called itself a fintech with a charter.
“Over the last four years or so as we've built out our technology platforms and products, we've hired people from outside the banking industry and tried to operate more like a technology company than a bank,” Butler said. “I tried to describe it last night in a town hall in which I said, you have a bank that thinks like a technology company that's going to merge with a technology company that has to think like a bank. We all think alike.”
The two companies’ technology infrastructures will obviously need to be integrated to provide a unified experience across platforms.
“They're going to need to make a decision around how do they have an infrastructure to support products that they are now going to offer collectively,” Martin said. “They're going to merge two different customer relationship management systems together and try to expand their national footprint to meet new customer demand and therefore the infrastructure needs to be able to support it.”
Once the technology integration is done, the two companies will have to figure out how to be progressive and offer new products and services to customers in a compliant manner, Martin said.
Rather than keep their identities and cultures intact, the two companies will seek to meld them, Butler said.
“Culturally, we want to operate this company as one,” Butler said. “We're not going to have separate identities. We have one identity, and that is going to be around serving the customer. That's been our mission, to provide the outstanding product to our customers. We have no fees, we have a high interest rate on our products, and we allow people to open an account in two minutes and 37 seconds. That's the core of what LendingClub wants to do, too. “
There are traditional cultural differences between banks and fintechs that the two companies will have to sort out, Harris said.
“Fintechs or Silicon Valley-style companies have a habit of being ambitious, bold and aggressive, and we try to put products out quickly,” he said. “We're looking for high growth. That's the opposite of the outlook or the focus of most banks. Most banks are more conservative, and there's reason for that again, because they're responsible for people's money and they do have this regulatory oversight. That’s what makes it challenging for fintechs who are looking for bank charters or other licenses. It’s also why it’s challenging for banks to develop great customer-facing technology and continuously revise it on a rapid basis.”
It wouldn’t work to keep the two parts separate, Harris said, because the same functions and activities run through the entire technology stack and customer service.
“I think we'll all have to hire people with both left brains and right brains,” he said.