LendingClub deal could spur more fintech-bank mergers

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LendingClub’s headline-grabbing deal for Radius Bank will likely have more fintechs scouting for other banks to buy.

Though the $185 million deal makes strategic sense for LendingClub, other fintechs might be challenged to find targets as compatible as Radius, an online-only lender in Boston, is to the $3 billion-asset marketplace lender. That might require some compromise as those buyers pursue deals.

LendingClub will gain a bank charter and low-cost funding from Radius’ $1.2 billion in deposits. The San Francisco company expects $80 million in financial benefits over time, including $25 million in savings from ending its revenue-sharing relationship with WebBank in Utah, when it buys the $1.4 billion-asset Radius.

“Once companies like LendingClub reach a certain size, more of them are going to diversify and will want the profitability that deposits provide,” said James Bradshaw, an analyst at Bridge City Capital.

“It’s such a compelling difference — the cost of deposits compared to other sources of funding,” Bradshaw added. “It could supercharge the pace of growth.”

That rationale applies to other online lenders, industry observers said.

“We’ll see more of these,” said Ron Shevlin, research director at Cornerstone Advisors.

“Once other guys get scale, I think you’ll see more of them pursue banks,” Bradshaw said. “It’s much more efficient to buy a bank than to go out and build a charter on your own. With an acquisition, you get the bank infrastructure and people with regulatory expertise. That saves a lot of time.”

“I’ve always been of the mind that the marketplace lending model is unstable,” said Todd Baker, a managing principal at Broadmoor Consulting. “The funding is costly — and institutional investors can disappear as soon as there is any problem.”

At this stage in the credit cycle, buying a bank can provide an online lender with ways to tighten up underwriting and proactively address potential credit issues. LendingClub, which relies on origination volume to generate gains from loan sales, can become a more selective lender when it generates more interest income.

To be sure, the challenge will involve finding banks that are strategic and cultural fits, which explains why such deals have been few and far between. The last notable fintech-bank merger took place in 2011, when Green Dot bought Bonneville Bank in Provo, Utah.

It is much more common for banks to buy fintechs. KeyCorp, for instance, bought HelloWallet in 2017 and Laurel Road’s digital lending platform in 2019. Community banks such as ConnectOne Bancorp and Cross River Bank have also acquired fintech companies.

Because most fintechs are national in scope — or aspire to be — and are digitally focused, traditional community banks with branches and local business models could be incompatible, Baker said.

Banks like Radius with a proven online deposit-gathering platform, a national lending operation, no branches and private equity ownership are rarities, industry experts said.

Acquisition-minded fintechs might opt to wait to see how LendingClub navigates the regulatory process. The Federal Reserve approved Green Dot's application to buy Bonneville on a 4-1 vote, with Fed Gov. Elizabeth Duke dissenting on grounds that the deal is too risky despite the safeguards required by the order.

“More could come, but I think it’s going to be more difficult and complicated to find partners than many people think,” Baker said.

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