One Alternative Lender's Endgame: Become a Bank

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If you can't beat them, become them.

Affirm, an alternative lender that launched in 2012 to give consumers an alternative to credit cards for their retail purchases, wants to expand its offerings and become a bank in its own right.

It currently provides point-of-sale loans to consumers shopping online, by phone and in stores, but its customers have begun asking for additional products and services, such as checking and savings accounts, online bill pay and financial advice.

"The short answer is yes, absolutely," said Carl Gish, the chief marketing officer at Affirm, when asked if Affirm wants to become a bank. "We want to create a better version of what a lot of banking is today, and we think we can do that really well with technology, with a more efficient business model and with a longer-term view of how to build relationships with our customers."

Since launching Affirm, the company's chief executive, PayPal co-founder Max Levchin, has been open about his criticism of banks, many of which he believes take advantage of their customers with hidden account fees and high interest rates on credit products.

Affirm charges only simple interest on its loans, and consumers can choose whether they want the repayment term to be three, six, 12 or 18 months. While Cross River Bank in New Jersey assists Affirm in originating the loan, Affirm services its loans and keeps all of them on its balance sheet.

But having a loan portfolio is a far cry from being a full-service bank.

Getting a national banking charter is "a rigorous process," said Jo Ann Barefoot, a former deputy comptroller of the currency. Among other requirements, applicants must demonstrate that they have adequate capital, an understanding of their market and a solid business plan — that, in short, they are set for success.

Another option is to apply for state charters, but getting them for all 50 states is even more onerous, according to Barefoot.

Yet a third option may soon present itself. The Office of the Comptroller of the Currency has floated the idea of creating a special-purpose bank charter for fintech startups that would allow them to provide a greater range of financial services.

Barefoot, now a senior fellow at the Mossavar-Rahmani Center for Business and Government at Harvard University, said she has spoken with the OCC at length about the special charter and that the agency wants to get input from the banking industry before it makes a decision. "I think they're very interested in doing it, but I don't think they've prejudged it," she said.

In late October, the OCC announced that it would set up an Office of Innovation to better "identify, understand, and respond" to the new frontier of finance. The office will open in early 2017.

One of the agency's lingering concerns about fintechs becoming banks is that most fintechs — like most startups in general — "want and need to scale up fast, and regulators traditionally get nervous about really rapid growth," Barefoot added.

Representatives of Affirm were careful to note that the company is not currently pursuing a charter, and that assuming the role of a full-service financial institution is a distant goal. But it does plan to expand into new products soon.

"Our current plans are to continue what we're doing," said Gish, "but at the same time, we're looking at how can we expand the footprint of what we do, and take the basics of our philosophy, if you will, or our approach, and apply it to more products for people."

Affirm's story so far has been one of rapid expansion. The company has more than 850 retail partners, including big brands such as Expedia and Eventbrite, compared to some 700 in July.

Jefferies, the investment bank, has been Affirm's main source of funding for loans, but the startup raised an additional $100 million in debt financing from Morgan Stanley last month, bringing its total funding to $525 million.

And, in the past year, Affirm has more than tripled its annual loan volume, which is now greater than $100 million. Half of its loan volume is tied to purchases made on mobile devices.

It is this digital savvy and ability to win customers that Affirm would undoubtedly hope to carry forward as a regulated financial institution. But regulators won't allow the step to be taken lightly.

"They want to be confident that you're going to succeed," Barefoot said. "You can't just get a [lending] license and go give it a try and fail like a fintech could."

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