Online lender’s aim: Turn borrowers into depositors

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Since 2012, the online lender Affirm has sought to chip away at credit cards’ dominance in consumer lending by offering point-of-sale installment loans on everything from bicycles to test-preparation courses.

Now the fintech headed by a co-founder of PayPal is looking to shake up one of the most fundamental products of banking: the savings account.

The San Francisco company is planning to launch an online-only savings account that will have no fees, will not require a minimum balance and will pay customers an interest rate of 2%. Affirm’s plans were first reported by Cheddar on Wednesday and a company spokeswoman confirmed them to American Banker Thursday.

Among fintechs aiming to beat banks at their own game, Affirm has taken a decidedly different approach than other online banks, such as Chime and Simple, which started by offering savings and checking accounts and relying heavily on interchange fees to sustain their business models.

Affirm, however, plied its trade as a point-of-sale lender for six years before going after consumers’ deposits.

Ron Shevlin, the director of research at Cornerstone Advisors in Scottsdale, Ariz., said that Affirm has built a loyal customer base through its lending, and that could serve it well as it looks to grow the other side of its balance sheet. The more deposits it is able to add, the more low-cost funds it will have at its disposal to expand into new loan categories, he said.

“The reality is, in the banking space, loans are where you have to make money,” Shevlin said. “Long-term, interchange fees are heading down.”

Affirm will provide the savings account through a bank partnership, though the San Francisco company has not identified the bank. Affirm currently originates loans through the $1.2 billion-asset Cross River Bank in Teaneck, N.J.

Cross River declined to comment on whether it is partnering with Affirm on the savings product.

In an emailed statement to American Banker, Max Levchin, Affirm’s founder and CEO, said that Affirm’s mission is “to provide honest financial products that improve lives.

“Based on user feedback and strong consumer interest, we’re working on a pilot that gives existing Affirm users the ability to put money into a savings account via our app,” said Levchin, who co-founded PayPal in 1998. “We are taking a thoughtful approach and are excited to get user feedback on the experience when the time is right.”

Affirm’s intentions to market a savings account resemble those announced last month by the online brokerage firm Robinhood Financial. However, Robinhood raised concerns among bankers and regulators by describing its saving account as being a bank product, though the funds wouldn’t be federally insured.

It’s also important to note that while Affirm’s 2% rate is attractive, it’s far from the market’s highest rate. CIT Bank currently pays 2.45% for an online savings account with a $100 minimum balance. And CIBC Bank USA pays 2.39% with no minimum balance.

Affirm doesn’t have to pay top dollar to lure deposits because it’s already established its reputation through its point-of-sale business, Shevlin said. Affirm originated more than $1 billion of point-of-sale loans in 2017.

“As long as their rate is competitive, or at least somewhat above the market average, they should be able to find some success” in deposit-gathering, Shevlin said.

Still, by calling its product a “savings account,” Affirm may attract the attention of banking regulators for possible violations of unfair, deceptive or abusive acts (UDAAP) regulation, even if a bank partner is involved, said Barry Hester, a banking and fintech attorney at Bryan Cave Leighton Paisner. That’s because nonbanks are not allowed to describe products like savings accounts as “bank” accounts, he said.

At some point, Affirm could have its eyes on a bank charter. It previously explored the potential to become a bank, even before the Office of the Comptroller of the Currency introduced its fintech charter. In a December 2017 letter to the OCC, Affirm encouraged the OCC’s efforts to develop a charter for fintechs.

“We believe the rapid development of the fintech industry warrants the kind of serious policy consideration shown by your office and applaud your efforts,” Manuel Alvarez, Affirm’s general counsel, said in the letter.

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