As fintechs achieve scale, they are likely to be on the prowl for banks to buy.

The tables have turned. There was a time when banks sought to acquire fintechs for their technology and customer reach. But the acquisition of Radius Bancorp by LendingClub (NYSE: LC) is the first case of a fintech, the largest of its kind in the country and listed, buying into a bank. And the acquisition makes eminent business sense. It could, therefore, set off a new trend in such deals. (AMERICAN BANKER)

Key benefits for LendingClub include a readymade bank charter, low-cost funding, savings in costs at correspondent banks and payback in two years.

“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 to AMERICAN BANKER. “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.”

Hit the ground running with a charter

Besides, for a fintech with banking ambitions, it makes more sense to buy a regulated bank than to go after a banking charter.

This is what Scott Sanborn, CEO LendingClub had to say about its Radius Bancorp transaction: “Our analysis showed that the acquisition of Radius is a superior route to a bank charter than the de novo approach because we believe it will accelerate our earnings while reducing our execution risk. This really is a one plus one equals three equation.”

“With an acquisition, you get the bank infrastructure and people with regulatory expertise. That saves a lot of time,” concurs Bradshaw.

Boost to profitability

Adding a bank, and its low-cost deposit base can instantly reduce the cost of funding for a fintech. At LendingClub the average cost of finance will fall by an estimated 220 basis points.

Add to that the savings in fees the fintech currently pays to banks for various services related to its platform activities, and a bank acquisition starts to make sense.

An unexpected bonus for the fintech is the opportunity to tighten up its lending norms because of the above earnings buffer from lower costs. It can be far more selective, thereby improving asset quality and therefore the quality of earnings in future years.

Related Story:  FinTech: LendingClub Is The First Fintech To Acquire a Bank