LendingClub, the first fintch company to acquire a bank
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.
Photo by Nick Pampoukidis on Unsplash
Have you heard of LendingClub? Some of you have and others haven't. LendingClub is a P2P lending platform where investors can fund loans that people need. In the process, LendingClub charges a percentage fee after every loan is funded.
Being a fintech company comes with its perks. Higher valuations. Lean structure. What many people didn't know about LendingClub is that they were the first fintech company to acquire a bank.
The situation
In their Q4 2019 earning report, LendingClub said that it would acquire Radius Bank, a digital bank based in Boston. Radius Bank has $1.4 Billion in assets.
This acquisition is a big deal. Fintech companies came on to the scene a few years ago as potential disruptors to the banking industry. However, many have fallen flat. As regulatory hurdles popped up, credit tightened, charge-offs rose, and legacy big banks upped their game.
While some fintech companies might look at M&A as a way of overcoming those hurdles, other fintech companies are looking at getting a banking charter so that they can overcome the hurdles. That will essentially make them a bank and a fintech company rather than a pure fintech company. Varo Money gained a banking charter earlier in 2019 and Square is currently in the process of getting a banking charter.
The benefits
One big benefit of the acquisition is that LendingClub will save roughly $25 million per year on fees it currently pays to WebBank. As they say, small things make a difference. By finding big and small ways to save money, LendingClub will have more resources to put towards expansion. For those that don't know, WebBank is the current Utah bank that LendingClub "rents" essentially as a pass-through entity to make its loans across the country.
Another benefit from this acquisition is that it will lower its own costs of funding by about $15 million per year to start as Radius' lower-cost deposits will replace LendingClub's current warehouse lines. Also, as more and more people place deposits on Radius Bank's savings and checking accounts, LendingClub will have a bigger pool of loanable funds to access when financing loans that its users need.
If you're wondering about how LendingClub would save $15 million from gaining access to Radius Bank's deposits, know that LendingClub spends a lot on marketing to get investors on the platform to fund loans. By having access to Radius Bank's customers' accounts, LendingClub won't have to spend a lot on marketing to convince people to be investors of P2P notes and instead get those loanable funds from their bank's accounts. With that, LendingClub estimates will bring its costs of debt down from roughly 4% to 1.8%.
Before the acquisition, LendingClub used its warehouse lines to acquire loans on its platform temporarily, before selling them in securitization or directly to institutions, banks, and individuals. With the acquisition, having Radius' deposits will allow LendingClub to hold more of its own loans on its balance sheet. They estimate to hold 10% of their loans and sell the rest. Being able to hold more loans could result in an incremental $40 million in economic profit per year for every $1 billion held on the balance sheet. The interest might be small but holding a lot of small loans and gaining interest in them adds up.
The acquisition details
To pay for the acquisition, LendingClub will pay $185 million for Radius, with 75% coming in cash and 25% coming in stock. But, there is a big BUT.
To clear the way for regulators, LendingClub also has to pay $50.2 million to current shareholder Shanda, a Chinese investment company that owns 22% of LendingClub shares, in exchange for converting its shares into non-voting stock.
In all, this adds up to about $80 million in annual economic benefit for Lending Club alone, which is fairly remarkable since LendingClub is paying only $185 million, or $235 million when including Shanda's payoff.
Another detail
In addition, Radius also appears to be a technically savvy operator, and Bankrate recently named it "Best Online Bank for 2020."
Conclusion
LendingClub is hoping to become a new kind of hybrid that retains the advantages of being a loan platform while also bringing in the advantages that come with traditional banking, most notably low-cost deposits and lower compliance costs.
Does this make me bullish on LendingClub? Yes, and it's making me see LendingClub's stock rebound. With all those cost savings from the acquisition, LendingClub will have an easier time becoming profitable. Less cash burn and more profits are on their way.
Comments
Post a Comment