LendingClub, the publicly traded digital-lending marketplace, announced Tuesday that it is acquiring Boston-based Radius Bank, which has $1.4 billion in assets and is partnered with several fintech companies. LendingClub will pay $185 million for the acquisition, which the company expects to pay for itself in less than two years.
The move offers a stable source of funding for LendingClub, sophisticated tools to underwrite customers and a path to an expanded product suite. LendingClub’s acquisition stands in contrast to other fintechs that have sought to become banks by applying for charters, including Varo, which received FDIC approval earlier this month.
For LendingClub, the acquisition has two important advantages: it will no longer have to work with a partner bank, but will have the additional backing of the bank’s balance sheet.
“Not paying a partner bank the related fees, that’s one part of it,” said Steve Allocca, president of LendingClub. “The other piece of it is taking a relatively small part of LendingClub’s loan funding business model, holding those loans on the bank’s balance sheets and funding them with deposits.”
Despite the challenge of obtaining regulators’ endorsement for the acquisition — a process the companies say will take between 12 to 15 months — the companies are optimistic about approval prospects, said Mike Butler, CEO and president of Radius.
By becoming a bank, LendingClub doesn’t want to replicate a traditional model. According to Allocca, the company plans to create a “marketplace bank,” in which 10% of the loans will be funded by deposits from LendingClub and Radius, while the rest will be funded by a marketplace of investors.
LendingClub also plans to launch a checking account of its own, with the cash flow data from the account to be used to underwrite customers, according to the company. More than half of LendingClub’s customers already opt to share their bank account data to support underwriting efforts, Allocca said.
According to LendingClub, it’s the first U.S. fintech company to acquire a bank, but the move is reminiscent of some previous developments in the industry, suggested Jay Wilson, who leads the financial technology team at Mercer Capital, a business valuation and financial advisory firm.
“There is some historical precedent for successful fintech acquisitions of banks as the online brokers and Green Dot acquired banks previously,” Wilson said.
An acquisition may appear less risky than a de novo route, but whether this will spur a new chapter of fintech-bank acquisitions is yet to be seen. A key implication, however, is that bank-fintech collaborations can generate results when interests align, Wilson explained.
“It illustrates the importance of banking partnerships to scale and enhance value for fintechs as banks still have advantages in funding, customer relationships, regulatory and compliance expertise,” he said. “Radius was able to grow efficiently and profitably through a successful fintech partnership strategy and only one branch, to ultimately attract an acquirer to reward their investors at exit.”
Hans Morris, managing partner of venture capital firm Nyca Partners and chairman of LendingClub’s board of directors, said the acquisition makes sense financially and strategically. The company has been publicly discussing its pursuit of a bank charter through multiple avenues.
“The significant synergies accelerate the economics of the business completely, and enable the company to innovate faster,” Morris told Bank Innovation in an email. “It opens up new avenues for interacting and supporting [LendingClub] customers, as well as mitigating reliance on third parties, providing regulatory clarity and enhancing its resilience when the cycle inevitably slows.”
LendingClub’s market capitalization was about $1.1 billion on Feb. 20.
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