The boundaries between traditional banking and fintechs continue to blur. Case in point: Fintech consumer lender LendingClub has finalized the acquisition of the digital-only Radius Bank, but it’s far from a charter purchase agreement. LendingClub plans to combine elements of its investor-driven market lending model with the Radius deposit-financed lending model to create a “market bank”.
With the acquisition closing in February 2021, LendingClub has become a banking holding company that will conduct most of its operations through the bank.
The combination is a marriage made in cyberspace.
Two digital creatures with never a branch between them
As a direct bank, Radius – now LendingClub Bank, NA – collected deposits through a combination of internet advertising, affinity group marketing, banking as a service, and other remote methods. He returned the deposits through a combination of national loan programs in several types of credit.
LendingClub, on the other hand, used its online platform to provide unsecured, sales-funded personal loans to investors (including banks), with initial funding secured through warehouse lines of credit. , usually. The company’s shares were personal loans used to consolidate other consumer debt, including credit card debt, to help consumers lower their cost of borrowing.
LendingClub now aims to become a financial health brand, starting with offering Radius deposit products to LendingClub’s three million members. In a presentation to analysts, LendingClub CEO Scott Sanborn said polls indicated most members would like to strengthen their relationship with the company.
A key distinction:
“Financial health” can mean different things. While Varo Bank promotes to people who tend to be unbanked or underbanked, LendingClub’s target is the heavily banked middle class who need help.
“Our clients are not the underbanked or excluded from the financial system,” says Sanborn. “These are high income and very creditworthy people who already make full use of banking services. In fact, they are among the most profitable clients of retail banking. It works better for banks than it does for them.
The typical member has an average FICO score and an average annual income of around $ 89,000. “It’s pretty much the mainstream of America,” says Anuj Nayar, chief financial officer and communications manager for LendingClub. “They tend to be a bit older than people who have just joined the financial world.” Nayar says many LendingClub members are Gen X, although other generations also borrow from LendingClub.
Since these consumers tend to have above-average income and above-average debt, including credit card, car and student loans, banking services, and the credit card industry rely on them.
“They are their most profitable customers and they are also our customers,” says Nayar. “They are desperately looking for a new solution to their age-old problem: get out of debt and not go into debt. According to the company’s annual report, core members of the business tend to return to LendingClub if they need another loan, “which increases the lifetime value of our members while helping them to improve their financial health “.
There are two aspects to the evolution of LendingClub: expanding its desired niche as a financial health brand and utilizing the benefit of having a bank under its roof that can increase insured deposits.
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In a message to consumers on LendingClub’s website, Sanborn lashed out at traditional players and neobanks.
Regarding the former, he wrote: “We think there is a disconnect between claiming to improve the financial health of customers, while also promoting a high interest, variable rate credit card, which is the antithesis. promoting financial health. But that is not how the existing system is put in place. (LendingClub loans have fixed rates.)
Neobanks, meanwhile, promise to disrupt the existing financial system, offering zero fees and a good mobile experience. However, since many do not offer credit, “they lack the capacity to handle the volatility of their customers’ cash flow and expenses and they lack scale,” he wrote.
Nayar says the goal, over time, of the new LendingClub is to offer borrowing, spending and savings solutions now that a bank is part of its structure. Support in each category can help strengthen the financial health of the middle-class consumers targeted by the business.
Opportunity in a fashion:
LendingClub Could Find Huge Potential In The Buy Now, Pay Later Trend – Helping People outside of it.
While the legacy and ideal of the business lies in credit card consolidation loans, the rush to offer Buy Now, Pay Later (BNPL) programs by merchants and lenders potentially offers new opportunities at LendingClub by providing offers that would help consumers opt out of those offers.
“Traders explain very publicly why they like BNPL plans,” says Nayar. “It forces people to spend more money. Nayar says many consumers seem to view point-of-sale installment plans as deferred debit card payments, rather than credit. However, if they miss a payment, usually very high interest rates come into play. According to Nayar, reports indicate that many people miss payments.
“We think there might be an opportunity for us,” says Nayar. “We could help people save money, instead of paying a lot of money on a very high interest rate loan product. In fact, we know we can save them money.
( Read more: “Buy now, pay later”: An innovative loan program heading to a cliff? )
Plans for moving to proactive financial advice
One of LendingClub’s boast points is the prowess of its proprietary credit scoring system. Nayar says the artificial intelligence behind this system, coupled with the additional data that LendingClub Bank’s records will now bring, will give the company additional insight into what drives consumers. This better understanding of member behavior represents another service angle that could also improve LendingClub’s activities.
“People always think their finances are complicated and they worry, thinking about the best way to make their money work for them,” says Nayar. He explains that in the future, LendingClub will be able to make proactive suggestions. For example, its algorithms can detect that someone is having trouble keeping track of credit card payments and can come up with a LendingClub solution.
“This could save them from the hamster wheel of revolving credit card debt,” says Nayar.
The company’s loan processing business allows for on-the-fly assessment and Nayar sees a point where LendingClub will be able to identify ways to save members money. A consumer with a car loan from another bank could be approached with a LendingClub refi opportunity.
The big picture:
Inertia no longer immobilizes depositors as much as before, and LendingClub Bank has everything to gain.
Efforts to help consumers make deposits will build on the old Radius Bank’s online and mobile deposit offerings. Nayar suggests that transaction accounts will be a great opportunity because, while many members of the company are well in the bank, many are annoyed by the overdraft fees and charges on these accounts.
Nayar tells a personal story here. He recently refinanced his mortgage with a new lender. He had forgotten that he had a free check with his original mortgage lender, a mega-bank. A few months after the refi, he realized he was paying a $ 30 monthly fee on the old free account, without warning. When he complained, he was told he could make a deposit of $ 25,000 and the bank would waive the monthly fee then. He moved his checking account.
“So I’m like, ‘It’s not 1960. If you don’t offer me free verification, I can open another account – that’s what I did.’
– Anuj Nayar, LendingClub
At a time when consumers are flocking to Chime and other neobanks, Nayar believes many consumers will respond to a square deal from LendingClub Bank. As Radius Bank, it has won numerous awards and other recognitions for its digital deposit services.
How Lending Club and its bank will fit together
Much of what Nayar discussed above is ongoing, but the benefit of stable deposit funding is something the acquisition of the bank will bring to LendingClub from the start.
Why is this important:
The LendingClub / Radius agreement highlights why federally insured deposits remain a key benefit for banks and credit unions.
Prior to the acquisition of Radius Bank, LendingClub sold all loans to investors, using warehouse lines of credit as an intermediary step. Now the original stream will be split. For 2021, the company plans to sell 75-85% of its origination volume to investors and keep 15-25% of the volume as an investment. He will be able to make this change because he will have deposits in LendingClub Bank, NA, to fund the loans.
As the visual above illustrates, when the bank’s acquisition by LendingClub was finalized, warehouse financing was costing an average of 3.3%, compared to an average of just 0.35% for deposits.
Thus, deposit financing will replace warehouse lines, with the portion of deposits used for loans sold being renewed as investors fund them.
The company will have two sources of income in the future: interest income on high quality loans held in its portfolio and origination and management fees levied on loans sold to investors. In addition, since LendingClub Bank will be the originator of most loans (with the exception of a few specialized loans), origination fees will be eliminated.