The M&A activity of the past few years followed a familiar formula — a larger company would purchase a smaller company of the same type and incorporate its products and services. Even the mega mergers such as BB&T-SunTrust and Fiserv-First Data follow this trend.
2020 has seen something different — large transactions between different kinds of companies in the financial services space. Visa announced it was buying Plaid for $5.3 billion, and just yesterday, Lending Club announced the acquisition of Radius Bank for $185 million, and Ally said it was acquiring CardWorks, which owns a banking subsidiary, for $2.65 billion.
These deals illustrate a thesis put forward for some time at CCG Catalyst — banks and fintechs are coming together. The future of the industry is the blurring of any distinction between financial institutions and financial technology companies. That’s why our podcast is called Bank-Fintech Fusion.
From this perspective, the Lending Club acquisition is a natural move, though it certainly has generated tremendous excitement across fintech social media. it’s worth noting that this is not the first time a fintech company has bought a bank, despite multiple news outlets reporting it as such. The prepaid player Green Dot bought Bonneville Bank in Utah nearly a decade ago.
The combination of any two companies presents a cultural challenge, particularly when banks and fintechs combine. (Instnt cofounder Mimi Salcedo was at Simple when BBVA acquired this pioneer of challenger banks — listen to her discuss this on our recent podcast.) But Radius is itself nearly a fintech company. It is a digital bank whose business is built around working with fintech startups. The cultural hurdles may not be so high here.
The move can give Lending Club access to inexpensive deposits, which is significant for all personal lenders in a time of interest rate uncertainty and potential recession. Alternative lenders launched after the last recession and have yet to see a difficult credit cycle. It is also a dramatic shortcut to a charter — Varo recently announced it was closer to completing its multiyear journey to secure a charter. Lending Club is showing its fellow fintech companies there is another way, and a cheaper one.
Radius Bank was purchased for approximately 1.5x book value, as investors were quick to point out. Plaid was bought for 2x its most recent valuation, which was already quite generous given its sales, estimated between $100 million and $200 million.
The Lending Club-Radius acquisition will not close for quite some time — approximately 12 to 15 months. Expect considerable regulatory scrutiny in the interim. The Colorado State Banking Board blocked the purchase of Cache Bank & trust by Elevations Credit Union, saying that only banks should buy other banks. A fintech company could face similar objections.
Shortly after the Lending Club news broke, word also came that the direct lender Ally Financial, formerly known as General Motors Acceptance Corporation, was purchasing the consumer lending company Cardholder Management Services, Inc., known as CardWorks, for $2.65 billion. The CardWorks subsidiary Merrick Bank Corp. will merge into Ally Bank under the terms of the deal. CardWorks CEO Don Berman owns 70% of the Woodbury, N.Y.-based company, and will stay on to oversee the unit (after, presumably, a very nice vacation.)
The CardWorks acquisition is currently expected to close in the third quarter. Ally reported $180.6 billion in assets as of Dec. 31, while CardWorks reported $4.7 billion in assets and $2.9 billion in deposits, according to an Ally press release. Ally said the acquisition would quickly be beneficial to its business, particularly credit cards, personal loans, and merchant services.
Despite the convergence of banking and fintech, there are areas of significant tension. JPMorgan recently instituted a proprietary data agreement, and has given third parties until July 30 to sign it or lose access to the bank’s data. The lack of federal open banking regulation, or regulation around the use of customer data, frees the bank to set its own policy. Other banks frustrated by screenscraping, as Jamie Dimon famously is, need to watch this closely. JPMorgan signed a deal with data aggregator Envestnet/Yodlee in Dec. 2019, and Plaid back in 2018 — but things have changed at Plaid.
PNC also sparred with Venmo (and Plaid) over access to bank accounts in December. A security update at PNC cut off access to third parties, and users objected. PNC’s social media support team referred angry Venmo users to Zelle. The issues around data access are one of the thorniest problems facing bank-fintech cooperation today.
The financial services industry is entering an era where banks and fintechs are becoming less distinct, particularly to the end user. There are tremendous opportunities for both banks and fintech companies to combine and become greater than the combination of their parts in order to execute on their vision.
CCG Catalyst Principal & Chief Relationship Officer Pat Valentino expressed the concrete takeaways of the collision of banking and fintech this way: “A fintech buying a bank will need to change its metrics for success from penetration to profitability. A bank buying a fintech will need to understand penetration and client experience vs. shareholder value.”
