Fintechs are increasingly taking after a "triangular" business model, which includes three pillars — lending, deposits and payments, said Brian Korn, partner at Manatt, Phelps & Phillips, who leads the firm’s fintech practice. In order to stay competitive, companies have been trying to expand in the areas they lack.
For example, those that started out as a payments company, such as PayPal and Square, are now trying to be more like lenders, while players like LendingClub and SoFi are trying to become banks.
What fintechs seek to gain from a bank charter is regulatory certainty, not having to deal with individual states and a handful of regulators. Then there is the appeal of cultivating long term relationships with customers, which fintechs can achieve through becoming an all-stop-shop with deposit taking abilities and various consumer lending products.
Aside from that, the main advantage of becoming a bank is the range of cheaper funding sources that come with being a depository institution. For one, banks have access to the Federal Reserve’s discount window, which means they can access money at a much lower cost than they have in the past. How much of that will be available to fintechs from the get-go is yet unclear.
“Strong need” for securitizing
Despite their move to banking, fintechs will still have a “strong need” for securitizations, sources told GlobalCapital.
“You’re still definitely going to see securitizations. Our securitization team has been doing a ton of work this year around fintechs,” said Erin Fonté, partner at Hunton Andrews Kurth. “Fintechs are still going to see what type of private capital markets funding is needed, and I would anticipate that even chartered institutions are going to have a mix of different funding sources to ensure growth and find a sweet spot in deal flow.”
Moreover, regulators have shown they are still hesitant about granting money to fintechs given their short track record, making it even more necessary for these soon-to-be-banks to keep a steady stream of securitizations.
“The Fed has not shown much exuberance in making money available to fintechs, so we’re not going to wake up to find fintechs treated the same as Wells Fargo even if they become banks,” said Korn. “The Fed and the Federal Deposit Insurance Corporation (FDIC) are going to put up some hoops, bells and whistles that will make it not as straightforward for fintechs as we might think.”
On the contrary, ABS investors have been very open to funding marketplace lenders, even those that are just a few years old.
The online lending ABS sector has experienced incredible growth in the span of eight years, exploding from $1bn in 2013 to $15bn in 2019.
While the cadence or structure of securities issued may change, the overall volume will likely remain the same, if not increase, said Rohit Arora, chief executive officer and co-founder of Biz2Credit, a small business lending platform.
“Fintechs are not going to rely much on gathering deposits, because the deposit-taking landscape in this country is very different now,” said Arora. “The top 15 banks are the ones that already control most of the deposits. Smaller banks tend to focus on selling all their loans to the secondary market.”