Have banks become one with fintech, or has fintech become the new status quo? Evidence suggests the latter, but the picture remains murky. Let’s make sense of our transforming financial climate.
If you asked banking executives in 2016 (when the Square stock was worth $11) what they thought of fintech, the answer would be simple: Fintech is a scenario builder for banks to test out products exogenously. Fintech is not new in other words, it’s just a tester pool for risky banking products.
Incumbents have been quite innovative too. E-trade and Schwab were the first to facilitate online trading, and they quickly adopted Robinhood’s zero trading fee business model and BlackRock invented fractional shares. But today, what fintech means is becoming blurry because we are seeing a growing convergence between established capital (banks) and fintech.
Today, we are either entering an era of fintech independence or we are in the midst of big banks redefining their own label. Either way, big banks are increasingly engaging with fintechs and so, maybe time has come to flip the 2016 thinking on its head--perhaps fintech is not so much a scenario builder anymore, but rather, the scenario.
Thesis: ‘’Digital-ization’’ of banks, ‘’bank-ization’’ of fintechs.
Incumbent banks are still burdened with things like branches as opposed to digital banks who cut those out. Banks are not new to branch costs and in the 1970s they developed the ATM. But now, with the mobile revolution, ATMs have been replaced by digital banking and peer to peer transactional apps like PayPal’s Venmo in the US and Twint here in Switzerland.
A digitalization of banking is therefore not new to incumbent banks, but on the other hand, a banking-ization of fintech is. This has been the case with Square, SoFi and most notably LendingClub. Most recently in February, LendingClub, bought Radius bank in a strategic move that would not only empower their position but disintermediate big banks in their capital markets operations and also, their linear integration efforts.
By convergence, we are speaking of a bidirectional convergent evolution, an evolution happening in both camps (banks and fintech) that mirror each other. We are not arguing that the camps are becoming one, but that they are both growing in a similar direction, just on separate sides of a large separating river.
A bank funded digital lending platform
LendingClub, the pioneer of peer-to-peer online lending, is not exactly what we would turn our attention to nowadays with everything happening in crypto. But the fintech, who in 2016 suffered great reputational losses from poor lending behavior, has done nothing short of re-inventing itself by acquiring Radius bank (Bye-bye WebBank?). If you missed the news, Lending Club has actually been one of the most successful covid-19 stocks, taking 460.96% in one year, and making up from its post 2016 blunders.
This price surge is linked to investor confidence because access to banking is hugely profitable. Radius Bank enables LendingClub strategic flexibility, such as bringing in lower cost of funding for their loan origination operations, and it enhances their ability to actually hold on to their loan originations directly on the balance sheet to let interest income accrue at a cheaper price. Also, it broadens their product offering for customers in cross-selling offerings like bank deposit savings accounts, and CDs.
A data driven digital bank like LendingClub looks a lot more like the future of banking than meets the eye. Fintech in the loan space, and those entering it (Square) benefit greatly from the features that banking may offer. Intelligent models and the use of big data algorithms enables them to maximize pricing by the customer in such a way that extracts more consumer surplus than otherwise possible. Can’t big banks do this too you ask? They can acquire technologies yes, but in spite of their massive sizes and protocols, established banks are often bogged down to old legacy technologies which is why they turn to M&A, too.
Goldman Sachs acquiring GreenSky
Goldman Sachs has been developing its consumer strategy with its Marcus offering for quite some time now. The GreenSky deal however, injects a point-of-sale solution meant to path the way for GS to improve its EPS and ROE durability even further. GreenSky is a major loan originator in the home improvement, and elective healthcare segments with room to grow in the solar side (though competition is rigorous from the likes of Loanpal).
GreenSky’s total addressable market is about $700 billion across their segments and their impressive business momentum appears strongly driven by merchant acquisitions, expansion into other spaces like solar, and a strong tech offering. Now that GreenSky has increased its liquidity and working capital potential with Goldman Sachs, the sky’s the limit for 2022, in much the same way LendingClub’s originations could prove larger in volume and more profitable on paper.
Goldman Sachs is a behemoth, and the deal is not likely to fundamentally alter or improve their bottom line because GreenSky’s revenues are less than 1% of Goldman Sachs’, but the synergies and cross-selling optionality from this merger could delivery value added to GS. It remains to be seen how well GreenSky will sit in Goldman Sachs’ engine, but one thing is sure in that the $2.24 billion price tag equating a 3X revenue multiple is a decent deal for GS.
Conclusion
The purchasing power is clearly in the hands of incumbent powerhouses like Goldman Sachs, but millennial revenue is mined by Fintech players, which incumbents need. The interdependence is becoming less blurred as both side of the river need one another.
Fintechs have become large enough to bank-inize their models to bankroll their next generation. Banks that plug in fintech into their revenue ecosystems will better meet the expectations of future users.
In sum, we are in the midst of a sort of consolidation towards one new financial landscape where parties are both bank and fintech at once. It is also a landscape where Fintech has begun playing the game banks use to master, i.e. buying the other side.
What’s also interesting for further analysis is Square’s purchase of Afterpay, in August—it is indicative of the changing landscape, and the important of feature companies that make up the BNPL space. Square is payment company made fintech loan originator, made BNPL provider, and soon bank (?).
