Some fintech lenders are in the process of going bankrupt, with both models appearing to be working for investors right now.
The agreed sale of home improvement lender GreenSky to Goldman Sachs is the latest in a series of similar moves for non-bank lending companies. Several notable digital lending companies that started out with some form of partnership, wholesale funding, or market model are now moving to a banking model. LendingClub has acquired Radius Bancorp and has become a bank, and SoFi Technologies is seeking to become one. Square now has its own banking license that it can use to issue business loans.
LendingClub experienced a strong recovery after closing its banking deal, with deposits available to fund its loans. The stock has more than doubled so far in 2021. Likewise, with deposits from Goldman Sachs instead of banking partnerships to fund loans, GreenSky could focus entirely on consumer and merchant relationships and new ones. products. This will be critical as the landscape of installment, buy-now and late-payment, and point-of-sale loans rapidly evolves. GreenSky shares jumped 53% on news of the deal.
It’s tempting to see all of this as an indication that the bank, for all of its issues, has turned out to be the ultimate lending platform: isolated from Washington’s ever-changing views on “fintech,” with cheap deposits. acting as the most sustainable form of crowdfunding and stress testing incentives to minimize credit risk.
But that’s not the whole story, at least as far as the market indicates. Take Affirm Holdings, a buy-it-now provider. It offers relatively large longer-term purchase loans, issued through partner banks. Yet not being a bank itself and using a mix of own funds and capital markets to fund loans has not held back the action. Affirm more than doubled its IPO price in January.
Likewise, shares of Upstart Holdings, an artificial intelligence lending platform that works with partner banks and investors, have increased sevenfold this year, amid a surge in lending volume. GreenSky was up about 70% from the year before the deal was announced with Goldman Sachs. Banks in the S&P Composite 1500 Index are up about 25% over the year.
Later, the banks could have headwinds. Deposits are likely to stay cheap for a while, even if interest rates start to rise and possibly mess up capital markets. As the costs of credit return to normal levels, losses can eat away at net loan returns, making it less attractive to share any savings with an outside partner. Yet at the same time, any technology partner able to demonstrate their ability to minimize credit losses could be even more valuable to banks and investors. And banks could remain hungry enough for loan growth that the costs of partnerships are justified.
There are certain regulatory factors to watch out for, such as any changes in the ‘real lender’ rules that might make it more difficult to grant loans through a partner, or how regulators view future charter grants to tech companies. financial. to keep an eye on Fannie Mae and Freddie Mac. With new capital requirements proposed, they could continue to be in a good position to help non-bank mortgage originators fend off potential competition from banks.
The banks may have won a few skirmishes, but the battle is far from over. Yet, as long as consumers are in good shape, everyone can win.
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