LendingClub is poised to become the first fintech to buy a US bank in a $185 million deal one analyst called 'amazing news' - here's why it's so transformative

• LendingClub, the marketplace lender, announced that it has agreed to buy Radius Bank in a deal CEO Scott Sanborn called "transformational."
• With this planned acquisition, LendingClub will now be a fully chartered bank able to take in deposits and issue its own loans without a partner bank.
• Radius Bank is a Boston-based digital bank that offers consumer banking, business banking, and a banking-as-a-service (BaaS) platform.
• Radius has partnered with Brex to launch the buzzy startup's corporate bank account last year and has integrated its own Radius savings product onto NerdWallet's mobile app.
• LendingClub's loans are currently funded both by investors and its own balance sheet cash. Being able to take in deposits could serve as another source of cash to lend.
• While LendingClub is not disclosing exact details on its product plans with this acquisition, a spokesperson told Business Insider that the lender is planning to launch some sort of checking product this year.
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LendingClub, the marketplace lender, said on Tuesday that it has agreed to buy Radius Bank.

Marking the first US fintech to announce it would buy a bank - and secure a bank charter via acquisition - the deal will allow LendingClub to take in deposits and issue its own loans without relying on or paying a partner bank.

LendingClub is set to buy Radius in a cash and stock transaction valued at $185 million, in a deal that Scott Sanborn, CEO of LendingClub, repeatedly called "transformative" during the company's fourth-quarter earnings call on Tuesday.

"This is amazing news. I'm sorry, I know I'm supposed to be a hardcore analyst," said Henry Coffey, a specialty finance analyst at Wedbush Securities, during the call. Coffey added that he had always expected LendingClub would buy a bank and use it for all its advantages, "but instead, I see that you're buying, frankly, a significant institution. So congratulations."

Sanborn agreed, stressing a few main reasons for the deal. For one, Radius is a digital-only bank with tech capabilities that are compatible to LendingClub.

"If you were looking for really a perfect match for LendingClub, finding somebody who excels at the online customer experience around deposit gathering and brings a branchless footprint is really a very unique opportunity," said Sanborn.

Radius Bank is a Boston-based digital bank that offers consumer banking, business banking, and a banking-as-a-service (BaaS) platform. Radius has $1.b in deposits and $1 billion in consumer and commercial loans on its balance sheet. And the bank offers specialized products like yacht loans, which make up 28% of its total outstanding loans.

"Radius is not a typical bank out of a group of thousands," said Sanborn. "They're one of only a handful of digital banks, featuring a national footprint with no legacy branch network."

Cost of capital

Another reason Sanborn highlighted was the cost savings of operating as a bank.

LendingClub's loan marketplace connects both consumer and institutional investors with consumer borrowers. Though LendingClub launched as a peer-to-peer lender, it's pivoted toward more institutional-friendly products like securitized baskets of personal loans.

Until now, LendingClub has offered personal, business, and auto loans which, since it doesn't have a bank charter, are issued in partnership with WebBank. Acquiring Radius will let it issue its own loans, cutting the cost of relying on a partner.

"We expect this transaction will pay for itself in two years," said Sanborn.

LendingClub's loans are currently funded both by investors and its own balance sheet cash. Being able to take in deposits could serve as another source of cash to lend, which could prove helpful in a recession.

LendingClub's CFO Tom Casey said that the lender will only look to fund about 10% of loans itself, selling the rest to investors.

"With the acquisition of Radius Bank, we will dramatically enhance the resiliency and earnings trajectory of LendingClub," Sanborn said, "while unlocking the ability to reimagine banking and create a category-defining experience for our members."

Regulatory considerations

By acquiring Radius, LendingClub will now be regulated by the SEC and FDIC, like any other bank. To be sure, LendingClub is no stranger to regulation. Unlike many fintechs, it's a public company with SEC oversight.

The acquisition is expected to close in 12 to 15 months, pending regulatory approval. During this time, LendingClub will work toward regulatory reviews required for the bank charter.

When asked about possible concerns around the approval of the acquisition, Sanborn said LendingClub feels good about it.

"We think that the acquisition path actually is a lower-risk path, in terms of timeline, versus de novo because we've built the capabilities and processes and controls around lending. But those don't exist for us on the deposit side," said Sanborn.

By acquiring a depository institution that's already regulated as a bank, Sanborn said, LendingClub expects this to be a path of lesser resistance than applying for its own bank charter.

While LendingClub is not disclosing exact details on its product plans with this acquisition, a spokesperson told Business Insider that the lender is planning to launch some sort of checking product this year.

The acquisition was announced during LendingClub's fourth quarter-earnings call, in which it also reported an adjusted net income of $2.2 million for 2019, up from a net loss of $32.4 million in 2018.

Partner, acquire, or DIY charters

Banking-as-a-service (BaaS) has been powering the buzzy world of fintechs. In order to take in deposits, for example, you need a bank charter.

But it can take over a year to get a bank charter, according to the Federal Reserve. So fintechs partner with banks like Radius as an alternative to seeking their own charter.

Through its BaaS channel, Radius has partnered with Brex to launch the buzzy startup's corporate bank account last year and has integrated its own Radius savings product onto NerdWallet's mobile app.

Digital-only neobanks like Chime and roboadvisors like Betterment, for example, rely on BaaS providers like Green Dot and Bancorp to provide the necessary FDIC insurance so they can take in deposits.

Though some fintechs are eyeing a bank charter themselves, and FDIC insurance is part of that. Varo became the first digital-only bank to seek its own deposit insurance after it got approval from the FDIC last week.

Robinhood, which applied for a bank charter last April, withdrew its application in December. Last July, the stock-trading fintech had also attempted to launch checking and savings accounts without a partner bank, therefore without FDIC insurance. Amid intense regulatory scrutiny, Robinhood halted the launch.

In 2018, the OCC rolled out a special fintech charter, but no fintechs applied. And last year, a New York federal district court ruled that the OCC doesn't have authority to grant national bank charters to fintechs. The OCC plans to appeal the ruling, according to Finextra.