February 25th: Unpacking Fintech’s Big Acquisition Spree — Deep Dive: LC & Radius Bank

Hey everyone! Ian here. Hope everyone’s well! 

I’m not sure what’s going on, but I’ve been very into EDM recently. I made an awesome playlist of newish EDM music and send it to some friends, to great reviews. My homie Steeve Vakeeswaran said, ““Very vibey. Very Ian. Good for your Wednesday morning hump-day walk to work. For context, The Weeknd listened to this before making Blinding Lights.” (Editor’s note: That last bit is not true…I think.)

We’re going to have a bonus issue of FTT this week: the original version of this was way too long, even for me. There’s still a lot left to talk about, like a new bank-led competitor to Plaid, and JPMorgan’s interest in starting a digital bank in the UK. Stay tuned!

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Point’s hiring for: a Senior Backend Engineer, Senior Data Engineer, and Senior React Native Engineer.

2020’s off to a slow start—kinda a quiet week in fintech right? Kidding, probably one of the most significant weeks in fintech since I’ve been interested in it since 2014. Let’s unpack...

Quickly, a recap of the deals that have been going over the past week: 

Lending Club bought Radius Bank for a $185 million:

An extremely significant acquisition that turns Lending Club, one of the oldest fintech startups out there, into a regulated bank...pending regulatory approval of course. Not only that, but Radius Bank has also been a major partner bank for consumer fintech startups through their “banking as a service” platform. 

Ally buys Cardworks for $2.65 billion:

Ally is one of the few banks that have a really strong digital product, through partnerships and by developing financial products in house too. 

My friend Ganesh Kumar, who used to work at Amazon and AmEx, wrote a great summary of Ally-Cardworks for us!

Ally Financial, a 100 year old company known primarily for auto lending via its GM genes along with Ally’s direct bank deposit and consumer product platform with its suite of auto-finance, insurance and commercial product lines, offered $2.65B ($1.35bn in cash and $1.30bn in Ally Financial’s common stock or 39.5 million shares) for Cardworks, a non prime credit and merchant servicing company founded in 1987.

This offer raised few eyebrows given its high premium for an unsecured credit card and merchant acquirer/servicer business, with $4.7bn in assets and $2.9bn in deposits.

Don Bermab, the CEO and majority owner of Cardworks has ~70% ownership stake, providing him a handsome payout for his company and continued independence as both Cardworks CEO and a member of the executive board.

The deal will help expand Ally’s existing product offerings into an end to end “established credit card platform, full-spectrum servicing and recovery operation and a nationwide merchant acquiring business".

Upon deal closing, Ally will be able to offer its services to an estimated 11 million consumers across all the 50 states with secured and unsecured banking products.

With strong commitments to risk management and customer-centric strategy of offering differentiated consumer product offerings supported by a growing and low-cost deposit base, the deal is in line with both companies' missions. 

Although Streer analysts wish the capital could be spent elsewhere or organically, Ally expects the deal to improve Ally’s Core ROTCE (return on tangible common equity) by about 100 to 150 basis points for 2021 and 2022 and provide up to 100 basis points of adjusted profit accretion over the same time period. ROTCE is a widely watched measure of how well a lender uses shareholder money to generate profits.

Morgan Stanley buys E*Trade for $13 billion:

Even more consolidation in the wealth management space. Frankly, a lot of people assumed after the Schwab-TD Ameritrade deal that ETrade would be the next, so the deal wasn’t a big surprise. In my opinion, the surprising part was the acquirer: Morgan Stanley doesn’t really have a strong digital product or strategy—they’ve been trying to something in the digital wealth management for years but internally haven’t gotten anything really off the ground. I remember when I was a reporter, I was convinced that MS would potentially follow Goldman down the path towards retail banking—during the 2008 financial crisis, both firms became regulated like a traditional bank versus an investment bank—but they didn’t. Now with their customers getting older and using newer services, they’re playing catch up by paying $13 billion. In ETrade, they’re not getting a modern product by any means, but getting a ton of deposits, a popular product that has a strong brand name. And, the deposits: with E-Trade’s $56 billion in deposits that MS can tap into to lend off of now, MS says E-Trade will lower its cost of funding by about $150 million.   

Intuit buys Credit Karma for $7 billion:

We had heard the Credit Karma had gotten an acquisition offer, but I’ve also been hearing that for years. Credit Karma is a great product that’s extremely valuable for a lot of people...and a lead generation machine to funnel people to the right credit cards, personal loan products, and more. I’ve been a longtime user, and have done my taxes through Credit Karma for the past few years.

On paper, this deal makes a lot of sense for Intuit. The company owns TurboTax, Mint, and Quickbooks, so adding Credit Karma allows Intuit to essentially turn into a financial data behemoth. With Mint, you get personal financial data around spending behavior; with TurboTax, you get income and other tax-related financial data; with Quickbooks, you get small business data. The question is how can Intuit monetize this: one idea is to potentially use their dataset to continue generating revenue through lead generation, but charge more for better data. Another is to develop financial service products that cater to their collective user base: Credit Karma’s already started doing this, with their recently announced savings product. I assume they’ll probably settle for something in the middle.

There will be some concern among Credit Karma customers around this acquisition. In 2019, ProPublica reported how Intuit was intentionally manipulating users to get them to pay to file taxes, which is free for lower and middle income Americans. This wasn’t just some run of the mill mistake: The Verge outlines just how these were pure product decisions, like not linking to the page for free filing on TurboTax’s website and other examples. 

The crazy thing is that Intuit hasn’t stopped either: a report showed that Intuit was spending more in ads for their “Free Edition” tax product, which isn’t actually free, versus the Free Filing product, which is free and Intuit didn’t spend anything on advertising that. Why both even advertising a “Free Edition” unless you make money off that? The return on investment for a campaign doesn’t make sense unless that was the case. 

This isn’t a one off situation either. Since 2016, Intuit’s TurboTax and others have been lobbying Congress against making tax filing simpler. These companies make their money by profiting off complexity and confusion.

As someone who first started their career in the mortgage backed securities industry, I’m an extremely principled person when it comes to taking advantage of people for financial gain. It’s just not something I can get behind. 

There’s also the brand trust issue; who knows how Intuit is going to influence Credit Karma’s product to extract revenue. Am I going to have to pay for a Credit Karma Deluxe version to access certain features? From a user perspective, I just flat out don’t trust Credit Karma enough to use it anymore. 

This is a real issue for Credit Karma; a benchmarking website put their NPS score (something used to judge how happy customers are) is 64. Intuit’s is negative 2. Seriously.

But I mean we all have a price....Intuit, if you wanna buy Fintech Today for $1 billion, email me at ian@fintechtoday.co and I won’t write anything about you all again! 

Diving Deep: Lending Club and Radius Bank 

If you know me, you’d know that I think about bank charters. There’s a reason I swear; I fundamentally believe that you can’t really have fintech without a strong understanding of financial services. Most consumer fintech companies aren’t software companies no matter how they pitch themselves to VC’s, they’re tech and software enabled financial services companies selling financial products. 

So things like bank relationships and compliance and regulation are things I find important to the fintech industry. Others don’t (move fast and break things) and you’d seen slip ups happen over the course of the past few years. 

Which is why I think Lending Club buying Radius Bank is the first domino; I expect a few more fintech startups to explore acquiring a charter over the next few years. Based on my discussions over the past week, it looks like multiple neobanks are in talks to purchase a charter. This isn’t including the companies that have been public about their interest in charters, like Square and OnDeck. I have 0 idea who but it isn’t the usual suspects or whoever you’re assuming (trust me, I’ve asked.) 

For lending companies, like LC, Square, and OnDeck, owning a bank reduces your cost of capital. Before you can lend money, you need money to lend. Since banks can create checking accounts and collect deposits, which is a cheaper way to beg money to borrow compared to raising a debt round or having a line of credit or “venture debt” (so hot right now).

But I’ve heard Lending Club doesn’t have trouble funding loans. Everyone including myself is much more interested in Radius Bank’s Banking-As-A-Service. Since Lending Club positions itself as a “marketplace lender” I wonder if they’ll start seeing themselves as a “marketplace fintech company.”

There’s a real shot that Lending Club could be a platform for financial services. In theory, Lending Club already has a ton of users and consumer distribution that they’ve built up over the past decade or so in the fintech space. On the other side, they have Radius’ partners that are selling to consumer and leveraging Radius’ banking infrastructure and API’s to create financial products. Lending Club could offer consumer companies a way to market their services to LC’s existing customer base and collect a few from the startups. By acting as an intermediary between fintech startups and their existing customer base, Lending Club has an outside shot of becoming the Amazon for fintech. 

Obviously there are problems with this theory: mainly Lending Club and Radius Bank. Lending Club has a sketchy past but more recently haven’t done anything too impressive in terms of product development. And, from what I’ve heard from people who have checked out Radius Bank’s API’s, they’re kinda shitty. And Lending Club isn’t known for their API development so I don’t have a lot of hope those API’s will improve anytime soon. Meanwhile the BaaS ecosystem is getting incredibly competitive. But one of the issues for BaaS companies in my eyes has been platform lock-in—how do you prevent your biggest customers from leaving and building their own infrastructure (its not impossible, you just need a lot of money to hire engineers). One solution might be going above and beyond to help your clients, by helping them get customers too. 

Tweets of the Week

Great details on the Credit Karma/Intuit deal from NEA’s Jai Sajnani.

My friend Seema Amble wrote a great article on Bill.com, an unsexy business that was one of the biggest IPO’s last year. Lot of interesting early stage startups are thinking about the accounts payable/receivables space...

Credit Karma was a growth machine...seems like folks are giving a lot of credit to CMO Greg Lull

Mengxi’s right, as usual.

What companies can tell from your credit card data always scared me, to be quite honest

I’m assuming you’re all nerds like me, and this video of payments optimization machine learning was great. Stripe CEO Patrick Collison tweeted that this would generate $2.5 billion in revenue for businesses on Stripe...this year alone...

Jeff Weinstein @jeff_weinstein
If you want to peek into the guts of our payments optimization machine learning, watch this video:
youtu.be/upQiW3IUFAg. Multi-armed bandit at scale for fun and profit!

Patrick Collison @patrickc

We just launched a major new version of this optimization engine. We expect it will generate an incremental $2.5B of revenue for Stripe businesses *this year*. https://t.co/Xhv0v0RvQu

Funding News of the Week

Lol do you need more funding news? I’m tired of financing deals this week.

Jobs of the Week

Our sponsor Point is hiring a lot of engineers: a Senior Backend Engineer, Senior Data Engineer, and Senior React Native Engineer.

Reach out to patrick@point.app if you're interested!