SoFi’s bank is launching soon, and Wall Street is stoked
Banking buzz
Protocol
January 21, 2022
SoFi shares rallied this week on news that the OCC has given a conditional OK to its plan to launch its own bank.
The company still has a bit of work to do, including closing its acquisition of Golden Pacific Bank, the vehicle for its banking ambitions. But there’s a reason why Wall Street’s getting excited.
Getting a charter — either by submitting to a regulatory process or buying an existing bank — is too big of a hassle for most fintech companies. Now SoFi looks to be getting to the other side of that moat. And Wall Street likes moats.
Dealing with regulators can be a pain. That’s the reason most fintechs typically work with partner banks.
-- It can be beneficial to both sides. The banks gain access to new tools and technologies, not to mention a revenue stream, while doing the hard work of compliance.
-- But fintechs can hit a point where they outgrow the arrangement, seeking more control over their products and profits. That led LendingClub to buy Radius Bank for $185 million in 2020. Last year, Square, whose parent recently renamed itself Block, got its own charter to launch Square Financial Services.
-- SoFi initially followed Square’s lead by applying for a charter, but then switched gears last year and bought Golden Pacific Bancorp for $22.3 million. CEO Anthony Noto said the move was a faster way to get to its goal.
-- The trend will “definitely accelerate,” Alex Johnson, fintech research director of Cornerstone Advisors, told Protocol. There’s so much money pouring into fintech right now — and buying a bank or acquiring a charter is “likely a good use of that capital.”
LendingClub showed why becoming a bank pays off. The fintech pioneer stunned Wall Street in 2020 when it said it was buying a bank. It surprised investors again last July by reporting the most profitable quarter in its history — largely because it has become a full-fledged bank.
-- Becoming a bank helped LendingClub cut costs while bringing additional revenue, CEO Scott Sanborn told Protocol last year. The fact that it is now subject to greater regulatory scrutiny actually inspired more confidence in customers, he said.
-- Hopes are high that SoFi will reap similar benefits with the expected launch of SoFi Bank. “It gives them easier access to capital,” which means they’d be able to offer customers better rates, IDC analyst Raymond Pucci told Protocol.
-- The downside is that regulators could slow SoFi down in expanding into other areas. In granting its conditional approval, the OCC cautioned SoFi about crypto. The agency noted that SoFi Bank “will not engage in any crypto-asset activities or services.
-- ”That’s not going to be a problem, a SoFi rep told Protocol. SoFi’s crypto business operates under SoFi Invest; SoFi Bank will be a separate entity. It’s typical for financial firms to cordon off their crypto activities in this way.
Not all fintechs should try this. Becoming a bank takes a lot of work and can be very expensive. It makes sense for big, established fintechs like SoFi and LendingClub, which have some experience dealing with regulators. “It’s a scale thing,” Pucci said. “You’re adding to your toolbox so you can do more things.” Now investors expect SoFi to put that toolbox to work.
– Benjamin Pimentel ( email | twitter)
SoFi Bank is becoming a reality - Protocol — The people, power and politics of tech |
