In this macro environment, where rising rates make traditional financing routes more onerous, FinTechs may find that high-yield accounts have high-yield payoffs.
The strategy is one that helps Affirm broaden its reach beyond its most visible offerings, the buy now, pay later (BNPL) solutions, and realize additional revenue streams.
In terms of the mechanics, and as detailed in a Thursday (Sept. 1) blog post, the Affirm accounts require no minimums or fees, and they are held by and FDIC insured through the company’s partner bank, Cross River Bank.
For the FinTechs, the move also helps these (and other firms) unlock a relatively cheaper source of capital. Having cheaper capital in hand can in turn boost balance sheet strength and fund operations as deposits reach critical mass.
To put it simply, in banking, deposits help create loans.
Interest income on those loans, where, say, for the BNPL providers, interest on point-of-sale (POS) loans can be in the mid-teens percentage points or more. The difference is meaningful: Paying out a few percentage points on deposits can be more than offset by getting tens of percentage points coming in on loans.
For the more traditional banks (Goldman, for example), having high-yield savings accounts tied to its digital Marcus bank offers a way to cross-pollinate revenue streams as diverse as credit cards and investment products. The net interest margin can help fund those initiatives.
There’s impetus to bring more of the deposit business in-house, so to speak. FinTech lenders are backing more loans with deposits, in part because it is getting harder to find institutional investors. Those investors want higher interest rates paid on loans and are pulling back amid perceptions of increased credit risk.
In another example, LendingClub, which acquired Boston-based Radius Bank last year for $185 million along with its bank charter, is funding more loans with bank deposits.
“If you don’t have the ability to fund your own loans, you’re going to be dependent upon the capital markets and disparate funding,” said LendingClub Chief Financial Officer Tom Casey. “That always becomes challenging for you to predict the price you can sell your loans.”