Two deals this past week shone a spotlight on the lure of financial services — done digitally — and the “build vs. buy” debate, settled firmly on the side of “buy.” For Morgan Stanley and LendingClub, the respective acquisitions of E-Trade and Radius Bancorp show how “one-stop shops” and platforms are all part of a long-term roadmap.
Call it a tale of two bank deals. The stories come with significantly different price tags: $185 million and $13 billion.
Yet, some common threads unite the respective bids by LendingClub for Radius Bank and by Morgan Stanley for E-Trade, with a nod toward the changing financial services landscape and serving customers through “one-stop shop” platform models.
The LendingClub Deal
For LendingClub, an online lender, the bid to buy Radius Bank means that (assuming the regulatory hurdles are satisfied), within 12 to 15 months, the company will move into a branchless banking model that offers services and products beyond credit. The move also means that, as LendingClub had applied for bank charters in the past (with the Office of the Comptroller of the Currency), it decided to buy its way into deposits and checking.
— PYMNTS (@pymnts) February 21, 2020
More immediately, the deal would give LendingClub a cheaper funding source for its loan business — last year, the company originated more than $12.3 billion worth of loans. LendingClub has estimated that it will save about $25 million a year on fees paid to WebBank, which acts as a “pass-through” entity that enables LendingClub to make those loans. The low-hanging fruit is for LendingClub to hold 10 percent of originations on its balance sheet, which, in turn, should bring in $40 million of economic profit for every $1 billion of loans held on the balance sheet, the company said.
The key here is that buying Radius Bank brings together two disparate companies with a presence in different markets. Radius Bank is not in the lending market, but has $1.4 billion in assets in its own operational book. LendingClub does not (yet) bring its consumers checking and savings account options, but it has near-term plans to offer bank accounts that will help consumers save money.
Here is where the “marketplace” and platform model comes in. If LendingClub had been intent on “building” a horizontally extended suite of offerings across financial services, it could have continued to pursue its charter. However, by buying Radius Bank, its platform gets extended automatically, in a way, with another platform, one that offers check deposit, bill pay and personal financial management tools.
It’s important to note, too, that the company has open application programming interfaces (APIs) that offer “Banking-as-a-Service” functionality — which, in essence, allows for new services and products to come online as digital banking continues to evolve through integration with Radius Bank’s own pacts with companies, such as Brex and NerdWallet.
The Morgan Stanley Deal
Last week, Morgan Stanley said it would buy online broker E-Trade in a stock deal worth $13 billion. The move takes Morgan Stanley down market a bit, deeply into online stock trading. The announcement focuses on businesses with overlap: investment management, which includes equity trading.
Yet, as reported by Forbes, folding in E-Trade means that Morgan Stanley will look to cross-sell its services and products, such as workplace planning accounts.
The report cited a memo by wealth management executive Andy Saperstein, stating that there will be reach across “all client segments, across all advice and service preferences, at scale. … Our strategy is predicated on the fact that investors will always look to a highly trained, trusted advisor for advice as their financial [lives become] more complicated, and their needs become more sophisticated.”
Here, it’s a hybrid approach that eyes the 5.2 million E-Trade customers, across digital and human-touch activities.
Perhaps Morgan Stanley is taking a cue from another big bank with a roadmap that is increasingly digital, and wants to tap younger, tech-savvy clients that will become wealthier as time goes on. That would be Goldman Sachs, of course.
As has been widely reported, the Wall Street powerhouse has been stepping up efforts to move downstream. According to PYMNTS reports late last month, the company said at its Investor Day that a digital wealth management offering will come later in the year, and digital checking accounts will debut next year. Goldman Sachs also seeks to double consumer deposits from a current $60 billion to $125 billion within five years. Card and loan balances should rise over that timeframe from $7 billion to $20 billion — a figure that, of course, includes the Apple Card.
Goldman Sachs has been explicit that the platform model will help externalize Banking-as-a-Service endeavors.
There’s a template and roadmap for LendingClub and Goldman Sachs from another platform juggernaut: Uber. The ride-hailing giant has been busy adding new features to that core competency — and critical mass that brings people used to the app and services from simply hailing transport to, say, trying Uber Eats. Banking does not have the same logistics challenges that freight and food delivery might, but it does have its own challenges.
For financial services companies, those challenges come with offering the correct products to customers at the right time, as well as a continuum of services that anticipate the needs of individuals and families in a way that ensures stickiness and loyalty, while also ensuring stickiness for the “provider” side of the equation.
For Uber, that means keeping freelancers and drivers happy. For companies such as Goldman Sachs and Radius Bank, that means bringing what might have otherwise been competitors into the fold, which has been a central tenet of APIs and FinTech/FI partnerships.
The “build versus buy” debate in building out platform models seems to have been settled, at least within digital banking, in favor of “buy.” As 2020 has not even finished its first quarter, though, it can be noted that the buying certainly isn’t over yet.