For more than a year, community bankers have been hard at work saving the nation’s small businesses via the Paycheck Protection Program (PPP). The effort has been nothing short of heroic—and, from what I am hearing, PPP didn’t just provide short-term income for community banks in 2020; the relationships earned with new customers in the throes of PPP are starting to pay off with new, more traditional business opportunities for community banks.
This story is the greatest story to be told in financial services, in my opinion. But there is another story you need to know because a lot of other things happened while you were focused on PPP and taking care of your customers.
This is a story about fintechs, but it’s not the story you typically hear from consultants who tell you about all the technology you need to invest in to be “relevant.” This is a story about the value of your most precious asset: your bank charter and how fintechs could be changing the way charters are valued for the foreseeable future.
In March, California-based online lender SoFi (short for “social finance”) announced that it was entering into an agreement to purchase a $150 million bank, Golden Pacific Bank in California, for $22.3 million in cash. SoFi plans to capitalize the bank with $750 million upon the closure of the transaction. The presumption is that the acquisition would allow SoFi to engage in more traditional banking activities and expand its business nationally. But that’s not the whole story. What follows is my best projection of what SoFi is up to, based on its other actions over the past year.
SoFi’s ambitions go well beyond just being like you. By its own admission (slide 35 of SoFi’s investor deck), it believes that the value of a bank charter translates into an increase of $200 million to $300 million in incremental EBITDA per year for each of the next four years. I am not an expert on bank performance, but I know enough to understand that you don’t get there on traditional banking services.
To get to that number and see the world like the SoFi team, you have to go back to April 2020, when SoFi purchased a company called Galileo. Galileo is a software developer, which makes it very easy for a fintech with a banking app to add the capability to issue debit cards. If you were developing an app for a fintech, you would contract with Galileo to license this functionality, because doing so is much cheaper than developing that functionality yourself.
However, there is one fundamental deficiency in Galileo’s business model. It can give you the code to enable your app to issue debit cards, but it cannot issue those cards. The fintech still needs a relationship with another party to issue those cards. They need a traditional bank, a “sponsor bank,” standing behind them. And this is where it gets difficult for the fintechs. If you rely on sponsor banks to do business, you have to find ones that are willing and able to help you. To date, there are approximately 35 to 40 banks nationwide that are engaged in active fintech sponsorship. Meanwhile, there are thousands of fintechs in formation, all of which, at some point, will need a sponsor bank to come to life.
Here’s where SoFi sees an opportunity. Why would it want to send every fintech that uses Galileo to a different bank? Why let those other banks enjoy the benefits of sponsorship—direct fees from fintechs, a share of interchange income, etc.? Wouldn’t SoFi like to have its own banking charter so that it could pick and choose which fintechs to sponsor and realize those benefits for itself?
Now you see things like SoFi sees things—and here’s why it matters to you. That $22.3 million in cash that was paid to the good shareholders of Golden Pacific Bank is not chump change. It’s real money, and I am happy for those shareholders. But if SoFi believes that a charter will yield them an incremental increase in EBITDA of $200 million-plus per year, then the earn-back period on this transaction for SoFi is one month.
Did the shareholders of Golden Pacific Bank get a good deal for their bank charter? Doesn’t this transaction drastically change the landscape for community bank charter acquisition? If there are thousands of new customers in the market for an asset that you have, wouldn't you think traditional valuation methodologies might fall short?
I'll take the next step for those of you who aren't even close to the M&A game. Does the SoFi story make you wonder, just a little bit, what it would take for you to become a sponsor bank for fintechs?
Over the past year, I have written a great deal about “banking as a service” and other alternatives to traditional banking business models. This is because, at the end of the day, it doesn’t matter what community banks do to survive. Survive they must. Other crises will come, and while they may pale in comparison to a pandemic, we’ll still need community bankers to ride in and save the day once more.
Christopher L. Williston VI is president and CEO of the Independent Bankers Association of Texas, based in Austin. He can be contacted at firstname.lastname@example.org.