Saturday, February 27, 2016

Why Does a Fintech Darling Need a Bank?

According to a recent American Banker article, WSFS Financial Corporation struck a deal with Zenbanx, a Silicon Valley-based neobank, mobile only player. Zenbanx offers a unique, multi-currency bank account that targets world travelers or those that frequently send money overseas. Its founder is Arkadi Kuhlmann, the former CEO of ING Direct. 

Arkadi was a frequent speaker on the FinTech rubber chicken circuit, being viewed as a visionary industry disruptor. 

I suppose he was. First online bank, the imminently recognizable Orange Account, yadda yadda yadda. Mr. Kuhlmann has basked in the Orange glory. Except the bank never achieved greater than a 0.55% ROA and a 6% ROE. Say what you will about ING Bank USA, but don't say it was very profitable. And it sold in 2012 for around book value. So its brand didn't blow away its buyer, Capital One, either.

But I digress. The point of this post, and I do have one, is that Zenbanx needed a bank to get off of the ground. Should we be surprised? The much lauded Simple sold to a bank (BBVA). Moven account holders use CBW Bank, a small $22 million in asset bank based in Kansas. Fee income driven by interchange fees account for 96% of CBW's revenues. That bank has an 8.90% ROA. You read that right. If Moven driven deposits keep coming in, CBW may have to raise capital to support the balance sheet.

There are others that are part of a bank or rely on them to distribute their wares. See the table from SNL Securities regarding various features of online accounts from FinTech and banks alike.

Why do FinTech firms rush to banks? I have my opinions. Leading among them is deposit insurance. Followed by regulation. With a firm dose of capital. Banks have or are well-schooled in all three. FinTech firms are not and do not. So they seek out relationships with financial institutions, and build a business model that can live on parts of the payment system, ceding other parts to their bank partners.

Banks get a slice of the payment stream, as in CBW's case. And they get the spread from balances being delivered by FinTech "disruptors", like Zenbanx. The risk is that these disruptors become wildly popular, and start to over-take the partner bank's traditional balance sheet, turning it into something it is not and does not wish to be.

That was my first reaction to the announced Zenbanx-WSFS deal. WSFS has fared well since its near failure during the early 90's S&L crisis, and weathered the 2007-08 recession relatively unscathed. And they entered the partnership carefully, keeping regulators fully apprised of the relationship so they hopefully don't run afoul of BSA-AML laws and regulations. The bank has done well as a community bank.

Let's hope after their FinTech partner becomes more mature, WSFS remains a community bank.

~ Jeff 

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