Less than two months into 2020, fintech M&A is dominating headlines in the financial services industry.
Visa kicked off the momentum when it announced its planned $5.3 billion acquisition of data aggregator Plaid in mid-January.
Last week online credit marketplace LendingClub announced plans to buy Boston-based Radius Bank in a $185 million cash-and-stock transaction, a deal that would allow LendingClub to secure a bank charter.
And while not an M&A move, Varo Money also received FDIC approval for deposit insurance this month, a major milestone for the digital bank as it works to secure its own banking charter.
This uptick in the sector’s activity represents a "maturing of fintech," said Cliff Stanford, a former Atlanta Federal Reserve Bank official, who now leads the bank regulatory team at the law firm Alston & Bird.
Fintechs are growing, accumulating users and establishing themselves in the financial services space. And it’s attracting attention, he said.
"The bigger established players that are buying up technology enabled financial companies are seeing those dynamics, and they want to dance while the music is still playing," he told Banking Dive.
Stanford said fintechs such as LendingClub and Varo Money are also demonstrating that they can "control their own destiny" through securing their own banking charters.
"Players like Visa or Morgan Stanley, obviously, those are extremely established companies with long histories and deep pockets to do [acquisitions]," he told Banking Dive. "What I think is interesting in all of this, is a company like LendingClub, coming into their own in terms of having the wherewithal, patience and capital to acquire a bank, be a bank and be regulated as such."
LendingClub, which had been exploring various paths to a banking charter for the last year, says acquiring the online bank will provide greater regulatory clarity and cheaper funding for its loans.
Stanford said Varo’s charter journey also illustrates what can be achieved when a fintech has patience, funding and a solid long-term mission.
"Not everyone can stomach the full-scope burden and time delay [in securing a bank charter]," he said. "And you need funding to carry you through that time and a real operating business model to get you there."
Varo withdrew its first FDIC application in 2018 after the agency asked the bank to improve its operations and fill crucial positions in senior management. The fintech refiled its application in July.
Varo CEO Colin Walsh told American Banker the FDIC also asked about Varo’s financial plan and stress-test scenarios, adding that the approval process has cost the company about $100 million.
"Not every fintech could achieve that," Stanford said.
But Stanford said it's important to note the FDIC has shown a willingness to foster innovation and work with fintechs, something that has helped the industry mature.
"The willingness of the FDIC to approve the deposit insurance in the first place, I think that's a result of the idiosyncrasies of Varo Money's business model … but it also is a reflection on the openness and willingness the FDIC has been signaling now for some time to be open to nontraditional bank approvals like this," he said.
Since joining in 2018, FDIC Chairwoman Jelena McWilliams has made innovation and bank-fintech collaboration high priorities at the agency.
The former vice president and chief legal officer of Fifth Third Bank, who has called the agency’s regulatory framework “ripe for revisiting," established an office of innovation last year in an effort to grow the adoption of technology at the agency and within the banking system.
The FDIC also recently issued guidance meant to clarify procedures for non-traditional banks seeking deposit insurance, a move Stanford believes resulted in the agency’s experience working through the process with Varo.
"It’s been an exciting year so far," Stanford said on the recent developments in the fintech space. "It just bears watching in terms of how long it carries out. No doubt there are a lot of companies out there thinking about it and talking about what sort of strategic options they have."