In this macro environment, where rising rates are making traditional funding routes more expensive, FinTechs may find that high yield accounts have high returns.
To affirm this week became the latest player to raise rates on its savings accounts, where the annual percentage yield (APY) is now 1.5%, a rate 11.5 times higher than the national average.
The strategy is one that helps Affirm expand its reach beyond its most visible offerings, buy now, pay later (BNPL) solutions, and realize additional revenue streams.
Read more: Goldman’s Marcus Raises Rates – And Bars For Neobanks
In terms of mechanics, and as detailed in a Thursday (September 1) blog postAffirm accounts require no minimums or fees, and they are owned and insured by the FDIC through the company’s partner bank, Cross the river bank.
For FinTechs, this move also helps them (and other businesses) unlock a relatively cheaper source of capital. Having cheaper capital can in turn strengthen balance sheet strength and fund operations as deposits reach critical mass.
Simply put, in banking, deposits help create loans.
Interest income on these loans, where, for example, for BNPL providers, interest on point-of-sale (POS) loans can be in the range of 12 percentage points or more. The difference is significant: paying a few percentage points on deposits can be more than offset by getting dozens of percentage points on loans.
For more traditional banks (Goldman, for example), having high-yield savings accounts linked to its Mark banking offers a way to pollinate income streams as diverse as credit cards and investment products. Net interest margin can help fund these initiatives.
There is an incentive to integrate the filing business more in-house, so to speak. FinTech lenders are backing more loans with deposits, in part because it’s increasingly difficult to find institutional investors. These investors want higher interest rates paid on loans and are pulling out amid perceptions of increased credit risk.
In another example, loan clubwhich last year acquired Boston-based Radius Bank for $185 million with its banking charter, funds more loans with bank deposits.
“If you don’t have the ability to fund your own loans, you’re going to be dependent on capital markets and disparate funding,” said LendingClub’s chief financial officer. Tom Casey. “It always becomes difficult for you to predict the price at which you can sell your loans.”
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