Fintech Acquisitions Are Rare Among Banks; Here’s One Exception

Few banks seem interested in purchasing financial technology firms. Just five such deals were announced this year as of July 14, based on a list of acquisitions compiled by Piper Sandler & Co. for Bank Director, using data from S&P Global Market Intelligence. Six of these deals were announced in 2020. Bank Director’s 2021 Bank M&A Survey found that a paltry 11% of respondents — primarily representing banks above $1 billion in assets — said their bank was likely to purchase a technology company in 2021.

Piper Sandler Managing Director Chris Donat believes banks are more interested in the tools and the solutions — more easily obtained through vendor relationships and collaborations — than in owning these companies outright.

Our list of recent fintech acquisitions by banks finds that as a group, big banks are the most active acquirers. But one small bank has been exceptionally active in this space: $2.7 billion MVB Financial Corp., based in ​​Fairmont, West Virginia. Working with fintechs has become a core element of the bank’s strategy.

MVB’s strategic shift dates back to 2016, when CEO Larry Mazza and CFO Don Robinson were trying to come up with a strategy to generate deposits to fuel the bank’s loan growth. They were inspired, says Robinson, by companies outside the banking sector that were housing deposits in loyalty programs and digital apps.

Examples include Starbucks Corp. and DraftKings, a sports betting app that reported $288 million in “cash reserved for users” — essentially deposits — in its 2020 annual report. Meanwhile, Starbucks recorded $1.6 billion in “stored value card liability” as of June 27; these funds are tied to the coffee purveyor’s prepaid cards, which customers can purchase and replenish online or in stores. Neither of these companies aim to be a bank, but they do draw dollars that their customers can use to buy coffee or gamble online — money that isn’t going to their primary bank account.

To better understand this evolving landscape, Robinson and Mazza reallocated marketing dollars to invest in fintech companies, viewing it as research and development. They took an active role in their investments, sitting on their boards. “We had a day-to-day involvement, kind of front row seat to their interactions,” says Robinson.

Today, the bank provides banking-as-a-service (BaaS) to fintech clients such as the personal finance company Credit Karma, which was itself acquired by Intuit last year. (Other BaaS banks include Coastal Financial Corp., NBKC Bank and Celtic Bank Corp.) The business has led to a huge increase in deposits. Fintech deposits totaled $533 million at the end of 2020, an increase of $382 million (255%) over the previous year — accounting for more than a quarter of MVB’s $1.98 billion in total deposits. Most of the fintech deposits ($358 million) come from the gaming industry. MVB’s return on average equity has more than doubled in the last two years, to 16.7% in 2020. Its return on average assets was 1.7%, up from 0.7% in 2018.

MVB has specific requirements for investing in fintech companies. There needs to be a market for the solution, which must solve problems faced by the industry or the bank’s clients. The management team should have a proven track record and resources for growing and scaling the company. And MVB wants to see what it can bring to the table. “We’re looking at that strategic partnership,” says Robinson. “How can we work with this [company]?”

The approach has resulted in a diverse array of acquisitions and investments, including Invest Forward, which offers a digital savings account; Paladin, focused on fraud prevention; and Trabian Technology, a software developer.

In a release explaining the rationale behind the Trabian acquisition, Mazza noted that the company adds “a new revenue stream and profit center and technological expertise that will benefit MVB and all of our stakeholders.”

Acquisitions that extend MVB further into areas like software development and fraud protection help the bank turn cost centers into profit centers, explains Robinson. “Trabian does work for, not only MVB, but it also does work for third parties,” he says. “As we look at the fintech world, one of the key pieces for us was looking at, how do you bring that expertise in house?”

The bank launched MVB Edge Ventures in June to oversee its technology investments and tackle two challenges that would vex any bank considering putting its capital into a fintech: valuation and culture.

To address valuations, MVB does its homework. “These are not public companies, right? So there’s a lot of diligence we have to do to make sure we understand the overall market,” says Robinson. “[We] try to stay away from pre-revenue companies, and we don’t invest in concepts.”

And the new venture arm addresses the cultural piece, along with regular communication with Robinson and Mazza.

“We have a team [that] work[s] together on a regular basis [to] integrate the companies and provide that platform,” says Robinson. He and Mazza regularly communicate with their portfolio fintechs, and Robinson says they have a lot to learn from one another. “They’re sharing the challenges and pitfalls they’re seeing,” he says, “and also the opportunities.”

Of course, MVB is not the only bank looking to fintech acquisitions to fuel growth. Earlier this month, Fifth Third Bancorp closed its acquisition of Provide. The digital platform offers deposit accounts, insurance coverage and financing to healthcare providers, originating $300 million in loans in the first half of 2021, according to Fifth Third’s July 21 earnings call.

“Our focus is on nonbank transactions that enhance our product and service capabilities,” Fifth Third CEO Greg Carmichael said on the call. “Provide would be a great example of that.” Fifth Third started investing in the company in 2018, and began funding loans through the platform around two years later. Provide will continue to operate as a subsidiary of the Cincinnati-based regional bank, which expects the platform to generate around $400 million in originations in the second half of 2021 and $1 billion in 2022.

2020-2021 (YTD) Fintech Acquisitions by Banks

Acquiring Bank Name Ticker Fintech Target Announcement Deal Value ($M)
Fifth Third Bancorp FITB Provide 6/22/2021 Undisclosed
Axos Financial AX E*TRADE Advisor Services 4/20/2021 $55
MVB Financial Corp. MVBF Trabian Technology 4/16/2021 Undisclosed
Bank of America Corp. BAC Axia Technologies 4/1/2021 Undisclosed
PNC Financial Services Group PNC Tempus Technologies 1/27/2021 Undisclosed
Alliance Data Systems Corp. (Comenity Bank) ADS Lon Operations 10/28/2020 $450
CRB Group (Cross River Bank) n/a Synthetic P2P Holdings Corp. (d/b/a PeerIQ) 8/21/2020 Undisclosed
American Express Co. AXP Kabbage 8/17/2020 Undisclosed
MVB Financial Corp. MVBF Invest Forward 8/7/2020 $1
MVB Financial Corp. MVBF Paladin 4/17/2020 Undisclosed
Bank of Montreal BMO Clearpool Group 1/22/2020 $147

Source: Piper Sandler & Co. using data from S&P Global Market Intelligence.

The Unbankey Bank: Coastal Financial’s Evolution

Coastal Financial Corp., a $2 billion community banking company in Everett, Washington, was a typical community bank seven years ago. It wasn’t looking to launch a banking-as-a-service (BaaS) division, where the bank would lend out its charter, payment rails and other bank exclusive products and services to third parties.

But that is exactly what the bank did.

When asked if he knew anything about BaaS prior to 2015 — the launch year of Coastal’s BaaS program — CEO Eric Sprink confessed, “Nope — we stumbled into it.”

In 2015, Sprink met Arkadi Kuhlmann, former CEO of ING Direct USA and ING Direct Canada, who was looking for a bank partner to offer banking services on the back end for his financial technology company, Zenbanx. The fintech offered deposit accounts, international currencies and money transfers.

This was the first time Sprink had heard anything about BaaS. He was interested, the board was interested, the executive team of Coastal was interested; so, the bank started an almost 15-month process of engaging investment bankers and consultants, speaking with regulators and preparing to enter into this new line of business.

But then, Coastal lost the bid to do business with Zenbanx to the personal finance giant SoFi Technologies, which later bought the fintech. Six months later, SoFi announced it was shutting down all Zenbanx accounts.

Instead of opting for resignation, Sprink — with the blessing of his board — continued to chase down new technology leads and partners. In the words of one of Sprink’s board members: “‘We’ve got to find out more about this … start running.’”

And Sprink hasn’t stopped running since. Along the way, Coastal recruited multiple new board members — one about every 18 months, and four in total — who have helped build Coastal’s BaaS strategy from the ground up. Sprink explains the process as being, “evolutionary, not revolutionary … We’ve intentionally looked really hard for expertise that we’re lacking in the evolution of our BaaS group.

That expertise, in part, is coming from its newest members: Stephan Klee; venture capitalist veteran and current CFO of Portage Ventures; Sadhana Akella-Mishra, chief risk officer at alternative core provider Finxact; Rilla Delorier, a former innovation executive at Umpqua Bank and PNC Bank; and Pamela Unger, a former tax manager at PwC, who brings understanding of direct venture capital accounting and oversight.

Coastal is dedicated to partnering with fintechs that are not only unwavering in their mission, but that are compatible with Coastal’s core values: stay flexible, embrace great thinking and be “unbankey,” as Sprink says. In what he describes as their “emotional gating criteria,” the bank sits down — or Zooms in, post-March 2020 — with these fintechs. They want to better understand the business, review their performance and investors, and, most importantly, find out what they want to accomplish. The key is to find partners that will reach and embolden specific communities through financial products and services tailored to their needs.

“We try real hard upfront to make sure we’re picking the ones that best fit us and that have the most likelihood of success,’’ he says. “With limited resources, you really have to stick to your gating criteria and believe in what you’re trying to accomplish.”

The whole process, from initial discussion to commercial launching, takes upwards of one year to 18 months. As of July, Coastal was working with 24 fintechs, half of them actively offering banking products and services through Coastal.

It takes a lot of effort to get to that stage. Out of the more than 1,100 fintechs vetted, only about 2% became fintech partners.

And in regard to the 12 active fintech partners, Coastal just recently crested the $1 million in revenue mark. Coastal’s BaaS revenue for the quarter ending June of 2021 was $1.4 million, a 50.2% increase from the prior quarter. Included in Coastal’s overall BaaS revenue, the bank reported $110,000 in interchange income for the quarter ending in June, up from $35,000 in the prior quarter. The bank isn’t tracking profitability of the division yet, but plans to break it out next year for analysts and investors.

In a 2020 survey, venture capitalist firm Andreessen Horowitz found that out of those surveyed, half of the BaaS banks were seeing above-industry average rates on their return on assets and equity, calculated from 2017 to 2019. The firm says that these returns are two to three times the average industry rate.

When Bank Director magazine launched a study to determine the top 10 fastest growing U.S. banks in 2020, it found that two of the banks listed are BaaS providers: NBKC Bank, with $1.2 billion in assets, placed at the top of the list, while $4.7 billion Celtic Bank ranked fifth.

A BaaS division could lead a bank to new revenue and deposit sources, growth and access to new customer segments, but it does not have the sole capability to turn a bank profitable. It takes good timing, patience and a healthy bank with curious leaders — a combination that Coastal seems to flourish on.

The bank’s second quarter 2021 investor presentation also reports that 73% of Coastal’s fintech partners are headed by a diverse CEO, those who identify as a minority or female. Eighty-eight percent have a diverse co-founder. Partners include Greenwood, Cheese, Fair, Aspiration and Ellevest, some of which reach underserved communities or offer mission-based banking practices.

“At the end of the day, we’re still a community bank, and we’re trying to give that [community banking] experience to others [who] haven’t had it yet,” Sprink says. “And we’re using partners to deliver it.”

How Innovative Banks Grow Deposits


deposits-8-14-19.pngCommunity banks are under enormous pressure to grow deposits.

Post-crisis liquidity concerns have challenged firms to find low-cost funds, while mega-banks continue to gobble up market share and customers demand digital offerings. In this intense environment, some banks are looking for ways to shake up their approach to gathering deposits. But some of the most compelling opportunities — digital-only banks and banking-as-a-service — require executives to rethink their banks’ strengths, their brands and their future roles in the financial ecosystem.

Digital Bank Brands
When JPMorgan & Co. shut down its digital-only brand called Finn after just one year, some saw it as a sign that community banks shouldn’t bother trying. But Dub Sutherland, shareholder and director of San Antonio, Texas-based TransPecos Banks, argues that there are too many unknowns to make extrapolations from Chase’s decision to ditch Finn.

Sutherland’s bank, which has $224 million in assets, successfully launched a digital-only brand that caters to medical professionals: BankMD. TransPecos is using NYMBUS’ SmartLaunch solution to focus on building products that meet the particular needs of medical professionals. BankMD has its own deposit and loan tracking system, so it doesn’t affect TransPecos’ existing operations. Sutherland says most BankMD customers don’t know and don’t seem to care about the bank on the back end.

Bankers who’ve spent decades crafting their institution’s brand might bristle at the thought of divorcing a digital brand from their brick-and-mortar signage.

I think there’s a fear for those who don’t understand branding and marketing, and don’t understand the new customer. The fact that being “First National Bank of Wherever” doesn’t really carry anything in this day and age,” explains Sutherland. “I do think there are a lot of bankers who fear that they’re going to somehow dilute their brand if they go and launch a digital one.”

That should never be the case, if executed properly. Sutherland explains the digital brand should be “targeting entirely different customers that [the bank] didn’t get before. It should absolutely be accretive.”

Community banks may be able to use a digital-only offering to develop expertise that serves different, niche segments and to experiment with new technologies — without putting core deposits at risk.

Banking-as-a-service
A cohort of banks gather deposits by providing deposit accounts, debit cards and payment services to financial technology companies that, in turn, provide those offerings to customers. In this “banking-as-a-service” (BaaS) model, banks provide the plumbing, settlement and regulatory oversight that enables fintechs to offer financial products; the fintechs bring relatively lower-cost deposits from their digitally native customers.

Essentially, BaaS helps these banks get a piece of the digital deposit pie without transforming the institutions.

“These are low-cost deposits. [Banks’] don’t have to do any servicing on them, there’s no recurring costs, no KYC calls,” says Sankaet Pathak, CEO of San Francisco-based Synapse. Synapse provides banks with the application programming interfaces (APIs) they need to automate a BaaS offering. He says banks “have almost no cost” with deposit-taking in a BaaS model that uses a Synapse platform.

Similar to a digital brand, providing BaaS for fintechs means the bank’s brand takes a back seat. That was a big consideration for Reinbeck, Iowa-based Lincoln Savings Bank when it explored the BaaS model, says Mike McCrary, EVP of e-commerce and emerging technology. Lincoln Savings, which has $1.3 billion in assets, has been running its LSBX BaaS program for about five years, using technology from Q2 Open.

McCrary began his career at the bank in the marketing department, so the model was something his team seriously weighed. In the end, though, McCrary says he’s proud to be enabling fintech partners to do great things.

“It doesn’t diminish our brand, because our brand is really for us, within the places that we touch,” he says. “We definitely continue to try to maximize that and increase the value of the brand within our marketplace, but we’re able to then offer our services outside of that immediate marketplace, with these other really great [fintech] brands.”

Bankers need to grapple with whether they are comfortable putting their firms’ brand on the backburner in order to launch a digital bank or BaaS program. But regardless of how banks choose to grow deposits, the time for considering these new business models is now.

“The cost of deposits, in particular, is a challenge that creates a ‘We need to do something about this’ statement inside a board room or an ALCO committee,” says Q2 Open COO Scott McCormack. “My advice would be to consider alternative strategies sooner than later[.] The opportunity to grow deposits by building a direct bank, partnering with or enabling a fintech … is a strategy that is more compelling than it has ever been.”

Potential Technology Partners

NYMBUS SmartLaunch

SmartLaunch leverages Nymbus’ SmartCore to offer a “digital bank-in-a-box” that runs deposits, loans and payments parallel to the bank’s existing infrastructure.

Q2 Open

Its CorePro system of record helps developers easily build mobile financial services. With a single set of API calls, CorePro can also be used to develop a BaaS offering.

Synapse

BaaS APIs serve as middleware, allowing banks to offer products and services to fintechs and automate the internal Know Your Customer, Anti-Money Laundering and settlement processes for the bank.

Treasury Prime

Their APIs enabled Boston-based Radius Bank to provide BaaS support powering a new checking account called Stackin’ Cash.

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.