Will a Fintech’s Acquisition of a Chicago Bank Restart the Race for Charters?
The industry hasn't seen a fintech go directly into banking since the heady days of LendingClub and SoFi. Does SmartBiz's recent bank acquisition herald a new pipeline of deals?
By Steve Cocheo, Senior Executive Editor at The Financial Brand
The recent acquisition of a Chicago-area small business bank by a fintech specializing in small business loans could well be the harbinger of things to come — specifically, a new crop of deals that could help fintechs obtain access to bank funding while providing an exit plan for bank owners and top managers who want to leave the field.
In a deal announced March 17 but approved earlier by regulators, SmartBiz, the fintech, acquired United Community Bancshares, Inc., and its wholly-owned subsidiary, Centrust Bank, N.A., with $148 million in assets. SmartBiz has operated a digital marketplace for Small Business Administration and other business loans since 2013. Participating bank lenders can make offers to the loan applicants through the marketplace and SmartBiz staffers assist applicants to line up the credit they need.
In the wake of approvals by the Federal Reserve Bank of Chicago and the Office of the Comptroller of the Currency, SmartBiz became SmartBiz Bank, N.A., and Centrust became a subsidiary. The original bank is retaining all of its staff, including key leaders, and will continue to function as a local lender while enabling SmartBiz to function as a direct lender funded with bank deposits. The national lending effort will continue to be operated digitally and will not have branches of its own. (Centrust has a single branch.)
"Small businesses are not really that well served by banks today," says Evan Singer, CEO of SmartBiz Bank. He explains that his company’s target borrowers have between $500,000 to $5 million in annual revenue. The costs involved in lending to such companies is about the same for banks as making loans to larger firms. As a result, he says, both larger banks and community lenders have turned away such applicants.
"So highly qualified business applicants may end up going to a higher-priced alternative lender when they should be getting lower-priced credit," says Singer. He says that while the company will continue to operate its marketplace with about five partner lenders, the acquisition will be the key focus.
"We really need to do this ourselves, as our own bank," says Singer.
Will more such deals follow? It’s a strong possibility under current Washington conditions.
The Regulatory Perspective on the SmartBiz Bank Deal
It has been several years since an acquisition by a fintech of an existing bank charter has taken place. LendingClub, originally a nonbank fintech that operated as a marketplace lender, acquired Radius Bank in early 2021. The company, now LendingClub Bank, blends its original reliance on funding by investors, including banks, buying loans, with funding raised via bank deposits. Fintech SoFi, having obtained approval to become a de novo bank, instead acquired Golden Pacific Bancorp, Inc., in 2022.
The SmartBiz Bank deal is the first fintech-bank acquisition or charter approved since those deals, according to Michele Alt, partner at Klaros Group and a 22-year veteran of the Comptroller of the Currency’s legal area. Alt’s firm advised SmartBiz in the acquisition.
"Whoever is in the leadership of the federal regulatory agencies in the next four years, they’ll definitely be more open to applications than the regulators were during the Biden era," says Alt.
Alt adds that although this is the first notable approval under Trump II, Singer and the group at SmartBiz had applied more than a year ago. "Approvals don’t just happen — it’s not, ‘Ok, there’s a new sheriff in town, approve everything in the queue’," she says.
Most of the process had occurred under the Biden administration, so "credit where credit is due to the regulators under both administrations," says Alt.
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Revving the Acquisition Engine
The LendingClub and SoFi deals whetted the appetite of fintechs that wanted charters. But the likelihood of regulatory delays, which affected deals even within the banking industry during the Biden years, was a chokepoint.
"One of the challenges for buyers was convincing sellers that they should tie themselves up with them, because approval was so uncertain," says Alt. Now, she says, the likelihood that more such approvals are in the offing will encourage banks that are willing to sell to entertain proposals.
"These are bankers ready to hang up their spurs, basically," says Alt, "who would be amenable to an offer, but not one that ties them up in a regulatory morass for a couple of years. Now they’re going to consider offers."
Will there be a wave of dealmaking? "Wave" is relative, says Alt.
There won’t be a hundred proposed acquisitions in the hopper, but given the drought, it’s not unreasonable to expect 10 or so this year. This could include charter approvals or acquisition approvals at the federal level or a state route — establishing an industrial loan company, which must still qualify to federal deposit insurance. (ILCs, also called industrial banks, are exempt from the federal Bank Holding Company Act. This charter option is only available in certain states.)
Alt stresses that no would-be fintech acquirer take the SmartBiz Bank approval as a sign that the process has suddenly become easy.
"It’s not, ‘Here’s a charter, there’s a charter, everybody gets a charter’," she explains. Fintechs will have to demonstrate they have the funding and resources to buy or build a safe and sound bank, adhering to regulatory schedules, and with appropriate risk management structures.
"If you want to be a bank, it’s time to get going, seize the day and apply for an existing charter," advises Alt. "Don’t wait for one to be created for you."
Digging into the SmartBiz Bank Acquisition
SmartBiz Bank’s Evan Singer says that the LendingClub Bank deal served as a catalyst for his company’s strategy.
"We started to look at this as the right move to serve our customers better," says Singer. The company recruited some of the people who had helped get the LendingClub deal done for the company’s board of directors and its management team.
Singer says that various options, such as an industrial bank charter or a de novo bank, were considered.
"But we wanted to find a bank that was already doing small business lending, that had the bank operations in place that we didn’t have, so that the deal would be complementary," says Singer. He also specifically wanted a team that would stay on post-acquisition. Gerard Buccino, now president of SmartBiz Bank, had been CEO of Centrust.
Centrust had not been a partner bank beforehand. Singer explains that most partner banks are larger, and the deal would not have worked as well.
The opportunity to raise deposits, rather than relying on securitization or other alternative funding, was appealing.
"It’s a much more sustainable model to bring on deposits and then use those to fund lending, versus a securitization model," says Singer. "Securitization can be great in good times, but in bad times it can dry up."
Later in 2025 Singer says the bank will launch a deposit product for small business operating accounts that will be offered nationally. This will widen the opportunity for raising deposits beyond the Chicago area.
For marketing, SmartBiz will continue to rely on a network of thousands of advisors to small businesses, such as accountants and attorneys, to refer potential borrowers to the company. Now the referrals could turn into business for SmartBiz Bank, rather than bank marketplace participants.
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Spoiler Alert: Watch Out for Charters for the Unexpected
Meanwhile, Alt says that while the SmartBiz Bank deal involves a very traditional form of bank lending, current Washington policy leanings suggest that the chartering process will see interest from new fintech players too.
"I think we’ll see applications involving crypto firms," says Alt. There’s precedent already at the state level — Wyoming created its "special purpose depository charter" in 2019 for institutions handling digital assets, such as virtual currencies, digital securities and digital consumer assets. Four have been approved thus far, according to the Wyoming Division of Banking website.
Alt says she wouldn’t be surprised to see other fintechs investigate charters, two potential activities being buy now, pay later credit and subprime lending.
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