Fintech lender and digital bank SoFi is building what could be a new banking model for the future. Using the momentum from three acquisitions, the San Francisco-based fintech is transforming itself from a leading student loan refinance lender to a banking + technology powerhouse, complete with a national banking charter.
Following closely on the heels of its acquisition of Galileo, an API and cloud-based payments platform, and Golden Pacific Bancorp, a California-based community bank, SoFi announced the acquisition of Technisys, a digital banking platform provider based in Argentina, with clients in North America as well as Latin America. SoFi believes the Technisys acquisition, expected to close mid-2022, will accelerate innovation, enable it to perform more real-time decisioning, and offer greater personalization to its customers. It will also give the fintech control of its primary technology platform.
Deals like this rewrite the rules of customer engagement, accelerating and improving the onboarding and account opening experience, embedding financial services into customers’ lives, and establishing platform business models, explains Anthony Lipp, Global Head of Banking and Financial Markets Strategy at IBM.
SoFi could change the standard banking structure by combining technology, payments and banking businesses into one agile model.
The move will provide SoFi with the digital tools and a seamless user experience to become a full-fledged financial one-stop shop, says Kristina Leach, director of BFSI insights at Quantum Metric.
The all-stock deal is worth about $1.1 billion. A relative bargain, since SoFi estimates that acquiring Technisys will generate between $500 and $800 million in additional revenue by the end of 2025.
SoFi will allow other financial institutions and fintechs to use the Technisys platform, according to the Wall Street Journal. That may or not work out as planned. Jim Marous, Co-Publisher of The Financial Brand and CEO of the Digital Banking Report observes that the desire for SoFi to be both a stronger competitor and a back-office provider to legacy banking organizations could become an issue.
Building a New Banking Model
SoFi’s trio of cross-industry acquisitions could be a harbinger of challenging times ahead for banks and credit unions. There’s no denying that the traditional banking system is shrinking, and bank revenues are being eroded by low interest rates, fee compression due to rising competition and an inability to differentiate their offerings, explains Michael Abbott, head of Accenture’s global banking practice.
“What started as a trickle of revenues to digital-only players is building into a steady flow as a new wave of competitors begins to change the very structure of the banking industry,” says Abbott.
Fintechs buying fintechs isn’t exactly news, and there has been a recent uptick in fintech M&A activity, but SoFi is moving fast, even in fintech years. “SoFi is moving at lightning speed to expand its services, and making acquisitions like Technisys and Galileo allows them to keep up the pace of innovation and deploy new products without disrupting their customer experience,” Leach observes.
In the past, fintechs relied on banks and credit unions to process payments or perform core banking functions, says IBM’s Lipp. This hampered fintechs’ desire to realize real-time processing. So now they are looking beyond the customer interface and are partnering with or acquiring providers that enable them to deliver true end-to-end digitization.
Deals on the Rise:
M&A will accelerate, with fintechs buying both fintechs and smaller financial institutions and vice versa.
Deals like SoFi’s acquisition of Technisys could put pressure on vertically-integrated banking models. “We see M&A accelerating in this space as fintechs move to grow and consolidate,” Abbott states. “And as fintech valuations come back down to earth from recent highs, I expect to see more banks buying fintechs as well.”
Leach also expects to see more banks acquiring fintech providers as well as fintechs acquiring smaller legacy banks. While small banks have traditionally not been attractive targets for acquisitions, well-funded fintechs are starting to see new benefits in considering this route, Leach explains. Golden Pacific Bank, for example, has total assets of just $175 million. Acquiring a bank charter allows a fintech to use deposit accounts to help fund their loan business, which is a cheaper form of fundraising.
Lessons From the SoFi Game Plan
SoFi’s Technisys acquisition does move it closer to a one-stop-banking shop and sets the combined entity up to innovate quickly and offer new products and services. It could also serve as a blueprint banks and credit unions can study as a way to read the winds of industry change and compete against the SoFis of the world.
Many believe traditional institutions still have a leg up over digital-only banks since they can offer a broader suite of products to their customers. And although fintechs may be operating somewhat under the regulatory radar, as they grow, regulators will be sure to impose rules and standards.
Here are three considerations incumbents should mull over to evaluate their competitive position in a changing banking landscape:
1. Break the value chain. Traditional financial institutions are in a great position to compete against fintechs if they look at playing new roles at multiple levels of the value chain. “Banks and credit unions have tremendous scale that could be unlocked by breaking down the old value chain, unbundling products and creating new revenue streams,” says Accenture’s Abbott.
2. Look to the ecosystem. While improving customer interfaces is key to competing with digital-only banks, incumbents should extend that focus to enhance the full end-to-end product journey. “Leading traditional players are aggressively driving digitization initiatives across their legacy operations and into their ecosystem partners,” IBM’s Lipp explains. “They are also expanding their role in platform business models with a broader reach across customer ecosystems that drive financial services consumption and decisions.”
3. Reevaluate offerings and business models to make them as enticing (or more enticing) than the flashy new competition. Quantum Metric’s Leach offers up this example: Fintechs and neobanks do not charge fees for overdrafts or ATM usage, so banks and credit unions need to either make sure their value proposition is more appealing than the lack of fees charged by fintechs, or they need to start eliminating fees.
“This is where greater investments in multichannel and personalized experience will drive the most value,” adds Leach.