Two huge M&A announcements this week that sound very different and under the covers are driven by the same goals.
- LendingClub buys Radius Bank – Fintech OG buys a bank with $1.4B in deposits. Price Tag: $185M
- Morgan Stanley buys E-Trade – Wall Street OG buys discount broker with $39B in deposits. Price Tag: $13B
They may sound very different, yet are driven by the same need for the lowest possible cost of capital. The cheapest money comes from you and I depositing our cash into the bank. From there, the bank lends it out and invests it, earning revenue from the deposits.
The E-Trade numbers are particularly interesting. Trading commissions are approaching zero, a trend started by RobinHood and accelerated by Schwab. In reality though, E-Trade doesn’t make the bulk of their money from that trading fee.
They make ~18% from commissions and over 60% from net interest over deposits (from an excellent post by Charley Ma that you should read).
As Morgan Stanley offers a fuller suite of retail finance products, those deposits are the zero cost capital they can use to finance them.
As LendingClub expands their product lineup, the Radius deposits offer them the same benefit.
Would you want to be a fintech carrying capital at 3% trying to compete with others who have an almost zero cost? Easy question. With almost no bank charters being created, expect to see more and more of these deals.