In this macro environment, where rising rates make traditional financing routes more onerous, FinTechs could find that high-yield accounts have high-yield payoffs.
Affirm now had become the latest player to enhance rates on its savings accounts, where the annual percentage yield (APY) has become 1.5%, a rate that's 11.5 times the national average.
The strategy is one that helps Affirm broaden its reach beyond its most visible offerings, the buy now, pay later (BNPL) solutions, and realize additional revenue streams.
Affirm's move follows other online banking suppliers that happen to be enhancing the APYs they provide on savings accounts. The roster includes Goldman Sachs, Chime yet others.
In terms of the mechanics, so that as detailed in a Thursday (Sept. 1) blog post, the Affirm accounts require no minimums or fees, and they're held by and FDIC insured through the company's partner bank, Cross River Bank.
For the FinTechs, the move likewise helps these (and other firms) unlock a relatively cheaper source of capital. Having cheaper capital in hand can in turn boost balance sheet strength and fund operations as deposits reach critical mass.
To put it simply, in banking, deposits help create loans.
Interest income on those loans, where, say, for the BNPL providers, interest on point-of-sale (POS) loans can be in the mid-teens percentage points or even more. The difference is meaningful: Paying out several percentage points on deposits can be a lot more than offset by getting tens of percentage points arriving on loans.
For the more traditional banks (Goldman, for instance), having high-yield savings accounts tied to its digital Marcus bank offers a method to cross-pollinate revenue streams as diverse as credit cards and investment products. The web interest margin might help fund those initiatives.
There's impetus to bring more of the deposit business in-house, as they say. FinTech lenders are backing more loans with deposits, partly because it is getting harder to find institutional investors. Those investors want higher interest rates paid on loans and are pulling back amid perceptions of increased credit risk.
In another example, LendingClub, which acquired Boston-based Radius Bank last year for $185 million along with its bank charter, is funding more loans with bank deposits.
\”If you do not have the opportunity to fund your own loans, you will be dependent upon the capital markets and disparate funding,\” said LendingClub Chief Financial Officer Tom Casey. \”That always becomes challenging that you should predict the price you can sell your loans.\”