The Consequences of Fintechs Becoming Banks

The recent collapse of Silicon Valley Bank has triggered a chain reaction of bank failures, leaving the future uncertain. This crisis has brought important issues to the forefront, leading to ongoing debates.

During Fintech Nexus USA 2023, Renaud Laplanche, CEO and Co-Founder of Upgrade, discussed why operating as a fintech has been advantageous in navigating the current environment.

Laplanche remarked, «We have recently been reminded of the risks involved in being a bank, such as managing asset-liability mismatch. SVB and First Republic serve as useful reminders.» He emphasized that being a fintech has allowed Upgrade to effectively address these risks.

The flexibility of operating as a fintech has enabled Upgrade to adapt to macroeconomic conditions. Laplanche explained their approach, stating, «To efficiently manage the mismatch between assets and liabilities and deposits, we established a network of 200 small banks and credit unions.»

Instead of attempting to match assets and liabilities on their own balance sheet, Upgrade leverages bilateral agreements with these institutions. They raise deposits online and, overnight, redistribute them among the network, using the deposits to finance loans. This approach ensures diversification and provides benefits similar to those of a bank, without the associated costs and regulatory burdens.

Additionally, this model benefits the participating small banks and credit unions. Laplanche highlighted their role in expanding access to advantages offered by a national pool of depositors. He acknowledged the challenges faced by smaller financial institutions in raising deposits locally, particularly since the onset of COVID-19 and the fallout from SVB’s failure. By outsourcing this function to Upgrade’s network, these institutions can tap into a broader customer base and benefit from a national brand identity.

Laplanche emphasized that this arrangement has proven vital for small banks and credit unions in the current market. Upgrade’s launch of a high-rate savings account in late 2022 has bolstered their network, allowing partnering institutions greater access to the deposit market.

In conclusion, Laplanche asserted that the digitally native nature of their business has made the entire process efficient and profitable. Operating as a fintech rather than a traditional bank has enabled Upgrade to navigate the challenges and risks associated with banking while creating mutually beneficial opportunities for their network of small banks and credit unions.

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