Two fintechs broaden banking ambitions

Wealthfront, a pioneer in robo advice that just a few months ago began offering savings accounts, says it's taking its next step — connecting customers with mortgages.

Meanwhile, Varo Money CEO Colin Walsh says that if his digital-only firm's application for a bank charter is approved, it will expand into robo advice and brokering mortgages.

The recent announcements are part of the fintech world's continuing mashup of wealth management and basic banking on digital-only platforms. Their target audience? The customers of traditional banks.

“The recent launch of savings accounts and planned expansion into checking accounts and mortgages are just a few steps on a path to become a viable alternative to banks," said David Goldstone, head of research at Backend Benchmarking.

Wealthfront — which has $13 billion in assets under management and says it has about $7 billion in deposits — describes traditional lenders as vulnerable to digital-first, artificial-intelligence-powered providers.

“By our estimate, there are over 50 million retail banking clients up for grabs at the top U.S. banks alone,” according to a company blog post in late November by Dan Carroll, founder and chief strategy officer of Wealthfront. “These branch-nevers will leave their banks for a better solution over the next decade.”

Customers will be able to apply for mortgages made by a bank partner of Wealthfront through Wealthfront's mobile app, Carroll wrote. The company, which already analyzes thousands of mortgages and home pricing data to help clients stay on track while saving for a down payment, will help clients figure out if they qualify for the loans, according to Carroll. Loans of $800,000 at 3.5% interest were given as an example.

Banks should take note, according to Goldstone. "Wealthfront has ambitions to expand well beyond investing to compete with traditional banks for customers' full personal finance relationships,” he said.

Breakdown of personal lending market by types of lender

Wealthfront, of Redwood City, Calif., did not provide more details regarding its new offering, such as which bank would be providing the mortgages. It relies on various partner banks to offer a cash account through its platform that earns 1.82% annual percentage yield. Wealthfront rivals such as Betterment, Personal Capital and Ron Carson Wealth now also offer high-interest accounts.

“Our clients ask us to help them with all of their financial needs,” said Wealthfront spokeswoman Kate Wauck. “Young professionals want to consolidate all of their money so they can manage it seamlessly the way they want through technology.”

Plans to broker mortgage lending would put them in competition with challenger banks, too.

Varo Money said it intends to offer a variety of loans, including mortgages, provided it secures a bank charter.

"At Varo, we plan to have a full range of consumer banking products in our road map once we become a bank, including [certificates of deposit], robo-advising, credit cards, home equity loans and mortgage brokering,” Walsh said in an interview Tuesday.

Critics point out that Wealthfront, like other independent robo advisers, has added banking products as it has proved tough to rely solely on digital investment advice for profits. Customer acquisition is costly, and investment giants such as Vanguard and Schwab have quickly leapfrogged robo advisers in growth of assets tied to digital advice.

There has been a benefit for some community lenders as more robos adopt savings offerings, with a number of banking partnerships.

But independent digital providers may find the upside on offering checking and savings accounts disappears quickly as the competitive field grows crowded. Schwab executives recently said the custodian was looking to expand its banking offerings, while banks including Wells Fargo and Bank of America have introduced digital investment advice to their retail banking customers.

"In order to survive, these robo startups need to diversify," said Jen Butler, a research director at Corporate Insight. "In the past several months, deposit products have been the focus of this expansion. Startups must now compete directly with established institutions, like Bank of America Merrill Lynch, Charles Schwab and JPMorgan Chase — organizations that have the luxury of an existing customer base to tap into and the scale to provide competitive pricing."

Fintechs have enjoyed success in digital lending.

Digital lenders more than doubled their market share in the past four years, as firms such as Social Finance and LendingClub now provide 49.4% of unsecured personal loans as of March, compared with just 22.4% in 2015, according to Experian.

SoFi offers personal and mortgage loans to retail clients on a platform that also serves up digital-advice products. The San Francisco company offers two- to seven-year loans of up to $100,000 with annual percentage rates between 5.99% and 18.07%, according to its website.

“When we talk with our members about what they want from a financial partner, they tell us they want to work with someone who rewards them for good choices, doesn’t charge them fees, and makes it possible to do everything on your smartphone,” Anthony Noto, SoFi's chief executive, said in February.

The asset management provider Envestnet is set to debut its credit exchange by the end of the year, opening up access to prequalified loans for clients in need of extra cash.

Tim Mayopoulos, president of Blend, a digital lending platform for banks, said it is understandable that upstarts like Wealthfront would want to get into mortgages.

“It’s a huge market with good margins when conditions are favorable, which they are at the moment,” said Mayopoulos, a former CEO of Fannie Mae. “However, it is also a space that is very complex from an operational and regulatory perspective.”

In addition to experience in dealing with regulators, established lenders have large customer bases and ample resources to spend on marketing, according to Mayopoulos.

“That said, Wealthfront and other new digital financial companies have attracted millions of users for their products over the past decade,” he said. “If they have managed to build the trust necessary to convince their customers to use them for a transaction as complex as a mortgage, the industry should prepare for yet another competitor. Wealthfront will certainly not be the last to venture into this space."

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