Canadian digital lender, eyeing U.S. market, sees upside in market downturn

Economic uncertainty has positioned Canada’s digital-only VersaBank for strong growth in the U.S. market, according to CEO David Taylor.

Earlier this week, the small online lender announced a $13.5 million deal to acquire a subsidiary of St. Cloud, Minnesota-based Stearns Financial Services, which Taylor described as “an essential piece of the puzzle” during an interview Thursday.

VersaBank specializes in loans to point-of-sale financing companies for consumer purchases of big-ticket items such as motorcycles, hot tubs and cosmetic surgeries. The Canadian bank is well positioned to benefit when other sources of financing for such companies dry up, Taylor said.

“We’re certainly not happy about what seems to be happening,” said CEO David Taylor, “but VersaBank traditionally tends to do quite well.”

“VersaBank is designed to sail these choppy, choppy waters and actually do quite well,” he said. “Traditionally, we’ve grown rapidly when our point-of-sale financing partners have trouble raising financing.”

VersaBank’s online-only strategy has minimized the company’s operating expenses, which employs around 100 people, including software developers and finance professionals at its London, Ontario headquarters and offices in Saskatoon and Vancouver. Fewer expenses has allowed the company to offer below-market rates for its loans, according to Taylor.

“We try to come up with unique, positive strategies that allow our cost of funds to be a good bit lower than the industry,” Taylor said, adding that VersaBank’s net interest margin typically averages around 3%.

Last year, the bank reported total revenue of roughly $50 million USD, along with roughly $24 million USD in cash earnings. as Canada reeled from the same economic volatility that has impacted the United States.

“This type of product is very popular in capital-market meltdowns for providing an alternate source of financing when point-of-sale companies find their funding has dried up,” Taylor said. “We haven’t found anything equivalent to this type of funding mechanism for point-of-sale finance companies in the U.S.”

VersaBank has targeted U.S. expansion since 2020, when pandemic-related turbulence resulted in short-term funding needs for many businesses across all sectors of the economy. Entering the U.S. market now has provided VersaBank with an opportunity, as businesses are struggling with inflation, rising interest rates and supply-chain disruptions, Taylor said.

In the early 1990s, Taylor used his background as a software developer to launch VersaBank, which was one of the earliest movers in online banking. The company spent its first few years market-testing a program that facilitated lending and deposit transactions via telephone connections.

In 2002, VersaBank was granted the first Saskatchewan Canadian federal banking license in 18 years. Throughout the 2008 economic crisis, the company’s financing options proved to be an “economically reliable source of funding” for Canadian point-of-sale companies, Taylor said.

VersaBank’s plan for entering the U.S. market involves a single-branch bank in the small town of Holdingford, Minnesota. Stearns Bank Holdingford, which VersaBank has committed to keeping in operation, will serve as a deposit-gathering platform for lenders financing large retail point-of-sale transactions, Taylor said.

One key to the deal is the small bank’s national charter with the Office of the Comptroller of the Currency. Assuming the acquisition gets approved, the charter will allow VersaBank to start doing business in the United States.

The market research firm LodeRock said in a recent report that VersaBank’s business model will enable multi-year double-digit growth in earnings per share. It described the bank’s U.S. expansion strategy as providing “upside optionality.”

Other digital lenders have purchased small banks as a way to operate at a national scale and avoid state-by-state licensing rules. In February, SoFi Technologies completed its $22.3 million acquisition of the $150 million-asset Golden Pacific Bank in Sacramento, California.

As VersaBank awaits regulatory approval for its pending acquisition, it is preparing for rapid adoption of its products in the U.S. market, in light of what Taylor described as “terrible market conditions” for point-of-sale companies.

“We’re certainly not happy about what seems to be happening,” he said, “but VersaBank traditionally tends to do quite well.”