Unless you're licensed as a bank, it'd be illegal to lend out these funds. As a mere money transmitter you are required to hold 100% of custodial funds, fractional reserve banking is not allowed.
Seeing as they've not ever communicated any lending product and as there's no hint of that anywhere, and seeing as they're the most funded ($40m) bitcoin company by reputable VCs who do due diligence and stress regulatory compliance, I doubt they'd be so blatantly breaking the law on this point.
The fee is indeed for the wallet service of insured storage with easy configurable pincode, password, 2-factor authentication and daily spending limits. If you can do all that yourself, awesome. But there's plenty of mainstream users who haven't a clue of proper security measures, and paying 0.12% annually for secure and insured storage, sounds like a decent deal.
I don't use it myself, I can easily set up my own secure cold storage. But it's a nice product, particularly for securing something many see as an investment vehicle that can easily do 10x, perhaps 100x value increase in the next 10 years. Paying 0.015x every 10 years to store, secure and insure that vehicle isn't such a big deal, and that's their fee structure.
