Community banks are under enormous pressure to grow deposits.
Post-crisis liquidity concerns have challenged firms to find low-cost funds, while mega-banks continue to gobble up market share and customers demand digital offerings. In this intense environment, some banks are looking for ways to shake up their approach to gathering deposits. But some of the most compelling opportunities — digital-only banks and banking-as-a-service — require executives to rethink their banks’ strengths, their brands and their future roles in the financial ecosystem.
Digital Bank Brands
When JPMorgan & Co. shut down its digital-only brand called Finn after just one year, some saw it as a sign that community banks shouldn’t bother trying. But Dub Sutherland, shareholder and director of San Antonio, Texas-based TransPecos Banks, argues that there are too many unknowns to make extrapolations from Chase’s decision to ditch Finn.
Sutherland’s bank, which has $224 million in assets, successfully launched a digital-only brand that caters to medical professionals: BankMD. TransPecos is using NYMBUS’ SmartLaunch solution to focus on building products that meet the particular needs of medical professionals. BankMD has its own deposit and loan tracking system, so it doesn’t affect TransPecos’ existing operations. Sutherland says most BankMD customers don’t know and don’t seem to care about the bank on the back end.
Bankers who’ve spent decades crafting their institution’s brand might bristle at the thought of divorcing a digital brand from their brick-and-mortar signage.
“I think there's a fear for those who don't understand branding and marketing, and don't understand the new customer. The fact that being “First National Bank of Wherever” doesn't really carry anything in this day and age,” explains Sutherland. “I do think there are a lot of bankers who fear that they're going to somehow dilute their brand if they go and launch a digital one.”
That should never be the case, if executed properly. Sutherland explains the digital brand should be “targeting entirely different customers that [the bank] didn't get before. It should absolutely be accretive.”
Community banks may be able to use a digital-only offering to develop expertise that serves different, niche segments and to experiment with new technologies — without putting core deposits at risk.
A cohort of banks gather deposits by providing deposit accounts, debit cards and payment services to financial technology companies that, in turn, provide those offerings to customers. In this “banking-as-a-service” (BaaS) model, banks provide the plumbing, settlement and regulatory oversight that enables fintechs to offer financial products; the fintechs bring relatively lower-cost deposits from their digitally native customers.
Essentially, BaaS helps these banks get a piece of the digital deposit pie without transforming the institutions.
“These are low-cost deposits. [Banks’] don't have to do any servicing on them, there’s no recurring costs, no KYC calls,” says Sankaet Pathak, CEO of San Francisco-based Synapse. Synapse provides banks with the application programming interfaces (APIs) they need to automate a BaaS offering. He says banks “have almost no cost” with deposit-taking in a BaaS model that uses a Synapse platform.
Similar to a digital brand, providing BaaS for fintechs means the bank’s brand takes a back seat. That was a big consideration for Reinbeck, Iowa-based Lincoln Savings Bank when it explored the BaaS model, says Mike McCrary, EVP of e-commerce and emerging technology. Lincoln Savings, which has $1.3 billion in assets, has been running its LSBX BaaS program for about five years, using technology from Q2 Open.
McCrary began his career at the bank in the marketing department, so the model was something his team seriously weighed. In the end, though, McCrary says he’s proud to be enabling fintech partners to do great things.
“It doesn't diminish our brand, because our brand is really for us, within the places that we touch,” he says. “We definitely continue to try to maximize that and increase the value of the brand within our marketplace, but we're able to then offer our services outside of that immediate marketplace, with these other really great [fintech] brands.”
Bankers need to grapple with whether they are comfortable putting their firms’ brand on the backburner in order to launch a digital bank or BaaS program. But regardless of how banks choose to grow deposits, the time for considering these new business models is now.
“The cost of deposits, in particular, is a challenge that creates a ‘We need to do something about this’ statement inside a board room or an ALCO committee,” says Q2 Open COO Scott McCormack. “My advice would be to consider alternative strategies sooner than later[.] The opportunity to grow deposits by building a direct bank, partnering with or enabling a fintech … is a strategy that is more compelling than it has ever been.”
Potential Technology Partners
SmartLaunch leverages Nymbus’ SmartCore to offer a “digital bank-in-a-box” that runs deposits, loans and payments parallel to the bank’s existing infrastructure.
Its CorePro system of record helps developers easily build mobile financial services. With a single set of API calls, CorePro can also be used to develop a BaaS offering.
BaaS APIs serve as middleware, allowing banks to offer products and services to fintechs and automate the internal Know Your Customer, Anti-Money Laundering and settlement processes for the bank.
Their APIs enabled Boston-based Radius Bank to provide BaaS support powering a new checking account called Stackin’ Cash.
Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director's FinXTech Connect platform.