Community Bank Builds Future on ‘Banking as a Service’ & Google Plex

Coastal Community Bank's board came close to selling out to give shareholders a great return. But it had second thoughts after seeing the potential of supporting fintechs and neobanks, and soon, collaborating with Google.

What keeps Eric Sprink so busy? In a word, fear.

Sprink, President and CEO at Coastal Community Bank, based in Everett, Wash., oversees not one but three growing organizations. One is the bank itself, an expanding community financial institution, with $2 billion in assets, that was seen as a juicy takeover candidate until Coastal’s board decided it wasn’t for sale. Another is CCBX, a division of the bank that specializes in banking as a service deals with fintechs and neobanks. And finally there is CCDB, the company’s digital banking division. Its main task at present is preparing the bank to partner in the Google Plex family of products in 2021 or 2022.

At first you might think Sprink is stressed because of demands on his time. Ask him how he splits his day. He deadpans that the bank gets 40%, CCBX gets 80% and CCDB gets 30%. Of course, you don’t have to be a banker to know that adds up to 150%.

Sprink’s point is that bankers can’t afford to waste opportunities, no matter how busy that makes them and their staff. And when Google wants to partner with you, you make the time, he says.

The urgency, again, comes because of fear.

“Listen, I’m scared all the time,” says Sprink. “I’m a bank CEO.”

He begins counting off competitors and possible rivals. “I’m scared of Amazon. I’m afraid of Walgreens offering checking and savings — they’re not even a technology company, but they are a great brand, right? Kabbage is now going to do small business checking. Walmart is working on getting into banking with its partner Ribbit Capital and a partner to be announced.”

Sprink could go on, but it’s clear he sees community banking heading for a battle for relevance and survival and he intends to come out of the other side of the valley intact and successful.

“It’s fun times right now and interesting and exciting,” says Sprink, “but I have trepidation because I see things changing. I want to make sure we evolve and do it safely. It’s moving fast, yet there are penalties for moving too fast and you can stub your toes pretty hard.”

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Coastal began looking at banking as a service in 2015, and has steadily grown its base of partners, with the pace picking up in latter 2020 and into 2021. The bank has gone about the partnering process selectively, vetting over 900 potential BaaS partners. Out of that huge pool, it has 21 partners in stages of signed letters of intent, implementation/onboarding, “friends and family” operation, and fully active. Six of those partners came on in the first half of 2021, reflecting an acceleration as CCBX hires additional staff and builds out its capabilities.

In 2020 Coastal booked BaaS fees of $2.3 million, up nearly 15% over 2019 and second in fee income only to deposit service charges and fees. BaaS accounted for nearly 5% of deposits at the end of 2020. However, Sprink considers it early days, still, with the company investing more in BaaS as results and scope grow.

A BaaS Bonus:

Coastal has picked up numerous customers — the people doing business with their BaaS partners — at a substantial expense savings. While they only likely know about Coastal if they read some tiny type, partners’ customers bring new credit, interchange and funding.

Coastal’s BaaS Began After a Big Fish Came Off the Hook

Sprink hates it when bankers say, “I need to do fintech.”

“That’s such a bastardized term that I always stop them and say, ‘Where are you on your walk? And how can we help you understand where you’re at?’,” says Sprink.

Sprink knows “the walk” well after about five years at it, and it’s a journey that he freely admits began after a big miss — but one that taught Coastal lessons it continues to apply to this day.

Arkadi Kuhlman, well-known for helping to build the online bank ING Direct, started an early mobile banking service called Zenbanx, which he wanted to run as a real bank. Kuhlman hoped to partner with a small bank in Seattle but that institution wound up selling out.

Coastal Community Bank challenger banks cards and mobile apps

Seven of Coastal Community Bank’s banking as a service partners, left to right, are Greenwood, One, Sable, Cheese, Till, Possible and Movocash.

Sprink heard about the sale and pounced. However, “long story short,” he says, “while we came close to doing a deal with Zenbanx, at the end of the day SoFi outbid us and bought it.” SoFi absorbed Zenbanx and closed the brand.

But Sprink and his board had whetted their appetites for BaaS. “And we retained the knowledge that we had learned through the dance,” says Sprink.

In fact, the experience convinced the board, which had been considering selling the bank, to hold off and consider pursuing a BaaS strategy.

Easing into a New Way of Banking

Coastal found out that Aspiration, one of the original “green” apps, was looking for a new approach to BaaS to replace the relationship it had with another institution. Sprink says the bank made it clear that it was new at this, but wanted to help Aspiration figure out a way. In 2017 Aspiration signed on as the bank’s first BaaS partner.

At this point, Coastal’s board began to think expanding into BaaS would make selling out needless, in terms of maximizing shareholder return. Sprink built a business plan and directors decided they had a blueprint for independence. The bank did an initial public offering in 2018 in order to give shareholders a way to sell if they chose, while providing additional funds that Sprink knew would be necessary to move ahead on both the banking and partnership fronts.

Concurrent with building certain kinds of expertise on staff was Coastal’s effort to add new directors, as vacancies arose and new needs found, who could help with the BaaS buildout and later the creation of the Google Plex expansion.

“It wasn’t a revolution, it was an evolution,” explains Sprink.

What had been a very traditional community bank board in the early 2010s has become a hybrid. Recruited experts include Stephan Klee, a fintech venture capitalist who had been CFO at Zenbanx; Sadhana Akella-Mishra, a compliance expert with virtual core provider Finxact and also a Zenbanx alumnus; Steven Donald Hovde, an investment banker; Pamela Ungar, a CPA with extensive experience with venture capital firms; and Rilla Delorier, former innovation leader at Umpqua Bank. All of these directors play an active part in advising Coastal management on issues the BaaS and Google divisions approach.

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Coastal’s Not in the Business of Building New Wheels

Sprink has also been steadily building staff for the digital divisions. In mid-June 2021 FTE had reached 330 and the bank still had the shingle out for help. Sprink says he’s hired nearly 80 people in the second quarter and he said one of the best opportunities was to snap up skilled help as the BBVA USA closed its Azlo and Simple fintech operations in the course of PNC’s acquisition of BBVA USA. In spite of massive adoption of technology, Sprink says that it is amazing how many people it still takes to deliver quality service, even behind the scenes.

Importantly, many of the people hired have expertise in hard banking specialties, such as fraud monitoring operations and compliance.

“We don’t look for programmers. We’re looking for bankers who are able to work with our partners who happen to do things via technology with digital communities.”

— Eric Sprink, Coastal Community Bank

As a newer player in the BaaS business, Sprink has advice for other community banks to consider as they begin to look at BaaS as a potential business line.

“Everyone’s looking at BaaS because their margins are under pressure,” says Sprink. “I would challenge other banks to not think, ‘I want to get into partner banking’, but instead ask, ‘What are we good at and what are we trying to accomplish? What are we trying to solve for?’.”

Sprink says BaaS players come in tiers. The biggest and oldest, like Cross River and Bancorp Bank, “have their own proprietary software and they have their own software engineers on staff. They’ve built a really sound product at the cost of hundreds of millions of dollars. So they would kind of like their partners to use it. And that makes total sense.”

But for, smaller players, Sprink suggests, that may not make sense. It doesn’t work for Coastal, and Sprink says definitively that he doesn’t get excited by the thought of building software and owning the stack.

“I would rather leverage the middleware companies and use the best of breed there,” he continues.

Accent on Flexibility:

At Coastal, the BaaS program works with eight different core operating systems, which offers flexibility to client fintechs and neobanks.

“This does cause complexity,” says Sprink. “So the job of the engineers that I do have is integrating systems, not building them.”

This enables Sprink’s BaaS bankers to concentrate on what they do well — compliance, oversight, reconciliation — all the “boring” stuff that actually keeps the wheels from falling off. Likewise he doesn’t want Coastal to get into the business of front-end applications fintechs and neobanks use. His people’s job is to make all workable and legal and to provide the banking system access that makes it all go.

The intent is to offer a very customized route to BaaS, not a cookie cutter approach.

“We listen hard to what our strategic partners are trying to accomplish, and why they’re doing what they’re doing. That’s because they’re doing it because people like me have never done it before, or they think they can do it better.”

— Eric Sprink, Coastal Community Bank

Serving Diverse Communities Through BaaS

Among the targeting points for potential partners for Coastal is prospects that seek to provide services that provide for diversity, equity and inclusion. Sprink believes this helps Coastal approach community banking on a bigger canvas and more quickly than it ever could on its own. It’s a point of pride with Sprink that 85% of the founders of the bank’s BaaS partners are minority or female and that 75% of partners are headed by a minority or woman CEO.

“So, we’re growing with a mission,” says Sprink.

In addition to Ellevest, which helps women advance financially, Coastal works with, Greenwood, “the black and brown bank out of Atlanta”; Fair, a Muslim-focused bank out of Houston; Cheese, which works with Chinese immigrants; Sable, which specializes in helping immigrants build credit in the U.S.; and Possible Finance, which offers small-dollar lending nationwide.

“I think it’s incumbent upon Coastal to be twice as communicative,” says Sprink. “We need to say, ‘We don’t understand how to bank this community. They’ve often been left out of traditional banking and so we can’t apply normal banking oversight because that will exclude them. So we need to use new data points, different onboarding systems and different technology.”

Keeping Regulators Continually in the Loop

Making BaaS work has been smoothed, according to Sprink, by pursuing a policy that might make some bankers skin itch: Constant communication with both state and federal regulators.

In fact, every time the bank is going to take on a new partner, it lets the regulators know.

“This may blow your mind, but we ask all of our partners to eventually go to meet the San Francisco Fed and the Department of Financial Institutions,” says Sprink. The practice continued during the pandemic through Zoom calls.

Sprink explains that it is important for regulators to understand the passion behind the creators of new services and what they want to accomplish. For his part, he wants to demonstrate that the bank will craft a BaaS approach that will maintain consumer protection and compliance.

“We’ve just found that the chemistry of being transparent, informative and extra communicative has done us well,” says Sprink.

There’s a practical aspect to these meetings too. Sprink doesn’t want to go down any roads that don’t suit the regulators.

“I think, ‘Tell me now, don’t catch me after I’ve been doing it for a year and then tell me I’ve been doing it wrong,” says Sprink. “Help me see the gaps now.”

Sprink adds that while profitability remains important, one criterion for deciding on partners is if Coastal will learn new things in the deal.

“Some partners we will work with on pricing or what have you,” says Sprink, “because we like what they are doing and how they are delivering something, or changing something in society.”

The Big One on the Horizon: Google Plex

Speaking of learning new things, Coastal is among the handful of banks and credit unions that is working with Google on new Google Plex accounts that will become part of Google Pay. Each participating institution will provide both a transaction and a savings account, based on the latest details Google discussed in late 2020. Few details have come out since then and participating institutions have kept a tight lid on details.

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For Coastal, the Google Plex arrangement is not being treated as a BaaS play, but as a collaboration. The bank sees this as an opportunity to exchange expertise while also increasing the company’s potential reach and building deposit relationships — and potentially more connections over time. It’s an opportunity to see how Google’s customer experience expertise translates to banking.

In investor materials, Coastal notes that the collaboration “is anticipated to be a great avenue for us to reach existing customers, our communities, and expand to new communities in the coming years. We expect that the new platform will provide customers with an enhanced customer experience and provide them with new avenues to interact with us.”

Management is also hoping that Google Plex will help the bank tap into a younger demographic.

On another level, this is also an alternative approach to expanding digital banking. Some community banks have already started their own standalone digital bank. This collaboration is an option that adopts the consumer appeal of Google.

The results of the much-anticipated Google Plex launch are a matter for the future. “We can’t comment on pro formas or projections,” says Sprink, “but remain excited about the relationship with Google. The big question for any new product is how consumers will respond, but we believe that well-designed digital banking is here to stay — as evidenced by our commitment to banking as a service.”

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