If You Launched a New Bank Today, What Would It Look Like?

Banks of the future are supposed to be all digital, all the time... right? So why are many new banks still using the traditional community banking model? Today's typical de novo institution is not quite your dad's old bank, but it's not a fintech fantasy either.

With all the digital tools and channels available today, no one would launching a new bank today would follow the same old formula, would they?  In the age of ecommerce and fintech, when Amazon and Alibaba just keep growing and yesterday’s retail giant, Sears, just barely hangs on, it seems like a proposition that’s hard to argue with.

True, megabanks and fintechs keep inventing new digital services and direct banks and challenger banks keep popping up. But despite all these changes, many of the newest banks in the U.S., including some still in organization, are not the digital-first creatures one might expect, especially after ten years of talk about disruption in finance.

In fact, they could be more accurately be described as “Traditional Community Banks 2.0.”

Yes, their investors and managers get the appeal of digital banking. They know what fintech firms have been up to, and some have even formed or considered partnerships with them. They incline towards only one physical office, or at most a “branch-lite” approach to geography.

There are some exceptions, like tech-focused Grasshopper Bank, in organization. But for the most part when The Financial Brand dug into investor materials and spoke with top executives of several de novo institutions, there’s one common factor underpinning their fundamental models: Humans.

“There is recognition among market participants that the most effective brand for small banks is competing with hand-to-hand combat.”
— Jonathan Hightower, Bryan Cave Leighton Paisner LLP

The stock offering statement from Tarpon Coast Bank (in organization) is a good example: “Hiring an experienced team of local bankers and marrying tomorrow’s technology with yesterday’s friendly service, Tarpon Coast is expecting to appeal to the retail client looking for high touch service and the businessperson looking for fast answers and the President’s cell phone.”

From the first bank chartered in Oklahoma in a decade: “Watermark Bank is a boutique bank, built with a team that represents some of our community’s most respected banks. With decades of banking and business experience, we bring the best of both worlds: the sophistication of a larger institution but with unparalleled personal service.”

Most of these startups refer to the desire of local small businesses to have a hometown bank again, after most had merged or failed out of existence. Frequently local business leaders organized the push for a new bank and have put their own money into them. Prior to the Great Recession, this was routine.

“There is recognition among market participants that the most effective brand for small banks is competing with hand-to-hand combat,” says Jonathan Hightower, Partner at Bryan Cave Leighton Paisner LLP. “New banks are necessarily small at the outset and therefore lack the resources to build robust technology platforms that allow them to operate on a mass basis. A portion of the small business market needs customized attention that is not always suited for larger operators, and smaller banks can effectively serve that portion of the market.”

Few of today’s de novos are being started by “kids,” and photos of the bankers still look like, well, bankers, not hipster techies. While regulators have eased up on the brakes that slowed de novo chartering to a virtual standstill for about a decade, they want to see experience at the helm.

“Newbies need not apply,” says Hightower. “It’s preferable for a CEO candidate to have prior experience as a successful bank CEO, and experience as a senior officer is a near-universal requirement. It’s not unusual for leaders of de novos to be on their second or even third startup bank.

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Giving Markets What They Want and Need

By the time Endeavor Bank opened in January 2018, San Diego had dropped from a high of 43 local institutions to a mere handful that were local. Three megabanks held 75% of local deposits, according to Dan Yates, Endeavor’s CEO, and a veteran California banker.

“There’s always room for a community bank that caters to small and medium size businesses’ needs.”
— Shaza Andersen, Trustar Bank (in organization)

“There’s always room for a community bank that caters to small and medium size businesses’ needs,” says Shaza Andersen, Founder and CEO of Trustar Bank (in organization), in Virginia (Pron.”Trust-Star”). This is her second startup in 12 years.

Andersen believes the Washington, D.C., market needs a new community bank to serve small business needs. She notes that in recent years a good half dozen or so institutions have been acquired in the market (including her previous bank, WashingtonFirst). As a result, the area is dominated by mega banks and regionals, she explains, and this will be exacerbated by the BB&T/SunTrust merger.

“Banks can grow too large to provide highly customized service,” Andersen explains.

“Many of the businesses we serve weren’t being served the way they wanted to be served,” says Ken Till, CEO at CommerceOne Bank, Birmingham, Ala., which opened in June 2018.

In Las Vegas, Lexicon Bank (in organization) is being formed to bring customized, relationship-based service to local businesses (you can see the thread here), with a specific niche as part of the business plan. John Miller, CEO, says that the growing city — six people move to Vegas hourly, he cites — has a high percentage of cash-based businesses that can use help with the compliance aspects of making large cash deposits.

The name “Lexicon,” by the way, refers to “redefining banking.” Miller hopes to start doing business in May.

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Why Aren’t These Banks All about Tech?

The point made earlier — that the leaders who regulators will approve are almost always going to be experienced bankers — might be extrapolated to hint: Older bankers aren’t hep to the digital age.

Quite the contrary.

“Our firms demand technological delivery,” says Ken Till. There’s no “if” in providing it.

Shaza Andersen intends to give Trustar’s business clients the latest of everything technological that they need, but she says that industry critics often equate “access” and “service.” To Andersen, they aren’t the same thing.

“Technology doesn’t constitute a relationship,” she explains. “If your business has a problem, you can’t ask your computer to solve it.” Andersen says the value community business banks bring to the table is human expertise and experience, and you don’t get that from an app.

“Once your company grows bigger, you are not looking for a fintech-type loan. Your credit needs are more complex.”
— Dan Yates, Endeavor Bank

Fintech is something traditional de novo bankers are looking at just as do other bankers and credit union executives. “I see the opportunity to team up with them, to partner with them to bring innovation to our customers,” says Andersen. “But fundamental to our success is the relationship.”

Till says CommerceOne brings a similar approach to the table, which it calls “Curated Banking.”

“Tech gets built on the relationship,” he says, not the other way around.

For Endeavor, there is a fintech fit. Yates acknowledges that some small businesses become attracted to online fintech lenders, like Kabbage. And this kind of approach can be a helpful one for embryonic companies that aren’t bank-ready yet.

“Once your company grows bigger, you are not looking for a fintech-type loan,” says Yates. “Your credit needs are more complex.”

Yates says Endeavor recently partnered with the fintech lender Fundation. When warranted, the bank does a handoff to its fintech partner, but it hopes to retain a connection so it can serve the company as it grows.

“It’s a win-win for everybody,” says Yates. “I’ve talked to other banks that have partnered with this fintech and they have seen some success.”

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Branches Aren’t Seen as De Rigueur Anymore

At the same time that these executives strike a balance between human and tech, no one plans on branching aggressively.

Andersen says her 23-year-old daughter, as a consumer, will likely never enter a bank branch. But business people like being able to meet with their bank officers so physical offices remain necessary.

But those locations will be different, she adds. “Our footprint will be smaller, as will the staffing levels. Our strategy is to have one branch in each of our markets, but not the three or four that we might have opened in the past.”

Tech helps here. “It’s just as easy for one of our bankers to meet with the business owner in their office, with tablet in hand,” says Till.

The emphasis will be on avoiding sprawling branches, relying instead on tech for many routine matters, he adds. Right now the bank has a single location and that is seen as a sales and service center, and the only one necessary.

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