When Citigroup’s CEO, Michael Corbat, discussed the benefits and potential pitfalls of his institution’s announced partnership with Google to provide checking accounts, he acknowledged there is a risk of banks and credit unions becoming “dumb utilities,” operating behind the scenes and losing the customer relationship.
Seven months after word of the Google checking account first came out it has yet to launch. Meanwhile, other bank and credit union partnerships with fintechs are multiplying at a rapid clip. Silicon Valley venture capital firm Andreessen Horowitz identifies more than 30 partner (or sponsor) banks that enable hundreds of fintechs to offer checking accounts, other insured deposit accounts or loan products. Clearly a growing number of financial institutions see more opportunity than risk in working behind the scenes for these smaller fintech players.
Some sponsor-bank examples are well known, such as The Bancorp Bank’s partnership with challenger bank Chime and Celtic Bank’s arrangement with online lender Kabbage. The newest partnership arrived in mid-June when CNBC reported that Amazon and Goldman Sachs announced a deal in which Goldman would provide lines of credit up to $1 million to Amazon merchants using an automated platform.
Far below that high-profile combination is a partnership that, in its own way, may be an important indicator of where banking is headed. Rho Business Banking represents an unusual combination of features including old-school relationship banking, a credit marketplace, a sponsor-bank setup and a sophisticated technology platform.
What sets Rho Banking Apart from Most Challengers
If you haven’t heard of Rho, you’re not alone. The platform launched officially in October 2019 with two co-founders listed: former banker and VC analyst Everett Cook and serial entrepreneur Alex Wheldon. As described on its site, “Banking services are provided by Evolve Bank & Trust.” Evolve is a Memphis-based bank with assets of about $500 million that, in addition to traditional banking services, offers specialized payment processing solutions to fintechs.
“Rho” is a letter in the Greek alphabet and in finance is used to designate how interest changes the value of an option. “It’s a metaphor for how we help improve our clients’ trajectories,” a spokesperson says.
In an interview with The Financial Brand, Cook, CEO, describes Rho Business Banking as a “modern commercial banking platform” rather than a challenger bank. If that makes it sound like nCino or one of the other providers of digital banking platforms, it’s not. While the core of the company is an advanced banking platform, it is for the use of its small business customers. Further, Rho offers FDIC-insured deposits and loans through a network of partner financial institutions.
Cook says the fintech has a structure similar to that of Chime, Varo Money and other challenger banks, but focuses on providing digital banking services to high-growth startup companies — modern companies used to dealing with sophisticated technology — a segment Cook and Wheldon believe are not well served by traditional financial institutions.
What makes Rho Banking unusual as a fintech is that it blends sophisticated digital banking with personal service. For example, each customer is assigned a relationship manager, experienced people hired away from banks. Sometimes these relationship managers make in-person visits, but Cook says the majority of their client interactions are by Zoom or phone and that the company is not geographically limited.
Some of the advanced digital solutions Rho has built include a suite of tools to assist small businesses to manage expenses, payables and receivables. API integrations to Quickbooks, Slack and other workflow automation software are part of the platform. Further, companies can apply for a full-service business bank account “in minutes,” as stated on the company’s website. At present, prospects have to contact a Rho banker to begin the process because the company is still in a closed beta, and is only admitting customers that fit its criteria.
Rho also offers Team Accounts that let companies track and categorize expenses on a real-time, cash-flow basis, not a GAAP accounting basis. “Teams can be actual people, a line item on a budget, or a couple of large client accounts,” Cook told Tearsheet. Team Cards (virtual or physical) can be attached to each team, allowing funds flow straight through to the team account. There is a 1% cashback reward feature on these corporate cards.
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Credit Function Becomes a Timely Addition
The company did not offer credit products when it first launched. These were rolled out in January 2020 after Rho had established working relationships with several SBA lenders. In addition, the fintech brought on board an experienced private credit professional who assists small business customers to access capital from a variety of places.
“He is our client’s ally,” Cook states. “He goes out to the market and helps them find the right types of credit for their businesses.”
That could be a $3 million receivable line or $7 million for acquisition financing, for example. Cook and his team built a network of banks and other partners they can go out to for client credit needs.
“Trying to be the best lender in every category is a recipe for disaster. So we decided very early that it made sense for us to adopt a partnership model.”
— Everett Cook, Rho Business Banking
“Lending is a highly specialized activity,” says Cook. “Trying to be the best lender in every category is a recipe for disaster. And so we decided very early that it made sense for us to adopt a partnership model with specialized lenders, whether they’re banks or nonbanks.”
Their approach and timing proved to be excellent. When the Paycheck Protection Program was rolled out in a rush in early April, some traditional institutions struggled initially. Rho circled its team to focus on PPP loans and connected small businesses — both new and existing clients — with the lenders it had established connections with. This resulted in an 80% increase in new clients since the end of March, according to Cook, many of them bigger companies than the fintech had been dealing with previously.
Cook states that balance sheet lending is a possibility going forward. But for now Rho’s attitude is pragmatic.
“We want our customers to be able to have the best of everything and the only way you can do that is by being their ally and by partnering to help them navigate their world,” says Cook. He also points out that despite their recent success in lining up credit for clients, most of the Rho Business Banking team is dedicated to building tools and products to help SMBs manage their day-to-day finances.
As reported in another story on The Financial Brand, some venture capital firms have pulled back on fintech funding. Cook states that Rho has not faced that situation and still has strong investor interest. (Inspired Capital led Rho’s seed round.)
“We’re growing and we think this space is very ripe for disruption,” says Cook referring to SMB banking. He believes too that the company’s hybrid approach to the market — combining a technology platform with experienced business bankers — makes a difference.
Rho doesn’t charge direct fees to customers — the only fee listed on the website is for international wire transfers. Instead, they generate revenue from interchange and what it earns for the deposits it “bundles” for bank partners, according to Cook. He says it’s not hard to add new revenue streams as long as they add value. “The hardest thing to build is customer trust and loyalty along with a great product that they’re happy to use day in and day out.”
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Significance to Banking’s Future
Circling back to the opening point about banks and credit unions ending up as “dumb utilities,” there is more than one perspective on that. Fintech sponsor institutions, like Evolve Bank, can do well providing the access to insured deposits and compliance and balance sheet expertise that most fintechs lack. Andreessen Horowitz notes that sponsor banks have a return on equity two to three times higher than the industry average in some cases.
Everett Cook’s take is that the sponsor-banking model, though not new at this point, is still game changing. “Part of the reason we started this company was because we recognized that the power of this structure is that it allows banks to focus on what they’re good at — like managing the balance sheet — and allows companies like us to focus on what we are like exceptional at — building great technology and delivering great value to our customers and excellent service.”
For the financial institutions that realize they are never going to be the best at technology, this “division of labor” makes sense, Cook believes. Nobody can do everything.”
Whether that type of arrangement “makes sense” to many banks and credit unions is an open question. But a growing number of institutions are willing to explore the possibilities of working with an entity like Rho Business Banking, especially if it doesn’t impinge on local relationships.