How a Small Bank’s Big Bet on Digital-Only Paid Off

Little-known TransPecos Financial has built a unique national digital banking brand, BankMD, that's already 'ridiculously successful' in lending to physicians. Insights from the originator of the fast-growing niche brand explain why.

Three years and about $5 million into its goal of creating a national digital-only niche bank, tiny TransPecos Financial has more to show for its efforts than JPMorgan Chase had to show for the millions it poured into Finn, its now-shuttered digital-only bank.

One possible reason for this surprising result is that San Antonio-based TransPecos didn’t attempt to simply replicate its traditional bank operation as a slick digital brand. Instead, it created BankMD, to tap the enormous potential in serving a targeted market — physicians — with a combination of speed and efficiency, yet with features and service highly focused on the market’s unique needs.

While BankMD is still a work in progress (it launched at the beginning of 2019), yet in the words of Founder and President, Moses Luevano, the unit is already “ridiculously successful,” having blown past its goals for years one and two, and being on pace do the same for year three.

Quick Impact:

In a short period, without fanfare, the BankMD digital bank dramatically boosted loans and profits at its community bank parent.

While specific goals and numbers for the BankMD unit are not public, the impact of the digital niche bank strategy is clearly visible in the performance of TransPecos Banks. Net operating income for the $472 million-asset state savings bank for yearend 2020 was $3.8 million, up 240% from $1,108 the year before. Return on assets went from 0.60% to 1.30% during the same period, per FDIC data. Charge-offs were also down for 2020, the data show.

In addition, the bank’s total assets grew 110% from yearend 2018 to the end of 2020. That growth was largely the result of the BankMD operation, according to Luevano, who believes they have barely scratched the surface.

Digital-Only But with a Human Heart

As recounted in an earlier story, Luevano, a 25-year banking veteran who has helped several large Texas banks set up medical lending units, felt there was great potential for a low-cost digital banking platform specifically designed to meet the needs of physicians.

Luevano found an interested partner in San Antonio’s Kennedy Sutherland law firm, which works extensively with community banks. In fact, one of its senior partners owns TransPecos Bank, which serves the West Texas market. They agreed to build a digital bank and brought in Nymbus, a provider of modern core banking systems to supply the necessary technology. (The tech company launched a new unit, Nymbus Labs, to assist banks and credit unions specifically to reach niche segments using one of three options.)

BankMD began operations in January 2019, initially just in Texas. In an interview with The Financial Brand, Luevano says the unit operates nationally now, offering mortgages and personal lines of credit to physicians. In addition, it has begun offering business loans to finance practice startups, equipment, acquisitions and working capital to physicians.

BankMD also has a mobile app and deposit platform operating, but hasn’t aggressively marketed those functions yet because it is still improving the systems. Luevano says a second generation deposit platform should be in place by yearend 2021.

Loan originations are all done digitally — BankMD has no physical presence and only seven full-time equivalent employees. However, the fintech-like operation is not only about technology. For one thing, Luevano states, underwriting physician loans is complex and nuanced, requiring both specialized software and human assistance. That assistance is provided by phone, chat, text and through web questions, the latter using artificial intelligence.

Physicians are a unique customer segment that aren’t just going to use a pure fintech, the executive maintains. “You need to give them a little bit of the ‘traditional juice’ in order to get them to do business with you,” he states. Among its seven employees are former physicians who are now bankers.

Read More: A Hybrid Fintech Startup Foretells Banking’s Future

An Ideal Niche that Others Won’t Go After

The physician market is hardly unknown. So why has BankMD been so successful so quickly? Low cost and a “secret sauce” is Luevano’s answer.

Large banks typically service the physician segment as part of their private client group, Luevano states. They set up nice offices and spend a lot of money to attract this type of customer. “Our acquisition costs are tiny compared to that,” he observes. “We’re building a model that not only is profitable, but has a long-term value that eclipses the typical bank profitability model for this type of customer. We’re picking up the highest value customers at the lowest acquisition costs, and that’s really the ticket for us.”

Key Insight:

Even successful neobanks may struggle to meet the specialized knowledge and features expected by a niche market like doctors.

The beauty of this particular strategy, Luevano believes, is that the big banks won’t copy it, even though they could. “Quite frankly, they don’t need to,” he says. “They already own the world.” Going after doctors or lawyers or similar segments doesn’t move the needle for them, he says.

Community banks, on the other hand, should be doing something like this, says Luevano. But he doesn’t think many will. “It’s outside of their comfort zone,” he maintains. In the case of TransPecos Banks, Luevano notes that Patrick Kennedy and Dub Sutherland, Managing Partner and Partner respectively at the Kennedy Sutherland law firm, understood that the “all things to all people” business model of many community financial institutions needs to change. And they were willing to invest capital to establish BankMD as a way to ensure the bank’s long-term future.

Luevano doesn’t feel that BankMD is insulated from fintech or big tech competition, but he thinks it would be a difficult proposition for most neobanks, such as Chime, to supply the knowledgeable high-touch component that BankMD offers. Even supposing they could do that, they would still need to know where to go to get these physicians, says Luevano.

“The marketing side of what we do — how we get the doctors — is our secret sauce,” the executive states. “We know where to go, so the key thing for us is to make sure we have something really good to give them. And that’s why we continue to improve the process and improve technology.”

Read More: How to Nail the Small Business Banking & Lending Market

What Sets Them Apart

Banks and banking products have become a commodity, Luevano believes. That’s why the TransPecos team sought to create something that stands out from the pack for a specific customer niche. In focus groups, doctors told them: “Show us that you will give us something that other banks don’t.”

BankMD is an online bank, but is more than that. “We’re leveraging good technology and the partnerships that provide it, because you have to have that in the banking world these days, says Luevano. “But our focus is always on the client.”

“Many banks believe that technology is the solution, but it’s often a solution looking for the problem.”

— Moses Luevano, BankMD

“We’re not pretending we know the answers to everything,” Luevano explains, “So we let the physicians guide us as to what solutions. We ask them: ‘Doctor, where are the pain points in your banking process and how can we fix that?’ Sometimes that will be technology. Sometimes it’s process or procedure.”

Either way the solution must be simple and reliable. “That’s why we’re launching one product at a time, because we just want to make sure we’re doing it right,” says Luevano. “In that regard our approach is actually kind of retro.”

What’s Next for BankMD?

Despite having such dramatic early success, BankMD and its parent organization are acting as if the result were just the opposite. They’re upgrading the mobile app and the overall deposit platform to maximize the impact of their digital-only venture.

“It’s a massive, multi-billion market,” says Luevano of the physician niche, “and the way I look at it is we get really one shot at this.”

As they expand, he sees the potential to joint venture with other banks around the country that want to participate in this business. “That’s still part of our model,” Luevano states. “We want this to be a $3 billion business, and we think we can get there, but it may require additional partnerships.”

Eventually, TransPecos believes BankMD can become a global brand. Right now, however, they are concentrating on making the sure their version 2.0 digital deposit and banking platform is as good as Chime has, but adapted to its specialized market.

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