Setting up a digital bank brand as an offshoot of a traditional financial institution has resurfaced as a hot idea. Usually it’s a competitive play by big banks. DBS rolled out Digibank in 2016, and Chase launched Finn, its mobile-only bank brand, a year later.
The digital brand strategy — an online “alter ego” — is a way for traditional financial institutions to circumvent cumbersome legacy systems and organizational silos to better compete with online banks like Ally and Marcus or mobile-first challenger banks like Monzo, Varo and dozens of others.
“Over 77% of banking institutions consider their current systems as the biggest roadblock to digital transformation,” notes Backbase in a report.
Even so digital brand can be a tricky proposition. As McKinsey says, banking is defined by conservative corporate cultures, with tremendous internal complexities that need to be addressed. “These include the cannibalization risk to existing businesses and the need to foster a different, more agile culture to enable the incubation and growth of an in-house ‘start-up’,” the consulting giant says.
Nevertheless, a standalone digital brand has appeal as a way to simultaneously differentiate and broaden the reach of traditional financial institutions. So far community banks have been on the sidelines, but a little-noticed move by a small Texas bank may end up being closely watched, and emulated, by other U.S. banking players.
The First Digital-Only Bank For Doctors
“More financial institutions will soon recognize the land grab opportunity to establish a digital-only brand for revenue protection and growth.”
— David Mitchell, President of NYMBUS
A new digital called BankMD illustrates the new realities of banking. It came together with a veritable cocktail of different players: a Texas-based investment bank, a San Antonio law firm with a large community bank practice, a small community bank in West Texas (which is owned by the senior partner of the law firm), and a digital bank technology provider in Florida.
BankMD start as a lending platform, concentrating specifically on mortgage loans for practicing physicians, medical students, and resident physicians. By then end of 2018, BankMD will also be taking deposits, along with a completely mobile account opening solution.
The unique digital banking model is the creation of Moses Luevano, a Texas banking veteran and managing partner of LFIV Group, an investment bank and consulting firm. Luevano discussed the concept with law firm Kennedy Sutherland about partnering to launch BankMD as a digital bank brand under the umbrella of TransPecos Banks, a state savings bank with only $195 million in assets. TransPecos Banks, founded in 1924, continues to serve its traditional West Texas markets through traditional means.
Luevano, who had set up medical lending units at several large banks in Texas, is currently is working at the bank pitching mortgage loans to doctors and their practices.
The technology powering the project comes from NYMBUS, a company offering a digital banking alternative to outdated core legacy systems. The legacy core provider for TransPecos couldn’t provide the kind of mobile-first support the bank wanted, so management reached out to NYMBUS.
TransPecos is outsourcing the infrastructure and support of BankMD entirely to NYMBUS, a move that doesn’t require a total core conversion. Instead, TransPecos is using the tech company’s Smartlaunch product — described as a “full-service and standalone digital brand alternative” — to get BankMD set up as a standalone division within the bank.
David Mitchell, President of NYMBUS, says BankMD represent just the start of a major trend emerging in the banking industry. “More financial institutions will soon recognize the land grab opportunity to establish a digital-only brand for revenue protection and growth,” promises Mitchell.
Community Banks Desperately Need a New Model
“If you’re not scared from all the digital challenges in the market, you’re not paying attention.”
— Dub Sutherland, BankMD Co-Founder
As a banking attorney, William Sutherland gets to see the good and bad among many community banking institutions. He believes that awareness of the need to change has improved greatly over the last two years, but he still cringes at how some executives in the banking industry haven’t caught on yet.
“If you’re not scared from all the digital challenges in the market, you’re not paying attention,” he cautions. This is especially true, he continues, for community banks with multiple locations in the suburbs or similar markets. They should be very concerned, he observes, because non-bank startups are doing a much better job than banks at making life simpler for consumers and small businesses.
Sutherland recounts a conversation with an FDIC examiner at a conference. The regulator said that their biggest concern was not credit quality, but that banks need to reexamine their business model.
A big part of the challenge, says Sutherland, is that most banks are staffed incorrectly. “They’re built to deal with banking of the last 80 years, so they have tellers, loan officers, etc. What they need is a project manager and software developers.”
“Most banks are staffed incorrectly. They’re built to deal with banking of the last 80 years”
— Dub Sutherland, BankMD Co-Founder
He says he got pushback during his stint as TransPecos Banks’ CEO when he hired a “Chief Organizational Development Officer” from a chrome plate manufacturer.
“I love manufacturing,” says Sutherland. “Manufacturers use ‘lean principles’ and measure everything down to the ounce. Banks measure things by quarterly results. That has to change.”
Starting with TransPecos Banks.
Sutherland and Patrick Kennedy, Jr., managing partner of Kennedy Sutherland and the bank’s chairman, realized that the “all-things-to-all-people” model had to change. More innovation and a focus on a niche were two of the things they knew they had to do. Rather than reconstitute the traditional bank — a long process — they chose to create a de novo digital bank brand.
Finding Inspiration in the ‘Single Vertical’ Strategy
Sutherland has long admired the vertical market model used with great success by North Carolina’s Live Oak Bank. The $3.4 billion SBA specialist lends nationally to more than 20 verticals. Among these are funeral homes, self-storage facilities, veterinarians, registered investment advisors, and government contractors. Each vertical is overseen by an expert in that field.
Like Live Oak, BankMD has doctors and other medical experts on staff to provide guidance to medical practice customers, not only in financial matters but also matters like medical record keeping.
For the time being, BankMD will remain focused on Texas, but there are plans to license the BankMD brand to other banks, along with the the business model, digital operations and loan processing platform.
“We’ll eat all we can and sell the rest,” quips Sutherland.
Other banks in Texas and elsewhere may already cater to the medical market. But Sutherland says that BankMD, in the spirit of a mobile-first financial provider, will compete by offering better and more accessible products, including a seamless digital application and quick loan decisions for loans.
Sutherland sees a big opportunity for the mobile deposit side of BankMD.
“Will we be as good as Starling Bank or Monzo?” he wonders. “That’s what we’re aiming for — not the community bank down the street.”
If BankMD works out as planned, Sutherland says TransPecos Banks will roll out other targeted digital brands.