The Digital Bank Growing Like Crazy (& Earning Record Profits)

In a world in love with the 'next shiny object,' early innovators tend to be quickly forgotten. First Internet Bank was a digital banking pioneer 22 years ago. It now has assets of $4.2 billion, operates as a full-service bank completely online, and is earning record profits. Its success provides insights for both traditional and challenger banks.

It’s possible that First Internet Bank — despite lacking a hip name like Chime or Revolut — may provide a glimpse at what the fast-moving digital banking world will look like in a decade or so.

If you have no clue who First Internet Bank is, it might be because you were too young to be in banking when this de novo internet bank launched. (Or perhaps you’ve simply forgotten about them.)

In our over-hyped world, very few things stay top of mind past a few months, much less 22 years. Yet First Internet Bank was the original U.S. challenger bank. It launched completely online in 1999, the brainchild of a man who built core systems for credit unions.

Two decades later, this pioneering institution has proven that not only can a digital bank grow rapidly, but it can be profitable, something very few challenger banks have achieved. Some are profitable on an operating basis, but FirstIB, a public company and a fully regulated financial institution, set record earnings in the second two quarters of 2020 and for the year as a whole.

“For 22 years digital has been ingrained in our DNA. While other folks have been trying to create that capability, we’ve been refining it.”
— David Becker, First Internet Bank

David Becker, founder and CEO of First Internet Bank understands media attention. “We were the darling of the media for our first three or four years” he says. “Then as more and more banks got into online banking, we kind of became old hat.”

It took 17 years to reach their first billion in assets — an eternity by today’s standards — but over the last five years FirstIB has been growing at 25% to 30% a year, not counting 2020, when it deliberately slowed loan growth. Even so, it reached $4.2 billion in assets by the end of 2020.

The Secret of Challenger Bank Profitability? Be a Bank

Operating below the fintech radar hasn’t hurt FirstIB, but Becker admits to becoming frustrated by the attention — and valuations — the investment community gives to “all the new shiny objects out there,” such as Aspiration, Varo and Chime, among others. As he tells The Financial Brand he feels like saying, “Hey, guys, we’ve been doing this for 22 years, and we’re not just providing a single-dimension service. We’re truly a full-service community bank.”

FirstIB has been a bank right along and has developed both sides of the balance sheet. Accenture’s Alan McIntyre, Senior Managing Director, Banking, has observed that many of the challenger bank models will struggle to be profitable living primarily off debit card interchange. “Ultimately these guys will either need huge scale at relatively low margins or they’ll have to build more of a traditional balance sheet model,” he says. While some are beginning to do this, FirstIB is way ahead. As of yearend 2020 it had $3 billion in loans booked.

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The Difference That Keeps on Giving

Becker says that operating a online-only bank, that’s traditional in most other respects, continues to provide three distinct advantages.

First, their lower cost to operate allows them to profitably offer deposit rates near the top nationally, primarily for money market deposits and CDs.

Second, it give them a national lending footprint, which with mortgages and SBA loans in particular, is a big advantage.

Third, they don’t need to digitally transform like a traditional financial institution, nor do they need to learn to deal with compliance issues like a fintech.

“For 22 years digital has been ingrained in our DNA,” says Becker. “While other folks have been trying to create that capability, we’ve been refining it.” Their digital-first foundation allows them to pivot quickly, ramping up new software solutions to meet fast changing conditions.

Key Insight:

With bank technology, nothing’s set in stone. First Internet Bank’s account opening system is just two years old, and working great, but they’re already looking to see if there’s a better mousetrap.

Why a Digital Bank Says No to Chatbots

A popular theme in retail banking now is the need to humanize the digital tools banks and credit unions have embraced. It’s an issue that goes back to the first installations of ATMs but has come to a head in the major uptake in mobile and online banking after the beginning of the pandemic. Often the solution has been to double down on technology in the form of artificial intelligence to enable more personalized interactions.

Becker doesn’t quite see it that way, which may seem odd for the head of an online-only institution. But from the beginning his focus has always been putting the customer at the center of any decision. He’s all for self-service, but if a consumer is uncomfortable about something, or has a problem that goes beyond an FAQ, Becker wants them to be able to easily reach a knowledgeable human.

“In my mind, the only real product we have is service. And to me that needs to be a human and not a machine.”

On the FirstIB website, if you click on “Contact Us,” not only will you see general phone numbers and an email address along with days and hours of availability, but also two buttons: “Relationship Managers” and “Loan Officers.” Click on either these and you’ll see photos of each person with their name, direct phone line and email. If the photo is “grayed out,” it will be show either “Currently unavailable” or “Helping a customer.” If the photo is clear, a customer can chat, call or email.

These folks are trained and backed up with data so that 93% of the time they can answer the question on the first contact, according to Becker.

What about chatbots or virtual assistants? Not at First Internet Bank.

“I still like the human play,” Becker states. “In my mind, the only real product we have is service. And to me that needs to be a human and not a machine. So we automate the mundane tasks, using AI and machine learning in the back office for things like spreading data and looking at files for BSA issues.”

This human/digital balance has been particularly helpful with the bank’s booming mortgage business. Becker says the bank’s customer base skews male with an average age of about 30. Many of these Millennials took out their first mortgage in the second half of 2020 and they had many questions.

“If you don’t have the human component, they get confused,” the CEO states.

Word to the Wise:

Watch your ratings on Yelp religiously, as First Internet Bank does, along with other social media. It’s where you find out what’s not working. Always respond to bad ratings. Five million people may read it.

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Competitors FirstIB Does and Doesn’t Worry About

As noted at the beginning, challenger banks don’t scare Becker and his team, since they’ve been one themselves for years. Neither does Square and similar payment-focused fintechs that are encroaching more and more into traditional banks’ space. In fact, Becker says Square helps FirstIB. “They’re like the venture capital seed finance for small retailers. We’re more like the ‘A’ investor once they’re up and running and need multiple services.”

On the other hand, Ally Bank gives them fits in auto finance. “We can’t touch them,” Becker concedes.

As for the big techs, FirstIB worked with Google for a time as part of a mortgage pricing venture. But as Nicole Lorch, FirstIB’s EVP and Chief Operating Officer, points out, Google is always testing things and can be fickle about getting in and out of markets, as they were with the short-lived mortgage venture.

FirstIB isn’t particularly interested in the Google Plex banking partnership as currently constructed. “It’s really front-ended by Google, not the banks,” says Becker.

The competitors that the online bank pays closest attention to are Apple, Google, Marcus and Capital One Bank. Says Lorch regarding Marcus: “They’re attracting a crowd that’s not unlike our customer.”

Despite that formidable lineup, Becker believes that within five years, FirstIB will be closing in on the $10 billion mark. SBA lending is a big reason why.

As of mid 2019 the bank had not done a single SBA loan, says Becker. By the end of 2020 they were number 40 on the list of 7A producers. “We’re just scratching the surface with SBA lending,” the CEO states. He hopes to rank in the top ten nationally by the third quarter of 2021.

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