Former Radius Bank head Mike Butler, who engineered its sale to LendingClub, is heading up a relaunch of Grasshopper Bank, a young tech-focused institution out of New York City. The bank is broadening its focus under its new leadership with a plan to build out the institution on multiple fronts. Its moves could prove instructive for both new and seasoned banks and credit unions scoping out fresh strategies.
Grasshopper launched in 2019, one of the first new national charters granted by the Comptroller of the Currency in a decade. Originally the bank set out to serve the needs of startup technology companies, and based its operations out of New York City’s “Silicon Alley.”
Grasshopper — the name is a play on “Grace Hopper,” a Navy rear admiral known for computer prowess — began with a focus on tech innovators from the tiniest to those raising their first level of investor funding (typically called “Series A”). The bank was relying on contacts and experience among the venture community.
Butler, now President and CEO at Grasshopper, arrived in mid-2021 and began putting together the skeleton for the buildout and bringing aboard additional talent. Grasshopper finished 2021 still in the red. The closely held bank’s board has heavy investment industry representation. Traditionally bank investors from private equity look for a payout, often via acquisition, in the first five years.
Butler is a veteran banker who nonetheless has an enthusiasm for new business models and for pivoting as market developments demand.
Radius was the result of Butler and his team transforming a troubled union-owned community bank in Boston into a remote-banking powerhouse. The bank parlayed partnerships with associations, heavy use of Google advertising, and early banking as a service relationships into a voracious deposit-gathering machine.
Under Butler Radius deployed all of those deposits into a broad range of assets. In short, Radius was an early example of the potential for a national banking operation operating virtually. Its sale to LendingClub in 2020 turned the marketplace lender into a bank.
Grasshopper may not literally be “Radius 2.0” but Butler and his team, several of whom have roots in the previous bank, will be applying lessons and using models based on that experience.
Butler says the bank will continue serving and pursuing the tech startup market even as it seeks growth. “The lower end of that segment sometimes gets ignored and management felt that the venture and portfolio area of the business community could use digital solutions,” says Butler. “That outreach remains in place.”
What’s underway now he likes to refer to as “Grasshopper 2.0.” Indeed, one of the earmarks of Radius — that geography means little — appears to be part of the changes at Grasshopper. For example, Butler often works remotely. (He was interviewed via video by The Financial Brand while he sat in a Boston-area WeWork.) A key lieutenant from the Radius days, Chris Tremont, is based in North Carolina. Tremont heads Grasshopper’s small business and banking-as-a-service (BaaS) divisions, as well as other functions.
Scooping Out a Bigger Niche for a Niche Bank
While there is overlap between the bank’s original customer base and the base that Butler and his team envision, there will be much new territory.
A broader and deeper small business banking effort is a major thrust of his plan. One offering is mobile-based Innovator Business Checking, tailored to small business owners. The interest-bearing account includes unlimited cashback rewards on its associated Visa debit card, no monthly fee, and unlimited ACH transfers and inbound wires. The account also features digital invoicing and support for automated bookkeeping through either Autobooks or QuickBooks.
A key aspect of the bank’s new offerings is a treasury management solution that Butler says will serve both the bank’s original venture capital companies as well as other small firms that often need such assistance. A commercial real estate lending operation has also been started in an effort to provide this financing in ways appropriate to smaller companies.
Butler is a big believer in Small Business Administration lending and he brought aboard an experienced SBA banker to head up that effort. “We needed more asset-generating businesses than just the segment raising venture capital,” explains Butler. He thinks there will be a natural fit here because not only are existing customers tech oriented, but many new business formations today have a tech focus.
“SBA lending serves the needs of firms that traditionally can’t get loans from banks,” says Butler. The critical nature of government-backed financing was underscored by the Paycheck Protection Program, he says. Much as that program has been somewhat tarnished by fraud issues, he says, “that sector was dying for that financing.”
On the deposit side Radius was heavily a consumer bank, but Butler believes that commercial banking is the next financial services area set for disruption. The process is already underway as Intuit small business banking, Square (owned by Block) small business banking, Mercury (“building banking for startups”), and Rho (“on a mission to take the friction out of finances”) ramp up in small business finance.
Compared to consumer financial services and asset-management services, small business banking — especially digitally — isn’t nearly as overbanked.
Butler says this means Grasshopper can build on its existing base and increase the size of its base at the same time. Attacking pain points has been in Grasshopper’s mission from the beginning.
“If you are a technophile who likes to do business digitally versus in person, you’d be our type of company, no matter whether you are in technology or in manufacturing or some other business.”
— Mike Butler, Grasshopper Bank
Technophiles represent a growing customer population. Says Butler: “When I started at Radius maybe 20% of people wanted to bank digitally. Now it’s probably more like 70%.”
Part of the continuing foray into business banking will hinge on improving customer service. Butler says that small business owners lack time and don’t want to waste it sorting out banking challenges.
“We’re going to make customer service easier for them,” says Butler, adding, optimistically, “but we’re going to make sure first that our products work better so they don’t need customer service.”
He believes focus will help there. “I was a big bank guy and I know what happens to small business in that environment,” he says. “But small business will be #1 for us.”
Technology Is Key to Grasshopper’s Move Into BaaS
Nimble operations will play a critical part in the digital bank’s push into the banking as a service market. Butler has worked to engineer this by revamping the bank’s tech stack.
“We shifted from a build-it model, which is what Grasshopper originally did, to a partnership model like what we deployed at Radius,” he explains. This entails a combination of tech from FIS, Mantl, Narmi, Alloy and others, with Treasury Prime providing APIs (application programming interfaces) that serve both customers as well as banking as a service partners. APIs will be available to small businesses that want to integrate them into their own innovation efforts as well as to BaaS clients.
Slicing the BaaS Pie:
BaaS has grown hotter and hotter as more banks become attracted to it as a line of business. But how far can it go?
How many fintechs want BaaS and how much underlying business potential do they really represent versus the number of banks that want a piece of it?
Butler has a two-part answer to that.
On one hand, he refers to the size of the BaaS market — and the fact that it’s growing. While checking accounts represent the staple of BaaS, to help the fintechs’ services become stickier, he says there’s a growing number and range of other activities fintechs want from banking. That is also helping to grow the number of potential BaaS clients, which was already rising.
However, Butler is an aggressive competitor and he’s about more than just sharing the pie as he drives into this sub-industry.
“Banks have been drawn into it because it sounds good. They are trying it because somebody else did it,” says Butler. But the industry has a history of such surges of interest, followed by shakeouts or exits. Predicts Butler: “When the others pull back, the strong ones remain, who are able to do it.”
Butler’s tech investments and partnerships were made with the intent of building the structure that would make Grasshopper one of the survivors. He’s also seen the benefit of investing in risk management and compliance in this regard.
“Banking as a service is a hard business,” says Butler. “You’ve got to give the BaaS client outstanding response and you also have to face large hurdles on the regulatory side. You have to run a safe and sound shop.”