How a Small Iowa Institution Became The Bank Powering Big Fintech Apps

Financial apps keep multiplying. Yet many can't function without riding the rails of traditional institutions, but only a handful of legacy banking institutions fill that role, so far. The LSBX venture of Lincoln Savings Bank is one of the exceptions. They are fueling growth and keeping their roots intact while serving as the back-end for A-list clients like the Square Cash App, Acorns, and other fintechs. This 117-year-old rural agricultural lender has a success story every community banking institution needs to hear.

“Everybody could see something was coming,” banker Mike McCrary modestly states about the early days of the fintech tsunami. Maybe everybody could see it, but only a few banking institutions figured out how to ride this digitally driven wave to success by acting as the back-end banking connection for apps like Chime, Digit, SoFi Money, Qapital, Moven, and many, many more.

Some, like Green Dot Bank and Sallie Mae Bank are relatively well-known. Others like CBW Bank, The Bancorp Bank, and Evolve Bank & Trust are less well-known except in fintech circles.

McCrary’s institution, Lincoln Savings Bank, is right in the thick of this competitive micro-niche, and in a few short years has built an A-list roster of fintech clients: Qapital, Money Lion, Acorns, and the Square Cash App. McCrary, 1st VP, Relationship Manager, was the driving force behind LSBX, the bank’s fintech-support venture.

Coaching Fintechs, Not Just Renting Out a Charter

In simplest terms, LSBX is the “bank of record” behind the fintechs’ banking services. McCrary says LSBX is much more than a routing number rental operation, in which the depository institution takes a very passive role in the relationship.

“We’re very involved in the front end — even in the design-approval stage — making sure that workflows are compliant,” says McCrary. “We’re also in weekly contact with each one of our fintech partners, discussing what they are building next; what’s working and not working; how do we make things better? In a lot of cases we’re coaching them.”

The bank’s technology partner for its LSBX unit is Q2 Software. McCrary says the tech vendor’s CorePro digital banking solution is an open API core platform that has a development layer enabling fintechs to perfect the customer experience design in an environment isolated from the actual account structure.

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Why Be Defensive About Fintech Inroads?

Five years ago, McCrary was thinking about how to grow the bank’s business. He was marketing director at the time and that’s what marketing directors do. McCrary believes in the fundamental strength of community banking — local knowledge, connections and support. But he also knew that any significant growth potential was going to come from something digital.

It was clear even then that banks risk having their traditional business model picked to bits. “We’re seeing pockets of the industry taken away,” says McCrary. “Somebody makes P2P payments simple, cool, and fun, for example. But moving money from one person to another is really core banking.” Digitally opened savings accounts is another example he mentions.

“Each of these little verticals is central to who we are and what we do as a bank — and each is being disrupted,” says McCrary.

“We knew these fintechs would be ‘banks’ one way or another, and we believed we could support them.”
— Mike McCrary, Lincoln Savings

But instead of looking at the all this and reacting defensively, Lincoln Savings Bank’s management saw an opportunity to strike alliances instead.

“We knew there were going to be more and more of these fintechs out there and they would be ‘banks’ one way or another,” McCrary explains, “and we believed we could support them.” Management gave him the leeway to see what he could stir up.

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How LSBX Snagged Big Name Fintechs as Clients

McCrary’s initial explorations led him to Des Moines-based fintech called Social Money (developer of the SmartyPig online savings platform), which, in turn introduced the banker to Swedish fintech Qapital, which became LSBX’s first fintech client. The bank is where Qapital’s goal-based savings accounts are housed. When Q2 acquired Social Money, that in turn led to some additional introductions.

Now, five years in, “we have lots of fintech companies calling us every week,” says McCrary. “When you’re part of a really small pool of people who are doing something, you’re pretty easy to be found.” A lot of what he does now is field these queries and work with different startups, “helping them understand what they need to do in order to be part of what we’re doing.”

Giving an idea of the potential market, fintech lending specialist Cross River Bank — which counts Quicken’s RocketLoans as a client along with Coinbase — last year signed 250 nondisclosure agreements but ended up signing only 14 new fintech partners, as reported by CNBC.

It’s a field with a high body count. As Cross River CEO Gilles Gade told the network, “The platforms get weeded out by the process because of the amount of compliance that we require them to implement — others disappear just because they were denied funding or didn’t have adequate controls.”

Right now, LSBX is only handling deposit products for its fintech clients, but management expects to add additional capabilities as fintechs themselves evolve.

“Initially fintech disruption occurred in very narrow silos,” McCrary observes. The fintechs that survive long term are the ones that add functions. “If their silo is a cool way to save,” he says, “the successful ones will add maybe a cool way to invest, or to budget.” LSBX will add capabilities in concert with that.

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Would OCC Fintech Charter Hurt LSBX?

The Special Purpose National Banking Charter — aka the “Fintech Charter” — offered by the Office of the Comptroller of the Currency is definitely on LSB’s radar. OCC issued a statement in July 2018 saying it would begin accepting applications for the new charter. This was quickly followed by legal challenges from the Conference of State Bank Supervisors and New York’s Department of Financial Services.

The OCC announcement says fintech companies with the new charter “will be supervised like similarly situated national banks.” That and other phrasing indicate a fair amount of flexibility for a fintech bank.

That concerns the folks at LSB as well as others in the banking industry, especially if it results in a “light” version of a national bank charter.

“This is dangerous territory,” McCrary maintains. “Banking is a very unique industry,” he adds. “It often looks easy when you’re only focusing on a narrow timeframe. That’s fine until there is another farm crisis or banking crisis that shakes the industry. Even very established players feel the pain, let alone anybody who’s brand new at it.”

Are Fintech Ventures The Future of Community Banking?

Lincoln Savings Bank is literally the only bank serving some of the rural communities in its footprint and it feels a commitment to continue lending in those communities as well as to support them through development efforts and sponsorships. LSBX helps it to continue to do so.

While McCrary wouldn’t disclose revenue data for the fintech unit, he did say that the “LSBX relationships benefit us on the deposit side of the balance sheet, as a source of low-cost deposits, and also result in additional fee income.” He notes that the fintech-sourced deposits are viewed as brokered funds by regulators, so that the bank utilizes the funds mostly in its bond portfolio to maintain liquidity.

At another bank supporting fintechs, Arkansas-based Evolve Bank & Trust, fintech-driven deposit growth is up dramatically. CNBC reports the bank’s partnerships (including YieldStreet, Empower, and Step) have led to 200% deposit growth with almost no advertising spending.

LSBX operates as a department of the bank. Since the venture’s launch in 2014, the bank’s ROE has climbed from 7.10% at yearend 2013 to 11.9% at yearend 2018. Deposits have doubled over the same time period.

“We weren’t sticking a flag in the ground called LSBX and hoping it would save the bank.”
— Mike McCrary, Lincoln Savings

McCrary says Lincoln Savings Bank’s fintech unit is a distinct line of business, and in and of itself is not a requisite for a successful community banking future. Overall, the venture “has been very complementary to what we do, but not necessary to what we do,” McCrary states. “We weren’t sticking a flag in the ground called LSBX and hoping it would save the bank.” Innovation, however, is essential to banking success, the banker maintains — innovation blended with the traditional strengths of community financial institutions.

Bankers need to think about connecting with customers in different ways, McCrary believes. “Doing things to get people into the branch is a diminishing proposition. We need to think about ‘How do I meet them where they’re at? How do I connect with them digitally?'” Yet that digital innovation must incorporate the particular flavor of the banking provider.

“We can’t all just operate on these generic sort of apps. They have to be a reflection of who we are. We need to make sure they connect with our voice and the character of our communities.”

“There is a lot of room for growth in traditional banking,” McCrary concludes, “as long as people innovate.”

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