How to Build a Hybrid Digital-First Bank from Scratch

Even with consolidation reducing the ranks of traditional financial institutions, and with neobanks popping up right and left to fill the gaps, there are still seasoned bankers who see big opportunities for a new community bank, if it's built using a different playbook from the usual one. One example opening in Florida may portend the start-up of the future.

The competitive onslaught faced by traditional institutions from megabanks and a slew of digital-only fintechs has left many community financial institutions selling to others. Yet, there are those who still see big opportunities for small banks and relish the challenge.

One example is Florida-based Locality Bank. The de novo (still in organization when this was written) is carving out a space as a new type of contender — a hybrid bank: part traditional, but very much a modern digital-first institution.

“We went out to local business leaders and said, ‘Hey, we’re seeing a lot of you are having a tough time getting financing,'” President and CEO Keith Costello tells The Financial Brand. “Everyone said ‘Yeah, you know, we need another community bank.'”

That’s not surprising considering that in Florida’s Broward County (which includes Fort Lauderdale, where Locality Bank will be based) 11 locally headquartered banks has shrunk to three over the last several years.

“There was a huge decrease in locally headquartered banks, what you would consider a community bank,” Costello says.

In the past, that scenario would spawn many new startups, but earning a bank charter and FDIC insurance just isn’t as common as it used to be. Only a handful of applications have made it through the FDIC recently — with 22 banks earning FDIC insurance in the last two years to date and ten of those were in 2021.

Locality Bank received its initial approval for a state charter in mid-September 2021 and Costello says they anticipate getting their FDIC insurance soon, with hopes to get the bank up and running by mid-December 2021 to serve primarily local businesses.

Read More: How Fintechs Buy, Rent and Fight Their Way Into Bank Charter

What Do They Mean By ‘Hybrid’?

The co-founders wanted to build a truly different community bank, and they did — but not quite as different as initially planned. Costello explains that one of the first things he and his team wanted to get rid of was cash, but that was a no-go. “The regulatory pushback on that one was a little too much to bear. We had to yield to having cash.”

To get regulatory approval, Costello and his team had to match the bank’s strategies to those of a traditional community bank. So, in addition to integrating cash into their plans, they decided to include a small branch network. Despite those concessions, Costello thinks what will ultimately set them apart from other legacy providers is having a fresh tech stack.

“A lot of younger people don’t even know what a community bank is anymore. The concept of it has kind of gotten lost.”

— Keith Costello, Locality Bank

Piloting the backend technology initiatives is Corey LeBlanc — Co-Founder, Chief Operating Officer and Chief Technology Officer at Locality. LeBlanc is no stranger to either technology or the banking industry. Prior to tag-teaming on the new bank with Costello, he worked at Louisiana-based Origin Bank for nearly 14 years as CTO and Chief Digital and Innovation Officer.

“We’re going to be hyper-focused on the communities that we serve and really empower them to be successful, but we’re going to do so with the technology that enables us to adjust on the fly,” LeBlanc explains.

Costello could be referred to as a serial banking entrepreneur, having sat at the helm of at least eight banks prior to starting Locality. He was the CEO of two banks and in leadership positions at six others. His last stint was as President and CEO of First Green Bank, which he sold to SeaCoast Bank. When his non-compete clause ended in October 2020, Costello says he started planning for Locality “the next day.”

Read More: Fintech-Bank Hybrids Are the Future of Banking

Differentiating From Legacy Providers

Locality isn’t a neobank, but its executives know they can’t go about banking the same way it’s been done for the last century. Costello says that he is “afraid that people — a lot of younger people — don’t even know what a community bank is anymore. The concept of it has kind of gotten lost.”

Part of the problem with traditional institutions, LeBlanc explains, is that many of them “don’t want to go through the process of re-engineering — they don’t want to invest in new technology.”

The goal of Locality is for every transaction to originate in its digital native platform. “You’re never going to have to come to us physically to achieve a goal with us,” he maintains.

Locality Bank phone app and card

Costello goes on to explain that they also plan to distinguish Locality from other community banks by offering a wider array of financial services. For instance, as the bank aggregates customer data, businesses can opt to use that data for actionable insights, such as their relative market position. While other institutions just give their customers a dashboard without creating any real value with it, LeBlanc says, Locality will provide usable data plus the capital to help their customers grow.

Like neobanks, Locality also won’t have its own fleet of ATMs. Instead, customers can use the plethora of ATMs already available as part of networks of other financial institutions. Locality will reimburse their customers for any fees.

Still a Role for Physical Banking

Costello and LeBlanc both agree that businesses of all sizes in the Fort Lauderdale area still like to visit a physical branch to talk to their bankers.

LeBlanc says they want Locality to offer relationships to their customers, not just apps — a step that the fintechs are missing. A branch will play a key role in that.

Read More: How One Community Bank is Reinventing Itself for Future Relevance

Costello and LeBlanc relate how, when first scoping out a location for their branch, real estate agents were taking them to old branches.

“We were laughing. It was like going into a time machine, back to the 1950s or something with some of these locations with safety deposit boxes,” LeBlanc says. “We want to do something completely different. Our location is going to be like a co-working space.”

So far, the branch plan will only have one office for the CFO. Otherwise, it will be set up as an open space which will “be rich in resources for entrepreneurs and business owners,” says Costello. “Some people like to wander in and have a cup of coffee and talk to somebody.”

Locality Bank design ideas

A Different Kind of Tech Partnership

As part of their strategy to set the new bank apart from both legacy providers and challenger banks alike, Locality Bank’s executive teams partnered up with bank technology provider Nymbus Labs to design a core banking system completely unique to Locality.

When Costello and LeBlanc started brainstorming ideas for the new bank and researching tech providers, they weren’t sure which company would be best suited for Locality. They knew Nymbus had “good technology, but we didn’t know that they understood banking necessarily,” LeBlanc says. But, when they learned more about the company and their platforms, “they stood out as a provider,” he notes.

“We wanted a partner specifically in this primary banking technology vendor space that was going to have as much skin in the game for our success as we did,” he continues. The result was what LeBlanc calls “a really nice mutually beneficial contract and relationship.”

Nymbus helped build both Locality Bank’s backend and frontend banking systems.

Read More: Chatbots, Live Chat, Video, Virtual Assistants: Which One Wins?

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