Coastal Financial Corp., a $2 billion community banking company in Everett, Washington, was a typical community bank seven years ago. It wasn’t looking to launch a banking-as-a-service (BaaS) division, where the bank would lend out its charter, payment rails and other bank exclusive products and services to third parties.
But that is exactly what the bank did.
When asked if he knew anything about BaaS prior to 2015 – the launch year of Coastal’s BaaS program – CEO Eric Sprink confessed, “Nope – we stumbled into it.”
In 2015, Sprink met Arkadi Kuhlmann, former CEO of ING Direct USA and ING Direct Canada, who was looking for a bank partner to offer banking services on the back end for his financial technology company, Zenbanx. The fintech offered deposit accounts, international currencies and money transfers.
This was the first time Sprink had heard anything about BaaS. He was interested, the board was interested, the executive team of Coastal was interested; so, the bank started an almost 15-month process of engaging investment bankers and consultants, speaking with regulators and preparing to enter into this new line of business.
But then, Coastal lost the bid to do business with Zenbanx to the personal finance giant SoFi Technologies, which later bought the fintech. Six months later, SoFi announced it was shutting down all Zenbanx accounts.
Instead of opting for resignation, Sprink – with the blessing of his board – continued to chase down new technology leads and partners. In the words of one of Sprink’s board members: “‘We’ve got to find out more about this … start running.’”
And Sprink hasn’t stopped running since. Along the way, Coastal recruited multiple new board members – one about every 18 months, and four in total – who have helped build Coastal’s BaaS strategy from the ground up. Sprink explains the process as being, “evolutionary, not revolutionary … We’ve intentionally looked really hard for expertise that we’re lacking in the evolution of our BaaS group.“
That expertise, in part, is coming from its newest members: Stephan Klee; venture capitalist veteran and current CFO of Portage Ventures; Sadhana Akella-Mishra, chief risk officer at alternative core provider Finxact; Rilla Delorier, a former innovation executive at Umpqua Bank and PNC Bank; and Pamela Unger, a former tax manager at PwC, who brings understanding of direct venture capital accounting and oversight.
Coastal is dedicated to partnering with fintechs that are not only unwavering in their mission, but that are compatible with Coastal’s core values: stay flexible, embrace great thinking and be “unbankey,” as Sprink says. In what he describes as their “emotional gating criteria,” the bank sits down – or Zooms in, post-March 2020 – with these fintechs. They want to better understand the business, review their performance and investors, and, most importantly, find out what they want to accomplish. The key is to find partners that will reach and embolden specific communities through financial products and services tailored to their needs.
“We try real hard upfront to make sure we’re picking the ones that best fit us and that have the most likelihood of success,” he says. “With limited resources, you really have to stick to your gating criteria and believe in what you’re trying to accomplish.”
The whole process, from initial discussion to commercial launching, takes upwards of one year to 18 months. As of July, Coastal was working with 24 fintechs, half of them actively offering banking products and services through Coastal.
It takes a lot of effort to get to that stage. Out of the more than 1,100 fintechs vetted, only about 2% became fintech partners.
And in regard to the 12 active fintech partners, Coastal just recently crested the $1 million in revenue mark. Coastal’s BaaS revenue for the quarter ending June of 2021 was $1.4 million, a 50.2% increase from the prior quarter. Included in Coastal’s overall BaaS revenue, the bank reported $110,000 in interchange income for the quarter ending in June, up from $35,000 in the prior quarter. The bank isn’t tracking profitability of the division yet, but plans to break it out next year for analysts and investors.
In a 2020 survey, venture capitalist firm Andreessen Horowitz found that out of those surveyed, half of the BaaS banks were seeing above-industry average rates on their return on assets and equity, calculated from 2017 to 2019. The firm says that these returns are two to three times the average industry rate.
When Bank Director magazine launched a study to determine the top 10 fastest growing U.S. banks in 2020, it found that two of the banks listed are BaaS providers: NBKC Bank, with $1.2 billion in assets, placed at the top of the list, while $4.7 billion Celtic Bank ranked fifth.
A BaaS division could lead a bank to new revenue and deposit sources, growth and access to new customer segments, but it does not have the sole capability to turn a bank profitable. It takes good timing, patience and a healthy bank with curious leaders – a combination that Coastal seems to flourish on.
The bank’s second quarter 2021 investor presentation also reports that 73% of Coastal’s fintech partners are headed by a diverse CEO, those who identify as a minority or female. Eighty-eight percent have a diverse co-founder. Partners include Greenwood, Cheese, Fair, Aspiration and Ellevest, some of which reach underserved communities or offer mission-based banking practices.
“At the end of the day, we’re still a community bank, and we’re trying to give that [community banking] experience to others [who] haven’t had it yet,” Sprink says. “And we’re using partners to deliver it.”