The Latest Model of Modern Banking


fintech-1-18-19.pngMost people assume that fintech companies are out to take business away from banks, but what if the opposite is true?

What if, instead of being a threat, fintech companies actually open up new opportunities for banks?

That’s what a handful of banks are exploring right now. They’re doing so by essentially white-labeling deposit insurance, regulatory expertise and access to credit platforms.

You can think of it as a partnership that leverages a fintech company’s strengths on the front end of the customer experience, with attractive and refined digital interfaces, as well as a bank’s strength on the backend, by providing access to safe and secure financial products.

It’s a classic win-win situation.

One bank pursuing this course is TAB Bank, an online bank based in Ogden, Utah, with $711 million in assets.

We came to the conclusion that we would build our strategy around how we think the market will look in two to five years, not how it behaves today,” says Curt Queyrouze, president of TAB. “What we determined was that once consumers try a digital interaction, they stay in that lane.”

Queyrouze has been cultivating this model for years.

The 20-year-old online bank has “sponsored” non-banks before who wanted access to the Visa and MasterCard credit platforms, says Queyrouze. Then TAB began working with marketplace lenders and offering traditional transaction accounts—in other words, white-labeling banking services to its partners.

“To the extent we can be the infrastructure for that cash account that attaches to whatever payment systems are out there, yeah, there’s a lot of benefit to that,” says Queyrouze. “As traditional banks we can hold that money, we can insure it and then we can take that money and turn around as the traditional banking model has always been and lend out that money, (or) use it in other ways to create profitable margin.”

The Bancorp Bank is pursuing a similar course. The $4.4 billion online bank headquartered in Delaware makes it clear what their model is all about: enabling non-bank companies to offer bank-like products.

“Take a close look behind some of the world’s most successful companies: that’s where you’ll find The Bancorp,” the company boasts.

The Bancorp backs Varo Money, for example, a mobile app offering users insured deposits, fee-free ATM withdrawals, interest-bearing savings accounts and personal loans in 21 states. (Varo Money was among the first fintechs to apply for the new national charter offered by the Office of the Comptroller of the Currency last year.)

Yet another bank pursuing a similar strategy is Cross River Bank, a New Jersey-based bank with $1.2 billion in assets.

Getting back to TAB, another epiphany came to Queyrouze in late 2018 at one of the biggest financial services conferences of the year.

Queyrouze thought about all the money being spent to lure new customers by both banks and non-banks.

As Queyrouze saw it, this gave TAB two potential paths to follow.

One would require a massive marketing budget to compete against bigger banks and fintech companies in the competition to acquire customers. The other was to stick to what it knew on the backend—namely, banking—while leveraging the strength of fintech companies on the frontend.

While we do have the option to market against this tide, we also have the opportunity to build a banking infrastructure to align with the fintech world and provide banking services to support their client base,” says Queyrouze.

In short, small banks like TAB don’t have the resources to compete in the digital realm against larger peers. Nor can they pump money into a national marketing blitz to grow their customer base.

But they can stick to what they do just as well as any bank regardless of size—banking—and let fintech partners handle the rest.

How the New FDIC Assessment Proposal Will Impact Your Bank


growth-strategy-8-14-15.pngIn June, the Federal Deposit Insurance Corp. (FDIC) issued a rulemaking that proposes to revise how it calculates deposit insurance assessments for banks with $10 billion in assets or less. Scheduled to become effective upon the FDIC’s reserve ratio for the deposit insurance fund (DIF) reaching a targeted level of 1.15 percent, these proposed rules provide an interesting perspective on the underwriting practices and risk forecasting of the FDIC.

The new rules broadly reflect the lessons of the recent community bank crisis and, in response, attempt to more finely tune deposit insurance assessments to reflect a bank’s risk of future failure. Unlike the current assessment rules, which reflect only the bank’s CAMELS ratings and certain simple financial ratios, the proposed assessment rates reflect the bank’s net income, non-performing loan ratios, OREO ratios, core deposit ratios, one-year asset growth, and a loan mix index. The new assessment rates are subject to caps for CAMELS 1- and 2-rated institutions and subject to floors for those institutions that are not in solid regulatory standing.

While the proposed assessment rates reflect a number of measures of an institution’s health, provisions relating to annual asset growth and loan mix may influence a bank’s focus on certain categories of loans and the growth strategies employed by many community banks in the future. We’ll discuss each of these new assessment categories in turn.

One Year Asset Growth
Under the proposed assessment rules, year-over-year asset growth is subject to a multiplier that would have, all other things being equal, the effect of creating a marginal assessment rate on a bank’s growth. In the supporting materials for the FDIC’s rulemaking, the FDIC indicates that it found a direct correlation between rapid asset growth and bank failures over the last several years. But while organic asset growth is subject to the new assessment rate, asset growth resulting from merger activity or failed bank acquisitions is expressly excluded from the proposed assessment rate. This approach is somewhat counterintuitive in that most bankers would view merger activity as entailing more risk than organic growth or growing through the hiring of new teams of bankers. While the new assessment rate might not be significant enough to impact community bank growth strategies on a wide scale, it may offset some of the added expense of a growth strategy based upon merger and acquisition activity.

Loan Mix Index Component
This component of the assessment model requires a bank to calculate each of its loan categories as a percentage of assets and then to multiply each category by a historical charge-off rate provided by the FDIC. The higher the 15-year historical charge-off rate, as weighted according to the number of banks that failed in each year, the higher the assessment under the proposed rules. Unsurprisingly, the proposed rules assign the highest historical charge-off rate (4.50 percent) to construction and development loans, with the next highest category being commercial and industrial loans at 1.60 percent. Interestingly, the types of loans with the lowest historical charge rates are farm-related, with agricultural land and agriculture business loans each having a 0.24 percent charge-off rate.

While the new loan mix index component is a clear reflection of the impact of recent bank failures on the current assessment rates, it may also create economic obstacles to construction lending, which continues to be performed safely by many community banks nationwide. Despite these positive stories, there is no doubt as to the regulators’ views of construction lending—in conjunction with the new Basel III risk-weights also applicable to certain construction loans, community banks face some downside in continuing to focus on this category of loan.

However, when considering the asset growth and loan index components together, community banks that have a strong pipeline of construction loans may have added incentive to complete an acquisition, particularly of an institution in a rural market. Not only can the acquiring bank continue to grow its assets while incurring a lower assessment rate, it can also favorably adjust its loan mix, particularly if the seller has a concentration of agricultural loans in its portfolio. In general, acquirers have recently focused their acquisition efforts on metro areas with greater growth prospects, but the assessment rules may provide an incentive to alter that focus in the future. In many ways, the proposed assessment rates provide bankers an interesting look “behind the curtain” of the FDIC, as this proposal clearly reflects the FDIC’s current points of regulatory concern and emphasis. And while none of the components of the proposed deposit insurance assessments may have an immediate impact on community banks, some institutions may be able to reap a substantial benefit if they can effectively reflect the new assessment components in their business plan going forward.