First Internet Bank is doubling down on banking as a service.
It’s something the community bank in Fishers, Indiana has been doing in a limited way for years — supporting fintechs by handling things that only a regulated institution is allowed to offer, such as deposits and accounts. checks insured by the Federal Deposit Insurance Corp. The bank recently started working with a technology company, Synctera, to automate the process of connecting with fintechs and managing two-way transaction and data flows through application programming interfaces.
In this effort, First Internet, with assets of $4.4 billion, is part of a growing trend. While hundreds of fintech startups seek to provide financial products without having to obtain a bank charter or deposit insurance, around 40 US banks – including Cross River Bank in Fort Lee, New Jersey, The Bancorp Bank in Wilmington, Delaware, and Evolve Bank & Trust in Memphis, Tennessee – offers banking-as-a-service partnerships. This leaves plenty of opportunities for other banks, and many are eager to get into this space, increase revenue and reduce customer acquisition costs. (Fintechs do the work of finding and signing up new customers.) CCG Catalyst analysts predict that 110 banks will offer banking as a service in 2030.
“There hasn’t been a week in the past year that banking as a service hasn’t been in the conversation for me,” wrote Kate Drew, director of research for CCG Analyst, in a recent report.
In an interview, David Becker, CEO of First Internet Bank, shared some of his past experiences as a banking service provider, how he chooses which fintechs the bank will work with, and how he builds the infrastructure to support this line. work. The bank will also continue to serve consumers directly and is in the midst of a project merger with First Century Bancorp, based in Gainesville, Georgia, which is expected to close in the first quarter.
What made you decide to go into banking as a service?
DAVID BECKER: I consider us one of the first fintech companies in the country, because I left tech in 1999 and started a bank. We’ve been banking as a service long before it was called banking as a service. Fifteen years ago, we created the first online check payment service for the State of Indiana, for its Department of Revenue to collect taxes and license fees online. And once upon a time there was a search engine called ChaCha that we provided real-time payments for like Uber is trying to do [with] their drivers.
Scott Jones, a friend of mine, started ChaCha. The company hired people to help with search requests before Siri arrived. It had about 20,000 people across the country as 1099 employees. His speech to the students was: you’re hungry, you want pizza. Order your pizza, hop online, do 45 minutes of research work, and by the time the pizza arrives you can get paid and have the cash to pay for dinner.
First Internet Bank also works with ApplePie, an online lender for franchise businesses. So we fumbled around in the field, but during COVID we took the opportunity to revamp a lot of our internal technologies and grow this platform even deeper.
How will partnering with Synctera help you?
Synctera connects fintechs to banking rails. Most fintechs are pretty one-dimensional: they originate deposits, they originate loans, they move money from point A to point B. So the full suite of software products that we use every day is exaggerated. rock [Hazlehurst, Synctera’s CEO] and his team can segment product silos, which simplifies things. And then on our side, it’s just a connection. We had to build all of this before. Synctera has a lot of stuff out of the box, which gets us to market much, much faster.
What advice would you give to a bank looking to get into banking as a service?
It’s a process change, especially for community banks that aren’t used to dealing with people outside their [geographic] Marlet. This changes the whole dynamic of a customer’s identity and how they deal with know-your-customer, bank secrecy law, and other compliance requirements. The community bank entering for the first time really needs to understand the resources it needs to achieve compliance. You can’t just turn on the switch and it starts working. You need to do your homework and build infrastructure.
One of the things I learned 40 years ago in the software world was to make sure your infrastructure is in place before you release. You get an opportunity to do good work. If you get the wrong way out of the door, customers will go elsewhere. You don’t really get a second chance. So you need to make sure that all parts and pieces are in order.
One thing that bankers have always feared about working with fintechs is that if the fintech does something wrong or something breaks, the customer will call the bank and expect them to fix it. Is this something you are concerned about and will you be handling customer service for some of these accounts or will this all be the work of fintech partners?
Typically, it goes to the fintech partner first. We are second or third level support. If they can’t fix it, if they can’t figure it out, ultimately our company’s reputation is at risk. That’s why we do our due diligence. If you have two guys with an idea and they raise a few hundred thousand dollars, chances are it won’t work for a myriad of reasons. So it’s all about finding the right tech company with the right product, stability, and market proof. I’ve reviewed hundreds of business plans and most of them are really a solution looking for a problem and you’re just not going to find it. You need to find someone who really solves a problem. We have invested in fintech companies and funds, we use a third party to vet companies, so we approach this from many angles.
There have been cases of fintechs who encountered financial and legal problems, which meant some liability and reputational risk for their banking partners.
We chase maybe one in 10 opportunities that we see. We are launched almost every day. Sometimes it’s a guy fresh out of his garage with a new idea, looking for a problem to solve. Or they have a working product, they have revenue, now they are ready to launch a national platform. In the past two or three years we’ve kissed a lot of frogs and only found one or two princes. The good part about this is that if you get a successful one, it can scale very quickly. This helps on the revenue side. There are expenses associated with it, but it is a good source of non-interest recurring revenue for the institutions building the infrastructure.
You mentioned ApplePie. How was the process with them? Did you have to spend a lot of time doing your due diligence and having lawyers go through their books and all that kind of stuff?
We started talking to them in January or February of last year and went to live with them in June. It was an established company, very well managed, very well organized, but it took us four to five months to sort out all the due diligence and contract issues. We had to review their underwriting, look at it historically, see how they handle compliance. But it hit the ground running because they were experienced. We were experienced. Between June and the end of the year, we opened approximately $82 million in new loans. During the month of January, we made almost 20 million dollars. We will probably make $115 million in new creations this year.
So you offer business loans through ApplePie. What other products do you plan to offer through the bank as a service?
I’m not supposed to name any names until we officially sign the agreements. I can, however, give you a few use cases. The first is that we have a company that wants to make sure that at the end of the day their employees are fully paid and supported, instead of working for X hours and then every two weeks you get a paycheck . They go after millennials who want that instant gratification: my money is my money and when my eight-hour shift is over, I get paid. The fintech captures all payroll information, captures all taxes and withholdings, and gives us an amount that we then transfer to Joe’s debit card. So when he walks through the door, he can literally go spend that money that night.
Another group we have conversations with works with immigrants who come here on visas to go to school. They graduate, get a job at a Silicon Valley company, and make $160,000 a year, but they can’t buy a car or rent an apartment. They have no credit profile, they have no experience. A fintech that has worked with this community for the past six or seven years has the ability to take out unsecured loans, but they do things based on school records and this and that. They check a FICO score if the person had a cell phone or something that might have given them some sort of credit profile, but they use other metrics to make a decision. They establish people. Our bank could provide the capital necessary to make this loan to the individual and declare it, and the customer could establish a credit profile. It’s a small segment of society from our perspective. I wouldn’t have the resources or the wherewithal to pursue them, but fintech has focused on this group. They find the customers and we provide the service. It’s really a good game.
Do you see First Internet Bank reducing the importance of your direct customer relationships and becoming more of a banking company as a service?
Not at all. We have built a great franchise. We continue to expand the small business department that we opened two and a half years ago. We’ve made over $100 million in [Small Business Administration] loans last year. We were in the top 25 SBA bank loan originators with SBA. Ordinary banking itself is doing well.