Payments Debacle at Small S.C. Bank Shows Risks of Ambitious Tech

A tiny South Carolina bank has learned the hard lesson of countless failed Silicon Valley startups: when you swing for the fences on a transformative new technology, sometimes you strike out.

Almost three years ago, Independence Bancshares in Greenville, S.C., decided to reinvent itself for the digital age. The small community lender, with just around $100 million in assets and a lingering hangover from the recession, would essentially become half bank and half tech startup.

Its bank unit, Independence National Bank, would remain in Greenville, operating its three branches as before. But the holding company would be rechristened nD Bancgroup, managed from New York City, and focused on developing a revolutionary payments system pitched by its new chief executive, Gordon Baird, a former Citigroup executive.

After producing millions of dollars in expenses and virtually no revenue, the payments project was killed last week. Independence’s board shut down the venture and fired Baird, the motor behind the project, as well as all the employees working on it, it said in a Securities and Exchange Commission filing. Lawrence Miller, the CEO of the bank unit, was made interim chief of the holding company.

Independence also said it would reconsider whether to go through with a complicated deal to buy the intellectual property underpinning the payments project from a company called MPIB Holdings, which was founded and owned by the now-fired Baird and another board member. That deal was inked less than six months ago after years in the making but remains under regulatory review.

Baird, Miller, the company’s directors and major investors all declined to comment or did not respond to inquiries. Independence said in a follow-up SEC filing Monday that "after two years and nine months of investing in the development of this business, we have not made enough progress."

It appears that the company’s board made the decision to fire Baird suddenly. Independence mailed out proxy material on Sept. 18 urging shareholders to re-elect Baird to its board; seven days later he was fired, and this week Independence sent revised proxies without mentioning Baird or Alvin Hageman, the board member who had co-founded MPIB Holdings.

Whatever triggered the abrupt split, it is a reminder that investing in tech can be treacherous, particularly for small banks. At a time when community bankers are often told they need to radically re-think their business models to avoid being left behind, Independence is a bank that, in its rush to innovate, appears to have bitten off more than it could chew. 

Many community banks are trying to figure out real-time payments, and some are making important innovations — like tiny Citizens Bank of Weir in Kansas, which created an instant-payments platform that earned it a New York Times profile last December.

Independence had a similar, and similarly ambitious, goal — "shoot-the-moon type stuff," in the words of one payments expert who spoke privately. It wanted trying to create a real-time network for payments that other banks could tap in to, bypassing the Automated Clearing House system.

The effort has been a financial disaster. Since the beginning of 2013, Independence has spent $8.9 million on its digital banking and payments efforts. The business has taken in just $49,930 in revenue, according to SEC filings.

That price tag is puzzlingly high, said Ken Mathis of the consultancy North Highland, who works with community banks that are developing new payments technologies.

"If they spent that much money, they did something wrong," he said.

Independence’s all-in approach is unusual for community banks, which "generally don’t try to hit a home run," Mathis said. "They start slow and make sure it works and that they can handle the risk and compliance first."

There are several possible reasons the board lost faith after sinking so much money into the project. The seven directors collectively own nearly half the company’s stock, and they may simply have tired of losing share value while waiting for the payments business to start making money.

Another possibility is that Baird’s technology started to look less promisingly disruptive now that major players in the banking industry are investing in same-day payments. For instance, the Clearing House, a payments company owned by 24 of the country’s biggest banks, said last year it would build a real-time payments system to be used by the entire financial system; and the Federal Reserve is also collaborating with a broad range of private-sector firms to spur the development of a faster, nationwide payment system.

A third possibility is that Independence’s regulators — who would have had to approve the tech-heavy business model — may had reservations about it.

Some small startups have had success in the payments world — take the money-transfer firm Dwolla or Citizens Bank of Weir — but Independence’s size set the odds against it from the get-go, said Gareth Lodge, an analyst with the consultancy Celent.

The money it managed to raise, while impressive for a small institution, "doesn’t really go far in these kind of projects," he said. "Some large banks will spend more than that on license fees, let alone integration costs."

Birth of the Dream
Independence hired Baird as a consultant in August 2012 to help develop its payments business. Baird had founded MPIB Holdings the year before to develop technology for faster mobile payments, and his plan for the technology involved linking up with a bank to bring it to life, according to SEC filings from the time of his hiring.

Independence signed on, and quickly. A little more than four months after it hired Baird as a consultant, it named him CEO. It also decided to buy his company to get the rights to MPIB's new technology and business strategy, and it planned to pay as much as $7 million, plus up to 7% of the revenue generated by the payments business for seven years, according to SEC filings.

MPIB had no revenue and a deficit of $1 million. Its value to Independence appears to come mainly from its intellectual property, but MPIB "ha[d] not been granted any form of [government] intellectual property protection," Independence said in an SEC filing at the time.

It also owned valuable technology, and the deal Independence ultimately agreed to includes computer software and hardware along with intellectual-property rights.

But it is not apparent from Baird’s resume where he acquired the technological know-how to develop the hardware and software for a new payments system-- he had spent his career in finance, not tech. At Citi he was a director in the global markets division, and he had also worked at State Street, the private-equity firm Thomas H. Lee Partners, where he’d helped recapitalize cash-strapped banks, and had founded a specialty-finance company

Yet Baird managed to persuade outsiders to buy in to his project, literally, and Independence raised $22.6 million in two stock sales since Baird joined the company.

He also brought two heavyweight ex-Citi execs on to the board of directors: Robert Willumstad, formerly Citigroup’s president and chief operating officer and later CEO of AIG, and Hageman, who co-headed Citi’s securitization, mortgage and asset-backed group and had co-founded MPIB.

Willumstad and Hageman both put their money behind the project, investing $1 million and $925,000, respectively, in the first stock sale. Independence's shares have lost about 56% of their value since then; they were trading at 35 cents per share at midafternoon Tuesday.

Signs of Trouble
Some board members appear to have had qualms about Baird’s new direction for Independence. Four months after he was named CEO, a dozen directors stepped down from the board, though several remained on the board of its bank subsidiary. A year later, another director, Sandy McLean, followed them out the door, writing in his resignation letter that he was leaving "due to my disagreement with the strategic direction of the company."

That strategic direction was ambitious, expensive and ultimately, perhaps, quixotic. Baird was developing infrastructure to make instant payments through a mobile phone — what he called "a completely new system for processing payments" in an American Banker interview last year.

As with many new tech offerings, he was hoping for widespread adoption. The idea was not simply to allow Independence’s customers access to faster payments, but to create a system that other finance companies would use.

"We'll let other institutions opt in to this technology, without it being disruptive or having to replace any existing infrastructure they have," he said last year.

The launch seems to have been beset by delays. Baird told American Banker in April 2014 that the real-time payments system would be up and running by that summer; in an interview with a local South Carolina paper this past June, the system was still on its way and had not yet been named.

Independence ultimately launched a payments product, but apparently not on the scale that Baird envisioned. Independence National Bank has an app called "My Payment Hub," but it can only be used by the bank’s own customers.

The project saw some encouraging signs along the way. Independence filed for three mobile banking patents in March 2014, though the patents have not been granted, according to the U.S. Patents and Trademarks Office. Independence also won the Federal Reserve Board’s approval to use a second routing number for the payments project.

Nonetheless, the promise of Baird’s payments technology seems to have gradually dimmed, to judge from the terms of the deal for MPIB.

The sale was finally signed this past April, but nowhere near the $7 million price tag cited two years ago. Independence agreed to buy some of MPIB’s assets for $250,000, with a chance for an additional $1.5 million and an award of 1.5 million shares of stock if the bank meets certain earnings metrics. Three weeks later, the bank also agreed to pay $150,454 to license the assets while waiting for the deal to close.

The Federal Reserve Bank of Richmond has not decided whether to approve the MPIB asset sale, but that may be a moot point with Independence scrapping the payments venture. Nor is it clear what means Independence has to back out of the deals.

The good news for Independence is that its bank, while unprofitable, is losing less money than its payments business. The bank unit lost $303,000 through the first two quarters, according to the Federal Deposit Insurance Corp., far less than the $1.9 million loss of the entire company. It has also has seen its asset quality improve — a possible source of optimism for the investors and employees who remain.