5 market niches banks are reaching with technology

April 22, 2022 8:19 AM

Taking a page from challenger banks’ playbook, traditional banks and credit unions are focusing on niches to stand out in a mass of competitors.

“Brands are normally most effective when they are tied to an affinity,” said Sam Kilmer, fintech practice leader at Cornerstone Advisors. “That doesn’t mean you can’t create value by being generic and serving everyone in a [certain] zip code. But when you create a small enough category that is unique, you own it.”

Some traditional institutions, such as Silicon Valley Bank and City National Bank, are rooted in a niche, such as startup founders for SVB and entertainment-industry professionals for City National. Others, such as KeyCorp in Cleveland and Needham Bank outside of Boston have made more recent plays to capture specific audiences, such as medical professionals in Key’s case or cannabis businesses as with Needham.

Banks are leaning on technology to serve slices of the population. This may involve acquiring or partnering with a fintech company or using software that helps scale up an emerging business. The benefits of catering to a niche may be dominating a budding market, such as cannabis, before it gets too crowded; becoming the go-to expert in a risky sector such as gambling that most other banks avoid; or simply gaining scale without setting up more branches.

“You can get away from geographic limitations and expand virtually without a physical footprint,” said Kilmer.

PwC’s 2021 Digital Banking Consumer Survey agrees. “We believe that, for most banks…pursuing a well-defined customer niche with a relevant offering, without regard to geography, is not only a useful defensive strategy but an opportunity to grow,” it reads.

Here is a closer look at five niches that traditional banks have jumped into, and the ways they are using technology to succeed.

Health care: Recession-proof and high-earning

Banks of all sizes are turning to the booming health care profession, often through fintech acquisitions.

“It’s a large, lucrative and stable market,” said Kilmer. “The players can buy almost everything that banks have,” including wealth management and private banking.

For example, the $186.3 billion-asset KeyBank acquired Laurel Road, which has roots in student loan refinancing, in 2019. It launched Laurel Road as a digital bank for medical professionals in March 2021.

“Doctors feel like banks pay attention to them when they have ‘arrived,’” said Alyssa Schaefer, chief experience officer at Laurel Road, during American Banker’s Digital Banking conference in 2021. “When they are in the thick of training they don’t have a lot of options for credit or mortgage. We are trying to engage them much earlier than other banks.”

Panacea Financial is another digital bank for physicians; it debuted in November 2020. It is a division of Primis Bank, a $3.5 billion-asset institution in Glen Allen, Virginia. Originally the digital bank offered checking and savings accounts and fixed-rate personal loans, but it has since introduced student loan refinancing, practice loans for those starting or acquiring a practice and insurance.

“I think everyone wants doctors as customers, but they haven’t been willing to make unique products for them,” said Michael Jerkins, president and co-founder of Panacea, in a November story.

On the lending side, Fifth Third Bancorp in Cincinnati acquired health care lender Provide in July 2021. In September, Fifth Third noted that new loan volumes were better than expected.

Meanwhile, Zions Bancorp in Salt Lake City is developing a digital mortgage product for dentists, veterinarians, optometrists, physicians and pharmacists who have already taken out business loans.

Home improvement: Capitalizing on a popular trend

A number of banks have acquired or partnered with home improvement-focused lenders to capitalize on consumers’ enthusiasm for renovating their homes. Sometimes these deals were motivated by the fintech lenders’ point-of-sale loan technology.

For example, Goldman Sachs announced it would purchase point-of-sale loan provider GreenSky in September 2021. The deal was expected to give Goldman access to a million customers every year, typically people who own their home and have a high income. The bank chose GreenSky because of its cloud-native technology as well as its merchant network, which include home-improvement companies.

“They've gotten their technology stack to a place where it's more modular than monolithic,” said Stephanie Cohen, global co-head of consumer and wealth management at Goldman in a September interview. “They have spent time making the interaction that happens at the customer's house really seamless.”

Portage Bank, a $40.6 million-asset institution headquartered in Ceylon, Minnesota, underwrote home renovation loans in partnership with the app Plunk as part of a test that ended in September 2021. Plunk helps homeowners figure out the valuation of their home in real time, discern which remodeling projects will deliver the greatest returns and connect with local contractors. In July 2021, it announced its home renovation loan, which lets homeowners borrow up to 75% of their home’s future remodeled value in an all-digital environment. Portage funded the loans while Plunk walked users through remodeling.

“Portage agreed to work with Plunk based on our ability to bring them new customers — and, importantly, be on the front wave of what we both believe is a very big opportunity for home renovation loans,” said David Bluhm, co-founder of Plunk. He said Portage gained both new loans and new customer leads.

Cannabis: A budding business gets a boost from compliance tech

A growing number of banks are banking cannabis businesses. Technology is helping them scale up their efforts and ensure they remain compliant in a regulatory and legal gray area. It also gives them a head start over banks that are waiting for legislation on the federal level.

West Town Bank & Trust, a subsidiary of Integrated Financial Holdings in Raleigh, North Carolina, uses software from RiskScout, a provider of an onboarding and due diligence platform that focuses on high-risk markets. This helps the $411.4 million-asset bank filter prospective customers and conduct intensive know-your-business checks that take negative news and more into account. Lead Bank, in Kansas City, Missouri, turned to Dama Financial, a company that helps banks handle cannabis businesses, for help sourcing customers, initial due diligence and ongoing monitoring.

“There is a very high resource requirement to bank the cannabis industry and we would not be able to do it to this level without partnering with a fintech like Dama,” said Danny Schneider, the Bank Secrecy Act officer at the $738.4 million-asset Lead Bank, in a February interview.

Needham Bank, in Needham, Massachusetts, announced that it would acquire Eastern Bankshares’ cannabis banking operation in early 2022. “As we prepared to enter the cannabis banking business, we took a holistic look at our infrastructure to ensure we were capturing the right information in each channel at account opening,” said Paul Evangelista, director of specialized banking at the $2.9 billion-asset bank.

That meant collaborating with its core data service provider COCC to ensure it was capturing the right data for compliance and monitoring purposes, and bringing on two new technology providers: Shield Compliance to automate customer onboarding and monitoring, and Verafin to monitor transactions and to create currency transaction reports and suspicious activity reports.

Gaming: A risky business with high rewards

Many banks are put off by the compliance demands of banking gamblers. But, like cannabis, it’s an emerging market for financial institutions.

“Gambling and gaming are becoming more mainstream,” said Kilmer. “The people that get in early stand to do very well.”

Lexicon Bank, a $247.1 million-asset bank in Las Vegas, was founded in 2019 by poker enthusiasts. It offers bank accounts and a private concierge service, and accepts customers who have played in at least one World Series of Poker event for its poker accounts.

With their consent, Lexicon gets data about its customers from local casinos, the World Series of Poker and other third parties as part of the know-your-customer process. Lexicon also relies on third-party software to automate its Bank Secrecy Act monitoring. Within that software, the bank uses a proprietary methodology to more efficiently monitor large wires and deposits. The software helps the bank keep an eye out for erratic patterns and higher-risk items for review.

“We wanted to start our gaming initiative with poker players based on our intimate knowledge of the game, and to help serve legitimate business segments that are often otherwise shut out of the banking industry,” said Hilary Nelson, director of operations and compliance at Lexicon Bank.

MVB Bank in Fairmont, West Virginia, caters to the gaming industry in a different way. Its MVB Edge Ventures subsidiary includes Flexia Payments, a digital casino cash-management service, and Grant, digital bank accounts for gaming and cryptocurrency, in its portfolio.

Several technology company acquisitions prepared the $2.8 billion-asset MVB for this specialization: Chartwell Compliance, a specialist in fintech compliance and licensing; Paladin Fraud, which helps companies protect against fraud; and Trabian Technology, a software development firm that creates customized banking systems for commercial customers.

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College students: A door to younger customers burdened by debt

Appealing to prospective students, current students and alumni is one way to draw a younger audience, especially those burdened by debt. When Susan Shields, the president and CEO of The Milford Bank, a $543 million-asset community bank in Milford, Connecticut, was debating ways to hook this demographic, she turned to FutureFuel.io, a company that helps users manage their student debt. The two created a co-branded online portal that helps users build a student debt payoff plan, compare alternative repayment plans and forgiveness programs, and more.

“Student loans is one thing we thought might resonate,” she said in a December interview.

In September 2021, JPMorgan Chase acquired Frank, a college planning platform that targets college students and adult learners.

“We want to build lifelong relationships with our customers,” said Jennifer Piepszak, co-CEO of Chase, in a press release announcing the acquisition. “Frank offers a unique opportunity for deeper engagement with students.”

The Frank website features a guided Free Application for Federal Student Aid application process, curated scholarships and discounted online courses for credit. The website will soon adopt Chase branding.

Michigan State University Federal Credit Union in East Lansing, Michigan, recently announced a digital brand called AlumniFi. It will be built by bank technology provider Nymbus and launch in late 2022 or early 2023.

AlumniFi will operate as a digital-only credit union marketed to alumni of Michigan State University and Oakland University to start. Marketing efforts will later expand to alumni of Michigan colleges and then those from anywhere in the country. The goal is to provide members with high-yield deposit products and loan options that are different from what they can find at traditional institutions, as well as access to embedded fintech partners that promote financial wellness. This includes ChangEd, an app that helps students pay off their student loans early, and savings and donation app Spave.