First Internet Bank is doubling down on banking as a service.
It’s something the Fishers, Indiana, community bank has been doing on a limited basis for years — backing fintechs by handling tasks only a regulated institution is permitted to offer, such as Federal Deposit Insurance Corp.-insured deposits and checking accounts. The bank recently began working with a technology company, Synctera, to automate the process of connecting with fintechs and managing the flows of transactions and data back and forth through application programming interfaces.
In this effort, the $4.4 billion-asset First Internet 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, about 40 U.S. banks — including Cross River Bank in Fort Lee, New Jersey, The Bancorp Bank in Wilmington, Delaware, and Evolve Bank & Trust in Memphis, Tennessee — offer banking-as-a-service partnerships. That leaves ample opportunity for other banks, and many are eager to get into this business, to grow revenue and lower customer acquisition costs. (The fintechs do the work of finding and signing up new customers.) Analysts at CCG Catalyst predict 110 banks will offer banking as a service in 2030.
“There hasn’t been a week in the last year when banking as a service hasn’t come up in conversation for me,” Kate Drew, director of research for CCG Catalyst, wrote in a
In an interview, David Becker, First Internet Bank’s CEO, shared some of his past experiences as a banking-as-a-service provider, how he chooses the fintechs the bank will work with and how he’s building out the infrastructure to support this line of business. The bank will also continue to serve consumers directly and it’s in the midst of a proposed
What made you decide to get into the business of banking as a service?
DAVID BECKER: I consider us to be one of the first fintech companies in the country, because I came out of tech in 1999 and started a bank. We've been doing banking as a service since long before it was called banking as a service. Fifteen years ago, we built 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 for which we provided real-time payments like Uber is trying to do [with] their drivers.
Scott Jones, a friend of mine, started ChaCha. The company hired people to assist with search inquiries before Siri came along. He had about 20,000 people across the country as 1099 employees. His pitch to college students was: you're hungry, you want a pizza. Order your pizza, jump online, do 45 minutes of search work, and by the time the pizza gets there, you can be paid and have the money to pay for dinner.
First Internet Bank also works with ApplePie, an online lender to franchise businesses. So we've been dabbling in the field, but during COVID we took the opportunity to revamp a lot of our internal technologies and build out that platform even deeper.
How will the partnership with Synctera help?
Synctera ties fintechs to the banking rails. Most fintechs are fairly one dimensional: they're a deposit originator, they're a loan originator, they're moving money from point A to point B. So the full suite of software products we use every day is overkill. Peter [Hazlehurst, Synctera’s CEO] and his team can segment silos of products, so that makes it simple. And then from our side, it's just a connection. We had to build all that stuff out prior. Synctera has a lot of things that are plug and play, and that enables us to get to market much, much faster.
What advice would you give to a bank that is interested in getting into banking as a service?
It's a change of process, particularly for community banks that are not used to dealing with people outside of their [geographic] market. That changes the whole dynamics of the identity of a customer and how they deal with the know-your-customer, Bank Secrecy Act and other compliance requirements. The community bank stepping into this for the first time really has to understand the resources it needs to put into compliance. You can't just turn the switch on and it starts running. You've got to do some homework and build some infrastructure.
One of the things I learned 40 years ago in the software world was, make sure you have your infrastructure in place before you release. You get one opportunity to do a good job. If you screw it up coming out of the gate, customers are going to go somewhere else. You don't really get a second chance. So you’ve got to make sure you have all the parts and pieces in order.
One thing that bankers have always worried about working with fintechs is if the fintech does something wrong or something breaks, that the customer will call the bank and expect it to fix it. Is that something that you are concerned about and will you handle customer service for some of these accounts or will that all be the work of the fintech partners?
As a general rule, it goes to the fintech partner first. We're second or third-tier support. If they can't fix it, if they can’t figure it out, ultimately, it's our business reputation at risk. That's why we go through the due diligence that we do. If you’ve got two guys with an idea and they raise a couple hundred thousand dollars, chances are, it's not going to fly for a myriad of reasons. So it's finding the right tech company up front with the right product, the right stability, and proof of market. I've looked at hundreds of business plans and most of them truly are a solution looking for a problem and you're just not going to find it. You have to find someone who is really solving a point of pain. We have invested in some fintech companies and funds, we use a third party to vet companies, so we’re approaching this from a lot of angles.
There have been cases of fintechs
We pursue maybe one in 10 of the opportunities that we see. We're getting pitched virtually every day. Sometimes it's a guy fresh out of his garage with a new idea, looking for a problem to solve. Or they’ve got a working product, they have revenue, now they're ready to launch a national platform. Over the last two or three years, we've kissed a lot of frogs and only found one or two princes. The good part about it is if you get a successful one it can scale very quickly. It does help on the revenue side. There are expenses associated with it, but it’s a good source of noninterest recurring revenue for institutions that build the infrastructure.
You mentioned ApplePie. What was the process like with them? Did you have to spend a lot of time doing your due diligence and having lawyers look through their books and all that kind of thing?
We started talking to them back in January or February of last year and we went live with them in June. They were an established firm, very well run, very well organized, but to get through all the due diligence and contractual issues took us a solid four to five months. We had to review their underwriting, look at it historically, look at how they handle compliance. But it hit the ground running because they were experienced. We were experienced. Between June and year end, we opened about $82 million in new loans. During the month of January, we did almost $20 million. We'll probably do $115 million in new originations this year.
So you are offering business loans through ApplePie. What other products are you thinking about offering through banking as a service?
I'm not supposed to mention names until we have officially signed the agreements. I can give you a couple of use cases, though. One is, we have a company that wants to make sure that at the end of the day their employees are fully paid and taken care of, instead of, you work for X hours and then every two weeks you get a paycheck. They're going after the millennials who want that instant gratification: my money's my money and when my eight-hour shift is over, I get paid. The fintech captures all the wage information, captures all the taxes and withholdings, and gives us an amount that we will then move to Joe's debit card. So when he walks out the door, he can literally go spend that money that evening.
Another group we’re having conversations with works with immigrants who come here on visas to go to school. They graduate, get a job with a company in Silicon Valley, and earn $160,000 a year, but they can't buy a car or rent an apartment. They have no credit profile, they have no background. A fintech that has worked with that community for the last six or seven years has the ability to underwrite unsecured loans, but they're doing things based on school records and this and that. They do check for a FICO score if the person had a cell phone or something that might have given them some kind of credit profile, but they use other parameters to make a decision. They get people established. Our bank could provide the capital to make that loan to the individual and report it, and the customer could build a credit profile. It's a small segment of society from our standpoint. I wouldn't have the resources or means to go after them, but the fintech’s homed in on that group. They find the customers and we provide the service. It's really a nice match.
Do you see First Internet Bank deemphasizing your direct relationships with customers and becoming more of a banking-as-a-service company?
No, not at all. We’ve built a great franchise. We continue to add to the small business department that we opened up two and a half years ago. We did over $100 million in [Small Business Administration] loans last year. We were in the top 25 bank SBA loan originators with SBA. The regular bank itself is doing great.
