Forget M&A: KeyBank counts on medical niche to drive growth

Unlike some regional banks, KeyCorp isn’t hunting for a good, old-fashioned bank merger to drive growth.

Instead, the Cleveland parent of KeyBank is taking a less flashy, more methodical approach that involves building a niche digital bank from scratch that targets doctors and dentists.

A big step in that direction came last week with the launch of Laurel Road for Doctors, a digital bank for physicians and dentists that offers products and services geared toward health care professionals. This push to attract such a high-earning, low-risk clientele is among a series of moves the company has made in recent years in its efforts to build a national consumer bank.

If the approach works, KeyBank could reap benefits similar to what it might gain from a traditional bank acquisition — increased market share, deeper customer relationships and improved profitability, said Jamie Warder, KeyBank’s head of digital banking. And it would do so without the cost of adding and maintaining more branches and the headaches that often come with integrating another bank.

“It’s about picking our spots and, in those spots, being very, very good,” he said.

The $170.3 billion-asset KeyBank hasn’t bought a bank since 2016 when it acquired First Niagara Financial Group in Buffalo, N.Y., for $3.7 billion. Instead, it’s been buying ancillary businesses such as the 2018 acquisition of a small business software platform created by Bolstr, the 2019 purchase of digital lending platform Laurel Road and, just last month, the acquisition of AQN Strategies, a data and analytics startup based in McLean, Va.

Laurel Road has contributed to a nearly 20% increase in KeyBank’s consumer loan book over the past two years, company filings show. Most of the activity is in student loan refinancing.

The niche strategy stands out at a time when peers such as PNC Financial Services Group, M&T Bank and Huntington Bancshares are turning to traditional bank M&A to help boost market share.

Its approach may also become more commonplace as banks try to differentiate themselves in a crowded industry, said Steve Williams, president and partner of Cornerstone Advisors, a financial services consulting firm. In addition, the pandemic sped up the transition to digital banking, making it necessary for banks to improve digital offerings while also finding ways to build and deepen relationships, he said.

“The new community in the virtual world is the niche, and that can be industry or lifestyle segments,” Williams said. “So I think this is another trend in the air, that folks are looking to digital to serve specific segments and personas and do it very well.”

And when banks are successful at niche banking, they focus resources on certain customers and “try to cut through the plain vanilla noise of unlimited banking choices,” he added.

KeyBank’s pursuit of medical professionals goes back a few years. In 2017, KeyBanc Capital Markets, the corporate and investment banking unit of KeyCorp, acquired Cain Brothers, a New York City-based boutique investment bank that focuses on the health care industry.

But it was the acquisition of Laurel Road that set the stage for a digital bank focused on health care workers. For the past two years, KeyBank through Laurel Road has provided school loans to medical students, student loan refinancing and personal loans and mortgages to doctors and dentists.

In 2020, the company refinanced $2.3 billion in student loans through Laurel Road, filings show. By the end of the year, the acquisition had netted 33,000 new households for KeyBank, the company said.

Meanwhile, KeyBank has been “working secretly behind the scenes” to build special banking products by tapping into Laurel Road’s brand and software engineering capabilities, Warder said.

The result: a digital bank that offers a credit card that pays 2% cash back to pay down student loans, a new savings account for those who refinance student loans and a high yield savings account with no minimum balance that pays 10 times the national average annual percentage yield.

KeyBank expects to add personal checking accounts later this year and expand the customer base next year to include nurses, therapists and other health care professionals, Warder said. Afterward, physician practice financing, equipment loans and accounting management services will be added.

“We will build out everything a doctor needs from a consumer to business banking perspective,” he said.

The relationship-driven focus is playing out in other areas of KeyBank’s business. Last fall, Chairman and CEO Chris Gorman said the company would exit indirect automobile lending, which tends to involve one-off loans that usually don’t lead to deeper relationships, and invest in mortgages and Laurel Road.

“If you’re in an indirect business, just by definition, it can’t be a relationship product,” Gorman said.

While the Laurel Road deal initially raised questions from some investors and analysts, it’s turned out to be a good play for KeyBank, according to Peter Winter, an analyst at Wedbush Securities. Not only did it diversify the bank’s lending portfolio, it boosted margins without compromising credit quality and helped accelerate its digital expansion, he said.

“This acquisition has been a home run for them,” he said.

There are no immediate plans to target another customer segment this way, Warder said. But if the time comes, the company could leverage its existing capabilities for another industry.

“I think we have strategic options, but the real focus now will be health care, I think, for the next several years,” he said.