Quontic Bank, a $400 million-asset bank in midtown Manhattan that has been transforming itself into an all-digital institution, says it had a good 2019: Retail deposits grew 261% to $200 million, the number of retail customers doubled (figure undisclosed), and a homegrown data reporting system automated hundreds of hours of manual labor.
Technology was a factor. The new deposits came from online customers all over the country, and the new reporting system helps executives quickly understand the bank’s liquidity position and calculate what rates they should offer to attract the right amount of deposits.
Steven Schnall, a former mortgage bank executive, bought Golden First Bank in 2009 and has been turning it into a digital bank ever since.
The focus is on digital access and digital marketing, and the goal is to beat challenger banks like Chime and Varo Money.
Schnall estimates that the number of digital-first fintechs and traditional banks Quontic competes with will grow from around 25 today to hundreds if not a thousand or more within a year.
“Everybody's starting to see that the rates that you can get online are far superior to the rates you're getting from Wells Fargo, Citi and JPMorgan Chase, and that it's not hard to access those rates,” said Schnall, Quontic's CEO. “In five years, most people will have the bulk of their personal banking online.”
The bank is relying on a few, largely tech-centric, strategies.
Online depositors, high interest rates
Quontic offers an online account called Amplify Interest Checking that pays 2%, which is many times the national average. It also has a money market account that pays an above-market 2.2%.
Other banks with a strong digital presence also offer high interest on savings accounts, including Goldman Sachs, HSBC Direct, Ally Bank, CIT Group, Capital One Financial and MUFG Union Bank's PurePoint Financial.
Some digital challengers also compete on interest rates: T-Mobile Money users earn as much as 4% on balances up to $3,000. Credit Karma, Betterment and Wealthfront all pay more than 2% on savings accounts.
Two factors make it feasible for Quontic to pay more on checking accounts. One is its lack of a branch network, which helps keep costs down. The other is the revenue stream its mortgage business pulls in — the average interest rate in its loan portfolio is around 6%.
“We're lending to underbanked people,” Schnall said. “We're getting paid a slight premium to compensate us for the risk of doing so. Having a 6% gross yield on our assets enables us to pay more than 2% for our deposits or our liabilities and still have nearly a 400-basis-point net interest margin, which by most people's standards is pretty attractive.”
Quontic’s interest rates create a digital marketing life of their own on bank rate sites like NerdWallet, RatePro and Bankrate.
“When you post a top-ranking rate, which ours often is, you don't have to have it posted for too long before the bloggers pick it up,” Schnall said. “And then suddenly the blogosphere will be filled with stories about the highest money market rate in the country, and that will drive a lot of organic traffic at no cost to us.”
The bank is constantly learning the optimal mix of marketing expenditures and deposit rate rankings, he said.
Attracting depositors with high rates comes with obvious risk: Customers that come to a provider for its high interest rate may leave as soon as they find a more attractive rate elsewhere.
“When you offer a high interest rate, that's a great way to get people who may not know who Quontic is to your doorstep, but it takes more than that to keep them as a long-term customer,” said Emmett Higdon, director of digital banking at Javelin Strategy & Research. “That's a real challenge for traditional banks as well as challenger banks.”
Quontic offers some digital banking features that could hold customers’ attention. It has embedded Sensibill’s receipt management technology in its app. The user takes a photo of each receipt, and the software captures the information on the receipt and shares it with customers through mobile banking. This can help them identify the sometimes mysterious items on their monthly checking account statements, track expenses and handle accounting chores.
“You don't see that at very many banks,” Higdon said.
The bank also offers Zelle person-to-person payments, a service available through many large banks but few challenger banks.
The bank is in the process of switching its online account-opening and mobile banking partners; it plans to launch the new versions in March.
“We saw more of an opportunity with these new partners because they had the ability for more customization, more open [application programming interfaces] so that we can more easily attach to other fintechs to add modules and components,” Schnall said. “The big three core providers have good technology, but they don’t enable a small bank like us to be as nimble or as agile as we want to be.”
Quontic is working on a three-minute account-opening process. Many other banks are working on quick, digital account opening.
“It's almost as though we're in an account-opening arms race,” Higdon said. “There are five-minute account openings, four-minute account openings. The customer doesn’t necessarily feel the difference, as long as it’s under a half-hour.”
Mortgages to immigrants and others in low-income areas
Around 65% of the borrowers to whom Quontic Bank makes mortgage loans are immigrants. Others are gig-economy workers.
As a community development financial institution, Quontic is compelled to lend in low-income neighborhoods. Its CDFI designation also means it is exempt from the Dodd-Frank Act’s qualified mortgage and ability-to-repay rules.
Instead of focusing on tax returns, as many lenders do, “we can look at the totality of the customer circumstances and make a lending decision based upon your demonstrated ability to pay your bills, your ability to accumulate a meaningful down payment on a home from gifts from family members,” Schnall said.
In some immigrant families, four to 10 family members contribute towards a down payment that ends up being 40% or 50% of the loan amount.
“If you looked strictly at that borrowing family's tax returns, that doesn't tell the whole picture,” Schnall said. “We know that historically people who have good credit and meaningful skin in the game don't default, and in the rare event that they do, if you have a low enough loan-to-value ratio, the bank is not going to sustain a loss on that loan.”
Real-time data access, reporting
Quontic’s core platform, FIS’s Horizon software, its Encompass mortgage software and its online and mobile banking systems, which it is in the process of upgrading, do not talk to each other. So the bank has built a middleware layer that provides real-time reporting and data access.
“When you're trying to manage to a certain liquidity ratio, capital ratio and cost of funds, and you're out there advertising different deposit products, you need to be able to know in real time, to meet my liquidity requirements tomorrow, next week, next month, next quarter, how much money do I need to bring in?” Schnall said. “What should the composition of those deposits look like? How do I price them, and how do I get a window into this in real time on a day-to-day, minute-to-minute basis?”
The new system, which the bank calls Quontic.works, is a cloud-based database. It connects via API to the core system, the mortgage lending system and digital banking programs and gathers data from all of them. A web- and mobile-enabled user interface lets the bank pull real-time reports or query the data to help with decisions about how to price deposits, achieve liquidity and meet cash needs.
“This middleware is going to enable us to scale the business,” Schnall said.
It saves hundreds of hours of labor each month preparing reports just to update the board for monthly meetings, he said.
“How much time do you have to study and analyze and make decisions on that data if it takes you hours just to generate the data?” Schnall said. “So on the fly, we have access to the most robust information that we could possibly imagine so that we spend more of our time, not just at the executive level but at the manager level, operating the business and making decisions rather than trying to get at information.”
Modern core systems have this kind of real-time reporting built in, observed Stephen Greer, senior analyst at Celent.
For older cores, banks need to either build their own software or turn to business intelligence vendors like SunTec and Zafin that help with decisions like deposit pricing, he said.
All of this, Schnall says, should help Quontic compete with neobanks like Simple, Chime and Aspiration that have bank partners in the background.
“Very few of the neobanks are actually banks,” Schnall said. “That's the gap we're trying to bridge here. And we think 2020 is going to tell a lot about our future.”
