Grasshopper Bank’s challenge: Designing apps for people who make apps

Transcription below:

Penny Crosman: (00:03)
Welcome to the American Banker podcast, I'm Penny Crosman. Mike Butler is someone who's been on our radar at American Banker for years when he was CEO of Radius Bank. His was one of the first community banks to deeply embrace fintech partnerships. The bank formed a partnership with online investing fintech Aspiration in 2015 to create a checking account for Aspiration customers. It worked with online lending company Prosper Marketplace to offer a new personal loan through the Prosper platform. It paired with Gradifi in 2016 to offer a debit card through which rewards could be used to help pay down student loans. And there were many others including Mantle. A few years ago, Radius Bank was bought by LendingClub. Today, Mike Butler is CEO of Grasshopper Bank, a digital bank for small businesses. And we're going to talk about his new job and the things he's building there and what specifically small businesses want and need from a digital bank. So Mike, welcome.

Mike Butler: (01:05)
Penny, thanks for having me. I always enjoy talking with you and obviously love the subject.

Penny Crosman: (01:11)
Thank you. So what have you seen among your small business customers in the way that they have been handling their businesses and the way they've been handling banking during the pandemic?

Mike Butler: (01:27)
This has been a really kind of fun evolution to watch. I think the pandemic accelerated the utilization of digital virtual banking for consumers and business. It was clearly evident on the consumer side, but when we were in our last year of Radius as a standalone, we had launched an SMB deposit account. And during the pandemic, the activity was vastly different. So PPP started all of it on the business side, really, and companies like Radius and others were able to deliver a digital application process. And for us, the opportunity was also to offer a parallel depository account. And we happened to do about a billion dollars' worth of PPP over that period and about 40% of those clients kept an operating account with us that they opened, they funded their loans through the operating account, which made their life easier. But what we found is that 40% continue to utilize it as their prime.

Mike Butler: (02:45)
And then during that time also, we did a little bit of marketing on the direct to business account, but we had a huge number of people applying for this digital DDA account. And at the peak of the pandemic, we were looking at a thousand businesses applying for the DDA account a month without a lot of marketing. And it just became abundantly clear to us that businesses were also being driven towards a digital solution. And frankly, what we also saw is that the pandemic accelerated it, but the SMB market has not been given, we don't think, a top class financial services digital experience yet. And that's what Grasshopper has set out to do.

Penny Crosman: (03:35)
Now, a thousand new customers a month, did that become a challenge to handle? Or because this is happening digitally and the software took care of it, was it not a challenge?

Mike Butler: (03:50)
Well, it's always a challenge, but trying to solve new customers is a fun challenge. So the onboarding part of it, because it's so technology driven, is not the real business issue. But maybe the customer service side, which is also being done virtually and digitally, has to keep pace. But other than that, this is a fairly seamless experience for our clients and for the client who can work digitally with a bank.

Penny Crosman: (04:19)
And other than PPP, have you made any significant changes to the mobile app or website to accommodate these new users and adjust to this digital-first mode?

Mike Butler: (04:36)
What I referenced was my last time at Radius. But since May, when I joined Grasshopper, we've taken a much different look at our technology platform. We have continued the philosophy of engaging with fintechs to create this Amazon-like experience. And we've also continued the concept of partnering with fintechs as it relates to banking as a service as well. But inside the small business community, you have this what I would call evolution of the type of clients that are engaged in SMB today. And they're different. And they're technology oriented, the people running them are more technology oriented, and therefore the demand for the virtual or digital product has been, you know, pretty strong. So we've realigned our platform to be able to do that. Our offering is going to be launched on March 1st for Grasshopper. It will be a totally digital, depository solution and we'll partner with other fintech firms to help solve the small businesses challenges that they're in day to day. We think there are a lot of opportunities to partner with great fintechs to deliver this great solution.

Penny Crosman: (05:58)
So the initial launch of the Grasshopper app itself will be March 1st.

Mike Butler: (06:03)
Yes.

Penny Crosman: (06:04)
So this is an exciting time for you because you've only got a few weeks.

Mike Butler: (06:09)
Right? Operating inside a digital bank, you realize that you have to put an organization together that's different than a traditional bank and that is filled with some human capital that thinks a bit more like a technology company first versus a bank. We like to say, we've got to add great people who have a technology bias and then can understand banking. I think traditionally you would find that a lot of banks look for people who understand banking first and then try and teach them customer service or technology second. And we've reversed that. So we've added a great number of very talented people. We continue to work with a variety of different partners on the fintech side to deliver it. And we're excited about our launch on March 1st.

Penny Crosman: (07:02)
Can you share the types of things for which you felt you should bring in partners versus developing in house?

Mike Butler: (07:16)
We are definitely a partner shop versus a build shop. Right? It goes back to, name all the fintech companies that are out there that are having great success. We have a partnership with Brex today, for example. So we think they've got a great offering on the credit card side. It's a great company. So we partner with somebody like them to be able to round out our offering. We surely believe that our platform some of the experiences with companies that you've mentioned earlier are able to create a better experience than maybe we could. So we look to that partnership side. So that's how we think giving the client the Amazon experience can go best for both sides.

Penny Crosman: (08:07)
Sure. That makes a lot of sense. And you have people who've been focused on things like account opening or digital lending for years and years. So why not kind of harness that rather than reinventing the wheel?

Mike Butler: (08:21)
Yeah. What we do best is the core checking account and that's our expertise. We think we're best at it. We fully expect that our product will be an award-winning product shortly. And then from there, we start to look around the industry. First we look at our client and we say, okay, what are the client's needs? What's the pain point of our client? Is it accounting software? Is it a purchasing type activity? Where is it that our small business clients have pain? And then how can we surround the checking account with those types of products and services in which our client can find their solutions in one spot?

Penny Crosman: (09:10)
Yeah, that makes sense. And I feel like that's been such a big part of the fintech story is each fintech finds a pain point that's been a problem either for consumers or businesses or banks themselves. And they find a really elegant solution to that problem. And then banks want to partner with them, or they compete with their own [version]. But I think a lot of fintechs look to that pain point solution, that's really how many of them have started and been very successful.

Mike Butler: (09:44)
Yeah. And part of what we like to say is, for whatever it's worth at Grasshopper, one strategy is that it's the customer experience that is most important for us. We try not to chase shiny new objects as much as we do make sure that the core of what small businesses need is satisfied. So when we can get a great checking account under hand in which the account has the features and functionality that a small business is looking for and has delivered virtually then that's great. And then what are the three or four other really big pain points, and then select really good companies that are dedicated to making their product work well for the client and then integrate it well inside our IT experience so that when the small business comes to us, the solution is seamless.

Penny Crosman: (10:42)
We're going to take a quick break. And we're back. So, Mike, you were just talking about the importance of customer experience. Can you share a little bit of how you're looking at that? Like, how do you figure out the right customer experience is, especially for the small business market, and what are sort of the most important elements of that? Is it that it, that it looks good and is easy to navigate? Or that it kind of mirrors the things that a small business owner might do when they go to a branch? What are some of the ways you look at the pieces of customer experience?

Mike Butler: (11:23)
I like to think about things in simpler terms: Time. Friction. That's the word that may be a bit overused today in the industry, but reducing the friction of working with the financial services company for a small business is probably the number one event or experience that we're constantly focused on. We like to say, how many questions do you need to answer? How many clicks do you need to make before you can open up a checking account? And how long can it take you? We've got a product that's going to roll out and you'll be able to have up to four signers on a checking account. It'll take them two minutes and 50 seconds or three minutes to open up a checking account.

Mike Butler: (12:24)
Now that's easy. That's frictionless. And then from there, what kind of access do you have? How does the website operate and how do you navigate it? And does it make sense to you? How can you follow your wires, all these things that you do every day, that's how we look at it. What does a small business do every day, where does it take them time and how can we reduce the friction in that experience. And I think when you can deliver that, people feel like their bank cares and businesses feel like their bank is thinking about them.

Penny Crosman: (13:04)
Right. And if it's easy and quick, then it fits much better into their work lives, . Now, you talk about fast account opening, and I know you and I have spoken about this before, but you of you of course have to always be cognizant of the potential for fraud and for synthetic identities to be used in opening new accounts. The PPP program itself was subject to a tremendous amount on fraud. Can you say anything about the importance of that and how you are trying to take that into account?

Mike Butler: (13:45)
You just hit on what I think is underestimated, the amount of fraud. It's really simple, we've talked about it before, but if you're going to commit fraud, are you going to walk in a branch to do it, or are you going to do it behind your computer? So that's the first thing that happens. I've committed since I began my efforts to deliver clients a digital solution, I have put risk management at the forefront of everything. And I would tell you, again, it's another partnership type approach that we've taken in which we've gone out and we stack a variety of different kind fraud-related products in the process of onboarding a client, not just one, but multiple technologies. Think about the client going through a series of filters before it gets to the point where they're getting an account open. We're constantly monitoring the effectiveness of those kind of technologies as it relates to the end fraud result.

Mike Butler: (14:58)
And it's as important as the client experience. If we end up allowing fraudulent clients to come in the organization, it's not going to be a long time that we're in business. So we spend a lot of time there. There are a number of really great companies out there that focus on fraud. And then the consumer side is well advanced. The small business side has some work to go, but we'll be partnering with those companies along the way. And that's one of the other things that we do. We love to partner with companies in on the fintech side who are focused on this, and we both learn from each other to create a better experience. But fraud is real. Unfortunately there's more what I would call bad guys, and you need outstanding, great technology to avoid negative outcomes.

Penny Crosman: (15:53)
Sure. That makes sense. So, switching gears a little bit, I think you refer to the phrase "innovation economy," and I've also been hearing the term "creator economy" a lot lately. How do you look at those and are those sort of an opportunity for you? And if so, how do you take advantage of that?

Mike Butler: (16:16)
Yeah, we love this space. So the creator or innovator innovation economy can be used interchangeably. And so first of all, as a digital bank, and we talked before about the people we hire and the culture of our organization. And we very much think like our clients, which is important, right? And so we understand what they're going through. We we work with them with banking as a service. We work with them to advance our technology. And so we're always surrounded by it. So it always feels right. And I think that's important to the client as well, but this is who we are today. That SMB market that I talked about earlier, this is where all the action is.

Mike Butler: (17:07)
You can look at well, where's the growth and venture capital? The growth and venture capital problem is tied to the majority of fintech. So what's going on in fintech. These are creator economies. These are innovators, these are disruptors and they operate in a way in which our products fit their needs very well. So that's another way we connect. Then I would tell you that the beauty of Grasshopper Bank is that we have a venture and tech business that's designed to serve the venture capital community and their portfolio companies. And especially in the fintech world, in areas that are around providing debt, providing capital. It just makes the Grasshopper experience all tied to this economy.

Penny Crosman: (18:01)
So would you say their needs in terms of digital banking or are quite different from a company that manufactures widgets of some kind?

Mike Butler: (18:12)
I actually don't think so. Penny, I think that, what's happening is that a creator economy may be more likely to go to a digital solution, but I still believe, and we still feel with the number of clients that we onboard, it's not just this move towards digital, but there is just a different generation of people. And we don't usually classify companies the way we used to: it's a manufacturing company, so therefore it's not necessarily going to want digital. I don't think it works that way anymore. I think it has to do with the person who's running the business and what bias they have. I mean, I'm gray haired and I haven't walked into a store in a long time, other than to pick up something. And I'm a technophile. But you may find a 25-year-old that loves to walk into stores or loves to shop in a traditional way. But I want to shop for my financial services digitally via my device. And so I think it has to do with the person more than the industry they're in. And I just think there's more, technophiles running companies, but there is a huge movement towards digital.

Penny Crosman: (19:36)
Sure. And we've seen that overall as well in various surveys and such, and we've also seen more banks and fintechs that are targeting small businesses in the past few years, number of challenger banks. And also some of the regional banks have been taking more of a focus on small businesses. U.S. Bank created a small business app a few years ago. Do you worry about this competition? And if not, how do you look at competition?

Mike Butler: (20:10)
Well, I don't not worry about competition. But I would also say to you, there's something comforting about knowing that that others see where the market is going and that you're not alone. It's always nice to know that somebody believes that the solution is a digital platform and more digital product. So there is some comfort there. I still think the number of companies really focused on small business are fewer than you would find in other industries. So I still feel like the competition here is less. I would tell you that Grasshopper Bank is a hundred percent focused on SMB, and that gives us a huge, huge advantage when it comes to competing with others who have other priorities. And it is the only thing that we do. Generally speaking, I'm okay with competition. Generally speaking, we're confident that as a fully focused SMB bank, we will get more than our share of the business and that will continue to evolve in a really great way.

Penny Crosman: (21:33)
That sounds good. And is there any app or company that you look to for inspiration?

Mike Butler: (21:40)
I don't know. Somebody asked me this question the other day and this is going to be a strange answer to you, but I think coming out of the pandemic and seeing what we've done in the pharmaceutical side and the speed with which we were able to develop the vaccine is a bit of an inspiration for me. If we can deliver a vaccine, we can deliver a better banking SMB package in the marketplace. I think those are the things that say, come on, let's go and do it right. This isn't that hard. Let's be inspired by what happened during the pandemic and with the vaccine, for people who put their minds to it and found a solution. And we can keep doing that here.

Penny Crosman: (22:26)
Sounds good. Well, Mike Butler, thank you so much for joining us today.

Mike Butler: (22:30)
Well, Penny, thank you. And I always enjoy talking with you.

Penny Crosman: (22:32)
Thank you. Thank you for listening to the American Bbanker podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Mike Butler at Grasshopper Bank. Rate us, review us and subscribe to our content at www.Americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.