What Seattle Bank learned from the collapse of the Google Plex deal

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Transcription:

Penny Crosman: (00:03)

Welcome to the American Banker podcast, I'm Penny Crosman. Many banks across the country are thinking about getting into fintech partnerships, thinking about getting into banking as a service, but how do you think through those decisions? Who and what are the right partnerships to make? How do you vet these companies? What are the areas where banking as a service can really work well? We're here today with Josh Williams, chief banking officer and head of partnerships at Seattle Bank. And he's going to help us talk about some of the decisions he's been making at his company. Welcome Josh.

Josh Williams: (00:38)

Great Penny. Good to be here.

Penny Crosman: (00:39)

So just in case people aren't that familiar with Seattle Bank, can you tell us a little bit about it?

Josh Williams: (00:45)

Sure. Seattle Bank by convention is a community bank, we're roughly $700 million in assets. We're somewhat unique, I think, in our approach. And so often think of ourselves as a boutique bank, partly reflecting the fact that we have private ownership, but partly reflect that we really recognize that as banking evolves and consumers' behavior and adoption of technology evolves, we really needed to be much more focused on how we go to market. And so we've really taken a forward-leaning approach into technology and in doing that really tried to drive a lot of focus around how we work with customers and our business model. So I think oftentimes we'll say, a small bank with a big vision.

Penny Crosman: (01:30)

So I spoke with some Seattle Bank people a couple of years ago when yours was one of the 11 banks that was all ready to work with Google on its Google Plex project, where you guys were going to offer checking accounts through Google's wallet and Google's infrastructure. And then that just kind of dissipated, Google pulled out. What can you tell us about what happened and what didn't happen? And first of all, why did you guys want to work with Google on this?

Josh Williams: (02:06)

I guess for starters, in terms of why we wanted to work with them, maybe just to back up somewhat, as we looked at how we were going to serve our clients, which primarily were high-net-worth families and individuals and closely held businesses, and this would've been roughly 2014, 2015, we really recognized that we needed to have a different technology stack so that we could customize and provide the right services that we wanted to really be differentiated. And that journey that, that started really led us to make technology at the center of what we do and, and something that we really address from the top down, meaning our biggest decisions around that are absolutely, the CEO's involved and I'm involved. Of course, we were able to hire a great CIO and a great team around that.

Josh Williams: (02:58)

And what evolved out of building that out was the recognition that really the architecture needed to provide good solutions to our clients at the end of the day has to be open. It has to be cloud-based in terms of being scalable and it needs to be real time. And the recognition was that that same architecture really starts to open up the door for banks to do much, much more, including going to partner with other businesses, whether they're fintechs or non-financial brands that want to have access to financial solutions for their clients. So that was the broad framework that we had already embarked upon. And I obviously can't say a lot about Google and their decision and you've had some great reporting on how they've navigated that.

Josh Williams: (03:45)

But what I can say, it was a really strong validation of our decision in terms of having that tech architecture that we've invested in, really moving away from traditional bank architecture or bank technology, and then also really strong validation of the solutions that we've used and the players that we've worked with, and that we were able to build out and have ready to go our piece of that, which was essentially allowing us to embed essentially full service banking solutions on a consumer level, into someone else's user experience. So, yeah, so I think in that sense, we learned a lot, it validated what we had expected and indeed a lot of those frameworks are things that we're using now on partnerships that we're looking to build going forward.

Penny Crosman: (04:34)

So do you think you would be interested in doing a similar deal with another big tech company, or are there other types of companies that you're looking to offer banking as a service for?

Josh Williams: (04:48)

Yeah, we're approaching partnerships and really think about it them in three broad categories. One would be working with fintech companies. They generally have a financial product they've designed, but they still need access to traditional rails or liquidity or capital. The other is where I would think of it as more of an embedded solution, it could be a marketplace or a non-financial brand that wants to offer that functionality. And to the extent that were a tech company, we certainly would have an interest there. We do think one advantage of essentially approaching banking as a service or embedded banking as a bank is that we essentially are able to bring in a stronger commitment and knowledge to the regulatory framework, as well as the technology and business factors that are really necessary as you start to think about companies that have greater enterprise risk and or reputation risk versus, say, an early stage company that's looking to just really rapidly get a simple product set out to market. And so I think for those reasons, we do think that we are able to work with established companies that are going to want to know that they have a stronger counterparty and essentially a more robust solution as they think about some of the other factors down the road around both scale, but also the regulatory climate.

Penny Crosman: (06:14)

So it sounds like you're fairly strict in about your vetting of fintech or banking as a service partnerships. I remember when banks were first starting to think about these partnerships. And I remember talking to one banker who said, I would just never do this because if anything went wrong at the fintech, I know my customer is going to call me and blame me because if my bank is on there, I'm going to become the scapegoat. How do you look at that? There's a lot of things to think about: scalability, security, the possibility of service interruptions. What are some of those things that you look at in your vetting process?

Josh Williams: (06:59)

Yeah, I think at a high level, we really think about three broad areas: What is the business case? What are the regulatory factors? And then what are the tech factors that go into ultimately providing that service? We have to solve for all three and really bringing all three to the forefront is essential so that anything we build is taking those into account at all times. I think otherwise it's too easy to solve for something that technically looks and maybe feels great to the customer in the short run or might have an interesting sort of revenue component on it, but it doesn't ultimately meet the regulatory environment from a consumer protection standpoint, and of course you could come up with a scenario where it's compliant and makes good money, but the customers don't like it, well, that's not going to work either.

Josh Williams: (07:52)

So it's really just recognizing that it really isn't an either/or proposition. We really have to solve for all three of those at the outset. Then I think within each of those, we definitely dive down to say, okay, what are the drivers that are most significant here? And absolutely, to your point, there are certain cases where we will absolutely own the risk at the end of the day as the charter holder. So whether that's in terms of FDIC insurance or re claims on, on electronic transactions, how are we going to make sure that upfront we're working with a partner that appreciates that? How do we build a compliance model around that and make sure that we're comfortable with it and monitoring it and validating it, and that it's set up to essentially succeed? The basic concern is absolutely correct. And so it's just essentially, how do we build for that from the, from the beginning and, and make sure that we have a plan for it to stay strong throughout.

Penny Crosman: (08:53)

Yeah. And customer service seems like an important one too. And I didn't mention that before, but it seems like something where people can fall between the cracks and sometimes in these arrangements, the first thing you mentioned was business case. And my understanding is that generally speaking banks get fees when they operate in a banking-as-a-service model. And in the case of say the Google Plex project, the idea was you were going to be able to draw from this pool of customers all over the world that already use Google products. Are, are those two of the main things, or, or are there other elements of the business case that you're really interested in?

Josh Williams: (09:38)

I mean, from a partnering standpoint, the way we think about it is, we could use technology to offer more or different services to existing clients. We could use it to go access, and we are doing this, new customer segments, but still under our brand. Really the advantage from a partnering standpoint is how can we leverage a brand that already has an engaged consumer base that has a very specific set of needs? It is a different means of acquisition or distribution, depending on how you want to think about that. To your point, there could be fee income from that, there could be deposit balances or lending opportunities, but I think the other really exciting opportunity, especially as we move into some of the more embedded scenarios with non-financial companies is, what novel data does that brand or that platform have about this customer that can help us get to outcome? So can we make available a credit product because there's more visibility on somebody's income from the platform platform that they're reaching us through, that starts to have that multiplier effect over and above just getting access to essentially new names or new prospects. It's actually getting additional information to bring new products to bear. So I think it is casting a wider net, but it's also able to reach deeper in terms of how we go about solving for client needs.

Penny Crosman: (11:08)

That's interesting. Because I've actually been thinking a bit for an upcoming story about how credit models are changing and there are so many newer sources of alternative data or newer sources of information about creditworthiness. Recently buy now/pay later data started to become available and the three credit bureaus and FICO often or fairly regularly come out with newer versions that take into account things like rent payments and things like that. But then it seems like it's hard for the banks to incorporate all that. A lot of banks have been doing loan underwriting a certain way for years. How are you able to sort of quickly incorporate new data? And is that related to the new core system that you mentioned in the beginning?

Josh Williams: (12:08)

So from a technology standpoint, enabling that absolutely is related to our core technology. Traditional bank technology was absolutely time tested for being highly secure, but it was essentially closed architecture that made it very difficult and in many cases, just practically impossible for banks to integrate new solutions, such as let's say, transactional data into an underwriting decision engine. We made the decision to move to a core provided by Finastra. And the reason that we did that was they shared our view of open banking overall. Their core is cloud based, it's real time. And they provide a API ecosystem around that allows us to then bring in whether it's new configurations, we're developing or third party solutions for that. So from a technical standpoint, that's critical to be able to evolve and bring in these new data sources as you mentioned. I think the other piece around that though is, and this is where I think it comes back to really a at each one of the business, the regulatory and the tech factors, right?

Josh Williams: (13:20)

The tech factor might be, we can do this. So the business case still has to come back to, well, what should we do, right? Like what is the relevant data to measuring risk in this situation? I think there's a lot of novel sources coming out. And so that's where I think there are advantages to being able to work with a fintech or a brand that has very close understanding of a specific customer base is in many cases, we're able to essentially co-develop with them to say, hey, here's what we're trying to solve for, how do we get better income visibility or cash flow visibility? And to the extent they're able to say, well, here's some ways we can do that, we then have the ability to start to model that out and just say, does that make sense?

Josh Williams: (14:02)

So first it does that mitigate risk. Second, we still have to go back through and say, wait, are we creating any issues from a regulatory standpoint? Let's just say fair lending in the case of a lending example, and then lastly, how are we going to do that from a tech standpoint? And I think by having those conversations early, by being very clear that we have to manage all three of those, again, I think the more established players are going even if that maybe is not as satisfying as hearing we can do this immediately. I think they appreciate the sense that that's a more durable solution. And then that starts to open up the bigger conversations around. Okay, well, let's say that we have to make an experiment around some of this data.

Josh Williams: (14:45)

Let's say we're good from a regulatory standpoint, we're good from a tech standpoint, but we just don't know the risk outcome. That's where we can work with the fintech to say, hey, if this is strategically important, how do we work together from a commercial standpoint to allow you guys to try this out and we still have to take an acceptable level of risk. So I think it's back to this whole idea of, we have this new information now, how do we incorporate that into those all three of those factors and put together something that we can take to market?

Penny Crosman: (15:14)

That makes sense. Because certainly regulators do look at fintech partners and there have been some actions taken against, for instance, banks that work with payday lender type companies. The regulators do eventually crack down on that. So certainly an important thing to watch out for. So a lot of banks are thinking about partnering with some kind of crypto company, a cryptocurrency exchange like Coinbase or Kraken or a company like Anchorage, which actually is a crypto custody provider and has a bank charter, or Nydig, a lot of banks are working with Nydig, which is a New York crypto custody provider. How do you guys look at the idea of offering crypto, partnering with a crypto company?

Josh Williams: (16:07)

It is something that we are pursuing, as I mentioned at the outset, in terms of our direct customer relationships, a significant portion of that is in the private banking and wealth management space. And so we've seen a high degree of interest from those clients and having access to crypto. And so our approach has essentially been to first essentially say there's three broad areas that we see of risk that we want to make sure that we're thought thoughtful about. So the first is just recognizing there's so much volatility in that asset. It's risky for a number of reasons as you start to think about crypto. Second is just custody, right? The fact that if somebody invests and then loses it, that's a high degree of concern. And then last is just a risk to both to the individual consumer, but from a systemic standpoint on financially, how do we worry about both fraud and anti-money laundering?

Josh Williams: (17:04)

So for those reasons, you know, we've decided that it makes sense to provide an offering. We are working with Nydig and the reason that we've chosen to pursue that is we think it's the best solution for managing those three risks. Now, essentially that means from a bank standpoint, we're not transacting. We look closely at the regulatory guidance, both on, what's been said so far, and then sort of the general direction that it sounds like they're going to be providing more information and felt that that's a solution where we're going to primarily work with accredited investors is where we would offer that too. So right away they have the ability and a higher degree of awareness around what's the right level for them to make an investment on that.

Josh Williams: (17:49)

I think somewhat similar to how you described with Anchorage, they have a strong custody model and just felt good about how they've approached that. And then, lastly, currently that model set up so customers could essentially buy and invest in crypto, but they can't transact in it. So they couldn't go use to go buy a Tesla or something like that. And you know, that's not to say over time, maybe that doesn't make sense, but in the near term, having that closed loop is how we got comfortable from that fraud. And anti-money laundering standpoint is the customers are already coming through the financial system. And so we know that we have those bases covered. So it's early stages. I think we'll see obviously a lot of evolution here. We think it makes sense to have give our clients that want to a relatively safe way to go out and get exposure to that. And, and we'll continue to see how it goes and I'm sure evolve with it.

Penny Crosman: (18:40)

How soon do you think you might have some sort of crypto offering for clients.

Josh Williams: (18:44)

I would say within months, if not weeks.

Penny Crosman: (18:49)Okay. All right. Well, let's, let's keep in touch and hear how it goes. Well, Josh, thank you for joining us and thank you all for listening to the American Banker podcast. I produced this episode with audio production by Kellie Malone. Special thanks this week to Josh Williams at Seattle Bank. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe.