Banks that have launched digital-only brands

March 8, 2022 2:33 PM

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Brick-and-mortar banks have been developing online-only counterparts since the 2000s. First National Bank of Omaha's FNBO Direct and River Valley Bank's IncredibleBank were among the first. Some, such as JPMorgan Chase's Finn, made a splash before sputtering out; Goldman Sachs is scaling back its troubled Marcus brand. But in the last several years, traditional banks have launched a crop of digital-only brands to go after niche audiences, experiment with new technologies that could potentially feed back into the home bank, and acquire rising tech talent.

The offerings continue in 2023. They include Monesty Bank from American Commerce Bank in Bremen, Georgia, which announced its launch in January; AlumniFi and Collegiate from Michigan State University Federal Credit Union, which both emerged this past winter; Owners Bank by Liberty Bank in Middletown, Connecticut, which debuted this week; and an upcoming digital brand for military members from Citizens Bank of Edmond in Edmond, Oklahoma.

"A few years ago, a lot of banks were standing up a new digital brand to go after high-rate deposit offerings and grow funding," said Matt Kelley, director at JAM Fintop, a joint venture that runs a venture capital fund with banks as limited partners, in a March 2022 interview. "When the pandemic hit, rates collapsed, liquidity flowed into the system like we've never seen before, and a lot of these strategies went dormant." But banks have been resuscitating this idea, inspired in part by new technologies, he said.

"Banks are starting to pull out their playbooks from before the pandemic and launch high-yield savings accounts under a separate digital brand to grow deposits and liquidity without cannibalizing their existing customers and brand," said Adam Aspes, a managing partner at JAM Fintop. He said this has been a focus for banks in the JAM Fintop network since the Silicon Valley Bank and Signature Bank collapses.

He has also seen digital brands as a method to attract certificates of deposit.

Though banks have to pay more on CDs than on savings accounts, "there is a new appreciation that the average duration of a CD portfolio is one year," Aspes said. "Having locked-in funding helps banks navigate interest rate spikes [like the one] that we just witnessed."

Even though digital brands have been around for a long time, the turmoil following the two bank failures in March puts pressure on banks, especially small institutions, to counter a flow of deposits to larger banks, said Joe Fielding, a partner in consulting firm Bain's financial services practice. One way that small banks may respond is with a high-yield "Engine 2" offering, that is, a business adjacent to a company's core business. Regardless of size, the willingness to launch an Engine 2 business partly comes down to a "transformational mindset," said Fielding. "You only see these types of bold moves from banks that are trying to be pioneering, and I don't know that pioneering needs to be a function of size or scale."

Some banks zero in on a particular affinity or group, such as the upcoming bank for military members by Citizens Bank of Edmond, bankers in the case of Texas National Bank's Bankers Lender, and couples combining their finances in the case of Iroquois Federal's Hitched. Other banks want to find pockets of growth outside of their markets without competing against themselves, such as PeoplesBank's Zynlo.

One challenge banks face is saturation.

"Banks need to work on the question of, what is going to make this compelling to a customer that already has access to full banking services in their community or full-scale digital offerings?" said Alexis Krivkovich, a senior partner at McKinsey who oversees the fintech practice for North America. "Are you bringing something new and different or is it just new and different for you?"

Here is a look at nine financial institutions that have built or significantly revamped digital brands in the past three years and how they are thinking through these strategies.

Jill Castilla, president and CEO of Citizens Bank of Edmond, has a personal connection to the financial challenges faced by military members.

Citizens Bank of Edmond to serve military members

Digital-only bank: name TBD

Parent or sponsor bank: Citizens Bank of Edmond

Differentiator: It caters to the needs of military members, who may be located far from bank branches and vulnerable to predatory lending

Jill Castilla, president and CEO of the $359.4 million-asset Citizens in Edmond, Oklahoma, has direct experience with the challenges of managing money as a military member. She enlisted in the army when she was 19.

"Many are coming, like me, from desperate situations, with little financial literacy tools surrounding them when they enter the service. They're very vulnerable to someone taking advantage of them," she said in an October 2022 podcast interview.

She notes that military training bases are often surrounded by payday lenders, pawn shops and, and unscrupulous used car lots. Recruits are typically 18 to 25 years old.

"It may be the first job in their family that someone has," she said.

Citizens Bank of Edmond and Nymbus are developing a new digital bank to address some of these issues; it's set to launch in the summer of 2023. Service members will be able to open accounts online, set up and receive direct deposit without the delays that might occur if they need to find a local bank, and access a cash-secured credit card to build credit.

Castilla acknowledged that there is already a "great military banking community," and is strategizing ways for those existing financial institutions to potentially hold the new brand's deposits or provide loans.

"We're a small community bank in one location, and we're trying to be mindful of our growth," she said.

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Liberty Bank caters to small business owners

Digital-only bank: Owners Bank

Parent or sponsor bank: Liberty Bank

Differentiator: It targets small business owners who want a slicker digital experience

Banks of all sizes are stepping up their capabilities for small business owners, from cash-flow forecasting to automated lending. Liberty Bank, which has $6.9 billion of assets, is serving this population with a separate brand.

Owners Bank launched on April 17. The digital-only bank features two checking accounts and a savings account; a credit card and loans will follow in July. Users can also send and accept payments, consolidate their external financial accounts with their Liberty account in one dashboard, and set savings goals. Later, Owners will feature a marketplace of apps, including for payroll, insurance benefits, HR recruiting and project management, to accommodate a diversity of small businesses. Customers will be able to reach customer service by video as well as phone and email.

For now, Owners Bank is available to small business owners in Rhode Island, Massachusetts, Connecticut and Pennsylvania. Later, it will become national.

When Liberty Bank surveyed 3,000 small businesses, the main takeaway was, "Big banks don't understand me, big banks don't want my business because I'm small," David Mitchell, founder and CEO of Owners Bank said in a recent interview. "I have trouble with cash flow. I just want to do the job I got hired to do and not do banking. I've got to deal with invoicing, I've got to deal with payments."

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Michigan State University Federal Credit Union expands to college students and alumni outside of its territory

Digital-only credit unions: Collegiate; AlumniFi

Parent or sponsor institution: Michigan State University Federal Credit Union

Differentiator: Two apps will target members on and beyond college campuses outside of MSUFCU's immediate market

Michigan State University Federal Credit Union is edging beyond the MSU community with two digital brands that bring credit union services to college students and graduates.

Collegiate, which launched on March 1, is for current students. It has a no-fee checking and savings account and a debit card, with a credit card and signature loan in the works. It will partner with colleges to promote its services on campus, starting with Olivet College in Olivet, Michigan.

AlumniFi, a digital credit union initially targeting recent graduates from 22 to 35 years of age, preceded Collegiate's launch by a few days. For now, the service is aimed at graduates of Michigan State University and Oakland University in Rochester, Michigan, although alumni from any college are eligible.

Both were developed in partnership with Nymbus. A differentiator is the series of fintechs that each app links to or integrates. For example, both services use Spave, which lets users round up spare change from debit card purchases and donate it to charities.

MSUFCU focused on digital brands because the foot traffic at MSUFCU branches has declined over time, and the generations it is targeting prefer digital services.

"The idea came from wanting to support members who don't connect with the MSUFCU brand," said Ami Iceman-Haueter, chief research and digital experience officer at MSUFCU, of AlumniFi. She estimates there are 330,000 Michigan State University alumni who do not use the credit union's services, "but we do think they can align with AlumniFi."

American Commerce Bank spotlights features that fight financial exploitation

Digital-only bank: Monesty Bank

Parent or sponsor bank: American Commerce Bank

Differentiator: It incorporates fraud monitoring technology so people can stay on top of vulnerable relatives' accounts

Monesty Bank is meant for people of all ages, but with a special lens on older adults and their caregivers.

"They may need additional assistance with managing finances, or staying out of harm's way with fraud schemes," said Richard Rotondo, vice president of digital banking at the $484.5 million-asset American Commerce and the project lead on Monesty. "A lot of the burden falls on other family members who have full-time jobs, who don't have the time to look at grandma's banking statement every day."

Monesty addresses that issue with its Safe Harbor checking account, which carries a $9.95 monthly fee but rolls in a yield of more than 4% and account monitoring from EverSafe, a company that alerts users after detecting unusual banking activity and gives trusted caregivers a window into their loved ones' accounts. (Users can also choose from two other checking accounts, high-yield savings, CDs, a credit card and more.)

"A lot of banks in the market have safety and security but not a lot of them tell that story," said Rotondo. "It's assumed." American Commerce purposely chose a .bank URL, which has stricter criteria to obtain than the usual .com, and selected a name that melds the words "money" and "honesty." The emphasis on safety is also to reassure older customers who are skeptical of digital banking, but Rotondo points out the account could be useful for parents of children heading off to college.

Rotondo chose EverSafe because of its off-the-shelf monitoring capabilities that American Commerce couldn't easily replicate. Monesty shares American Commerce's Jack Henry core. It uses MeridianLink for online account opening and Eltropy for live customer service, including video, with Monesty employees.

Like others on this list, American Commerce felt that a digital brand could extend geographic reach beyond its existing small cluster of branches, but with lower cost than running brick-and-mortar branches. So far, it has a few dozen customers, with little advertising, since its launch in November 2022.

Central Pacific tries out banking-as-a-service with Swell

Digital-only bank: Swell

Parent or sponsor bank: Central Pacific Financial Corp.

Differentiator: Independent challenger bank that lets users move money between cash and their line of credit in real time

Swell, a digital bank that Central Pacific Financial Corp. in Honolulu incubated for more than a year, was spun off as an independent company in 2022. But the bank's leaders are hoping it plants the seeds of future banking-as-a-service efforts to expand Central Pacific's services to the mainland.

Kevin Dahlstrom, now the CEO of Swell, which is based in Boulder, Colorado, was brought in to Central Pacific as chief marketing officer in early 2020 to help modernize the bank. Developing a fintech was one task on his list. Swell is aimed at what the company calls "strivers," or people who want to take control of their finances and tackle debt. The initial products will be Swell Credit, a personal line of credit designed to help consumers save interest on credit card debt, and Swell Cash, a digital checking account. Swell began a small-scale launch in April.

The credit solutions company Elevate will help Swell underwrite personal lines of credit. Swell chose i2c as its core provider because it lets the digital bank integrate cash and credit in real time, meaning users can move money from their checking account to their credit account instantly and vice versa.

"Swell Credit is designed to help consumers [with credit card debt] save thousands in interest charges and pay their debt down years faster," said Dahlstrom.

Central Pacific is a minority investor in Swell. Swell also marks its first foray into banking-as-a-service. "The pandemic made us realize, when it shut down tourism, how dependent we are on our home state," said David Morimoto, chief financial officer of the $7.4 billion-asset Central Pacific. "Over time we want to see banking-as-a-service initiatives grow to complement our Hawaii banking franchise."

Texas National Bank creates a virtual bank for bankers

Digital-only bank: Bankers Lender

Parent or sponsor bank: Texas National Bank

Differentiator: It’s just for bankers

New business is slow in the parts of Texas where Texas National Bank operates, including its headquarters city of Sweetwater. The new digital-only bank it launched last year, Bankers Lender, will mine an unexpected segment for new customers — people who work for banks.

"We heard as we were vetting this idea with others in the industry that there is a certain amount of privacy you give up as banker banking at your own financial institution," said Mike Fernandez, president and CEO of the $164.1 million-asset Texas National. "You may want to keep a big insurance check private. Or if you are running a business outside of banking hours it [may not be] something you want everyone to know about."

Bankers Lender, which launched in April 2022, features unsecured personal loans, commercial loans, real estate loans and a deposit account. At the time of launch, Fernandez said that interest rates will be more competitive than online lenders', which is possible because its target market tends to have high credit profiles.

Bankers Lender is currently open to bankers ("from the teller counter to the corner office," said Fernandez) in Texas. The plan at launch was to eventually branch out to neighboring states.

Cambridge Savings seeks deposits outside its state

Digital-only bank: Ivy Bank

Parent or sponsor bank: Cambridge Savings Bank

Differentiator: High-yield savings and money management tools

Cambridge Savings Bank in Cambridge, Massachusetts, has branches scattered around the greater Boston area. The $6.5 billion-asset mutual bank is hoping its all-digital Ivy Bank will entice customers beyond the state.

Ivy, which the bank announced in July 2021, offers high-yield savings and certificates of deposit. It incorporates money management tools that aggregate the user's financial accounts and visualize their spending and net worth. Customers will reach a human when they call or email customer service.

"Ivy lets us combine the best of our heritage as a relationship-oriented, customer-centric bank with a best-in-class digital offering," said chief customer officer Katie Catlender.

Ivy deploys tools from vendors including the account-opening platform Mantl and the financial data company MX Technologies. In the summer of 2022, it launched a feature with credit monitoring, a credit simulator tool, recommendations for how to improve a score, and financial education resources. Almost a quarter of Ivy customers and 15% of Cambridge Savings customers use it.

Cambridge Savings has already brought technology introduced through Ivy into its physical bank. For instance, after analyzing how Ivy users interacted with the money management tools, it adopted the same service for Cambridge Savings customers. About one-third of customers across both divisions have been using these features over the past six months.

The digital capabilities are also showing promise in attracting new accounts: the bank finds that it is generating five times the amount of deposits through digital channels, either via Cambridge Savings or Ivy, than in person.

Texas Capital goes after frequent flyers

Digital-only bank: Bask Bank

Parent or sponsor bank: Texas Capital Bancshares

Differentiator: Offers both mileage rewards and high yields

Texas Capital Bancshares in Dallas launched Bask Bank in early 2020 with a specific type of reward to appeal to avid travelers: one American Airlines Aadvantage frequent-flier mile per dollar saved annually. In 2022, it added a high-yield savings account that recently awarded users with 4.65% on deposits. Bask also offers certificates of deposit. The rate of Aadvantage rewards has risen too: users now get two miles per $1 saved annually.

The digital-only Bask Bank is meant to help the $28.4 billion-asset Texas Capital reach new heights of its own. "You are seeing a growing segment of customers comfortable having a 100% digital experience," said Matt Quale in a 2022 interview, when he was president of Bask. (Quale is now president of digital banking at Forbright Bank in Chevy Chase, Maryland.) "This allowed us to tap into a new customer segment that was beyond our historical geography."

The fixed costs of digital-only accounts are low compared with the costs of adding more branches. Texas Capital also hopes to adopt some of the digital capabilities of Bask Bank for the broader bank. It has already rebooted its visual branding and marketing technology after experimenting within Bask Bank, and shares a website content management system and customer data platform with Bask.

There is also the potential for new Bask employees to influence the direction of Texas Capital.

"Launching a digital bank gives you more capacity to hire digital experts that the rest of the bank can leverage," said Quale.

First Horizon moves digital bank to the cloud

Digital-only bank: VirtualBank

Parent or sponsor bank: First Horizon

Differentiator: Migrating a 20-year-old digital bank to all-new tech in the cloud

First Horizon in Memphis, Tennessee, once contemplated standing up its own digital bank. Conveniently, it inherited the 20-plus- year-old VirtualBank when it acquired Iberiabank at the end of 2019.

In 2021, the $78.7 billion-asset First Horizon decided to run VirtualBank on Finxact's cloud-based core as a way to test more modern infrastructure for the bank on a small scale. VirtualBank also uses application programming interfaces from the digital banking firm Apiture to open and service money market accounts and certificates of deposit. It uses Alloy and IDology for fraud protection, MX for external account connections, Payrailz for bill pay, Ensenta for mobile check deposits and Savana for customer servicing.

First Horizon hopes VirtualBank will be a route to gaining new customers and ingraining a more digital-first mentality at the bank. The bank hopes that in the future it will be able to apply the same technology and methods it developed for its digital-only bank more broadly, and thereby reap new revenue streams and improve client experience.

"The idea is that some of those systems could grow into tools for the rest of First Horizon over time or at least learn different ways to approach some of our technology problems," said Tyler Craft, head of VirtualBank and fintech at First Horizon. Still, that long-term strategy is subject to change under Toronto-Dominion Bank, which extended the deadline for closing its merger this past February.