The bank formerly called Bank of California in Oakland is putting a new twist on the practice of acquiring deposits from merchant-card customers.
Innovative Bank, which took that name Jan. 23, plans to solicit just about all new funds from customers of its sister company, the merchant card processor Innovative Solutions. Most of these customers are outside the Bay Area.
Tim Jochner, the chairman of Innovative Bancorp, in Calabasas, Calif., the holding company for $60 million-asset Innovative Bank and Innovative Solutions, said no other bank depends so heavily on its merchant card customers to build its deposit base.
It would appear Innovative Bank is well equipped to execute this strategy. Founded by Mr. Jochner and several partners in October 1999, Innovative Solutions has 40 offices throughout the country that serve more than 75,000 small businesses. With that base, the privately held bank will not actively seek additional demand deposits at its two branches in Oakland, and it does not plan to open any more branches.
We believe this strategy will actually create more opportunity for core deposits, which every bank is looking for, said Mr. Jochner, who with partners purchased the Bank of Oakland in April.
Merchant card processors serve as intermediaries between businesses and credit card issuers, collecting a fee for their services. Mr. Jochner owned another merchant-card processing company, Superior Bankcard Services, which he founded with one of this partners, Joe Kaplan, in 1994. They attracted 55,000 customers before selling Superior in July 1998 for more than $100 million
This time the hope is that, by combining a merchant card processing firm with a bank under one parent, profits can be boosted by cross-selling additional bank products, such as credit cards and commercial loans, to merchant customers nationwide.
Mr. Jochner said that the small, single-owner and home-occupancy businesses that Innovative Solutions is targeting are a natural fit for a service-oriented community bank.
If you provide the smaller accounts with good service at a fair price, they are much more loyal than large accounts, he said. And its an untapped market because most [banks] are focusing on larger customers, which comprise just 3% of the overall market. So we are focusing on the other 97% very small businesses that are almost never visited by bankers.
Innovative may just have found a diamond in the rough in very small businesses, said John Flemming, the president and chief operating officer of Carpenter & Co., a bank-consulting firm in Irvine, Calif.
What is different about their strategy, Mr. Flemming said, is that Innovative has a proven ability to market financial services to very small businesses. Very few banks have that because these types of companies are usually so hard to reach . If they are able to cross-sell enough products to this market, it could prove very profitable.
Though practically all of its deposit-gathering efforts will be nationwide, Innovative intends to limit its lending to California. It has loan production offices in Sacramento, Fresno, and Oakland.
