When disruptor PerkStreet Financial in Boston closed up shop late last year, executives at nearby Eastern Bank saw an opportunity to shake up the status quo.
Eastern officials had long been debating ways to develop innovative products and services but had yet to settle on a plan. So, after conducting some due diligence, they reached out to PerkStreet's leaders to see if they would be interested in bringing their fresh ideas to the $8.7 billion-asset bank.
It took some convincing the PerkStreet team seemed less than eager to join a mainstream bank but the recruitment effort succeeded: on Monday, Eastern announced that it was launching a new innovation unit, Eastern Labs, and that it had brought in four PerkStreet alumni to run it. It also said it had established a corresponding website where it will invite financial tech firms to pitch ideas that would resonate with customers.
With the hiring of the PerkStreet team, Eastern joins banks like BBVA Compass in turning to fintech entrepreneurs to help it better compete in the digital age. Earlier this year, BBVA acquired the mobile banking firm Simple to give it a mobile platform it said it could not have built on its own and to gain the startup's talent.
Eastern's new innovation unit is tasked with both creating new data-based technologies and discovering promising companies that Eastern Bank could buy or invest in as the bank aims to keep up with more tech-savvy large banks and faces intensifying competition from retailers, tech startups and other nonbanks that are offering everything from deposit accounts to prepaid cards to loans.
"We are in the fight for relevancy and survival," says Bob Rivers, Eastern Bank's president and chief operating officer, explaining the decision to launch Eastern Labs. "We will build cutting-edge tech, invest in it and transform Eastern culture in the process."
To be sure, Eastern Bank is no tech laggard. The bank, the largest in Massachusetts, offers a wide range of mobile and online services (which it's updating) and it is in the midst of developing a branch-of-the-future model.
Still, while it is common for large banking companies, like Capital One Financial and U.S. Bancorp, to have innovation labs, it is unusual for a bank Eastern's size to make such a commitment, industry observers say. The very nature of an innovation lab is to test what works and what doesn't and small banks generally aren't comfortable carving out resources for innovations that might never see the light of day.
"Banks aren't really used to [failing] but it's gospel in startup culture," says Jacob Jegher, a senior analyst with Celent.
Likewise, entrepreneurs don't usually want to work under a financial institution brand that conjures images of corporate attire and rigid rules. PerkStreet's founder and Capital One veteran Dan O'Malley admits he had reservations about joining a mainstream bank after running a startup for five years.
"I didn't think I wanted to go back into a bank," says O'Malley who will run Eastern Labs and report to Rivers. "The reason I wanted to do this a lesson I learned from PerkStreet trying to [transform banking] without inside access is really hard.... I care about moving this industry farther along."
At PerkStreet, O'Malley strived to create a banking experience that rewarded consumers for using debit cards instead of credit. The startup worked with partner banks to accomplish the goal but ran out of money in August as it fought for market share in a very competitive space.
What sold him on joining Eastern was the sheer availability of data within the bank that he and his team could use to develop new products and the bank execs' shared passion to help change the industry.
Without getting too specific, Eastern officials said that the ex-PerkStreet team will look at developing new mobile technologies, loan products and other digital services. Some could be built into the bank's technologies, while others could be used to form independent companies to serve the industry. Roughly 80 of the bank's current employees will contribute to the lab's research in varying capacities.
O'Malley has a particular interest on better using internal data to set loan rates. A bank, unlike upstarts, has a data advantage in that it already has access to customer income data, which could be used to develop more specific pricing.
"Lending is getting completely rewritten," says O'Malley.
Analysts view the new lab as a step in the right direction for the industry.
"It's an exciting development [that] really shows that it's not just the top five or six banks making major innovation bets," says Jim Bruene, editor and founder of The Finovate Group.
Perhaps the biggest challenge Eastern faces is changing its culture. Rivers hopes an open-space office which the bank is creating and plans to open this summer in Boston will help inject an entrepreneurial spirit into the bank. The lab execs plan to eventually host hackathons and thereby attract tech talent.
"Most developers imagine the culture of a bank as stodgy and they are right," adds O'Malley. "We have to create a culture that people want to be a part of."
Rivers declined to say how much Eastern is spending on the lab, but noted that the bank can be patient because it is a mutual thrift and does not have to answer to outside shareholders. The bank has been around for 200 years and positions tech investments as part of the long-term plan so it can exist for another 200 years, Rivers says.
"We don't worry about short-term earnings," Rivers says.