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How This Community Bank Vies for Digital Customers

Radius Bank is throwing away the small-bank playbook. Rather than open branches in pursuit of new accounts, the Boston institution with two physical locations is forming alliances with fintech startups.

In 2013, the $725 million-asset bank joined forces with LevelUp, a mobile payments provider. Then Radius teamed up with SmarterBucks to produce a debit card rewards program to pay down college debt. And in mid-July, the institution announced its latest partner: Aspiration, a startup online investment firm for the masses. The companies are introducing a digital-only, high-yield personal checking account that lets customers choose what they pay — including nothing if they wish.

The latest alliance exemplifies a budding trend among community banks, in which they take on the role of Oz behind the curtain of an edgier digital banking interface in order to grow their deposit accounts. Lincoln Savings Bank in Waterloo, Iowa, for example, has recently starting working with the savings startup Qapital. CBW Bank in Kansas has long worked with startups, including Simple and Moven, and currently it is partnering with Ripple Labs on cross-border payments.

Radius sees its latest relationship as a way to acquire customers.

"We aren't doing it through building brick and mortar," said Chris Tremont, executive vice president of virtual banking for Radius Bank. "We are doing it through digital partnerships. Our branch is at the corner of Aspiration and Radius Bank. It is a different way to approach consumer growth."

Certainly, the economics are better. AlixPartners estimates opening a checking account online can save up to $100 per account compared to opening an account in a branch.

Radius hopes to open thousands of accounts via the Aspiration partnership over the next 18 months. Aspiration, whose products are designed to help the middle class build wealth, is seeking to earn positive branding recognition that consumers trust.

"Both earning and keeping that trust means we can have relationships with customers for a long time," said Andrei Cherny, a co-founder of Aspiration and its chief executive.

Cherney is also a former White House aide and financial fraud prosecutor. He co-edited Elizabeth Warren's initial proposal for the Consumer Financial Protection Bureau for a quarterly journal.

The Bank and the Startup

Both companies said their cultures clicked quickly. But it took more than a year of due diligence to work out what is a new arrangement for the community bank: a white-label approach where customers are expected to interact with the Aspiration brand rather than Radius. So details like who handles the inevitable customer service issues needed to be addressed, for example. End verdict: Aspiration will take the first crack. If the startup can't help, it will connect with Radius on behalf of the customer, and then connect back to the customer to answer their questions, say, on debit purchases.

Like most neobanks, Aspiration is tasked with designing the interface and for marketing the account, which is beginning with a wait list approach. To grow awareness of a new brand name — one of the biggest challenges for any firm — Aspiration says it is using social media and online marketing techniques in addition to old-school strategies like flying a banner over beaches on the fourth of July that read: "Declare independence from Big Banks. Join"

The account features are meant to do some of the luring: an attractive interest rate (1.00% APY on the entirety of balances of $2,500 or more), free ATM access, no monthly maintenance fees and only a deposit of $10 to open an account. Most striking, however, is its business model:  the bank account service asks for monthly tips — from 0 to $6 per month.

"Most people are very fair-minded," said Cherny.

The tipping model, after all, is one Aspiration has deployed on its investment product, and there's a do-good aspect to incentivize people to pay, well, something. For every dollar the startup makes, Aspiration donates one dime to a program that distributes microloans to struggling Americans.

Edward Niestat, a managing director at AlixPartners, sees the startup's partnership with Radius as embodying a large industry trend: the desire to woo and win over the younger generations.

"For sure, there's an attempt by most of the banks to reach out to millennial generation who care less about brick-and-mortar branches and traditional banking," said Niestat.

So far, however, most banks are going the traditional route of rejiggering their own products to try to suit digital audiences rather than buddy up with startups like Radius is doing. Beyond the hassle of managing yet another vendor, hesitation could come from a reluctance on banks' part to disintermediate their brand names. And that potential loss of institution recognition with consumers exemplifies an age-old existential debate for the industry undergoing a digital transformation.

"It's the regular fight for app space and homepage space and front of mind space," said Niestat.

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