Nobody told Suresh Ramamurthi that banks were too old-fashioned and heavily regulated to innovate.
Hoping to bring the speed of the Internet to an industry that seemed stuck in the 1970s, the Google veteran spent several years looking for a bank to acquire before he and his wife purchased the struggling Citizens Bank of Weir, Kan., in 2009. After turning it around, he transformed the 123-year-old institution, with one branch in a dusty town with 661 residents, into a seedbed for disruptive financial technology — not to mention a wildly profitable generator of fee income.
Why didn't he just go the route so many fintech startups have taken and start a nonbank company, where lighter regulation would have allowed him to hit the ground running?
"I did not know that," Ramamurthi said recently, laughing. "I said, 'if you want to really do this, you want to be a real bank.' And I filed a business plan that said 'this is all I'm going to do.' … We were actually saying what we want to do to the regulators. It took some time to get approval from them."
Ramamurthi's patience has been paying off. From his base in Weir, he's acquired a nationwide business clientele through word of mouth. These customers are largely fintech startups like Moven and, early on, Simple, that have used the renamed CBW Bank's charter to host accounts for consumers. But they also include insurance companies, a claims processor and other corporations that use the bank's technology to take the friction out of payments.
This year CBW Bank introduced real-time payments for these customers, leveraging the legacy infrastructure of the major debit card networks. Ramamurthi, the bank's chairman and chief technology officer, is finding ways to speed up money transfers at a time when the banking industry is coming around to the idea that it needs to modernize its cobwebbed payments system, lest regulators force its hand.
CBW Bank has also served as a showcase for next-gen risk-management tools developed by Yantra Financial Technologies, a separate, 35-employee company based in Topeka that Ramamurthi founded. One such feature uses Internet-connected sensors in cars to vet debit card purchases at gas stations.
All the while the bank has been making money hand over fist, generating returns on equity of 20.76% in 2013 and 46.88% last year while the industry average was stuck in the high single digits. And CBW has done this off a tiny asset base of $17 million (and with only 10 employees as of Sept. 30). Most of its profits come from fees, suggesting a new model for community banks to remain viable in a rapidly changing, increasingly digital world.
"They've built a great little fintech company inside a community bank," said Bob Wray, president and CEO of the Capital Corporation, a bank advisory firm in Overland Park, Kan. Providing services to nonbank fintech firms allows CBW to "get fee income with likely very little risk associated with the actual business. They aren't trying to loan money in a small town or invest capital to support asset growth."
For demonstrating that even the smallest of small-town banks can innovate, Ramamurthi has been named American Banker's Innovator of the Year for 2015.
Fixing the 'Plumbing'
Ramamurthi, 47, was born in India. While working in Silicon Valley for Google — on maps for mobile devices and the now-defunct Google Checkout payment processing service — he realized "the nature of money was changing," he said.
"A whole new generation has come up on Google," Ramamurthi said. "One thing Google did for everybody is, you hit the enter button, and you got a response. … Today you cannot handle a three-second delay on the Internet. So therefore people ask the same question, 'why is my money not moving at the same speed?'"
At CBW, Ramamurthi set out to fix what he calls the banking system's "broken plumbing." This meant going beyond the superficial, incremental improvements that many fintech companies are simply plastering over the banking experience.
"Most people are painting windows, fake windows," he said. "You can pretty up the numbers with online banking. That does nothing to the plumbing."
The challenge is that legacy systems are "broken from the point of being able to do new things, but they're perfectly OK for what they're already doing," Ramamurthi said. "It's like concrete setting. The concrete is poured and the concrete is set. You're not going to change it anymore."
His solution was to, as he puts it, separate the account from accounting.
"We went back to first principles," Ramamurthi said, invoking Aristotle. "We said, 'what is the basic unit here that we're dealing with?' It's a number in a database. If that number goes up, it's called credit. If it goes down it's called debit. So we rebuilt that from scratch."
Specifically, Yantra, his tech company, built a platform to keep track of the money going in and out of customers' individual accounts, outside the core processing system inherited from the bank's previous management. That older system remains the official record of the bank's aggregate balances. Once a day, the two are reconciled.
"This sounds like a trivial thing but this is the most fundamental thing that allowed me to create more layers of innovation," Ramamurthi said. It was also a huge pain since the bank had to rebuild its connections to various payment systems: the automated clearing house, Fedwire, MasterCard, Visa, and so on.
The new "smart account" system incorporates compliance and risk management features and gives CBW the flexibility to do some pretty neat things.
For example, at the Finovate conference in San Jose this past spring Ramamurthi demonstrated a feature whereby customers can create multiple account numbers and assign them to different recurring billers. Bills are automatically paid only if they are within upper and lower limits set by the customer, who is asked to approve any amounts outside those bounds.
This arrangement addresses the problem with "pull payments," in which consumers essentially hand over the keys to their accounts to strangers, relying on them to take out the correct amounts, which they don't always do. Ramamurthi told the audience he got the idea from a bitter experience years ago when a phone company wrongly tried to take $9,000 out of his account.
The platform also allows CBW Bank to take into account contextual information in approving transactions, such as in the example of the cloud-connected car. When a debit card is swiped at the gas station, the system can check the vehicle identification number to make sure it's the right car and check the miles since the last refueling to make sure the transaction makes sense. It can also limit purchases to certain gas stations, for fleet owners who want their drivers to fill up only at Shell — or parents who don't want their children driving too far from home.
"My daughter refuses to take my cards that I offer her," Ramamurthi said. "She says, 'you're going to control everything that I spend.'"
CBW Bank introduced real-time transfers this year as the Federal Reserve was increasingly nudging the industry to speed up payments, an area where the U.S. has lagged other countries. Policymakers see the snail's pace of bank transfers as an impediment to commerce and a destabilizing force in the lives of workers trying to make ends meet.
While CBW was among a handful of early adopters of Ripple, a high-speed system for value transfer, to be any use to customers a real-time payment service required ubiquitous coverage at other financial institutions. In a move worthy of television's MacGyver, Ramamurthi jury-rigged the infrastructure of the debit card networks so his customers could send funds instantly.
"I had to," he said. "I couldn't invent a new protocol."
This took 18 months of work, including negotiations with Visa, MasterCard, NYCE and Pulse. Some of these networks had never facilitated push payments before.
"It took a while to work with them to understand the risks of that," Ramamurthi said. "When you're pushing money you're basically asking somebody else to issue credit based on what you told them. And then they're saying, 'are you good for the money?' So we had to prove that we are good for the money. And then they said 'what mechanisms do you have to make sure nobody's committing fraud on your side?' Because I'm going to issue credit and the guy's going to take the money and go, and if tomorrow you tell me it's fraud and don't give me the money, what do I do? So we had to solve all those issues. It was painstaking."
But the demand was there among CBW's business customers around the country; daily transaction volume is now well past the thousands, Ramamurthi said.
Melissa Craig, a financial technology consultant, calls Ramamurthi "a visionary" for deftly blending banking with fintech — and recognizing that the two need each other.
U.S. bankers, she said, "are many years behind their global counterparts. The integration of U.S. banking and tech needs a good jump start."
As for the fintechs, they "are not going to get anywhere unless they find a federally chartered bank," she said. "The banks are holding the cards. The people in San Francisco hate to hear that. They think the fintechs are going to eat the banks. They're not."
Small Town, Global Reach
The bank's technological sophistication might not be apparent to visitors at its branch in Weir, where local farmers sometimes stop in to use the knife sharpener.
"It's a fascinating little town, it's like Mayberry in The Andy Griffith Show that's just gone bad," Ramamurthi said in 2012 at a Federal Reserve Bank of St. Louis conference. "There's no more barbershops."
When he and his wife Suchitra Padmanabhan, CBW Bank's president, acquired the institution in October 2009, it was under distress and had been operating under a cease-and-desist order from the FDIC for nearly two years. It took less than a year to get the order lifted.
"We did a study, reviewed every loan twice," Ramamurthi said. "We said 'OK, let's understand how lending works in this small town where everybody should be connected to everybody else in some fashion.' So we found there were 42 family groups that could be connected across the entire portfolio. Then I knew who the key people were in each family, so if a loan payment wasn't coming you knew which uncle to call. That's how I did my due diligence on that bank."
In a town like Weir, know-your-customer is "a nonissue," he said.
Saving the town bank and employing locals have earned the immigrant couple admiration among Kansans.
"They've been loyal to that town," said Wray, the Kansas consultant. "They could have easily folded up shop and moved to an office in Topeka to accomplish most of what they're doing."
Outside Weir, CBW Bank typically operates behind the scenes, hosting prepaid debit accounts for firms like Moven, provider of a mobile money-management app, and Leaf College Savings, whose gift cards help families save for their kids' education.
Alex Sion, president of the U.S. consumer business at Moven, said CBW has updated the Bancorp Bank's old model of partnering with prepaid card companies "for the digital age,"
"There are only a handful of banks trying to enable and drive innovation within the space," said Sion. "In some ways Suresh and CBW are the purest ones out there."
The bank also has a remittance service to India called Global Remit. It markets the real-time debit payment service to businesses as a payroll and medical claims solution using the BlastPay brand. The service is a key feature of CBW Bank's prepaid OneCard MasterCard for consumers, which is currently available on an invitation-only basis (a common practice for Internet startups with new products).
Banking regulations are pretty much the antithesis of Silicon Valley's just-do-it culture, and Ramamurthi alternates between boasting and grumbling about CBW Bank's compliance burden.
"I literally called my regulator before I came here to let them know what I'm going to say here and had to have a lawyer review everything I was going to say," he said at the Finovate presentation. "I'm highly, highly, highly watched." At other conferences, he has joked that anti-money-laundering regulations make him "an unpaid government informant with personal criminal liability," something that many bankers have undoubtedly thought over the years but few dare to say aloud.
Speaking of regulatory requirements broadly, he told American Banker: "We do everything a big bank does: Create policies, procedures, board approvals, risk assessments. … Yes, they give you some leeway if you are a small bank, but not in my case."
Why not? "I wish I knew," he said, adding that he suspects CBW Bank's unusual story and business model invite extra scrutiny.
Wray said it's conceivable that regulators could put the brakes on CBW Bank's growth in the coming years if they decide that the bank is too concentrated in these technology businesses and needs to be more diversified.
Ramamurthi was guarded when asked about the bank's growth ambitions. "The rate at which we'll scale will depend on the rate at which we are comfortable growing and our regulators are comfortable growing," he said. He also hopes to sell the technology he's developed to other banks.
Soon, Ramamurthi said, banks will face more competitive challenges from the industry he came from.
"There isn't a bank that's got the number of customers Facebook has or Google has," Ramamurthi said. "There isn't a bank that handles the number of transactions Twitter handles in a day. There are guys with infrastructure bigger than most banks in terms of volume. Just because a bank has $100 trillion in assets, that's just six more zeroes in a database. The database doesn't get any heavier.
"So banks have not been pushed. Twitter has been pushed and their systems are much better. And you are going to see some of that percolate into banking." He added, "That's what we are doing."