The Pains of Starting a Fintech Bank
Ever since the financial crisis, starting a bank from scratch has been hard. But opening a digital-only de novo bank is an especially tall order.
Don Allen Price, a longtime industry executive, left Comerica in November with a plan to start the first nationally chartered, digital-only bank, similar to the challenger banks of the U.K. But discouraging signals from regulators and a lukewarm reception from prospective investors have made the process slow going.
His struggles highlight a larger issue in an industry famously resistant to change: Everyone complains that banks don't innovate fast enough, but facts on the ground often make it hard to do so.
The United Kingdom has already seen the emergence of mobile-first institutions that have won regulatory approval for a banking charter. It is only a matter of time before they invade the U.S. market.
Price, who most recently served as the chief financial officer for the retail and wealth management units at Comerica, has a similar goal as many of the fintech startups that have proliferated in the last few years: create a digital, customer-oriented experience. Unlike startups such as Moven or Simple, he didn't want to partner with a legacy banking institution, since doing so would undermine the benefit of starting fresh.
"The fintechs were good at disrupting certain aspects [of banking] but to be at the center of the customer's universe you really have to own the core transactions account," Price said.
A major reason why banks have trouble innovating "is not due to the cost of new technology, but the cost of replacing legacy technology with new technology," said Price, who also worked at Barclays and Bank One.
So Price set out to build a bank from the ground up using the new technology, along with new values. He was inspired by being part of a team at Comerica that was chosen to brainstorm and figure out how the bank of the future might look.
"Comerica, like many regional banks, suffers from a lack of relevance from the new generation, who are digital natives and digitally savvy," he said. "So I was part of a team that was tasked with trying to find out how to solve this. I think we came up with a pretty good plan, but it was too much of a change for a legacy company. Then it kind of got put on the shelf when Comerica went through some issues that have been widely publicized." (Comerica, based in Dallas, declined to comment for this story.)
Price called his new venture Antithesis Holdings – "because we want to be the antithesis of what banking currently is," he explained. "We want to reimagine banking, building from the ground up." Price added that while Antithesis is the name of the holding company he incorporated in January, it will ultimately not be the name of the bank itself.
After promising initial talks with local regulators late last year and early this year regarding a full bank charter, Price was later informed that regulators in Washington would be taking a step back, instead focusing on examining a specific parts of fintech, namely online lending and cryptocurrencies. So there would not be much use in even applying for a charter for a while.
"It sounds like they are biting off one chunk at a time, so it may be a ways out until they look at an FDIC-insured digital bank," he said.
You could count on one hand the number of de novo banks approved since 2010, and those that did make the cut had more traditional models. One glint of hope for Price's team is that the Office of the Comptroller of the Currency recently said it was open to the idea of extending limited-purpose charters to fintech firms.
"If the OCC does move forward with idea that has been floating around of extending special purpose banking charters to certain fintech companies – in payments and lending for example – … and see that the sky didn't fall, they might then say, Now let's do it with a depository institution," said Brian Knight, senior research fellow for the Financial Markets Working Group at the Mercatus Center at George Mason University.
In the meantime, Antithesis – currently made up of three full-time employees and six part-time or unpaid team members – is not twiddling its thumbs. It has a tech and ops team actively building out its infrastructure while the company continues to court investors.
The latter has also been a challenge. Investors in de novo banks and in fintech startups tend to be two different classes, said Carla Brooks, a managing director at Commerce Street Investment Management in Dallas, which is working with Antithesis on finding investors. Also, getting investors in a new bank without yet having a bank charter can be somewhat of a hard sell, and leads to a kind of "chicken and the egg" scenario, she said.
"Finding that right investor that understands the whole package of what [Antithesis] is doing, those people are few and far between," she said. "But it's doable."
Price said he is confident that finding investors won't be a great obstacle; the company is about halfway through its capital raise, and expects to be done within the next 60 days. He would not say how much money Antithesis seeks. Price said he wants to be ready as possible when regulators are prepared to extend a charter to a digital startup bank.
"We're building out our infrastructure as if we're going to be regulated like any other bank, or even more so," he said.
Price's resume should help in the process. If U.S. regulators welcome digital startup banks as their counterparts the U.K. and Germany have done, they may be more likely to do so for a startup with former bankers in leadership roles, said J. Brennan Ryan, an attorney with Nelson, Mullins, Riley & Scarborough in Atlanta.
"Without question I think regulators would want a number of key management personnel to have prior banking experience," he said. "I think when it comes to this there is still a bit of a learning curve for the regulators; I think it [a digital-only bank getting a charter] will happen. It's just a question of how quickly."
For Price, the future of banking is about more than computer systems, and involves changing the relationship between bank and customer.
"It's not just technology. Innovation can be about how you communicate with customers and what you communicate to them," he said. "A lot of people want to differentiate on products and services, but banking is not that kind of industry; it's about user experience and values."
The "mass marketing" approach in banking, as Price puts it, will no longer work for millennials and future generations. Instead, "everything has to be customized; it has to be the right place and the right time with the right offer delivered in a way that's easy to comprehend." Millennials, he said, also want the companies they do business with – including banks – to share their values and social concerns.
Without giving away the "secret sauce" behind Antithesis, Price said it would start with consumer deposits and focus on establishing trust and providing convenience to its customers, more so than the existing banking industry.
Price noted that banks, like airlines, often rank high on lists of most hated brands by consumers, and that perception is ultimately what he is trying to change.
"If a bank right now tried to do what we are planning, they would be thought of as disingenuous," he said. "We don't even think of legacy banks as our competition, but the other challenger banks."