Transcription:
Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman. Betsy Cohen, founder of Bancorp Bank, is a pioneer in the area of banking as a service, where a chartered bank works with fintechs to provide the services that banks are allowed to provide, but fintechs are not, such as FDIC-insured savings accounts. This idea of banking as a service became extremely popular a few years ago as scores of banks got into it. Over the last year and a half or so, there's been kind of a freeze as bank regulators have hit at least half a dozen banks with consent orders related to this activity. We're going to get Betsy's take on this evolution. Welcome, Betsy.
Betsy Cohen (00:42):
Thank you very much for inviting me, Penny.
Penny Crosman (00:45):
Sure, thanks for coming. So when you founded Bancorp Bank in the year 2000, what was the need that you saw at that time for banking as a service? And I don't even know if it was called that at that time.
Betsy Cohen (00:58):
I don't think that we actually had a name. We were just trying to find a function and we came to it, I would say two or three years too early. But it gave us a learning period in which we could evolve what became a very lucrative business model, which minimized risk and maximized the low-cost deposits that came with the business relationships that we had with fintechs that needed our services or needed to rent a BIN or needed other services that we would provide on the platform. As a matter of fact, when we provided a business plan to the banking department, they were somewhat skeptical because it was new and it was unusual, and they sent an examiner to make sure that we were still in business and we were doing what we said we'd be doing every three months for the first maybe year and a half. And finally the examiner came to us and said, I won't be coming back because I'm retiring and I'd only like to ask one favor. And we said, of course, he said, I'd like to buy stock in the bank. So we felt that that was movement forward on behalf of the perception of the regulators as to what could be another way to approach a bank banking platform.
Penny Crosman (02:51):
So when you say you were early, do you mean because regulators weren't ready or because the market wasn't ready or because people didn't know what it was?
Betsy Cohen (03:01):
I'd say all three. And in addition to what you just enumerated, it was that the fintechs themselves didn't have the need or articulated need. They were still in the process of defining product, reaching out on a B2C basis to individual customers and identifying for themselves a path forward. So all of us were new together, which in some ways was a good thing. We were very good problem solvers on behalf of our clients, both with the regulators and other organizations. And so we continued relationships that we began maybe in 2002 when we were really ready to move forward with PayPal through today. And that's, I think, quite remarkable. PayPal has reached out as they have grown to other organizations that offer banking is a service to augment what we do, but they've never left the organization.
Penny Crosman (04:22):
So you basically purpose built this to work with fintechs. What went into that in terms of technology choices, in terms of creating an organizational hierarchy and staffing it and having the right expertise to do this?
Betsy Cohen (04:43):
We built piece by piece, we adopted and then adapted technology platforms that were extant in the market and integrated them into a single offering. Today, technology has moved on. I sort of analogy it to a house that I bought many years ago that was built in 1956, and the architect was a tremendously inventive guy who foresaw lighting in a way that really hadn't been done before. Problem was he didn't have a way to deliver it. So for the first couple of years that we owned this house, you'd walk into a room and a light would go on, not always the same light, but a light would go on and then you would walk out and turn the light off and repeat the process. That's really where technology was in terms of support of the large groups of data that were required to pass through a network in the early two thousands. Today, it's a very different story. Technology really has come forward. Embedded finances is a very important part of a financial offering. And the other side of the equation, which is the users are today much more sophisticated as well as being much more demanding than they were 20 years ago.
Penny Crosman (06:31):
So a few years ago, a bunch of smallish banks got into this. They discovered this as a business model, a way to make money basically to offer the same kind of back office for fintechs. When you saw that happening, did you identify that there might be trouble brewing with people getting into this and taking on fintech clients very quickly?
Betsy Cohen (07:02):
I think that we recognized that the banks that were stretching for a new platform and a new stream of income did not have in place the kind of technology depth or banking depth and experience. Remember, I started my first bank, I got the first de novo charter in 1973. So I had been through many cycles and knew that there were two sides to the balance sheet and knew a significant amount about technology toward the mid to late nineties. And one of the reasons that I moved on from a brick and mortar bank to an online bank was that I really was able to say to myself, what are people going to be doing 10 years from now? And you couldn't do that within the format of also running a brick and mortar bank that was a public bank, and that required not investment, but continual and very steady earnings in order to succeed. So it was that shift which made it possible. Not all the smaller banks have done that. Some of them combine those two functions and don't have the length of experience. I guess it's just a matter of getting older, but certainly the length of experience of some 50 years in the banking business that I have.
Penny Crosman (08:56):
And what do you think of all of these consent orders that have been coming out against banks that offer banking as a service? I don't want to be rude, but I've seen at least six in the last couple of years.
Betsy Cohen (09:12):
I think that the regulators are struggling. Penny, I think to say that there are no risks and that they're overreacting is not right. There are risks inherent and embedded in this process, but whether they require the kind of response that the regulators seem to be providing, I would hesitate to say, and I don't know each consent order in each bank and how dreadful it is and all the rest of it. I mean, we've had some examples, but it may be that the regulators are saying to themselves, if a bank processes a million transactions a year in the AML/BSA space and 20 of them are found to be inappropriate decisions, maybe that's just the canary in the mine shaft and we ought to get a closer look. So that may be the thinking that goes into a consent order. Let's slow this process down. But the impact on the bank and the impact on the marketplace, generally, banking accessibility, because many of the banks that are involved are servicing previously populations, which previously did not have as much access. They may not be balancing all the elements that I would think would be important.
Penny Crosman (10:59):
Well, and it does seem like the regulators are kind of expecting the banks to act as regulators for their FinTech partners.
Betsy Cohen (11:08):
Absolutely. And I don't think the banks are shying away. I think it's just a matter of the measurement of severity and how one approaches remedying either faulty processes or what may be just human missteps as you go through, as there are in the banking business that's not online as well as that which is online.
Penny Crosman (11:39):
Do you have any advice for other banks that might be thinking about getting into this or in the very early days of this?
Betsy Cohen (11:48):
Yeah, I mean, I think you have to recognize that it's expensive. It takes time. Onboarding has to be done carefully, that there are two sides to the ledger. And that when you're getting funds, you really have to do something with them. And what you do with them ultimately can be create difficulty. We've had a lot of examples of banks that have grown too fast, I think, and maybe without the proper safeguards, maybe Silicon Valley fell into that rank, or maybe people took their eye off the fact that banking is all about matching up your liability and asset durations. There are very basic banking principles which are as applicable to the kind of bank that Bancorp became as there are in brick and mortar banks. It doesn't change.
Penny Crosman (12:59):
That makes sense. So these days you run a firm called Cohen Circle. What are you doing there?
Betsy Cohen (13:04):
Oh, I'd say we're making mischief, but we're not. We're pulling the vast experience that we have in a variety of areas. One, as we've been discussing with online banking and the movement of funds, understanding of the public markets. Remember, I've taken eight of my idea companies to the public market, so I must have learned something. The understanding of securitization of asset light balance sheets of all the things that make up a total capital markets understanding as well as the overlay of pure banking and trying to select from the many hundreds of companies that I knew during the 15 years I was the CEO of Bancorp and have now come to a level of maturity where their access to capital or their interest in having a public currency for acquisitions or for many other reasons, puts them in a position of being an appropriate good possibility of a public company. So that's one aspect of what we do. But remember, we're creatures of the market as well. And so when public offerings are not be well accepted, we look for companies that maybe others took to the public markets that haven't fared as well, because some of corporate infrastructure and continual earnings and other aspects were not really present. And we helped them to go private and we generally do corporate advising as a business.
Penny Crosman (15:06):
And what do you look for when you're thinking about working with a fintech in some of the ways that you mentioned, what are some of the qualities you look for in management or some of the business model features you look for or staffing or other elements that interest you?
Betsy Cohen (15:24):
We're looking for corporate infrastructure to be in place, and by that I really mean seasoned management. This can't be their first idea. And I say that because in technology and customer response, the market moves very quickly. So a senior manager of an institution has to be alert and be responsive to those changes and be able to navigate the market successfully. I mean, we had the big Petri dish, as we call it during COVID, when nothing that worked before COVID worked during COVID and everything that didn't work before COVID worked during COVID. So it required a shift in thinking and having management that understands, that has had some experience with it is really critical. I think financial reporting capacity is also important. Knowing what you're doing on the financial side and having it appropriately staffed is really a critical function. And most importantly, having a differentiated product that serves a purpose and a need and has been market tested.
Penny Crosman (16:47):
That makes sense. Well, Betsy Cohen, thank you so much for joining us today, and to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Wen-Wyst Jeanmary. Special thanks this week to Betsy Cohen at Cohen Circle. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.