Online consumer lending: What is the secret sauce for partnering with fintechs in a rising-rate environment?

How can machine-learning credit models, digital customer acquisition, digital asset purchasing programs, and innovative products help banks in a rising-rate environment and help manage balance sheet diversification, liquidity, and income? Hear the practical application perspective, an overview, and key takeaways about partnering with FinTech to complement existing strategies through technology and online consumer lending best practices.

Transcript:

IVR Machine (00:07):

Please welcome to the stage, Miriam Cross Technology reporter, American Banker Matt, field President, and CFO, CCC Bank. Rebecca Bacon, VP Head of Financial Institutions Upgrade, Inc.

Miriam Cross (00:29):

Hi, I'm Miriam Cross and I'm a technology reporter at American Banker. Today I'm speaking with Matt Field, the president and Chief financial officer of CC Bank and Rebecca Bacon, the Head of Financial institutions at Upgrade. We're talking about online consumer lending and the art of partnering with fintechs in a rising rate environment. Matt, Rebecca, thanks so much for being here. Of course. I'll start by asking each of you to give some background on your respective company. Matt, can you tell us about CC Bank?

Matt Field (00:58):

Sure, yeah. CC Bank is short for Capital Community Bank. This year is actually our 30th year anniversary, So we're a reasonably young bank, especially compared to some of the banks I've met at the conference here. But we're a hundred percent located in the state of Utah. We have six locations across the state of Utah, 750 million in assets. And I think what makes us unique is you could really a bit draw a line through the middle of our bank. We're traditional community bank on one side, and then we are bank sponsor lending with FinTech partnerships and banking as a service kind of on the other side.

Miriam Cross (01:39):

What are some of the fintechs you sponsor?

Matt Field (01:42):

We work with a variety of different installment loans, buy now, pay later type of entities.

Miriam Cross (01:49):

And Rebecca, what does Upgrade do?

Rebecca Bacon (01:52):

So, Hi everyone. Rebecca Bacon. I lead our bank and credit union team at Upgrade. We are an online lender or Neobank. We facilitate origination of personal loans, personal credit lines, auto refi, as well as home improvement. And we now offer deposits to banks and credit unions. We've been in business since 2016 and done about 21 billion in credit products since our inception. About 1500 employees headquartered in San Francisco.

Miriam Cross (02:18):

And what kind of companies do you work with?

Rebecca Bacon (02:19):

So predominantly banks and credit unions. So we have about 200 partners to date of all asset sizes. So we have a few large money centers we work with. Really runs the gamut of community bank regional, some smaller credit unions. We also work with five of the top 10 credit unions in terms of purchasing our products.

Miriam Cross (02:38):

And CC Bank is one of your partners. So how do you two work together?

Rebecca Bacon (02:41):

Yeah, CC Bank is one of our first partners on the deposit program. So a little bit about the deposits. So upgrades started with loan products, so helping our banks and credit unions find interest income and diversify their balance sheets. But the hardest thing for us to hear in 2022 was we love the credit, we love the products, liquidity is tight. So we started the deposit program with a rewards checking account in 2021, and frankly no one was really interested in it. Liquidity was booming, but 2022 that changed. So we launched a high APY savings account and we're sweeping these deposits to banks and credit unions in exchange for loan purchases. So CC Bank was one of our first. So we've swept deposits in exchange for a forward flow relationship on the personal loan product and it's been a great, great for our banks to kind of secure that liquidity, but also great for us to continue funding on the loan side. We aim for the deposits to be cheaper than anywhere else a bank could borrow. So cheaper than Federal Home Loan Bank or somewhere like that.

Miriam Cross (03:46):

And Matt, for how long have you been working with upgrade?

Matt Field (03:49):

Well, Rebecca could probably correct me, but I want to say maybe nine months or something like that. Yep, that sounds great. Getting close to a year.

Rebecca Bacon (03:55):

We started the loan relationship at the same time, I believe, as the deposit.

Miriam Cross (04:00):

And what kind of lending programs do you do at CC Bank?

Matt Field (04:04):

Well, kind of how I mentioned before, so there's two sides of our bank. The largest side from an asset size is traditional community banking. So we do everything that would traditionally entail small business lending, real estate lending, construction lending, A and D, land development, all that kind of stuff. Lines of credits, SBA, 5047, all that kind of stuff. And then the other half of the bank is kind of these FinTech partnerships. So we are the bank sponsor lender of a variety of different FinTech programs.

Miriam Cross (04:44):

So is upgrade your first foray into personal loans directly from CC Bank?

Matt Field (04:48):

Actually not. We started our kind of FinTech lending journey, I want to say it was, I joined the bank in 2018. They had already had a bit of a run rate with it. I think maybe they started in 2017. Our relationship with Upgrade, like I said, has been a little bit less than a year, but it's been a good partnership. And really what led us into the partnership with Upgrade is, I mean, it caught our attention. So here's a FinTech lender that was willing and able to offset the loans that we were buying with deposits. So of course that grabbed our attention when we heard about it. We hadn't heard about a program like that before. We do purchase or we had purchased some loans from some competition of upgrade. But Upgrade was unique in that if you're willing to buy X amount of loans from us, we will fund it at the same time with equal offsetting deposits. So an opportunity to grab additional margin and net interest income with baked in deposits was really unique and attractive to us.

Miriam Cross (06:12):

What kind of demand are you seeing for loans across your portfolio?

Matt Field (06:16):

So that's exactly why we got into it. And the relationship with Upgrade and the relationship with upgrade's competitors is, I think I've heard other people mention it during the conference, but when the government started to combat inflation and take rates up during 2022, we saw our community pipeline start to dry up. Not a lot of businesses locally that were looking to make investments, looking to grow, looking to borrow money at the existing rates that were kind of existing at the time. And so with that bit of a dry up and slow down in local community lending pipelines, this was an opportunity with upgrades to really kind of supplement that business. If our traditional construction of a neighborhood of homes or whatever was going to slow down, how do we deploy working capital? How do we continue to stimulate interest income? And this was a way to offset that slowdown.

Miriam Cross (07:31):

And how does that compare with what you've been hearing from your other bank clients?

Rebecca Bacon (07:35):

Yeah, it's very similar. So the main reason people partner with us is for interest income, so to generate that additional net interest margin, but diversification too. So we've worked with a lot of partners that perhaps consumer is not their area of expertise. Maybe they're not a consumer focused bank or a commercial bank. So we've worked with a lot of partners that are diversification focused, so maybe they're an agricultural lender and they need to bring in consumer assets. So interest income diversification are big reasons to work with us. We've also worked with partners around geographic constraints, so focusing on perhaps a CRA problem or CRA strategy. For some of our credit unions, it's been working towards low income designation. These are all things that our FinTech partnership can solve for so we can generate additional customers, additional loan demand in those regions for partners.

Matt Field (08:29):

Yeah, I would just add, I mean the diversification that you spoke to. So there was a couple compelling and interesting reasons for us to get into this. I've already mentioned kind of the slowdown in our traditional community lending and this being a supplement to offset some of that slowdown. Diversification was definitely another, and I would say the liquidity component was a third. So for us, I mean we are a $750 million community bank. Consumer lending is not our specialty. We're mainly focused on small to mid-size businesses, construction, all kinds of things I've already mentioned. But a consumer that walks into the bank and wants, I think you guys do a thousand dollars loans maybe up to 50. Debt consolidation. We're not good at that. Yeah, debt consolidation. In fact, customers don't walk in because we're not good at that, right? They go to the credit unions or they go elsewhere to an online lender. And so this was an opportunity for us to diversify our assets a bit. I was actually at the bank in weird long story that I won't get into the details, but I was at the bank, I started as a teller in 2001 at the bank. I was in accounting and finance in 2008, nine and 10 during the great recession. And that lack of diversification was something that we learned a painful lesson on, and luckily we're still here to be able to learn from that lesson and where a lot of our pure banks unfortunately did not make it through that. But at that point in time, what was so hard for us was we had a portfolio that was almost uniquely full of construction lending, CRE backed lending. And when values did what they did and the recession happened, I mean it was horrible. It was painful and took huge losses. Fast forward to now, we're very focused on trying to diversify our business. I've already talked about the community lending, the FinTech partnerships, but this is an area of diversification for us as well. We don't have customers walking in looking for small dollar loans. Our partnership with Upgrade allows us to get into that asset class without having to develop the specialty underwriting and tools that it would take to make that happen.

Miriam Cross (11:09):

So that's something else I was wondering, did you consider building such a program on your own?

Matt Field (11:14):

Yeah, yesterday in a session I was sitting next to someone here from Capital One. That's something they, they're good at as a 750 million bank. Unfortunately, we don't have the tech or the coding talent to really build a seamless platform. So we do the bank sponsor lending where we're actually the lender originating the loans. This partnership with Upgrade is a little bit more simple where we're just buying some flow from them. It's originated at a different bank. We're not the originator. We're just buying flow as far as us building the products and services to capture that small dollar consumer market. It is just not a skillset that we have or a priority that we have at this time.

Miriam Cross (12:06):

And how important would you say is a digital end-to-end experience with applying for a consumer loan?

Matt Field (12:16):

Well, I think it's huge, right? Customers these days, they want the ease, the convenience. A lot of these lenders, I can't speak specifically for upgrade, you probably could, but it's same day funding, application decision, automated decisioning, same day funding and stuff like that. And that's a convenience that these type of consumers are becoming more and more used to. And that as a bank, we're focused on credits of half a million dollars, a million dollars, $5 million where we're preparing very detailed credit underwriting memos and packets and just does not make sense for this type of business and not something that we're good at. So that seamless experience I think is becoming more and more of demand. And you see it in numbers too. I mean, so much of the business is kind of pivoting towards FinTech, especially in this consumer space. And the convenience is kind of king.

Rebecca Bacon (13:27):

And I can add to that too. I mean on the digital side, the consumer is seeking that, like you said, a frictionless a hundred percent digital experience. Fast two days is where we're at in terms of app to funding. And I think if you even look, you go online and you look, how do I refinance my credit card? The first hits aren't going to be your local community bank. They're not going to be Bank of America Capital One. They're going to be upgrade and the likes of a lot of online lenders, because we excel in that space, we can pay off your existing card provider directly versus proceeds going directly to you. So these digital platforms have really perfected what maybe the credit union invented in terms of that signature loan, that personal loan product, and we can do it at scale safely from a credit risk and fraud standpoint.

Miriam Cross (14:16):

Has there been, have you noticed a market change in business over the last few months? Over the last year? Like more inquiries or more interest from banks?

Rebecca Bacon (14:23):

On the deposit side. For sure. We've definitely seen fairly strong demand for our new deposit program from consumers. The demand is still strong. I think we've seen this with general macroeconomic numbers, is that the US consumer is still spending and still seeking credit even at higher rates. So we still see strong demand on the loan side from the customer, and we're seeing strong demand still for our loan products, given they're mostly up in Prime, we lend mostly to a seven, ten FICO six figures in income. So banks are still comfortable lending there, and if they can achieve a liquidity solution, we still see strong demand on the flow side as well.

Miriam Cross (15:01):

And have the reasons that banks come to you, have they changed over the last few months or the last year?

Rebecca Bacon (15:06):

I would say besides the liquidity component, they're still pretty similar in terms of interest, income and diversification. We do see a bit more of folks looking to a co-owned nature of the customer. So I think the average cost of customer acquisition for a financial product is close to $500. So if we can acquire the customer and the loan and potentially reach a co-owned nature around cross-selling or marketing, that's also been recently a topic for a lot of our banks and credit unions. If there can be some shared nature of that, we do service all of the loans in terms of collecting a lot of the loan products. We're the servicer. So the relationship traditionally stays with us, but I think us as well as many fintechs are getting more creative on sharing the customer, which is important for financial institutions today.

Miriam Cross (15:54):

Yeah. So you said you've been working with Upgrade for about nine months. What have been the results of this relationship?

Matt Field (16:03):

Yeah, So you can help me out here. I don't have the numbers on the top tip of my tongue here, but I think we're a small bank, 750 million. We've got I guess one to 2% of our total assets in upgrade loans at this point. Again, it's not our primary business. It's a diversification play. It's an investment play. And kind of thinking about it a little bit, would a bank, as a bank, we personally feel like we would rather fill or use some of that investment bucket with loans as opposed to going out and buying T-bills or mortgage backed securities. And especially given some of the devaluation of those in the AOCI losses that are pretty common across the industry. So currently I want to say we have about $10 million deployed with upgrade in their loans. We're reinvesting the principal and interest payments and growing that portfolio. We also participated in upgrades deposit feature, and did the one-to-one match. And that, again, is a very unique product that somebody is willing to sell you a loan, but also give you the money to buy the loan.

Rebecca Bacon (17:37):

Our personal loan program right now, the rates are around 15%, so the return for our banks is around seven, 8% depending where you buy on the credit spectrum. So it's been a nice short duration asset for folks in terms of generating that interest income over time. I think a nice thing about flow programs versus T-bills or buying into treasuries is you get the benefit of credit changes over time. So we've raised rates just like everyone, four or 500 basis points on Titan Credit. So consumer delinquencies are rising across the space. So entering into forward flow, you get the benefit of that with every vintage.

Matt Field (18:15):

And that was actually, that makes me think of our strategy in getting into the loans with Upgrade was they're willing to give you the deposits to match it. And I just mentioned we have around 10 million and that's probably growing, but we didn't jump into the full 10 million all at once. And the reason we did that is we wanted to diversify the tranches that we were buying over time. So we jumped in at roughly a million a month. And again, the reason for that was I didn't want to get our full 10 million locked in on one specific monthly tranche and I don't know, capture some abnormal or unique timing or element of that consumer in that month. And so we spread that over a 10 month purchase period. And at this point, upgrade is doing the servicing, we're reinvesting those principal and interest payments and just kind of growing the portfolio. These are loans largely or maybe entirely unsecured, so there is loss potential. So that was a part of it. We funded, we used information upgrade's, been in the business since 2017. So we used some of the loss data and information from Upgrade to be able to understand what our allowance for loan loss should be on the portfolio. And so there was a period where we were funding that, especially kind of in that acquisition phase that we were funding that early on to make sure that we had adequate coverage, but we're past all that at this point and just kind of truing that up on a monthly and quarterly basis and now kind of reaping the benefits of the additional interest income.

Miriam Cross (20:02):

And I'd love to broaden this out to FinTech partnerships as a whole. So what is CC Bank's philosophy on partnering with fintechs versus building technology? Oneself? You mentioned before you don't necessarily have the resources to build yourself.

Matt Field (20:18):

Yeah, exactly. So I think there's a lot of ways to go about partnering with the FinTech or approaching the FinTech space. And actually I made just a few notes. I went out and looked this morning, and the Federal Reserve Bank of St. Louis reported very recently that in 2017, the share of consumer loan originations by a FinTech 21%, now that's close to the 40, and so doubling over five years and then personal loan balances was 33% FinTech in 2017 and is now 54%. So I think the strategy, and again, I'm not speaking to the Capital Ones and the Chases and the banks of America of the world, but for a community bank, the strategy of bearing your head in the sand and hoping that you don't have to think about this market, you don't have to think about the competition, I think is a bit of a death strategy long-term, right? So you can see it in the market. It's on the top of people's minds and of bank executives minds that FinTech is kind of coming into the space. So there's lots of different ways to get into the space. We are in the space in a couple of ways. We are actually a bank sponsor that put loans on our specific paper, and then we also have some banking as a service, FBO deposit type plays as well. This partnership with Upgrade is the easy way in building it all yourself, having it on your paper, there's risk that's challenging, it's regulatory sensitive. You're accountable for everything the partner does, and full compliance purchasing these loans from Upgrade is one way to get exposure to the FinTech market without having to build it all out yourself. And you're exactly right. I mean, we don't today, although we'd love to get to the point, have that tech talent to really code out new products and whatnot. So those are the couple of ways in, I think I mentioned to you before that when I joined the bank in 2018, I think we had one compliance person. We're a staff of about 150 people, and today our compliance team is closer to 10 or a dozen people. That's the approach of doing the bank sponsor on your own paper. It is very compliance sensitive. This upgrade partnership is exposure to the asset class, exposure to the FinTech kind of bubble, but very lighter, lower lift.

Miriam Cross (23:17):

And what kind of homework do you do on fintechs before starting a partnership?

Matt Field (23:22):

Well, again, I think it depends on what your strategy is. Our strategy of being the bank sponsor of the program and actually being the originator of the loan, the homework and the preparation and the vendor management and due diligence that you have to do is very, very robust and intense. I would say it's probably easily a 30 to 90 day process. You've got to know every detail because ultimately you're accountable for everything that partner does with Upgrade. They're originating on a different bank's charter. We are buying the loans after origination. The vendor management for that is more manageable. So not that it goes away, it still has to be done. You have to understand who you're working with, check references, understand the run rate performance of their loans, the tranches that they've originated over time, understand how they're tweaking and adjusting underwriting given market conditions. But it's a lighter lift to partner to approach FinTech in this way versus going at it the other way.

Miriam Cross (24:42):

And I was moderating panel yesterday about bank FinTech partnerships. And one question came up that I thought was very interesting about whether a bank is willing to be a fintech's first partner. And I was curious what your thoughts were on that.

Matt Field (24:57):

Yeah, So I guess for us, for CC Bank, we're more entrepreneurial upgrade conveys to that. Yeah, we're doing some stuff with upgrade that I think is less traditional, and you can elaborate on that if you'd like, but we're entrepreneurial, and I think we are open to that consideration. We're not the biggest player in this space. And so we're open to considering lots of different FinTech partners, including newer partners. We realize there's risks there and you have to be very careful. We love to see a potential FinTech partner that has been in the space for a while, because that usually lets you know that their compliance is robust, their experience in working with the bank has been there. They know what to expect. But I think if you go to Chase and you say, Hey, I'm a new FinTech, I want to start a bank partner program, you'll probably get laughed out of the room unless your founder is Elon Musk or somebody that carries a lot of weight. But for us, we are open to the concept, but definitely some enhanced risks that you have to get ahead of.

Rebecca Bacon (26:18):

Yeah, I would add to that too. There's a lot that comes with experience with the partners. So I think big difference between being the first partner and the first product. So when CC Bank joined us with deposits, they were the first, but definitely not the first partner. It's important for us even to tell our partners that we've been through exams with various regulators that we are profitable, that we have a track historical performance like you touched on. All of those things are so important to a regulated entity to see SOC reports business, all those different types of risk, whether it's credit risk, compliance, risk counterparty are also important when evaluating a partner.

Miriam Cross (27:00):

So, I'm curious, you said you upgrade started in 2017, so how did you attract customers before you had a track record?

Rebecca Bacon (27:07):

Yeah, good question. Well, although we were founded in 2017, our team has been in the business longer. So our executive team is the same team that built and scaled a different platform. So we have a deep history in the FinTech lending space. Our chief credit officer came from Bank of the West. So we have a lot of in-house expertise on consumer lending. But the track record to get the number of partners, we have really started with a lot of references. You know what I mean? A lot of our partners are happy with the product and perform reference calls for us to generate more. So we share all of our historical performance and complete transparency with partners. So for personal loan card, auto refi, every loan we've ever originated is available to view when you're looking at us as a platform. But we're also very financial institution friendly, which is important for us. We don't focus as much on securitization market or asset managers. We do have a near prime product that we sell to some public FORTI Act funds, but we focus on banks and credit unions. They're a long-term stable partner for us versus a trade like you would see potentially in the securitization market. But to do that, we have to have extremely robust compliance function. I think that's more important to them than the best user experience in the world. The highest NPS score, higher return, I think most important for our partners is that compliance risk that they can comfortably get through exams. So we provide people with, as I mentioned, SOC reporting. Anything an examiner would want to see in terms of complaint logs from consumers since we are the ones doing the servicing, but perhaps they still want to see that data. It has to be kind of full transparency with the bank partner.

Miriam Cross (28:46):

And what are the questions that banks ask you most often when they're vetting you?

Rebecca Bacon (28:50):

Everything I would say, I don't think we've seen a new question recently, but I can say most common is historical performance. They are buying the asset, they want to make sure it's performed financials that we are profitable, not going to go out of business tomorrow. And then probably that compliance function, so our compliance management system and the audit and how we carry out that oversight.

Miriam Cross (29:14):

And Matt, how important is it to CC Bank and your compliance team that this is a company that regulators are familiar with?

Matt Field (29:27):

Yeah, I mean, I think that can cut two ways. I mean, I think Upgrade is a great company. They're very compliance focused. They're committed to doing things. She talked about the expertise and the experience, their staff and their executives. I don't know that there's a ton of importance to having the regulators familiar with the company. I mean, for example, it could be a bad thing. Imagine a partnership with Binance right now. That's one they're very familiar with, but not in a good way, But kind of cuts the other way. So I think it's maybe less about the familiarity that the regulators have with the FinTech, although that can help or hurt. I think it's more about the homework that you do as a bank and the vendor management that you do and how you document that extremely thoroughly and who you're doing business with and that you can count on them to fulfill their obligations and their compliance responsibilities. And for some of the bank sponsor lending that we do, their ongoing expectations of audits, underwriting model reviews to make sure that they're compliant with fair lending practices and all kinds of other stuff. And so the expectation is huge. And just recently the regulators released updated third party partnership guidance for banks. And it's clear in there that although you might contract with a partner to do X, Y, Z part of the equation, you're ultimately accountable as the bank. And so that's just a huge part of this space.

Miriam Cross (31:23):

And you mentioned this a little bit before, but I'd love to revisit the question. How do you view FinTech partnerships for CC Bank's overall future and strategy?

Matt Field (31:36):

Yeah, I mean I think it's huge for us specifically, and this we may be the only ones that think this way. We never want to lose touch with our community and our roots. That's how we started 30 years ago. We think that's also a good diversification play to not be solely FinTech focused. But at the same time, I mean the numbers speak for themselves. FinTech is in a growth mode and the writings on the wall that you look five years down the road, they're going to play a bigger and bigger role in consumer's lives. And let me add that. If you think it's just consumer, you're sadly mistaken. In fact, I was looking 25% of small business loans I think in 2022 originated by an online non-bank lender. So we, we've got to be in that space. We've got to be focused on it. We've been in it, I think I mentioned since 2017. So we already have quite a bit of experience. We've gone through several exam cycles and some of those have not been fun. I actually joke with the executive that heads our FinTech partnership team, that he's my best friend when it comes to exams because they used to come in and be really concerned about interest rate, risk and liquidity. And now they spend almost all their time with him looking at the third party relationships that we have and making sure that we're on top of them and that we're mitigating the risk. They still look at interest rate, risk and liquidity, but it's more checking the boxes before they leave. But yeah, FinTech is a huge part of our future and we're going to kind of continue in this kind of bifurcated strategy and that diversification that offers as well.

Miriam Cross (33:43):

And is there anything I haven't asked yet that either of you would like to talk about?

Rebecca Bacon (33:47):

I would add just a bit to what Matt said about serving the community you're in. So that is something we've been able to help our partners with, particularly our credit unions. A lot of them have a limited field of membership and serve a few specific geographies and we can help them acquire assets there. But also if they look at a lot of, we've even seen it where we send them a consumer and they actually had a membership with the credit union already. So this is someone who maybe had a product with you, a mortgage with you, but didn't come to you for the personal loan. So it's a nice way to kind of recapture some of that local community and also generate obviously new customers in that community. So working with a FinTech doesn't have to be the concept of someone eating your lunch. It's kind of expanding on that local community footprint.

Miriam Cross (34:33):

Yeah, love to open this up to the audience. Does anybody have any questions?

Rebecca Bacon (34:43):

One brave soul has a question. Come on.

Audience Member 1 (34:49):

Thank you very much for your candid conversation. I found it very helpful that so that seriously.

Rebecca Bacon (35:12):

Thank you very much. Really appreciate that.

Miriam Cross (35:16):

In the back.

Audience Member 1 (35:18):

How do you go about evaluating the right?

Matt Field (35:30):

Yeah, So that's a great question. I mean, I think there's a lot of different considerations points we've hit on some of them already. Is it the fintech's first bank partnership? Although I said we'd consider it, that is a concern, but it is something that we look at. We look at some of the things that Rebecca talked about. So we look at the experience and track record of the executive team if some of these fintechs have already been in the space, we look at their history, their performance, we look at their financial performance, which can be tough. We see a lot of fintechs that are exclusively focused on growth and kind of put their earnings and their retained equity in a second or third seat. So all those kind of things are consideration. We look at the product they're offering, we look at regulatory risk and sensitivities with the products they're offering. And if it's something that we think we can get ahead of the financial condition of the company, the credibility of the company, lawsuits outstanding, all kinds of things like that is what we're looking at. And of course, if there's a business case, it's got to be mutually beneficial for both of us for it to work. Is there meaningful economics in it for us such that it's worth the risk? We come across a lot of opportunities where this would 10x your FinTech partnership count, but only 50% increase the economics. And so we're very sensitive to all of those dynamics and looking at them kind comprehensively before making that decision.

Rebecca Bacon (37:30):

And I'd add too, the growth point is an interesting one. When looking at a partner, we saw this a lot through 2020 when we had so much demand for loans, we were wildly oversubscribed, but you never want a partner that's so focused on growth, they would originate at the price of performance. So that's something that I think has been critical and a lot of our more sophisticated partners are always asking that. So we've maintained an extremely tight credit box despite whatever's kind of pressures go on the growth side.

Audience member 2 (38:13):

Do you get reach out from fintechs from overseas like Europe and Asia, and is that something you're open to or is that really sort of off the charts for you at this point?

Matt Field (38:28):

We do. We have one current FinTech partner in our great white north neighbor in Canada, which is certainly different maybe than a European field, but we have talked to European companies. We're open to considering everything we do retain, and the regulators asked us to retain a list of fintechs that we considered. And so these are the fintechs that we've passed through. These are the ones that we didn't pass through. And to be frank, there's a lot of names on that list. But yeah, there's great companies over in Europe. They're ahead of us, I think in certain areas, especially crypto and some other areas. And we talk to companies in Europe and we have at least one partner outside of the US. I think it does bring some enhanced risk, just familiarity with Utah, but the US regulatory environments and the rules and regulations that exist here, but it's something that we consider. Yes.

Audience Member 3 (39:47):

Hi, Matt. You mentioned you made a comment right near the end of the session around the amount of time that auditors are spending, talking about third party technology relationships as opposed to other types of risk, if I heard that correctly. Can you elaborate a little bit? How much has that maybe changed over the last five years, and relative to the number of partnerships you might have at CC Bank?

Matt Field (40:12):

Yeah. We have roughly 12 partnerships. So we're not huge, but a meaningful amount. And I was at the bank, I'm actually a Boomerang employee, so I started as a teller in one. I left during the great recession and was hired back. So I have experience at our bank pre and post recession and pre and post of FinTech partnerships. And I'm joking with my coworker when I tell them, Hey, thanks for taking, I'm the president and CFO, so I take the brunt of the Alco concerns and this and that. And I joke with him, Hey, thanks for diverting all their focus and attention to these third party relationships and fintechs. But I mean, there's some realistic truth to that that I've never been a regulator and don't aspire to be one. But I think they scope out what they want to look at, but they also have stuff they have to look at, I think. And they spend a lot of time and attention while they're at our bank looking at these third party relationships and so much so that I think it has reduced some of their focus and attention on other matters. Now I do see that kind of pivoting. We just had the events of March with SVB and Signature and Silver Gate and First Republic and so on and so forth. And liquidity is king, which is an interesting component of this relationship with upgrade is it comes with liquidity, but I see heightened focus on that. We have our exam coming up in August, just received their request list, and I think that's going to be heightened attention. So are we testing our lines? What kind of liquidity lines do we have? How resilient are those in a economic downturn or if we had financial struggles, interest rate risk? I mean, we just went through a period unprecedented speed of escalations of rate, and I think we're expecting to hear their latest decision here in a couple hours today. But they have a very heightened focus on third party risk management and these strategic FinTech partnerships. And going into it, that's a huge investment. So almost 10% of our staff work on the compliance team now focused on this. And that is one advantage of the upgrade program is they're originated at a different bank, not ours. It just gives us exposure to the asset class, it gives us income return, and with less compliance lift, there's still obviously vendor management and you have to be on top of your asset quality and your loan loss metrics and make sure that you're prepared for that. But it's a different feel and flavor.

Rebecca Bacon (43:29):

Yes.

Audience Member 5 (43:33):

Yeah. So throughout this conference I've heard a lot about FinTech partnerships on mortgages and personal loans, pretty big consumer products. But for Rebecca, primarily for this question, do you see any similar opportunities in the credit card space? Because before credit unions or banks like CC Bank with companies like yourself who have credit card products to offer to consumers directly, but maybe not via throughout traditional banks or smaller credit unions?

Rebecca Bacon (44:00):

Yeah, definitely. I think we're seeing a lot in the card space, some big headlines around the Apple card and things like that. Upgrade does offer a card, so our card is a bit unique. It's an unsecured line of credit with a card access device, so they can access and draw on the line at point of sale via the card, but it doesn't revolve. So that's something I think fintech's done. A great job, of course, is innovating and it's an innovative solution. So we are offering consumers, our card product goal is to get the consumer out of the revolving trap of credit card debt. So if you look at the personal loan, the use case is debt consolidation, and a lot of people will run up a credit card and refi it with a personal loan several times with an origination fee attached. So the better product for them is the upgrade card where they never end up in that revolving trap. You pay P and I each month and there's no concept of minimum payment or a minimum due amount. It's just a stated of due amount that's P and I on anything you haven't prepaid. Every month will be a new subline. So I think in the card space, we have done an upgrade. You'll see a lot of innovative products like that to try and get the consumer to a better financial position. The card product, the same way we partner on the personal loan side, we sell it to banks and credit unions, those draws so they can invest in an extremely short duration and smaller size loan. Those are closer to $1,200 versus our average of 16,000. I think that's something we've seen in the HELOC space. People try and get a HELOC on a card or try and get a consumer who has equity in their home to use a HELOC for financing versus credit card. But I think what we see is they just don't do it. It's too hard. They don't want to take that equity risk on their home. So cards like the upgrade card I think will be more common as we're headed into the future, especially with banks and credit unions funding innovative products like that. The servicing on that product, as you can imagine, is a bit heavier. So we do that as well. So we absorb that for our partners.

Matt Field (46:02):

And then I could say as a bank, we actually are bank sponsor and we hold a bin with MasterCard of a FinTech credit card, not the upgrade, but a separate product where we're the originator of that loan, we're the bin. We hold a relationship with MasterCard, but it's deployed through a FinTech relationship. We're not currently buying credit card loans from upgrade yet. We're on the installment space, but that's another exposure and diversification we can have if we wanted to.

Miriam Cross (46:33):

There's a question over here. Yes. Okay, cool. Anybody else?

Audience Member 6 (46:44):

What is our main pain points that you guys are facing in your core banking platforms?

Matt Field (46:56):

Let's see. So we're with one of the big three. I won't call them out. We actually pivoted. We were with a different, one of the big three, about three and a half years ago, and we pivoted and switched. Frankly, it was largely a pricing decision. The price had become, it just had escalated so quickly. Over time, different products and services added on account growth. And when we started shopping, we were able to capture a significant price reduction moving to a different one of the big three. It was super painful. I hope we don't have to do it again, but it was a cost play. As far as other pain points, I think it's just challenges and innovations. So really kind of like that modern banking core is the challenge with some of the big three. And our current core provider is like those API integrations, open banking, just not something they really super excel at.

Miriam Cross (48:14):

Anybody else yes. Mike's coming.

Audience Member 7 (48:26):

Thanks. So I'm just wondering, for CC Bank, what methods or what strategies do you have to ensure that of the multiple partners that you have, that there isn't spillover effect if something goes awry with one of your partners, that it doesn't tarnish the entire product line? I mean, I'm wondering what you can do as a bank to hedge against that risk.

Matt Field (49:00):

Yeah, I mean, I think that's a great question. And I mean, I think we just recently saw some concerns with that with the consent order at Cross River. I think it's a valid concern, and I think it just comes back to the third party risk management. So on the front end, being very aware of who you're going into business with, aware of their financial condition, aware of the products and services that they're offering, aware of all those kind of different factors. And then on an ongoing basis, that very, very close working relationship that, I hate to say it, but you kind of become their regulator, right? You're in their business. We do site visits all the time. We do recurring audits that are contractually required, whether it's model review or BSA, AL. So I don't think you can ever guarantee it doesn't happen, but I think you can try to mitigate that with a lot of vendor due diligence and ongoing just kind of supervision of that entity and that relationship and trying to stay very much out of it.

Rebecca Bacon (50:18):

I'll even add to that too, there's a lot of things that I think have become industry standard in terms of contractual protections. So things you can advocate that you look for in a partner like the onsite visits, things like that. Assuming liability the partner can take on for you. So those type of, I think protections are really important to look for when taking on. Perhaps. I know one for example, that upgrade does is fraud risk. We take that if there's a loan that was had a case of ID fraud, we repurchased the loan. So that type of risk, some of those risks can be mitigated contractually.

Miriam Cross (50:51):

Thank you all very much and thank you so much for being here.

Matt Field (50:54):

Thank you.