How to Build a Digital Bank

Transcription:

Penny Crosman (00:08):

Welcome everybody. Thank you for joining us for this late day session. As Stephanie said, I'm here with Danielle Kane, who is Director of Small Business Lending at Grasshopper Bank. She previously worked at Lending Club and at Radius Bank, and as you know, Radius Bank Lending Club bought Radius, and so she was part of that team. And so we're just going to kind of walk Danielle through the Grasshopper journey and what they've been doing, how they've been doing it, what they've been building, and kind of what her experience has been. And she's game to take questions from the audience. If anybody wants to ask, just raise your hand and I'll try to keep an eye out. So just to start with, where did the name Grasshopper come from?

Danielle Kane (01:02):

So just to caveat here, I was not here when it was named back when it was founded in 2019, but we stuck with it. So Grasshopper was actually named after Grace Hopper who invented cobol, which is one of the first computer languages for business and finance. So Grace Hopper turned to Grasshopper, and a fun fact about grasshoppers is that they can only move forward. So our tagline is only forward.

Penny Crosman (01:32):

I did not know that I'll be paying closer attention to Grasshoppers in the future. So can you tell us a little bit about what the original mission was and then how you've evolved since you started in 2019?

Danielle Kane (01:47):

Yeah, so Grasshopper was founded in 2019. It was a very different bank. It was only one business vertical VC in private equity and everything was built in-house. And then in the summer of 2021, that changed when Mike Butler came on, who some of you in the room might know who he is. Mike Butler came on and really a bunch of us from Radius came with him and we decided that we wanted to refocus our strategy and really invest in small businesses. And the best way to do that and deliver the best client experiences is move from an all in-house tech strategy to a partner first tech strategy. So that began in November of 2021 with our core conversion from TEOS to FIS. And then we built our tech stack on top of that with strategic FinTech partners and we launched a bank in March of 2022 with five new business lines. I can list them off. So CRE lending, SBA lending, small business banking, banking, a service, and API banking, which I coupled together and then yacht lending, which I can't forget.

Penny Crosman (03:07):

So anyone wants to buy a yacht, you know where to go. So what was behind the decision to go from buying everything, building everything in house to partnering for everything?

Danielle Kane (03:20):

Yeah, I think that from our standpoint, it was a very obvious decision and there's a couple of reasons why I think that we really wanted to be the best way for us to be nimble, to scale efficiently and to make sure that the best client experience for our best client experience to be delivered was to really lean into the best technology, which is coming from fintech's nowadays, and to lean with them and partner with them to build this bank in reality, not doing it.

Penny Crosman (03:55):

And yet you do have some developers and they developed your NAMI app?

Danielle Kane (04:00):

Yeah, so our mobile app is powered by NAMI, and the thing that we really like about NMI besides being a great strategic partner is that they built everything that we needed for table stakes to deliver to these clients. So in reality, bill pay, money, movement, insights, mobile check deposit, so really in our mind tables stakes and the needs that we wanted to launch with the MVP and the big thing for us and that NAMI did was able to open up their NAMI application framework in reality, which is kind of the idea of open banking and apping. And what we did is that we had an innovation arm, so our own engineering team came in and made things that people were asking for, our clients were asking for. So that we had two roadmaps parallel. One, maintaining the table stakes and the app. And then the second one, innovation. So a couple of things we made this year on top of keeping a great UX and client experience on the app is virtual debit cards, card card-based team management, international wires secure an app in chat and we wouldn't be able to do that while being bogged down of maintaining the actual app itself.

Penny Crosman (05:22):

How do you decide which new thing or which new feature to include or which new thing to offer? Is it mostly through just listening to existing customers or is it looking at what's possible and then figuring out what's practical for you?

Danielle Kane (05:37):

Yeah, I think it's a combination of things. I think we definitely listen to the feedback of clients and we really should be delivering things that our clients are asking for and eating. And that's I think really important for personalization and specialization there. So one is definitely client feedback. The next thing is what we think would be moving the industry forward or moving our app forward for acquisition as well. So it's both clients and what we see in the marketplace and what we think be more quick wins to get to market quickly.

Penny Crosman (06:17):

And what do you look for when you are evaluating fintech's? What are some of the characteristics you're looking for in the company, in the technology, in the people?

Danielle Kane (06:29):

Yeah, that's a great question. So like I said, our entire strategy is based on these leaning into these FinTech partners. And the big thing for us, and I think that there's differing opinions about how others look for these FinTech partners, but what we really like is early stage companies. The reason that we like early stage companies is that we really want to be engaged in the design of the product and the experience. And early stage companies allow that to happen, no negativity towards these larger companies. But when we launched a bank, we were a $300 million bank and in reality, it's going to be hard to get these large companies to do what we need at a time we need because we're such a small fish in a big pond where these early stage companies, we can be their first revenue stream, we can be their first company, we can be their first product, and they can really build with us what we want and what is best for our clients.

(07:33):

I think the second thing that we look at is the big differentiator for us is less about the technology and more about the people behind the technology. I think that people can come up to us and say, our technology can do this, or our technology can do that, and in reality they very well could do this or that, or you could just have a really good salesperson. But I think what we really care about is the people behind it that are saying, Hey, this is our technology and we're willing to make it work for you and we're committed to what you're looking for and delivering that digital banking experience. And we're really willing to have a shared goal there. I think another thing, and I heard in the past panel I think from locality is that building a bank from scratch can be very expensive, but it doesn't have to be.

(08:33):

You can have partners that also have skin in the game and that have a mutual success where you can keep accountability so that when you're successful and you scale, they can also be successful in scale. And I think we found really good success of keeping the cost of acquisition, the cost to maintain down because of that mutual success. I think from us and our right now, we're can lists off some partners right now, but Mantle is our DAO partner. We use Alloy per decision engine Army is our online banking partner and really we've been working with them not only at Grasshopper but before at Radius two re on the SMB side perfecting their product so that we can have all the data for them to scale and to sell to other clients as well. We believe that it's not just the technology, it's the technology and the driver behind the technology that's making a bank successful and that we want to be able to improve the industry as well and not only be the winners of the industry and just mutual success for their overall industry of small business.

Penny Crosman (09:42):

So those companies you mentioned are fairly well established, I would say. I mean they're not like the old DOG, but they're not like a year old either.

Danielle Kane (09:52):

But I think the key thing is that when we started in 2021 at Grasshopper, they were more well established, but we've been working them for a very long time before that at Radius. So this isn't our first rodeo. There's a reason that we picked these partners. And if you look back to see the beginning of them, Radius was a part of it.

Penny Crosman (10:18):

And at that time, did you have any worries that they might not make it or they might have trouble with compliance or any of the things that you worry about with the early stage partner?

Danielle Kane (10:29):

Yeah, I think that there's always advantage and disadvantages of any partnership. I think that the thing here is that committing to them and having working together for that mutual success is really what you need to do, believing in them. If they're going to take a chance on us and believing in us, you also need to believe in them. And I think that we got pretty lucky if they're still here today helping us.

Penny Crosman (11:01):

And what kinds of businesses do you serve mostly?

Danielle Kane (11:05):

Yeah, so right now our main focus is, well first of all, we serve a whole scale of businesses from micro businesses all the way up to VC, private equity, and their portfolio companies. Our biggest investment right now, like I said before, is the small business side. We do think that there's an ability for disruption in the industry and that there's on the consumer side, that there's all these institutions and these products out there that are giving great experiences, great services to them. And on the SMB side, we're missing the mark and that we can be able to do the same thing for them. So that's the reason that we're investing in the SMB market.

Penny Crosman (11:52):

That makes sense. So I know some people here would say that a lot of what they do with small businesses happens in the branch, that people are still coming to the branch to talk to a human being that a lot of accounts, the person at BMO said most of the account opening for small businesses happens at the branch, now you're digital only. What's the counter argument to that?

Danielle Kane (12:22):

First, I just want to say that everyone's hesitant path for success and our path has going to be look different because of the structure that we are. But I think that the reason that people are making, if someone is opening more accounts in the branch is because they aren't able to successfully and efficiently open accounts online.

(12:48):

It's outdated to think that you need to be in person to talk to a human at Grasshopper. You can talk to a US-based client service by phone, by text, by chat, by email, in app. And we're not pioneers here. There's many fintech's, many digital banks that can do the exact same thing. I think that where we're missing or where there's confusion in the market is that there's lack of awareness. So clients are going to these community banks, they don't know that there's so much more technology out there or in branch, not community banks, but there's so much more technology out there that can do so good for them. And that is just there's a lack of awareness to let them know that technology and human touch isn't separate and actually technology humanizes banking and allows you to do banking better and more and have the human touch as well from afar.

Penny Crosman (13:49):

And how do you go about expand, strengthening the relationship and expanding it where some people would say that's where a human comes in, building the trust, in building the association.

Danielle Kane (14:06):

So I do think that, like I said before, being a digital bank where we see ourselves as a FinTech, but with a banking charter, a technology with a banking charter does not mean that there's no human touch to ourselves. We have the ability to work with our clients through their business journey and be able to deliver them the products that they need. Just because we're not in person does not mean that we're not being able to give the specialized needs that they need and be able to give the products that they need to scale.

Penny Crosman (14:44):

Sure, that makes sense. And we sort of touched on this already, but what would you say are the pros, the cons of being digital only? Are there any downsides that you guys experience?

Danielle Kane (14:56):

Yeah, there's advantages and disadvantages of however you for digital banks or institutional banks or community banks, I think there's some obvious advantages for digital bank. I think the first one is that the lack of overhead in infrastructure. So the money that we're going out for these branches or the infrastructure to maintain the branches all goes into the money of our clients. So we have a really nice API, we have cash back on our virtual and physical debit cards. We have no monthly fees, we don't upcharge for transactions, so there's a lot of money that they can save or money back in their pockets. I think the other one, which is a little obvious as well, is that it's banking anywhere. So they can have all the resources they need in their palm of their hands, move money in and out, get paid pay vendors and really manage cashflow.

(15:59):

There's a multitude of things within our app that you can do and you can really do it however you need, wherever you need to do it, however you need to do it, you don't need to go into a branch and take that time back to your passion project to your family business. And I think it's also really important in how we're so successful as well is at the acquisition front we open 90% of our accounts within less than 10 minutes fully online. That's the happy path. 10% is through manual view and in reality that manual review is already done through documents right when they apply for the account. So the 10% open within less or decision within less than a day. So I think that's a huge advantage to us. I think that people are extremely impatient and that if you can't open account online within less than 10 minutes, almost fully automated that you're going to lose that acquisition there.

Penny Crosman (17:01):

I think another popular myth, and maybe it's a misconception, is that the very small businesses might be okay online digital only, but then when they get to a certain size and complexity and size of loan, then they're going to want to go to a more traditional institution. What would you say? Are you getting bigger companies, bigger loans?

Danielle Kane (17:23):

Yeah, I think that, like I said, our businesses right now are on the SMB side, but we do have verticals, like I said before, we have startup banking vertical, which I, it's accelerated checking. We launched that two months ago. Then we have our VCP checking and portfolio companies as well as lending on the larger side. I do think that the key thing for us to win over more is to be able to more on the lending side, I think is to onboard find the way to onboard these loans, these clients, these more complex clients, these VCP and their portfolio companies where they can view all of it in one shared view through online. And right now we don't have a lending piece to do that, but I think that that's where we're moving towards.

Penny Crosman (18:22):

And I think you're also working on sort of a lending marketplace where you will help people get loans at other places where appropriate.

Danielle Kane (18:30):

Yeah, so I think a big thing that the issue for these small businesses or these micro businesses is that a lot of lenders don't think it's worth it with the environment right now to lend off these smaller loans to clients. So they're having really trouble trying to find lending. So what we're building now into 2024 is a full scale marketplace so that we can have loans from all the way from micro businesses all the way to startups. And last week we on boarded our first AI lender Lenda. They already approved I think 25 loans in the past week for us. So 25 of our clients that didn't have access to capital before are now having access to capital. And I do think that that's huge.

Penny Crosman (19:28):

Now, if you're partnering with a FinTech on that level, is there an extra level of vetting and due diligence so that for instance, if they were hit with some sort of fair lending consent order or something so that it wouldn't backfire on you?

Danielle Kane (19:45):

Yeah, I think that all our partnerships go through the very strict due diligence and compliance partnership. I think that Lenda specifically has been in the works for a while now and has been, even though we just launched it, we've been talking to them for over a year now and it's really doing our due diligence. But when we were ready to act is when we did.

Penny Crosman (20:14):

Alright. And can you tell us about any of your other FinTech partners? You mentioned a few in the beginning that you use for digital banking.

Danielle Kane (20:22):

Yeah, so we use Treasury Prime for our APIs, so banking as a service and API banking. We use, like I said, mantle for our digital account opening. We use Alloy for a decision engine. Verity is we use for AI fraud with an onboarding, we use Hummingbird for compliance. I'm probably forgetting someone and they're probably going to be angry with me. Yeah.

Penny Crosman (20:51):

Alright. So you guys kind of relaunched in 2022. Could you tell us a little bit about the relaunch and why you felt the need to sort start fresh?

Danielle Kane (21:08):

Yeah, I think that it all comes down to being client first and being nimble. Like I said before, the speed to market was really important for us and the ability to scale efficiently and we wouldn't be able to scale efficiently if we did everything in house and we wouldn't be able to have industry leading technology if we did everything. So I think, like I said before, there's a ton of technology out there with all these great fintech's and instead of trying to always work to take away the piece of the pie or win the piece of the pie back from fintech's, you really need to lean in to them and say, Hey, if we can't beat them, join them and make improvements there. And I think that's also another reason that we are really important for bass partnerships is that we have a core deposits.

(22:05):

Most important thing for building the bank and that's why I lead SMB banking and we really are growing rapidly there, but we also believe that fintech's have great solutions and that the idea that we're always trying to beat them in reality is that majority we aren't going to and we need to lean with them and be able to take the piece of pie back by supporting them on the best side and giving them that great bank partnership so that the industry can have this great technology and that we can also be successful by holding those deposits as well.

Penny Crosman (22:48):

You mentioned that you're growing deposits and I know people earlier were talking about this sort of race for deposits that there's a big focus on trying to get more deposits right now. What would you say is the key, and you probably don't want to give away too much, but is it all about rate or is there more to it than that?

Danielle Kane (23:07):

No, I don't think it's about rate. I think, like I said before, we've been doing this for a year and a half in reality to the market, probably a no name, but we're opening thousands of accounts a month. And the reason is because we're in placements that our people are searching for or actively searching for bank account, they're sticky, but that we're doing the quick wins of going after clients that are actively searching for a bank account and we can open the account in less than 10 minutes with a very easy simple client experience. And so once we win them over with the convenience there, once they see how great the experience is, how we at retain them. And I think we're at a 95% retention rate right now a year out. So I'm doing pretty good as well. Yeah.

Penny Crosman (23:59):

At least the first year's going well. Yeah, that's good. And what about scaling? I don't know if you can share how many customers you have today, but do you have plans for how you can grow as your customers grow and as your customer base grows?

Danielle Kane (24:17):

Yeah, I think scale is very important. I think that the way that we built the bank was for the ability to scale. When we launched a bank back in March, 2022, we were at a $300 million bank and now we're about 690, so 2.3 and a year and a half. And I think that the ability to grow even more was probably because our regulators didn't want us to. So nothing more to say there. But I do think that scaling efficiently is really important and being able to prove that profitability and getting to profitability quickly is important. And I think that we've made the model to do so. The only thing that's stopping us right now from scale is investment in marketing and I think that the first year was to prove that the man versus machine acquisition funnel works and we did prove it works. And so now we just need to pump more money into the machine and be able to operationally scale as well on the backend.

Penny Crosman (25:29):

That makes sense. Alright, so we have about four and a half minutes left. Any questions in the audience for Danielle? Oh, we got one here. Yeah, Stephanie's coming. Microphone is coming.

Audience Member 1 (25:50):

How confident are you on your fraud controls for client acquisition onboarding? Meaning are you confident that pretty much every legitimate business can get in online and apply online and get your checking account and you're keeping the bad guys out?

Danielle Kane (26:07):

Yeah, I think that I'm very confident in our fraud controls. I think that on the onboarding side, like I said, we use Alloy, but the big thing for us is that the constant iterations of the alloy workflow or the scorecard workflow, I think we're on the 300th in the past six months from moving from onto mantle. So I think the constant iterations is really big. And I think also a big thing is in the first year the idea of failing and fixing it is really important and committing to that and if you have operating loss quickly, you can be able to make changes very quick. And I think that at this point, like I said, we have very, very, very little operating loss. We close very little accounts because of due to fraud or outside our business risk. So just constant improvements on the front end is important.

Audience Member 1 (27:13):

On the other side, how confident are you that you're not keeping out legitimate businesses?

Danielle Kane (27:18):

Yeah, I think that's a tricky one too. I think that the rule setting that we create is we do our best that we can to keep our clients safe, to keep the bank safe and that in reality the fail safe that I would say that we try to give the benefit of the doubt. So if you fail on the KYB side, which is a majority of people fail, if you fail, we instantly have a document upload that you can give formation docs. If you fail on address verification, you give address verification. So in reality, if you fail on those pieces, you have a chance to show, hey, yes, I failed mid desk, but because I started the account one month ago or 10 days ago, but here are my formation docs. And I think that's where there's a missing piece there where these engines on the KYB side, for newer companies, it's very hard to open the accounts. And that's why we have these manual reviews, which is like the 10%.

Audience Member 1 (28:21):

Great. Thank you.

Penny Crosman (28:23):

Thank you. Any others?

Audience Member 2 (28:37):

So my question is around the, hey, looking at your value prop, right? So everything seems to be free and then a lot of learning from my bank is that hey, if you offer a free product and an easy onboarding product, you tend to attract some sort of a low intent customer, just curious to get through the application and see what's out there and then end up with some sort of less engagement. So I'm curious, do you see that and how do you solve to make sure that you actually, your marketing is well spent and getting the high tenant, large end customer actually using your product?

Danielle Kane (29:13):

Yeah, so I think the one big thing that we do, that we found many years ago that really helps with that is that to open an account you need to deposit a hundred dollars. And I think that's the big friction point where people who are just searching around, that's where they fall off. And more engaged clients, people that are actually interested in opening account will deposit that a hundred dollars and move in and open the account. And then from there it's retention engagement, making sure that we can make that the adoption of the app and of the debit cards and the features. But I do think that not only is it the free service is important, but also, or the free part of it important, but the resources that we're giving them as well is very attractive to our clients.

Penny Crosman (30:11):

Alright, we are just out of time. Danielle, thanks so much for joining us and I hope you all found that interesting. Thank you very much.