Innovation Luncheon: How Digital Banking Can Enhance Business Deposit Taking and Commercial Loan Origination for Small Businesses without Using Banking-as-a-Service

NewtekOne, established in 1998, recently acquired a manual, single branch New York City-based bank, and by utilizing technology, people, and process, has transformed what is now known as Newtek Bank, N.A. into what it believes is the first true technology-oriented bank with no branches, traditional bankers, brokers, or BDOs. Newtek Bank has opened 15,000 depository accounts remotely and is the largest SBA government guaranteed lender in the United States in the most recent full fiscal year. Come hear how they did it, and how you can do it, too.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Barry Sloane (00:10):
Good afternoon everybody and welcome. My name is Barry Sloane. I'm CEO, president, and founder of Newtek One, which is a publicly traded holding company, stock symbol NEWT, which owns a nationally chartered bank, OCC regulated, called Newtek Bank National Association. The purpose of today's conversation is to share our experience in working with SMBs—small and medium-sized businesses—and SMEs—small and medium-sized enterprises. We refer to this particular economic demographic as independent business owners. We think most of our clients prefer to be called independent business owners than small anything, but we still use the acronyms SME and SMB as people have a better understanding of them. Our two objectives today are to share the knowledge we've gained as an OCC chartered bank and a bank holding company, providing all the solutions we've developed over 27 years.

(01:12):
But also importantly, how we partner with credit unions and community banks. We offer our software, people, and processes to help you gather deposits or make loans. As I sat through yesterday's presentations and today's, I felt very good about the fact that small and medium-sized business is growing in popularity. I think PPP financing caused the whole world to wake up and go, "Oh my God, there's all these small businesses out there and they employ so many people." This is a really important demographic. You've heard some of this data in other presentations: it's 43% of US GDP and approximately 65% of net new job growth. We are an SBA lender, one of the top three SBA lenders in the United States by loan volume. If you go to the SBA's website, you'll see that we've stabilized or created over 110,000 jobs, which is the second highest in the United States over the last five years.

(02:26):
If you go back through our history, we got into the banking business in January of 2023—almost a full three years ago—by acquiring a nationally chartered bank. We'll talk about the trials, tribulations, and how our business, financial, and technological solutions are merged into a bank. I know we're all feeling good about the presentations and all the different things we could do with software, processes, and people. Then we're all going to go back to our day jobs and meet the chief risk officer, the chief technology officer, and the chief compliance officer. Maybe somebody like me, the president and CEO, will say, "You can't do that." What we're here to talk about today is giving you an insight into how we have been able to do it.

(03:16):
I will tell you it takes time. The company was founded in 1998, and we've been in this particular space for almost three full years. When you think about Newtek One, we try not to position ourselves simply as a bank or a bank holding company. We always think about the customer. We provide business and financial solutions to independent business owners in all 50 states. Importantly, we do it without branches, traditional bankers, brokers, or BDOs. As we go through the presentation and talk about some of the economics of our business—our high performance in ROAA, ROTCE, and efficiency ratio—it'll become important for you to realize: "Can I do this and make money at it? Is this really a strategy where I can be successful?" This industry is not one size fits all.

(04:18):
There are people in the audience that love the branch banking system and the close personal relationships you get from a community bank. Then you've got others thinking about doing it on a large scale where you don't need those traditional bankers, brokers, or BDOs. We'll point out the benefits of both. A little history lesson on Newtek One: we converted to a financial holding company in January of 2024. We were founded in 1998 out of a spare bedroom of a New York City apartment at 120 West 18th Street, apartment 4B. If you want to talk about a small business, that was a small business. There was myself and two other founders, and we had the privilege of not getting a paycheck for three years starting from scratch. We decided to focus on this SMB market because nobody else really did.

(05:13):
There was a big void in the market for larger organizations to provide financial, business, and technological solutions to this extremely valuable customer base. Regarding our pedigree today, in calendar year 2024, we were the largest by loan volume. This year we came in second—no big deal—but we're estimated to lend about $1.5 billion to $1.75 billion in 2025. We process payments electronically—Visa, Mastercard, Amex, and Discover—totaling about $5.5 billion in volume. We are a payroll company like Paychex and ADP. We have about 80,000 customer accounts and 2.5 million business referrals in our database. We get 600 unique business referrals a day. If this doesn't sound anything like your organization, it's because it probably isn't.

(06:13):
A lot of people look at us like we're a community bank, but we're really a national player and we do our business in an entirely different manner.

(06:26):
We have $2.4 billion of total assets at the holding company and $1.4 billion at the bank. In January of 2023, when we took over the bank, it had $140 million of deposits and $180 million of assets. Today, assets at the bank are $1.4 billion and deposits are $1.2 billion. We're very pleased with our performance and will be reporting earnings on Wednesday. We've built a technology-oriented digital bank, which is more than just software or people; there's a total process. It's one of the benefits of partnering with us because we give you our people, process, and technology. We could be a lender service provider and make loans for your organization. We could be a super ISO and manage payment processing on your platform, or act as a payroll company.

(07:32):
These solutions can be integrated into your depository accounts. When you think about payment processing or payroll, it's literally the movement of money. Our customers send and receive money. We have done the integration for ourselves and can do it for you by integrating into your cores. We're on a Fiserv Premier Core and use Communicator Open, so we are able to take data, push it from our systems into the core, and project it back to the customer through a business portal called the Newtek Advantage. That portal can also be given to your institution. You need to have a frictionless environment for the business client; it has to be easy.

(08:27):
We also subscribe to the fact that the customer needs a human being. Generally speaking, this customer base wants to know they have someone. Historically, people thought that meant having a branch or traditional bankers, but you don't. We have staff that works out of their homes; we are primarily a remote organization. They're on camera and visible to the customer. We refer to our staff who are booking and binding as business service specialists, and those managing the client once they're in the portfolio as customer service representatives. This gives the customer a connection with the institution, seeing a real person so they know they aren't being scammed. Looking at the math, we have a recent efficiency ratio in the high 40s, and about 62% at the holding company. We operate very efficiently and haven't even begun to scale yet. We are profitable, with forecast earnings for the year at about $2.30 at the midpoint.

(10:21):
Our goal is to get to know you better. We have a booth outside to introduce how we can help you gather deposits by allowing us to handle payroll and merchant services and digitally putting them into your account. We have an "instant merchant account"—open a bank account, get a merchant account. We have an "instant payroll quote"—open a bank account, get a quote on payroll. Everything is tied together. Very shortly, we'll be launching our version of the "Triple Play," where you get a line of credit, a bank account, and a merchant account all at the same time.

(11:07):
These are the things we do for our customers and can do for yours. We're a payroll bureau integrated into your bank account. We're a payment processor integrated into the account. We make SBA loans, 504 loans, CRE loans, standard C&I loans, and lines of credit. To get approved by the Federal Reserve, we had to spin off our technology solutions business, though we still have a 30% stake and a board seat. We can provide your customers a free cybersecurity analysis. We have a licensed insurance agency for life, accident, health, and property and casualty.

(12:06):
In the Newtek Advantage, a customer gets real-time web traffic analytics and document storage. We also have Newtek Accounting, which offers free tax analysis—particularly important with the "One Big Beautiful Bill" and changes in tax law. This next part might make some people mad, but the banking industry is fully reliant upon deposits at 2% to 3% below the risk-free rate.

(12:49):
If your whole existence depends upon getting deposits at 1.5% or 2% while Treasury bills and money market funds are at 4%, you need to ask yourself, "What am I doing to earn those deposits?" In this industry, the answer is often "not much," which is why you need to offer payroll and merchant services. You must give the customer real value for safeguarding their money because an FDIC-insured account is a commodity. It is similar to a government money market fund. Because people can move money with the click of a button on a phone, we are going to have to do a lot more for the customer than just take their deposits.

(13:50):
As someone new to the banking space, I don't talk, feel, or look like a banker, but I guess I am one. Industry analysts all want to know how many non-interest-bearing deposit accounts we have. You can have an intellectual conversation about whether a non-interest-bearing deposit is stickier, but the fact of the matter is that those accounts are going to be a thing of the past. You've got to give the customer value. On the lending side, we believe the marketplace primarily provides low-margin, low-risk loans like residential mortgages and car loans. We, on the other hand, do higher-risk loans. Net of expected charge-offs, we know our standards work because we've been doing this for over two decades through the 2008 crisis and COVID. We're pleasantly surprised that the regulators have been fantastic. The OCC understands that we are providing a valuable service by giving businesses long-term patient capital. We have higher non-performing loans and provisions, but they've accepted it because our allowance for credit losses is 5.5%, our capitalization is strong, and we make money every quarter.

(15:48):
You have to take a critical look at your business plan. Our focus is entirely on the SMB, SME, and independent business owner. We aren't talking about consumer businesses or the Fortune 1000, which are already well-served. We've been doing this for 27 years. We know what motivates these customers and we work hard to give them a great solution.

(16:48):
I look at the three major issues the banking industry is facing. One: how will you continue to get deposits below the risk-free rate when you aren't positioned against money market funds? Two: how will you gravitate to investing in assets that provide greater returns? Private credit and non-bank lenders are doing the loans you'd like to do. As a lender service provider, we can assemble the loan, provide the technology, handle marketing, and put the credit memo together using AI. We can service the loan and put it on your balance sheet, or we'll put it on ours. Three: efficiency ratio. We are branchless and traditional bankerless. We still have almost 600 employees, but we aren't taking clients to lunch or meeting them at country clubs. They come to us through a referral system.

(18:27):
These are the three problems we believe we have solved: efficiency ratio, earnings, and achieving deposits below the risk-free rate.

(18:44):
People ask why we became a bank. We were previously a Business Development Corp (BDC). The company started in 2000 and transitioned into a BDC in 2014. BDCs are essentially mutual funds that provide solutions to small and medium-sized businesses. We swung and missed at acquiring our first bank but won the second. It was a small, manual, single-branch bank in Flushing, Queens that was 60 years old. It had 60-year-old people and 60-year-old software. We had to totally change that over while remaining profitable as a public company. The reason we did it is because you all have gold: your customers look at you 12 to 20 times a month. If you were Google, you'd love those eyeballs. But what are you doing with them?

(20:31):
Customers want to make sure their money didn't disappear overnight. You have to take advantage of that interaction through things like the Newtek Advantage. We felt that becoming a bank and offering depository services was the key—specifically the ability to move money better than our competitors. You need a full menu: ACH, wire, stablecoin, and card processing. If you process with us, you see all your batches on a real-time basis. We took this leap of faith because we now have an ecosystem that isn't just a fantasy; it's what we've been doing for three years.

(21:52):
The Newtek Advantage can be white-labeled. We use a Fiserv core and can integrate easily into any Fiserv core using Communicator Open. We offer our clients free document storage for operating agreements, leases, and policies. We provide free web traffic analytics and the ability to handle payroll via the portal. We use iSolved software, which is state-of-the-art, but you get a real person in the United States on camera to help you board the client and provide service. We have 350 professionals on camera, on demand, when you need them.

(23:29):
Regarding margins: I started in finance in 1982. Today, even the giants don't want to do traditional lending because there's no margin and it exposes you to asset-liability issues. Investor-based CRE and basic C&I products not linked to a depository account are difficult. Our big product going forward will be the "Triple Play"—bank account, line of credit, and merchant account all at once. Our ROA this year should be between 2% and 2.5%, with ROTCE north of 20%.

(24:35):
We acquire clients through our referral system, NewTracker. Even if your customer base is primarily consumer, 20% to 25% likely operate a business in their household. You need to reach out to them digitally or via telemarketing. It's much better than advertising on the backs of buses. Our bank efficiency ratio is below 50%.

(25:19):
It is all about people, process, and software in a compliant manner. We developed our own digital account opening but use Aperture software for online banking because it is commercially viable. We didn't want to recreate everything. When we took over the bank, there were about 1,000 total accounts. Today we have 22,000 digital bank accounts, all opened without anyone visiting a branch. We've been through three examinations with the OCC and things are good. Information sharing is extremely important.

(26:50):
NewTracker is a referral-based system with our staff on camera. If you are a bank president or a lending officer, you can see what we're doing with your customer 24/7 and get nightly reports. Our alliance partners include UBS, Morgan Stanley, large credit unions like Randolph-Brooks and Ent, and trade associations like Meineke. These organizations don't want to do these loans or process payroll themselves, but they want the client service. This is a bear; it is not easy. The hardest step is the staff. Staff often doesn't want to change. We use AI to monitor staff interactions; if certain phrases are used, it goes to a manager.

(28:40):
Being on camera creates an entirely different feeling for the customer. Facial recognition technology will only make this easier. I'm also a fan of remote work. If you have good management and the right tools, you can manage staff just as well at home as in an office. I am not convinced that sitting in a bullpen is better for anything other than training. Commuting an hour or two a day is a total waste of time.

(30:43):
We look to partner with you. We aren't selling software; there are no fees and no long-term contracts. You could hire us today and fire us tomorrow. An at-will relationship is invaluable. We've been through audits and know what the OCC and the Fed look for. "Banking as a Service" has become a dirty word to auditors, but we are a regulated entity that passes the same tests you do.

(32:12):
We are a unique company, but we treat your customers as our own. I wish I had the same relationship with the capital markets that I do with regulators, because markets look at non-interest income and loan loss reserves and get nervous. But those non-accruals turn into cash, and we are earning a very nice wage. I'll open it up for Q&A.

Audience One (33:31):
What was the biggest challenge in executing this strategy?

Barry Sloane (33:35):
The biggest challenge relates to internal staffing. You have to continue to hire bank executives, and I look at hiring as a trial-and-error process. If you hire three people, one is great, the second is mediocre, and the third is a complete surprise—not in a good way. Everyone told me I'd hate the regulators, but it's the opposite. You can call them and get answers quickly. The most difficult part is that we are doing things differently. We aren't a normal payroll provider or deposit gatherer. It's hard to get staff who will follow a disruptive strategy. Most people in this industry are trained that if they make a mistake, they get penalized, so they avoid innovation. We look for "thrill seekers"—people who want to be part of an entrepreneurial culture.

Audience One (35:48):
How do the regulators view what you're doing?

Barry Sloane (35:54):
We told them exactly who we are. We explained that our loan portfolio would have an 8% charge-off rate over its life because we provide long-term capital, not daily deposit advances. We told them we would have big provisions and be well-capitalized. We showed them we are servicing a market that the rest of the industry ignores. The fact that we have a long history and showed we could manage this complicated, intertwined business helped a lot. We pay close attention to Reg W issues, and so far, the relationship has been a pleasant surprise.

Audience Two (37:52):
How would you define your business culture?

Barry Sloane (37:56):
As the son of a retailer, I believe the client is always right. Taking someone's deposit is a privilege. Whether there is $1,000 or $1 million in the account, you treat them well. Culturally, we care. The management team is expected to be available for customer problems on Saturdays and Sundays. Not everyone likes that, and I don't blame them, but we are there for our customers. We have many stakeholders—employees, creditors, stockholders, and customers—and it is a culture of caring.

Audience One (39:28):
You described your services as an ecosystem. What do you mean by a financial ecosystem?

Barry Sloane (39:50):
A customer who has been in business for years already has someone doing their payroll and payments. The challenge is getting to the decision-maker. I tell my managers to ask: "Who is it you're talking to? Do they own the business? Are they the controller?" People often don't know. A robot would ask that every time. In our ecosystem, a business owner can log into the portal at night and make payroll, see every dollar sent via ACH or wire, and see every dollar received via card. They can look at web traffic and their bank account in one place, currently integrated with QuickBooks. We provide graphs and charts for a P&L. It's data, analytics, and transactional capability all in one place. We want to expand integrations to Xero and Sage, but currently, we can already help a business reduce expenses and risk while providing long-term patient capital.

Audience Two (43:17):
How do you guide your marketing approach with so many partners and services?

Barry Sloane (43:30):
We go to conferences like this and have been endorsed by trade organizations since 2003. We have directors of strategic alliances at multiple conferences today reaching out to manufacturers and government-guaranteed lenders. We also recently started outbound telemarketing into our existing database. For all of you, your customer base is a treasure trove. If you are allowed to email or call them, you should, because nobody has more credibility than the bank holding their money. Banking is a valuable function and everyone needs it. Even with the current regulatory environment, we have gold in our customer bases. It's very hard to plan for the long term, so you have to look at what you know.