‘I was right but I was early’: Quontic Bank’s path from a single bank branch to digital bank with national aspirations
- It isn't easy for a small institution to compete against large incumbents and challenger banks.
- NY-based Quontic Bank provides a model for smaller banks with big aspirations.
Quontic Bank, an institution with $400 million in deposits and one branch, has come a long way since CEO Steve Schnall bought the struggling bank in 2009. With just $20 million in assets, he recapitalized the bank, rebranded it to Quontic from Golden First Bank, and moved it to New York City.
The bank recently celebrated its 10 year anniversary and exemplifies one path smaller financial institutions can take to compete in today's market. Schnall, who previously ran a $4 billion, 1000 person mortgage REIT and mortgage bank, saw early on that the brick and mortar banking model was dying.
“Consumers didn’t need branches,” he told Tearsheet. “We intentionally didn’t open branches. I was right but early.”
Without core deposits, Quontic became heavily reliant on wholesale deposit sources. About eighteen months ago, regulators became increasingly uncomfortable with this structure and Quontic was pushed to find a solution. Schnall was impressed with how challenger and traditional banks were competing online for deposits.
“We pivoted toward being a digital bank,” he said. “Now, virtually all of our deposits, technology and innovation are focused toward facilitating a fintech approach.”
Pivoting toward digital
Quontic took a two-step approach with its pivot towards digital. First, the bank knew it needed to build a stack of technologies to bring in deposits online. Its technology was heavily reliant on a core provider. As Quontic started surveying the technology landscape, it found that no core providers or consulting firm could move fast enough. “It was an exercise in pure frustration,” said Schnall.
Instead of ripping out its legacy system and starting afresh, the bank created Quontic Works, a middleware solution built on Azure that sits on top of its existing core technology. Quontic Works provides API connectivity to external sources and tools and also helps the bank’s financial position and performance across silos.
Quontic is a CDFI, or a Community Development Financial Institution. It's a U.S. Treasury designation for financial institutions that have as a mission to bank underrepresented populations. In return, Quontic gets government grants. Quontic needs to show that 60 percent of its loans are to low income demographics -- a big data feat for a small bank lending nationally. Quontic used to have an employee that did just this full time.
The bank hired a boutique firm based in Montreal to build its CDFI module that uses APIs to connect into municipality databases to pull out demographic information it could overlay on its loan book.
“It’s cut hundreds of man hours in time sucking data out of software, tweaking it, and reporting it,” Schnall said.
New tech, new KPIs
Next, digital consumers’ demands are different than branch customers. They also like to self serve. Quontic had to train its staff to respond quicker to their needs and in new channels like chat and email if it wanted to bring in deposits at scale. In addition to its online deposit gathering, the bank is now underwriting more than $50 million of mortgages every month and customer service continues to evolve.
Quontic Works has also proven effective in helping to optimize employee performance. Schnall says that everyone knows now what they need to do from data from Quontic Works.
With more data on how individuals and departments were performing, Schnall reconstructed how employees get paid and incentivized. Quontic uses three buckets of performance -- minimum, primary, and visionary -- to categorize employee contribution.
"The first thing we did was cut pay by 10 percent," he said. "But if you hit minimum, you get back that 10 percent. And as you hit primary and visionary get another 10 percent each time."
Before Quontic built Works, a mortgage loan processor would get assigned files. If loans moved slowly, the bank would add more processors. Now, the bank knows how much volume a person can do and how long this process should take. With this level of clarity and the new incentive structure, Schanll claims that Quontic has boosted efficiency levels by 2x.
Quontic's journey from branch banking to mortgage lender to digital bank has been a process for Schnall.
"I thought we’d get where we are faster than we did," he said. "I didn’t have the enthusiasm for the business that i have today."
Quontic's CEO believes this work has positioned the bank well for future growth, even if it took a long time to get here.
"I think we can double the size of the bank in a couple of years. Our capital growth is organic and we're proving we can do what Chime does with a bank charter. We’ve proven this business can scale to infinity."
Benchmarking against the competition
Quontic doesn't want to compare itself to challenger banks like Chime, which compete over transaction accounts, like checking. These banks have high customer acquisition costs for accounts that don't appear to have high levels of assets in them. Quontic's strategy doesn't include managing millions of accounts with just $300 in them.
Instead, Schnall wants to compete with Marcus, Goldman Sachs' digital consumer bank. Marcus does unsecured consumer lending and uses money market and CD products to bring in deposits, which it's built to $50 billion.
"Our first attack is money market and CDs," he said.
"Our next step is to move into transaction deposits. We’re not going to go out and compete for pure transactions."