The bank pioneering banking as a service

For the past five years, Coastal Community Bank in Everett, Wash., has provided what it calls banking as a service, or BaaS, to broker-dealers and digital financial services companies.

The strategic vision, developed by the $1.1 billion-asset community bank’s board of directors and Eric Sprink, its president and CEO, was first seeded when a digital financial services company approached Coastal Community Bank about handling its backroom processing. “We said, ‘That’s interesting, but we don’t really know what it means,’” Sprink says.

Bank executives consulted with regulators who said that providing BaaS might be a possibility but that the community bank wasn’t ready yet. “Banking as a service is risky and complex,” Sprink says. “The regulators advised us to first build up our infrastructure.”

Building a new division from scratch

Sprink and the board were already mulling the bank’s future, well aware of the increasing number of nonbank entrants in the financial services sector. “When you start discussing 10 to 20 years from now, you really open your eyes to how financial services is changing,” Sprink says.

The board considered three strategies: sell to another bank, stay independent and private, or go public. Ultimately, the board decided to go all-in on pursuing BaaS and voted to go public to raise the capital to do so.

“Our board put a flag in the ground and our vision is based on a seven- to 10-year strategy,” Sprink says. “They were spot on. Change is happening, only faster than we anticipated.”

The community bank first moved to boost its in-house expertise, adding board members Stephan Klee, who has a broad background in the venture capital and fintech world, and Sadhana Akella-Mishra, an attorney focused on fintech compliance and global risk. “Their expertise gave confidence to the rest of the board members,” Sprink says.

With the capital raised from going public, Coastal Community Bank began building its new division, dubbed CCBX, that enables broker-dealers and digital financial services providers to deliver seamless financial services, including banking services, to clients. The community bank added between 25 and 30 full-time equivalents with specific skills in payments, operations, audit, compliance and accounting.

In 2018, the bank landed its first BaaS client, Aspiration, an SEC-registered broker-dealer offering cash management accounts. Recognizing that the community bank owns all of the privacy with nonbroker-dealers, Bank Secrecy Act (BSA) and compliance issues associated with providing BaaS, Coastal Community Bank continually worked to upgrade its capabilities as it sought new BaaS clients.

“A lot of bad people try to open accounts online. You’ve got to be three times as good opening accounts online as through a traditional branch,” Sprink says. “We have an obligation to continue to expand and enhance BSA oversight procedures.”

To that end, the community bank began reviewing potential fintech partners, looking for a firm that could provide lower-cost data management and help build a proprietary AI-based BSA product.

In preparation for such a partnership, Coastal Community Bank brought on David Franklin as senior vice president and data scientist architect. “We had to hire someone that speaks the language,” Sprink says. “We have to have oversight.”

The community bank eventually chose Neocova in St. Louis, Mo., an artificial intelligence-based, application programming interface-driven (API) banking technology platform designed specifically to support community banks. The bank announced the partnership in January 2020.

Sprink says they continue to see milestones achieved from the partnership, such as enhanced management and utilization of that data management for the bank and its customers. “We’re learning how to open new accounts online with world-class fraud prevention, including BSA, KYC [know your customer] and CIP [customer identification program],” Sprink says.

The community bank is also experiencing less costly, more efficient fraud monitoring, as the new AI-powered capabilities reduce accounts flagged as false positives. Since only a small percentage of flagged activity turns out to be truly fraudulent, this reduces staff time reviewing those that are truly suspicious. “It’s a cost savings,” Sprink says. “That means either you have fewer accounts to review or, on the other hand, it allows you to grow faster.”

The capabilities the community bank is developing for BaaS will also benefit its regular banking customers. “If you really step back, more and more in banking is about data management,” he says. “We hope to use this technology to provide custom-fit solutions for our customers.”

“More and more in banking is about data management.”

—Eric Sprink, Coastal Community Bank

‘You’ve got to be all in’

While Sprink is proud of the bank’s progress to date, it’s not been an easy or fast journey. “It’s taken us five years to get to this point,” he says. “We’d put a toe in, then a leg and then check with the regulators. We’re still a bank; we’re still compliance-focused. We can’t just go zero to 60.”

Sprink has collaborated closely with regulators, meeting with them every 90 days and checking in with them fairly often, sometimes weekly. The community bank even takes its customers to meet with regulators, who have been generally positive about its BaaS-related initiatives

While Sprink believes more community banks should explore partnering in digital delivery, he cautions that they must have a vision. “Don’t just partner with a fintech without identifying your specific needs within their given strategy,” he says.

Sprink insists that Coastal Community Bank’s commitment has been essential to its long-term success.

“You’ve got to be all in,” he says. “We have raised extra capital at IPO to support this long-term vision. A whole ecosystem has to be built. Your policies and procedures have to be updated; your liquidity has to be updated. You have to lean in and hire the resources, and you have to communicate with everybody, often.”