Embrace change, take risks, and disrupt yourself

Hosted by top 5 banking and fintech influencer, Jim Marous, Banking Transformed highlights the challenges facing the banking industry. Featuring some of the top minds in business, this podcast explores how financial institutions can prepare for the future of banking.

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How Banking-as-a-Service has Made Webster Bank Future-Ready

Banking-as-a-service (BaaS) provides a great opportunity for existing financial institutions to reach a greater number of customers at a lower cost by teaming up with non-traditional financial and non-financial businesses.

It is expected the BaaS model will become a new battleground for both established banks and digital challengers, as the model has the potential to generate new revenue growth for both financial and non-financial businesses. The question becomes, will legacy banks become a distributor of financial products, a producer of them, or both?

I am joined on the Banking Transformed podcast by Matthew Smith, Head of Digital Banking and Banking as a Service at Webster Bank. Matthew discusses why Webster Bank decided to pursue the BaaS strategy and the success of the strategy to date.

Jim Marous:
Hello, and welcome to Banking Transformed. I'm your host Jim Marous, founder and CEO of the Digital Banking Report and co-publisher of The Financial Brand. Banking as a service provides a great opportunity for existing financial institutions to reach a greater number of customers at a lower cost by teaming up with non-traditional financial and non-financial businesses.

Jim Marous:
It's expected that the BaaS's model will become a new battleground for both established banks and digital challengers as the model has the potential to generate new revenue growth for both financial and non-financial businesses. The question becomes, will legacy banks become a distributor of financial services, a producer of them, or both? I am joined today on the Banking Transformed Podcast by Matt Smith, head of digital banking and banking as a service at Webster Bank.

Jim Marous:
Matt will discuss why Webster Bank has decided to pursue the BaaS strategy and the success of the strategy today. So welcome to show Matt. Banking as a service has become a very powerful vehicle for innovation and revenue growth, especially as traditional financial institutions support the distribution of financial services across a variety of verticals.

Jim Marous:
Many organizations are still at the very early stages of development and thinking about banking as a service discussing the role that they'll play in the future of finance. Webster Bank, however, has already embraced this potential of a BaaS model. So before we begin that, can you share a little bit about your journey up to this point and what you've been doing in financial services before you joined Webster?

Matthew Smith:
Yeah. So thank you so much for having me, Jim, I'm a big fan of the show so I appreciate the invitation to come and chat with you a bit. As you mentioned, I'm Matthew Smith, I'm responsible for all digital banking innovation, as well as banking as a service and our digital bank P&L channel for Webster Bank, right? Which was on... I was formally on the Sterling National Bank side and we just completed a merger earlier this year.

Matthew Smith:
It's an exciting time for me personally. I've kind of had a long journey within financial services. I started out working at GE Capital where I had a number of different roles that range from FP&A leadership, corporate restructuring, operations, data, and started to dip my toe in the technology world when I went over to Bridgewater, which is a large hedge fund that's located in Westport where I kind of ran finance technology right where we were kind of looking to do things like cloud migration and a bunch of other innovative things.

Matthew Smith:
I was representing it from a finance side, but learned a lot about the business, learned a lot about technology and then made my way over to Sterling where I ended up being our chief marketing officer and head of product innovation. And through doing that, we launched our first digital bank which was called BrioDirect. I had had some experience launching banks when I was at GE Capital. We did GE Capital Bank, which is now Marcus by Goldman.

Matthew Smith:
So I was excited to kind of have some success at Sterling and we kind of started thinking differently about the world once that kind of broke out. And it got us out of thinking about physical distribution channels and really focusing more on digital, which then spun the concept of branching out into banking as a service, so excited about that.

Jim Marous:
It's interesting. We met in an event down in Miami in January, and we discussed this transformation you were then going through with the combination of Webster and Sterling Bank. What was interesting to me was both banks are small midsized banks in the same region, but both banks were really focused on becoming digital banks, as well as supporting banking as a service. Can you explain some of the differences if there were any between the way the two organizations approached banking as a service?

Matthew Smith:
Yeah, I think so. What's interesting is I would say technically Webster didn't have a vast business, right? I think they were intrigued by the concept of it. What they were kind of doing at least from my perspective was focusing on trying to build an infrastructure, right? And the infrastructure could be used to take on more of the client experience, right, and own more of the source code and in doing so, would give them the ability to scale into multiple different businesses, right?

Matthew Smith:
Whether that be banking as a service or even other things from a consumer and commercial perspective. I think on the Sterling side, we were going through a digital transformation, right? We had kicked off many projects and banking as a service was going to be our primary growth engine, right? And what we were looking at was a way that we could basically find new use cases for existing banking services that we provide, right?

Matthew Smith:
And we saw an opportunity within this space, we felt that there were a big gap between the Goldmans of the world and sort of like the MetaBanks and Evolve Banks of the world. And we thought we could slot right in the middle where we have an optimal mix of good products and services, but really focusing more on a relationship, value proposition, right? And we can talk more about that as the conversation goes on.

Jim Marous:
So in our research, we have found that the biggest hurdle to success with digital banking transformation has been top management support of the process in building a culture that supports the development of the digital bank. How have your organizations and your organization now as one really dealt with this challenge? What do you see is your leadership's guidance in the overall organization? Because it's a heavy load. It's not an easy process.

Matthew Smith:
Yeah, I think so your point is spot on, right? What's interesting is prior to the merger, our CEO Jack Kopnisky was very supportive of the work that we were looking to do and made it a priority to kind of drive that down the organization. As you know, building a BaaS business is not just about technology, it's about the controls that you have in place from a risk and compliance perspective, right?

Matthew Smith:
And so getting partners like our friends in risk and compliance, getting our technology teams, getting our operations team to lock arms with us as we go on that journey was really big, right? And I think he was instrumental in kind of driving that messaging and our president at the time, Luis Massiani who's now the COO, the combined bank echoed that sentiment and been a huge supporter of it.

Matthew Smith:
What was interesting is going into the merger, one of the things you always selfishly think about is like, "Hey, you really going to support this business," right? What you just said. And our new CEO which was legacy's Webster's CEOs, John Ciulla literally every press conference, even merger announcements talks about the pillars of growth in banking as a service being one of them, right?

Matthew Smith:
So I think him saying that, making that declaration to the street and then reinforcing that through internal conversations that we've had at the leadership level has given us an opportunity to be able to be successful in this space. So I think both sides are really committed to it. Now that we're a combined organization, we've got the scale to be able to do some really great things, and it's been nothing but reinforced by the EMC that we have on our side. So we're very excited about it.

Jim Marous:
So it's interesting. It goes without saying that 98, 99% of the financial institutions aren't in the top 10, and they're not in the bottom 10 so you got this mass middle. Both at Sterling, and now at Webster, what have been some of the biggest challenges you've needed to address in the journey not only to become a stronger digital bank and provide digital banking services, but in the banking as a service journey?

Matthew Smith:
Yeah. I think it's a great question, right? I would say the number one thing is recognizing that this is an ever changing regulatory landscape, right? And in doing that, you've got to procure some folks that really understand that space and not be bullish about it, right? I think we really took a step back and said, "Okay, what are the foundational elements that we need to put in place?" We recognize that there are things that we're going to evolve in our tech stack over time that's going to help us be better BaaS providers.

Matthew Smith:
The big thing that we were concerned about more so than that was, do we have the regulatory and compliance foundation to be able to support these things. We're regulated by the OCC, we weren't before, we are now. And kind of coming into those conversations, it was really about demonstrating that we've got a comprehensive playbook that takes us from assessing an opportunity through diligence, through signing an MSA, through onboarding, and then post integration monitoring.

Matthew Smith:
And having that foundation in place, getting that reviewed by the regulators, having the right people in the right controls was really instrumental, right? I mean, we spent a lot of time really focusing on that. From a tech perspective in parallel, obviously we need to figure out a solution, right? And there's always going to be limitations, especially if you're working with a major core provider, right?

Matthew Smith:
So it's partnering with them to figure out what can we do to provide a best in class solution that's going to enable time to market and quality. And then I think going forward, we're being strategic and tactical, right? What are the things that we're going to need to replace or do differently in order for us to be able to scale to multiple partnerships?

Matthew Smith:
Obviously we like to get to the place where we're doing 14, 15 implementations a year. To do that, it's going to require both the process that I actually mentioned, as well as the tech stack to be able to support those types of scaling.

Jim Marous:
So it's interest. When we are talking to each other when we were both in Miami, you mentioned also the regulatory issues. And we talked about the fact that at your organization, you're almost ahead of the curve and ahead of where the regulators really are. I kid about the fact that regulators are the oldest and most legacy bankers so they're really hard to bring along.

Jim Marous:
How does your organization, not just... I'm going to say not just play by the rules, I don't mean you're playing against rules, but stay within the tight confines of the rules as they were written before, while at the same time pushing the model forward in a way that's still in the interest of what the regulators are trying to achieve, but may not be documented specifically.

Matthew Smith:
Yeah. I think we... So we really put risk first, right? We think about that and we take it very seriously. We've got a group of folks that are kind of liaisons to us from the second line perspective. I actually built out a first line risk team that's within my team to be able to do a lot of the foundational work to build out this infrastructure to support this.

Matthew Smith:
But I think it's funny like you say we're ahead. You never really feel like you're ahead, right? You're always feel like you're a little behind, right? And so I think thinking of it that way kind of always keeps us on our toes, right? What could we be doing differently? How are we thinking about these things? I also think our risk first mindset and the ability to kind of have deep conversations with our regulators has been really helpful, right?

Matthew Smith:
We're not just doing stuff and then asking for permission, right? We're actively going to them with ideas and we're looking to kind of partner to figure out what's the best way to solve for it. I think in taking that as an approach and learning from mistakes of others, right? Obviously we're always looking at the news, what's going on, what are some things we need to watch out for. The combination of all those things has put us in a position to be successful and hopefully will yield dividends for years to come.

Jim Marous:
So as you've gone through this journey of building a digital bank and supporting the BaaS model, what areas of your organization need the most focus to become a leader in both digital and banking as a service, has it been product development, the use of data, maybe your back office operations or technology? What areas need the most change where you were versus where you need to be?

Matthew Smith:
Yeah, it's interesting. I think what we did was we carved this out as a line of business, which I think is a really important step, right? We didn't just try and jam this in to another place. And I think in doing so, we were very consistent and methodical about how we approach the support model for this, right?

Matthew Smith:
So on my team, we've got dedicated folks that run everything from relationship management, which I think obviously is a key differentiator for us, I mentioned before. We're not necessarily as focused on just offering products in this space. We're actually looking at partnering, right?

Matthew Smith:
What are ways that we can expand the relationship to us providing services, to us providing consultative services with regards to risk and compliance for us consuming products and services in our environment, right? In a platform banking type of approach, or an embedded finance type of approach, making strategic investments in some companies, right? I think that's a key differentiator for us.

Matthew Smith:
So we really put an infrastructure to be able to say, we've got kind of relationship management, we've got project management, we've got business process optimization, client delivery, and all of those first line risk functions that I mentioned before that sit within my group, right? Which gives, gives me a span of control to be able to operate a little bit independent of some of the areas that potentially don't know as much about this particular business.

Matthew Smith:
And then we've got within each of the functional groups, right? Risk, compliance, legal, other areas like operations. We've got groups that are dedicated to kind of focusing on the work that we're doing which means they can hone in on this particular business. They understand it, they know what we're looking to do. They can help us solve it.

Matthew Smith:
Even from a product management perspective, we've got a key liaison that helps us coordinate across payments, receivables and other types of products. So it's really we built an ecosystem, right? And we've got everybody working together, understanding their roles, understanding the business, and really setting this up for success.

Matthew Smith:
What I've seen in other places is if you try and jam this into like, "Hey, we just want to do a couple deals, we'll figure it out," right? It doesn't really work that way, right? You've got to have a good infrastructure to be able to support it. And I think that's why we were able to see so much success coming out of the gate for this particular business.

Jim Marous:
So this is really a completely different business model than traditional banking. I've written a number of articles for The Financial Brand around the importance of including employees in the process of becoming more of a digital banking organization. How do you engage employees in the process of both the digital banking organization, as well as supporting banking as a service? What tools do you provide to them to empower them more fully?

Matthew Smith:
Yeah, I mean, well, the first thing is you got voice of the customer and then you use things like NPS, right? And other scores to kind of help you drive what's the feedback that you're getting and then making adjustments, but that's the external customer. The internal customer is actually quite interesting approach that we've taken. We're constantly talking to each other, right?

Matthew Smith:
We're setting up councils, we're convening as groups, right? And we do a lot of group think. I think what's interesting is you can go to organizations you have like one or two folks that kind of make decisions. What's nice about what we've kind of built is we've kind of set up these individualized councils where we're all getting together, we're talking about what makes the most sense both from a prioritization perspective, as well as gathering new ideas to be able to allocate resources and capital to achieve our goals, right?

Matthew Smith:
And so what's nice is we're not looking at a marketing team as like a utility, right? Like hey, I just want you to do the thing that I'm asking you to do, or we're looking at a product team as a utility, I just want you to do the thing I'm asking you to. We're actively bringing people into the fold and we're saying, "Give me your ideas. Let's talk about this. Let's have some group think."

Matthew Smith:
And I think that approach has yield a lot of dividends, right? If you look at what we've done on the digital bank side, and this is a little bit outside of banking as a service, we've made tremendous improvements both to our client experience from an onboarding perspective, right? So folks that are looking to bring in a deposit account through BrioDirect and even our backend servicing application, launching a brand new mobile application with all the best features, bells and whistles, and then consistently looking to optimize those experiences has been a really big thing.

Matthew Smith:
I was actually talking to somebody the other day about how we've got a group of people that are just looking at performance, right? And we're saying, hey, how is this working both from a client experience perspective? Can we get some feedback from folks that are boots on the ground? Right? That are actively looking at these experiences over time. And what was funny, they kind of called it a luxury and I was like, "I think it's a normal course of business," right?

Matthew Smith:
This is how we think about the world. And we need to constantly be measuring and talking to ourselves and figuring out what's the best way that we can improve and optimize the experiences to deliver the best possible client experience that we can to drive and deepen relationships with our existing customers and then acquire new.

Jim Marous:
You said it well that it really gets down to the experience. And we talked about it when we were together, that I call some of this stuff faking digital where you offer products on digital channels. But if it takes 10 minutes or 12 minutes or 15 minutes to open a new account or to apply for new loan, you're really not providing a digital experience. How has your organization removed the friction and simplified digital engagement? Because if you're going to have a digital bank and you're going to support banking as a service, you can't be the slowest player out there.

Matthew Smith:
Yeah. I mean, that's a really big thing, right? I think you're right. I call that the veneer approach, right? You put a digital front end on it and then in the back, you've got a bunch of people running around doing manual processes to enable it. That's not what we want to do, right? I've been kind of challenging the folks internally to think holistically about experiences, right?

Matthew Smith:
You want to create an experience that starts with a digital impression or some sort of marketing, and then guides people all the way through a seamless process that expeditiously moves them through it, right? Successfully. And at the same time, provides a really best in class kind of look and feel, right? And so from our standpoint, we actually put a client experience person in the fold, right? When we're talking about what we're going to build out and we're thinking holistically about the solution, right?

Matthew Smith:
So you can use agile. And I think sometimes what happens with agile is you get focused on delivering MVPs and then you're done and you move on to the next thing, right? I think with us, what we're looking to do is scope out second, third, fourth phases of the project, make sure we keep our eye on the prize and it's a living thing, right?

Matthew Smith:
We're always looking to optimize, we're always looking to kind of continue down that path of making the experience better. And I think to do that, it takes a big commitment, right? It takes staffing commitment, it takes tooling, right? It takes the ability to be able to kind of assess the situation and quickly course correct, right? And make adjustments that are going to yield the best results for you and your customer.

Jim Marous:
After looking at leadership and culture, probably the second biggest challenge in digital banking transformation is maybe not just working on the back office, but really using data analytics to build better experiences, to build those proactive notifications to customers, to actually look from a customer's perspective as opposed to a product's perspective, how is Webster Bank addressing these issues with regard to using data and analytics more powerfully towards an experience?

Matthew Smith:
Yeah, I think so it goes back to my point about setting up an infrastructure for you to be able to gain insights, right? So the decisions that we make are based on data, right? Full stop, right? Yes, there's gut feel stuff like, hey, this thing looks like it's providing some friction, but we're validating those things based on the data, right?

Matthew Smith:
Where are we seeing drop off? What's the pull through rate? Right? Where are areas of improvement that we can see? Right? We know if we look at KYC verification and we're getting massive amount of drop off, right? The data's going to tell us what's going wrong in the client experience, right? I think same thing if you think about servicing applications. I think some of the mistakes that people make are they launch these things and then you don't look at how it's performing, right?

Matthew Smith:
So are you getting digital adoption? Right? People just downloading your app and actually using it, right? Where are they using it the most? Where are they using it the least? Right? Are they having issues enrolling in specific products and services? All of that data we've set up an infrastructure for us to be able to consume and make decisions, right?

Matthew Smith:
And what's interesting about that is I think it not only does it help you with regards to building a better client experience, it actually helps you draw in clients as well, right? If you think about marketing optimization, right? That's all data, right? Most of what we're doing is we're examining how a thing is working and then we're course correcting in the moment, right? Saying this thing is working great. Let's keep that going. We'll monitor it. This thing is not working well and then we need to make adjustments.

Matthew Smith:
But I think the big mistake that I find within the industry is not taking into consideration the power that the data will give you, right? And then using that to make the best possible decisions. And you're always going to have to prioritize, right? I think as an organization you can't do everything, right?

Matthew Smith:
You're not going to have an endless supply of resources and capital to be able to do every single thing that you want. But I think using data, you can really see where you're going to get the biggest influence and the biggest bang for your buck which enables you to make the best possible decisions again for your client.

Jim Marous:
So when Webster Bank and Sterling before that looked at banking as a service, do you see this as more of a distribution play to be able to distribute your services to a broader array of customers or was it more of a revenue play where you were able to actually generate revenue from your partners?

Matthew Smith:
Yeah, I think it was more... It was twofold, right? I think for us, at the time we were looking for alternative ways to gather deposits, right? That was our initial use case. I mean, what we've learned is that this is much broader than that, right? There's a tremendous amount of opportunity both in the fee income space, as well as if you want to branch into lending, right? I think there's a lot of different opportunities and we're exploring all of that. Original use case was really more about deposits.

Matthew Smith:
What was interesting about banking as a service, and I explain this internally a lot, which is, you're not doing anything that's like so vastly new, it's just a different application of what you already do, right? So we provide deposit products, right, to businesses. We provide deposit products to consumers, right?

Matthew Smith:
That is not a thing that's foreign, what's foreign for us is having somebody else be the front end of it, right? And basically if you look at it from a regulatory lens, you're outsourcing parts of your operation. So even though our client is the fintech, right? And we're providing end services to their clients, right? So it's kind of a two party hop.

Matthew Smith:
From a regulatory perspective, it's our client, right? And we're actually outsourcing major parts of our responsibility to a fintech. So what we had to do in order to launch that business was get comfortable with that model and put an infrastructure in place that enabled us to do the necessary reviews to ensure that our partner could fulfill that obligation as if they were doing it like we would, right?

Matthew Smith:
And once you have that, once you understand that role, it makes it quite easy for you to scale the business because you're looking at it from the same lens every time, right? Are you able to fulfill these obligations? What does your technology look like? How do we put the proper controls and ongoing monitoring in place to make sure that you can do this?

Matthew Smith:
Outside of that, if you think about it from a funding source perspective, and even from a fee income perspective, it's quite lucrative for the bank, right? So it's a two pronged approach, right? We get to apply a different use case to a thing that we're already comfortable doing. And at the same time, we're able to expand it to a sizable deposit and fee income gathering machine for us to kind of grow as we get bigger.

Jim Marous:
So it's interesting. When you jump into this space of banking as a service, you can't stay who you are today forever because the real benefit is in expanding your services, expanding the capabilities and delivering things more efficiently. Our research has seen that during the digital transformation process, since there's so many priorities, that innovation sometimes tends to take a backseat.

Jim Marous:
Well, this is really not available to an organization like yours where you're going to really have to keep on creating new ways of partnering with the organizations you partner with. So how do you keep innovation as a top priority within your organization and how do you keep people over the entire organization involved in innovation?

Matthew Smith:
Yeah, so we talked about organizational design earlier. I think one of the best decisions that we made as a combined organization was to create a chief innovation officer role, right? So my lines of businesses that I'm responsible for reporting to the chief innovation officer, her name is Bea Ordonez. She is an amazing and dynamic leader, right?

Matthew Smith:
And what's great about that is you have a person whose sole responsibility is to advocate for innovation across the company. And that's not just saying the stuff that we're doing in BaaS, right? It's digital innovation, it's the stuff we're doing in transformation. We're looking at a lot of different ways that we can implement blockchain use cases. She's responsible for that. She's responsible for business development. She's responsible for product. She's responsible for marketing. All of these functions sit within her.

Matthew Smith:
And I think what's great about that is she's able to kind of bridge the gap across multiple functions that should be innovating, right? Product marketing, these lines of businesses that I run digital innovation transformation and having someone at that level, right, be able to kind of be an advocate across the organization helps us get the word out, right? And so we're actively doing town halls, we're talking with different folks across the organization, getting people involved.

Matthew Smith:
I can't tell you how many times her and I, or me, her and our head of transformation, a gentleman named Derek Green who's also dynamic and fantastic, we've had just individual conversations with the head of operations and some of his direct reports or the folks in risk and compliance or the folks in legal or other teams, right? I get all the time invitations from HR or other groups where they're like, "Hey, we're having a staff meeting. Could you come and talk about some of the things that you're doing?"

Matthew Smith:
And I think that's building a culture, right? So us setting it up that way enables us, one, to carve out a group that is kind of immune from things like core conversion and some of the things that can be very overbearing within a merger and really gives us the opportunity to flex and be innovative without the distraction, right? Without the competing priorities, right?

Matthew Smith:
And I think, yes, you'll always have situations where you can't do everything. But what's nice about it is we're not saying like, "Hey, because we're busy doing a conversion and we have to focus on these fundamental things, we're not going to innovate for the next two years." We actually set up a team that's separate for us to be able to focus on that, which I think was a very smart move by our leadership team and thankful for it.

Jim Marous:
So, Matt, as opposed to a traditional bank who have owned the entire value chain, a lot of banking industry's players often focus on only one or two stages of the value chain, from being a provider to maybe an aggregator to distributor or some variation of those teams. Where do you see Webster falling today and where do you maybe see it falling in the future if it's going to be different than that?

Matthew Smith:
Yeah. I think it's an interesting question, right? I was pretty opposed from the beginning to taking just a product centric approach to this, right? Because I think that ends up being a value proposition that's just based on me providing a single service, right? What I think is really great about what we build and I kind of alluded to it earlier is we've really taken more of a partnership approach, right?

Matthew Smith:
And we use that term very specifically, right? Because we're actively looking for ways that we can partner holistically in a relationship. And by doing that, I think it provides a different level of value proposition for us, right? Especially within this space, because we're not just looking to sell you a thing, right? What we're actually looking is to figure out what's your needs, right, and partner with you to help you grow your business, right? Full stop.

Matthew Smith:
I think where we could evolve, right? To kind of take on more parts of that is exactly what I kind of alluded to before, is what are other ways that we can expand on these relationships? Right? One of the ways that I think has been really nice is looking at and assessing the technology that's being provided by these fintechs and then looking for an opportunity for us to embed that finance or embed that experience into our own to provide an expansion of products and services to our own clients, right?

Matthew Smith:
So now not only are we providing the backend operations for them, there's a return for us, right? Where we're actually getting access to a product or services that would've taken us either a really long time to develop, or in a lot of cases, it's a thing that we potentially don't want exposure from a balance sheet perspective, right? So it allows us to kind of build on those experiences.

Matthew Smith:
I also think our ability to be able to make potential equity investments in some of these companies is really big, right? So holistically, I do think that yes, there's certainly a product approach, but I do think that we can round this out, right? And we can be a lot broader of a partner, right? And that's what I would hope to continue with going forward.

Matthew Smith:
One thing I do think for the future, because you asked about the future, scaling our technology to be able to operate a little bit faster, right? Because one of the things obviously that every bank is going to get criticized is you move a little bit slower, right? I think we've done a lot of good work on the process side.

Matthew Smith:
From a technology side, I think there's still some work to be done, right? To be able to match the speed for which our partners want to run. I think we've had great partners and I think everybody's work together to kind of get things done. But I think in the future, what would be really great is if we could start to incubate some of these high potential startups, right? It gives us an opportunity to kind of move away from competitive takeaways.

Matthew Smith:
And now we've expanded our share of the market to be able to bank both high potential startups, right, and have the infrastructure to be able to kind of support 10, 20 partnerships right in a year, while at the same time being a great place for kind of more mature companies who have outgrown some of their smaller partners and are looking for more of what we're providing, which is a relationship approach. So I think there's a lot of really good stuff coming down the pike for us, but it's all exciting and it's all really good things.

Jim Marous:
So it's interesting. As we're talking here, it comes to my thought process that really playing in the banking as a service arena is really pushing Webster to become a better digital bank, to become more efficient bank, to innovate and use more advanced technology. So it really has made it so that you're being pushed to become a better you as an organization than you might have had if you hadn't had the banking as a service platform.

Matthew Smith:
I think that is a thousand percent correct, right? So what's interesting about it is you kind of start off with these business lines where you've got a digital bank and then you've got banking as a service. And what we've started to see is that there's really an ecosystem at play, right? If you look at banking as a service, we're providing the opportunity for fintechs to offer banking services, right?

Matthew Smith:
We're doing that through the use of APIs, right? Mostly. And so when you think about that, we're creating an open banking platform over time, right, that's going to enable us to scale partnerships and connect in a much different way, right? Facilitate the transfer of information that becomes a value stream. And then when you look at what we're doing in platform banking, it's leveraging a lot of those same APIs or even a variation of those APIs to do the same thing in reverse, right?

Matthew Smith:
How can we connect you into our experience? We want to own the client experience, but we want to offer the products and services that these fintechs do. That leads us into digital banking, right? And so now we're almost using this as an incubation hub, right? Where we can test and deploy new technologies to a subset of our clients, which then enables us to scale it across the larger organization.

Matthew Smith:
What's great about the scaled business, right, for Webster, we've got the HSA Bank, right? Which has a huge client base, right? We've got the consumer distribution network which is very big right on the East Coast. And then we've got commercial, we've got small business, we've got ample opportunity to grow anything that we launch, right?

Matthew Smith:
And so what's great about it is all the banking as a service plays have enabled us to think differently about our business, what makes these fintechs successful, what products and services could we potentially consume, incubate that technology and then bring it across the organization. It's a great ecosystem, right? The way that it works. And you're exactly right that we've kind of found a very good working relationship between all of these lines, and it's been very exciting.

Jim Marous:
So it's interesting because really then support of the banking as a service platform really has made Webster much more future ready than they may have been simply going down the traditional route of improving everything they did in the old ways.

Matthew Smith:
Yeah. For sure.

Jim Marous:
The old services. So can you share a few success stories around your banking as a service journey? Because again, most of my listeners aren't on that journey yet, they're just thinking about it. Can you share a couple of the successes and where you'd maybe like to see your platform go in the future?

Matthew Smith:
Yeah, I think so. If we want to get specific customer related, right, I could kind of talk about our relationship with a company called BrightFi, right? BrightFi is a financial technology company that's providing services basically to the under banked, right? That's their target market, right? Which to us is hitting a very important segment for us as a business, right?

Matthew Smith:
And I think that was one of the things that first attracted us to them. But what's interesting about their business model is that they've kind of expanded to be really more of a platform provider. So they have a direct to consumer business. They also partner with other companies who want to provide these banking services to similar groups, right?

Matthew Smith:
So if you're a credit union that has a demographic that you're looking to provide digital banking services to, you might not be able to produce that in house, but they could partner with a BrightFi to be able to provide this technology at a fraction of a cost. And they've done some tremendous work, right? And the reason why I call them out as a great strategic partner is twofold, right?

Matthew Smith:
One is when we kind of found them, they were doing some work, they had kind of a different banking partner. And one of the things that they talked about was, "Hey, look, we feel like we're just a number, right? We're kind of a commodity." I think we spent a lot of time invested talking with them about their business, learning their business, really thinking about ways that we could help them grow and expand their business. And ultimately, it formed a great partnership, right?

Matthew Smith:
We ended up being their best sponsor rather. But what's really great about it I think holistically is we haven't just stopped at that, right? It's not like, hey, we launched the partnership with them and that was it. I'm talking with the CEO of that company all the time about what are different ways that we could expand into different communities, right?

Matthew Smith:
So now we're talking about, is there some stuff that we can do within the microbusiness segment, right? Which we think is the under banked of the business banking world, right? And so we're constantly looking at ways that we can continue to improve. Also, what I think is interesting is we've collaborated, right? So when you think about things like fraud right there, there's opportunities for us to share our knowledge. And I think we've learned from each other, right?

Matthew Smith:
And they've made adjustments on their end, we've made adjustments on our end. It's been a true working partnership and I think that is a testament to how successful it is. What I think is also great about it internally is that particular company got us to think differently about how we run our processes, right? So thinking about what does the way that they're doing KYC, right?

Matthew Smith:
What's the best in class solution look like? How are they approaching other areas of fraud? How are they approaching the client experience? How are they approaching things like biometrics, right, and using that as a way to kind of like connect differently with the clients. I think that we've looked at them and we've said what's interesting is we're the bank partner and we're supposed to have a lot of knowledge around this space and we do, but you guys are doing some very interesting things that I think we could adopt and expand on our side, right?

Matthew Smith:
And our BSA team has been very open and transparent about how they've enjoyed the partnership with that particular client. And I think it's been a real two-way street, right? So like if you multiply that example by a lot, I could name a bunch of different clients that we work with where it's been a similar experience, right? And so I think holistically just having that as a sounding board and the ability to kind of adopt some of their processes into ours and vice versa, it's really a two way relationship.

Matthew Smith:
And I think also the technology that we built is scalable for the entire organization, right? So the APIs that we're using for things like account opening, right, can be applied to other relationships, other form of banking, right? We want to do direct to consumer deposit gathering. We're able to use those APIs in a different use case, right?

Matthew Smith:
I was talking with our head of product the other day about some of the stuff that we're doing around money movement, right? Our wire APIs. That can be used in a multitude of constructs, right? So I think everything that we're doing in BaaS has a touch point to other points in the business, and we're really looking at it that way.

Matthew Smith:
And that's why I say it's very important, this is not a product approach for us, right? We're not looking at this and saying, "Hey, we just want to provide a deposit account." What we're looking at is how can we build an infrastructure to be able to support what that client needs, but then also use that in other areas of the business. And I think that's a different approach than potentially others are taking to that problem.

Jim Marous:
Yeah, it definitely really amplifies the innovation process on both sides. You're using your innovation for your partners, but your partners are also providing innovation for you so it's a great give and take scenario. So-

Matthew Smith:
Exactly.

Jim Marous:
We've been seeing a major shift in the way banking makes money. We're seeing the deletion of some things that were typical fee generation items, but we're also seeing new ways to make money, especially when you're talking about open banking, open APIs. What do you see is the most likely revenue model in the future for financial institutions or is it really going to differ from institution to institution?

Matthew Smith:
Yeah, I think what's interesting is so when I was running products for Sterling, one of the areas that I thought was hugely untapped, at least for us, I know other places actually monetize this quite well, is this concept of information reporting, right? And I actually think that that is a very untapped potential within the banking as a service space, as well as just holistically across the organization, right?

Matthew Smith:
APIs facilitate the transfer of information, right? Which means you have data, right? And from that standpoint, when I think about what we could do, not only can we provide operations to folks, but we can provide data, right? And data itself is very important, right, and is valuable. But data and synthesis is actually quite valuable, right?

Matthew Smith:
So if we can find a way to figure out what's a way to replicate some of the things that we've done internally to help us and we talked about this earlier, right? Examining kind of the experiences really looking at how our products and services are resonating with our clients and mixing in both the actual voice of the customer with actual, tangible data that we get from operations, if we can figure out a way to package that in synthesis form, right, and help our clients on the BaaS side, figure out how they can continue to monetize, continue to deepen relationships, I think that's very valuable, right?

Matthew Smith:
And I think what you're going to see over time is through the use of APIs and open banking, right? You're going to get this wave of data as a service, right? Everything's going to be as a service now, right? Card as a service, data as a service. But what I think is really interesting about that particular approach is it's so valuable, right? If you can provide a BaaS client that kind of information, you can do the same thing in commercial, you can do the same thing in small business, right?

Matthew Smith:
And if you're providing that kind of value to organizations, it comes at a premium, right? So you're going to get increased revenues that come from that, but man does that deep in relationships, right? Now, you're talking about, hey, you're not just... Again, you're not just providing a product, you're providing a service that's actually helping me expand and grow my business.

Matthew Smith:
I think that's the wave of the future, right? Where we're going to go and we're going to start seeing banks is really focusing on moving away from, hey, I've got a really good private banking offering, right? Or I've got a really good service on the commercial side and really focusing on how do I deepen relationships with the use of data and synthesis?

Jim Marous:
It's interesting, a lot of the bankers I've met one to one in the last nine months have really had a challenge just keeping up with what's going on today. I know from meeting with you that you're not satisfied with this, you're always pushing the envelope trying to say, "What's next on my list?" So what is next on your to-do list in 2022 and maybe the beginning of 2023 with regards to what you really want to get accomplished? And on top of that, what recommendations do you provide to banks of all sizes as they start their... Or go through their digital banking transformation journey?

Matthew Smith:
Yeah, I think so. It's a great question, right? To your point, I'm never kind of resting on this, right? It's an evolving thing. One of the things I think we're doing that's quite interesting is this concept of credit card as a service, right? I personally think that the next phase of disruption that will come from fintechs is really going to be in the consumer lending space.

Matthew Smith:
You're starting to see a lot of buy now pay later. And I think that card is no different, right? What people are looking for is financial education. If you think about that as compared to a debit card, right, it's vastly superior in terms of a tool to be able to build credit, right? And so I think that as folks get more educated and as fintechs kind of take on this concept of educating clients about what's the best use of financial tools for them, I think you're going to see disruption in that space.

Matthew Smith:
What we're trying to do is we're trying to get ahead of that, right? So building an infrastructure to be able to support fintech partnerships that want to issue cards in a variety of different fashions. And I think in doing that, what it's done is again, forced us to think differently about how we go to market with things internally, right? And so do we have the opportunity to kind of expand and deepen relationships by creating more opportunities for consumers to get credit with us?

Matthew Smith:
I think we're also looking at the same thing on the business banking side, right? Like what are ways that we can deepen relationships through expansion to credit or expansion to different products and services? Right. So I think the big thing for us is continuing to innovate in the space, right? Looking at what are opportunities. I talked a little bit about some of the work that we're doing in blockchain.

Matthew Smith:
We joined a consortium that kind of enables us to connect with like-minded banks to think through what are potential uses for blockchain. I think that's definitely the future, right? And so we're actively looking at that, everything from lending on chain to tokenized use cases, right? I think there's a lot of opportunity, right? And so I think for us, it's continuing to understand how the space is moving.

Matthew Smith:
I think we've got great people that are constantly looking at what's trending in the space and what are some things that we need to be looking at. And I think we're doing that, right? My advice to banks is I think just don't be sleepy, right? The biggest thing is you look at the amount of penetration that fintechs have been able to kind of take on, well, a large part of the reason for that is superior technology and connecting better with clients, right?

Matthew Smith:
Actually kind of going and saying, what are you looking to do? And solving a specific problem in a way that banks traditionally have not been able to do. So how do you compete against that? Right? I think you can partner, which is one of the things that we've been doing, right? And I think it proves our experience and it gives them the opportunity to build clients, which then gives us new clients, right?

Matthew Smith:
Or you could sit and just say like, "Hey look, we're going to rest on our laurels that we've just got a great reputation as a company." I think that's a recipe for disaster. I think you do too, right? So I think my biggest advice would be make sure you're continuing to follow the trends and look for opportunities to kind of innovate, but then it all comes down to execution, right?

Matthew Smith:
You got to be in the position to be able to do it. We can talk about those all we want to, I think one of the things that Webster and before that, Sterling has kind of continued to foster is this culture of execution, right? It's actually interesting, I remember our CEO would say all the time, "I don't care if you try and fail, I just care that you tried." Right? Like if you have an idea and you want to go about doing it, go about doing it, right?

Matthew Smith:
And you want to create a culture where people come with fresh ideas and they can kind of get together in a room where people make a decision and kind of move. And if it fails, it fails, right? You don't want to punish people for failing. What you want to do is incent people for actually trying, right? And I think some of those things will work, some things won't, but creating that culture within any organization is I think vastly important. So that's a big one for us.

Jim Marous:
Matt, thanks for being on the show today. It's always fun to talk to you and to catch up on where you're going. It's always changed. I know that if I wait three more months, you're going to be in a completely different place with everything you're working on.

Matthew Smith:
Hopefully.

Jim Marous:
So thank you so much for being on the show today.

Matthew Smith:
No, thank you. I appreciate the time. This was great. Great connecting with you.

Jim Marous:
Thanks for listening to Banking Transformed, the most popular banking podcast in retail banking and the winner of three international awards for podcast excellence. If you enjoyed today's interview, please give our show a five star rating on your preferred podcast platform. Also, be sure to catch my recent articles on The Financial Brand and the research we're doing for the Digital Banking Report.

Jim Marous:
This has been a production of Evergreen Podcasts. A special thank you to our producer, Leah Longbrake, audio engineer, Sean Rule-Hoffman and video producer, Will Pritts. I'm your host, Jim Marous. Until next time, remember, more than ever financial institutions must redefine their value proposition in a rapidly changing marketplace.

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