Mortgage lender poised to begin digital bank experiment

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As the head of Everett Advisory Partners for nearly a decade, Stephen Curry — like a lot of strategy consultants — urged community and regional banks to go digital.

The advice has become even more relevant in a rising-rate environment where banks are scrambling to build deposits.

Now, as CEO of Gateway Mortgage Group in Tulsa, Okla., he’s about to start practicing what he preached.

Gateway in August agreed to buy the $314 million-asset Farmers Exchange Bank in Cherokee, Okla., with the intention of turning it into the digital-only Gateway First Bank. State and federal regulators approved the deal in January, and it is expected to be completed in about a week; the rebranded bank is slated to debut this summer.

A digital-only strategy made sense, he said, because Gateway has national ambitions as a more diversified financial player, but neither it nor Farmers has a large retail presence.

“Unless you have a very competitive branch business model, it really doesn’t makes sense to go with the branch-construct [strategy] in today’s market,” Curry said in a recent interview.

Gateway Mortgage operates in 40 states and the District of Columbia. It often has only a single office in each state and also made mortgage loans online. Its goal is to expand its reach and cross-sell home loans with savings and other banking products.

“This in a lot of ways is the perfect opportunity to deploy the digital business model,” Curry said. “We see the strategic imperative in the marketplace, and our franchise really lends itself to a digital banking deployment.”

To that end, Gateway has turned to FIS to provide the modern core banking platform for the new digital bank.

“We’re seeing direct and digital-only banks grow in popularity among consumers, and financial institutions are eager to get into the game,” said Rob Lee, the executive vice president of digital and banking solutions for FIS.

Indeed, traditional banks increasingly are eager to expand their digital reach where they have little-to-no branch presence. For example, PNC Bank in October rolled out an online-only bank that features a high-yield savings account for consumers outside its traditional markets.

Lending firms like Gateway also are getting into the act. American Banker reported in March that Toyota Financial Services will move beyond auto financing and leasing to offer consumers a digital-only bank.

Lee said that while technology hurdles are a given to bringing a digital-only bank to life, “there are many business-strategy considerations.”

“Specifically, the bank will need to think about brand positioning, product and pricing strategy, target-customer segments, [and] target-operating model for the digital-only bank, among other things,” he said.

Curry said Gateway will market the digital-only bank in a few ways.

To start, Gateway only will offer money market accounts and certificates of deposit.

“Once we have built up the CD and money market portfolio, we would start cross-selling checking product for more established relationships,” said Curry, who adds that he expects the bank to have competitive rates.

Generous rates and distinctive services will be necessary for success, one expert said.

“Delivering a digital bank in the market requires differentiation for attractiveness in an ever-consolidating race for rates,” said Lane Martin, a partner in the banking practice at the consulting firm Capco.

“Customers ultimately will want more of a full-service offering to limit the number of relationships with financial institutions, which requires a modern infrastructure and fresh perspective to bring new offerings to the market,” Martin added.

Gateway also will market the bank on its own and to mortgage customers.

“As we originate new mortgages on our digital point-of-sale platform, we’re going to provide customers the opportunity to open a CD or money market account as part of the mortgage application,” Curry said.

He describes a future scenario where Gateway offers a small mortgage discount or upfront cash incentive to entice consumers to open the CD or money market account.

Curry said Gateway has established a team focused on the best path forward for potential promotions and establishing a competitive rate.

“One of the things that’s been important for us is to find people with that unique experience that can help us drive our competitive strategy on the front end,” he said.

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