Share
Many community banks are feeling pressure to grow to avoid being wiped out or bought out. Could serving non-traditional businesses provide the new opportunity they need?
Ryan James, CEO of Surety Bank in central Florida, joins us to discuss his bank’s experiences with the non-traditional, including moving into cannabis and crypto-related banking.
A few takeaways from the conversation:
INTERVIEW TRANSCRIPT
So Ryan James, president, and CEO at Surety Bank. Welcome to the BAI Banking Strategies podcast.
Thank you, Terry, for having me.
So Surety has the lineage of a traditional banking institution and you provide mainstream consumer and business banking services that people associate with a bank, but you also provide services to other entities that some would probably consider non-traditional. Can you tell us more about those other services and who you’re providing them for?
On top of traditional services to our direct community, we provide services to money service businesses: to check cashers across the nation, to cannabis operators and to some crypto operators that buy and sell cryptocurrencies.
Competition is tough for banks everywhere, but some of these areas that you’re talking about are sorts of off limits for a lot of your peer institutions. What has led Surety to venture into these areas that other banks look at and don’t go into?
I started at Surety Bank in 2001 out of college, and we had a lot of gas station loans. I would say half of our loan portfolio were gas station loans. The bank became experts in that when, in the ’90s, a lot of banks were straying away from it for site contamination. So we went in and had belts and suspenders approach look into contamination and know that industry very well. And along with that, a lot of our gas stations also cashed checks on Friday because a lot of their clientele will come in, cash a check and buy their local goods and services. When I became CEO in 2009, we had local check cashers and we’re very familiar and comfortable with them, and then we would get more coming to us as their bank accounts were closed down. So we’re like, “Well, why would they close down this bank account?” We looked at them. The balances were good. It didn’t overburden our staff. And so what we were finding was the banks weren’t keeping up with compliance. They just didn’t want to deal with it. So we looked at it, saw how much compliance that was needed to monitor, and asked “was it worth it?” And the answer was, “Yes, it was a service that was needed. Could we provide excellent services and could we profit from this?” And so it started from there. Over the early 2000s and the early teens, BSA really was picking up. Anti-money laundering, KYC, just really ramping up. As examiners would come in and they would see, “Oh, a little bank, you have check cashers,” they would frown upon it. We just kept on digging into the compliance and said, “Well, what do you not like about this?” And what we had found, they didn’t really have anything specific they didn’t like. They had these just preconceived notions that check cashers were a bad entity. And so we had to start from there and prove, “No, it’s not money laundering. These businesses have licenses. This is 100% legal set up and here are controls in place.”
I’m guessing that a big part of the reason why other banks steer clear of servicing these kinds of businesses is because of their perception of the risk involved. So how do you think about risk at Surety Bank and how has that view evolved as a result of servicing these riskier enterprises?
It’s the same risk with any type of product. You have to go through your checklist of what’s the worst thing that can happen, and how do you mitigate the risk? This is from an operational standpoint, from cash flow, liquidity. Do you need a major invest in architecture software? If you had to get out of that line of business, would it have an impact on future earnings? Would it have an impact on your capital? It’s the same line that you would do looking into a new line of lending. What percentage of it does it weigh into your capital? You don’t want to go into a line and be much larger than your capital can afford. You have to look at the BSA risk. Who are your customers’ customers? Do your customers have a good AML policy? Do you have enough employees that can monitor them? How much time does it take to monitor? You go through step-by-step like you would for any risk assessment for any product and then go through your channels, go through your committees, go through your board of directors. I see it as kind of simple. You just go through step by step and see if you’re willing to accept a risk if there is risk left over after mitigation.
You mentioned your board here, which is something I wanted to ask you about. How did you get your board on board with this? Board members tend to be the most conservative part of the business, particularly at smaller banks like yours because they typically have their own capital at stake. So how much persuasion did your board require, and how did you go about making the case for being a pioneer in these areas?
You’re not going to win anything in one board meeting, but you level it in and build it. And I took it as a personal excitement. If I can’t win over that board of directors, then maybe there’s something wrong in my philosophy. So if compliance reason they have a question with or you can’t mitigate it, then you didn’t do a good enough job. So I looked at it that way. You can’t get frustrated with board of directors not seeing your point of view. I looked at it was my fault not being able to overcome that objection. If I couldn’t overcome that objection, then that’s why you have a board of directors. You have that checks and balances. They may see something that I didn’t see. Sometimes if you’re too much into the weeds, having a board of directors, their expertise may be in something completely unrelated to banking that they could bring in that risk. We have several lawyers on the boards, very helpful as well. They’re used to always seeing the worst-case scenarios. You need to be able to overcome those objections. If you can’t, then you shouldn’t go in that line of product.
So having your board comfortable is certainly a big positive, but that’s not the only obstacle here, I would imagine. What are some of the bigger challenges that you’ve encountered in moving into these new areas, be it in compliance or other parts of the operation, and how have you dealt with those challenges?
So you do have to dip your toes in the water, go through an examination and then slowly increase. You can’t just go in there and throw everything at it. And know that prior to going into a new line of business or product, you put together a risk assessment, of course, and you go through each line. But doing a risk assessment prior to being live, you don’t know what you don’t know. So being able to open up with maybe just one customer, sit on that, audit them, how much time does that take? Make sure that you’re not overburdening your compliance department. And just know that if you are adding new deposits, what is it going to be the makeup of these deposits? Even though you may be in crypto sector and you’ve got now a lot of non-interest deposits, that doesn’t mean that you need to go use those deposits and lend it out or buy bonds with, because those deposits being non-interest bearing, they could be gone any day. So you really need to have that product and service be able to stand on their own, not to only profit because you’re using those deposits to lend out or to buy bonds. You need to be able to go into that line or service so it can stand on its own two feet.
Other banks are trying to figure out how to enter some of these emerging industries like cannabis and crypto. And once they figure that out, there’s no reason to think they won’t follow through and put resources into pursuing market share. So you’re early to the game. Do you think that there’s any enduring advantages in being a first mover here?
Yes, there is because especially in the money services business area, which encompasses check cashers, cryptocurrencies, any type of money transmission, they typically will want to bank with a bank that is going to be here tomorrow. And if there’s somebody that’s been in the line of business for 10, 15, 20 years and then you have a newcomer, who do you want to bank with? You’re going to want to be with somebody that has been in it, the board is behind it and go through it. Time and time again, we see banks that maybe they’re dying on the vine, they’re doing the Hail Mary, and we’re like, “Well, we’re going to get in this line of business,” and think it’s going to solve all their problems. And they’re not going into it in a position of strength. And so they’re giving away the farm and then they find out right away, “Wait a second, we didn’t realize all the expenses that it had on our operational staff.” And then that’s just a recipe for disaster and they’re going to go out and exit the market as a couple exam cycles go through. So if they’re not willing to test the waters, go in there, go through an exam cycle, being strong in their convictions and the whole bank – not just a sales department or deposit operations, but everybody has to be together and have the same motive.
Looking at cannabis in particular, most banks are waiting for the federal government’s blessing before starting to bank in that industry. What services are you providing now and what do you know regarding the federal enforcement landscape or ways to operate in the current gray zones that other banks may not know?
As far as cannabis goes, the genie’s out of the bottle. You’ve got hundreds, if not thousands, of banks that file continual SARs. You have FinCEN that is giving out some guidance on what to do on banking cannabis. If you’re going into the line of business, you need to know that if it is taken away, what impact is it going to hit on you. If you are dependent on those deposits and then you have to sell bonds to avoid a run on your bank, well, right now would be a horrible time to sell your bonds because everybody’s got a pretty large loss because of the rates rising so much over the past year. You can’t put yourself in that position by going into that line of business at the moment. You’ve got publicly traded companies that have direct income from the sales of cannabis. It is now legal in more states than it’s not. You’re telling me the federal governments are all going to get together and they’re going to then go after every bank, every business, every state that is allowing cannabis sales? It’s just not going to happen, as far as we concerned. But we are still going to build a program that if we were forced to get out to, then we can without impacting our capital.
So, similar question regarding crypto. What is Surety doing in that space, and how are you thinking about future opportunities there following the spectacular implosion of FTX and the collapse, following that, of a whole bunch of FTX counterparties. All of this has plunged the industry in what people are calling “crypto winter.” How do you see that playing out?
We’re a small bank, so we did not take on large companies that had a billion dollars on deposit, but I can tell you FTX would have never even passed the first conversation. It would have never passed through our program at all. We would have never banked them. There’s no way they were up to date on their KYC, their AML programs, their policies and procedures. There are so many crypto-related companies that we have turned down that were not identifying source of funds and that bank at these larger banks. So it’s frustrating to me that banks that have much greater resources than us weren’t knowing their customers. So you can’t have a bank just dependent on one product. You can’t be a bank and just be dependent on commercial loans. You can’t be a bank and be dependent on just crypto-related deposits. You have to go back to lending 101. You have to look at source of repayments. You need to have not one, but at least two sources of repayments. So the banks that thought on the mining rigs that their source of repayment is the mining of Bitcoin, and then if that doesn’t pay, then getting the mining equipment. But to me, that is only one source of payment because if the mining wasn’t generating enough money to pay their payments, one of two things happened: either the price of Bitcoin plummeted, and so whatever the miners are mining, that Bitcoin wasn’t worth enough to cover all the expenses, or the price of energy goes up. Either one of those two things happen or both happen, then that equipment is worthless. So if you have that equipment as collateral and you think that’s a second source of repayment, you’re wrong. That’s all one source of repayment. So they should have looked at cross-collateralizing other items or commercial real estate and really hold their pants up with belts and suspenders.
Ryan, if I asked you to give a single piece of advice to other banks looking for new opportunities to diversify beyond the reliance on net interest margin and products and services that are largely commoditized in the U.S. market, what would that single piece of advice be and what would these banks have to do to take advantage of your advice that they may not be doing now?
First, I think before you ever need to go into a new product, you need to clean house first. Look at where you can cut costs. So many vendors that they have that they could eliminate and not even affect their operations because what happens in a long-time business, and we’re guilty of it too, if you sit back and look and say, “Well, why are we paying this? Wait a second. That service was great 10 years ago, but we don’t need it anymore because we now have this.” You really need to go through each department and look at getting efficiencies first before you go out and look at a new product in a new line of business. I think there’s so much money that is being spent, and a dollar saved and a dollar earned is the same dollar. So, first and foremost, I think you need to just be lean and mean upfront and then go out and look for new products and services.
So last question. What comes next for Surety Bank? What’s your next big idea? What areas outside mainstream banking products and services do you see as being ripe for an ambitious community bank like yours to take advantage of?
Right now, there’s of course going to be a lot of unknown in 2023. Crypto is not going away. The volume of it clearly has gone down, but the amount of transactions that happen per day on Bitcoin blockchain are really the same pre-2020. There was so much money that was put out in stimulus and so much money on Wall Street, private equity firms going into, but there’s still 250 million Bitcoin transactions a day. So that will be there, but it’s not probably going to unicorn where the banks had hoped to. I believe that, especially with community banks, if community banks can band together and take their traditional thought of lending and then pair that with fintechs to have revolvers in the “true” buy now, pay later – not to buy a shirt, but for a hot water heater that’s needed, or maybe for solar. Look at areas like that. I believe it’s time for community banks to band together so then they can compete against the larger banks and still bring your same services to the market that you do in your local footprint and then be on a larger scale, but also reduce your liability by not having too much of your capital at risk in that section. Still be very prudent and spread your risk along the area. And I think there’s a lot of areas with technology now that community banks can really provide way better service than the large banks.
So Ryan James, president and CEO at Surety Bank, many thanks again for joining us on the BAI Banking Strategies podcast.
Thank you so much for having me, Terry.
Join our community to unlock exclusive content, connect with industry experts, and gain access to valuable resources that will help you stay ahead.
