Dashboard: Can a Digital Bank Deliver for Business Owners?

Welcome to another 21 Hats dashboard. I'm Lauren Feldman and I'm here with Mike Butler who is CEO of Grasshopper Bank. Welcome to the podcast, Mike. >> Oh, thanks for having me. I'm excited about talking with you. >> My pleasure. Really happy to have you here. Te tell us about Grasshopper. Uh what's its mission? >> Well, you know, Grasshopper's mission is to serve the, you know, business and innovation economy in a digital fashion. So we believe that the um the movement within our client base is to be more technology oriented and digital and small businesses in particular are moving more rapidly in that direction and our mission is to serve them with financial services products that are delivered digitally kind of like supported by good human capital but you know makes it easy to easy to work with us. Are you a bank or a fintech or both? >> We are a OC charter bank. We like to say that we are a fintech with a charter. Um obviously technology is a really critical part of what we do every day and we have embraced the fintech uh evolution that's been going on for the last 10 or 15 years and we can talk a lot more how we do that but we are you know a fully you know FDIC chartered bank governed by the OC >> and you also do other things that banks do like SBA lending correct? Oh, we're a full-ervice bank. Um, you know, we like to say that we're a full-ervice bank just without branches and we are focused on, you know, again, providing the customer with the, you know, that Amazon-like experience that they have become accustomed to um, in their day-to-day world that they don't always seem to find when they start to work in the financial services sector. So, we like to say that we're the Amazon of financial services. >> Tell us a little bit more about that. what what are you able to do uh in that regard for businesses that they might not find at a more traditional bank? >> Well, I think we always start with the core product that we think is important to small businesses and that's their checking account. And so we have developed um with our partners on the fintech side, we think an industryleading and award-winning kind of platform that allows our customers to open their core DDA account in about 3 to four minutes per ser that right there is a big difference between um working with other community banks in which you have to walk into a branch and open a checking account. Sometimes it people tell us it takes over a week to get that done. So this is a 3 to four minute experience, no paper that gives you access to an industry-leading, you know, digitally driven um demand deposit account. >> Got it. Uh what what's your background? How did you wind up running a bank that focuses on small businesses in particular? >> Well, I was uh you know, I got out of college and I started to work with a big bank, Keycorp. wasn't as big when I started versus when I left, but we ended up to be over a hundred billion dollars. And you know, um I think what you start to realize when you're in the bigger bank environment is first of all, unless you're the CEO, you're you can't change culture. And so that was a big driver for me is like, you know, I wanted to um you know, run a bank that had a very clear culture of customer service and client first and digital. And so, you know, I took the opportunity to work with a small community bank in Boston that was looking for some direction and we we just got into the whole concept of how do you build a digital bank? You know, what's it like to say to yourself, what where is the industry going, right? The old Wayne Gretzky line of where's it going versus where it's been? And I don't think I was any of us were genius as to where it was going. And I think everybody knew technology was going to change the way people worked with banks, but it was how and when that I think was, you know, the part of it that was important for us. And and we decided to be early adapters and again we closed branches and develop digital platforms and and started to acquire clients, you know, via, you know, digital uh account opening. >> I should point out this is a sponsored podcast. we're we're just getting to know each other, but we hope to build a working relationship uh together. Um given what you just said about working at that community bank and and getting to know uh your customers in perhaps a different way than traditional banks have, are do you see business owners making certain mistakes over and over again? Are there are there things you've picked up that you would share that could be beneficial to to business owners? >> Well, you know, I I mean, I I I think back back to your question previously as well is we felt like as the digital evolution continued to evolve, consumers, you know, throughout the pandemic started to adapt to these, you know, the the idea of working with a digital bank and then businesses were the next great place to go. And you know the the the the part about businesses is small businesses there's no there's no CFO there's no chief of marketing there's no chief technology officer it's like these small business owners do everything themselves and time is critically you know is is critical for them. So providing the digital solution was something that we really felt could help the client that that business client just spend more time on the business side of it than the financial side of it. And and when it comes to, you know, mistakes, I I mean, everybody makes mistakes. We all make mistakes. And, you know, but I I think the the the thing that sometimes happens is that, you know, when when you don't have time to think through the the real financial solutions, you end up maybe with more expensive ones or sometimes you end up with products that don't na naturally fit your what what what you need to solve the problem. And and I think that's the that's the rub that I always seem to find with businesses. I don't have the time. I wish I had the time to think through that a little bit more. And what we're trying to do is provide that business owner with something that we think is tailored to their needs. And that also can save them time. The one place that I hear owners talking about most frequently in terms of uh time and bureaucracy and difficulty [snorts] is in applying for loans and that at some banks that application process can be almost never ending. Um is that an area that you've been able to address? >> Yeah, re really. Um I I it's the the time conssuming part of it. Um I I'm not going to Yeah, I I could spend forever here with you on this, but in our early stages of moving into digital, you know what you find out that the paper generated questions and data um requests that are being made by a lot of traditional banks today are no longer really viable to you know or necessary when it comes to making a good credit decision. There is so much data out there that we use today in our scorecards that allow us to make a really good credit decision about a particular client and reduce that friction. Here's that's the word we battle all the time, right? Is how can we eliminate the friction in the process? So asking asking people simple questions like actually you know um you know what do you do for a living? I don't need to ask that question. I know because I know based on the data that I can get out there about the individual, you know, um, uh, company, I know what business they're in. They don't have to tell me. Um, sometimes I don't have to even ask what their financial position is because I can also get that, um, via the, um, you know, the data sources that we pull down. And when we go through our we we have two particular loans that we like to talk about with small businesses. One is, you know, just a regular term loan in which clients can apply and fill out an application in lit literally minutes with maybe answering 15 questions versus 50. And and you're going to get an answer back fairly quickly. Now, it's it's not always yes, but but but you're going to know fairly quickly whether or not we think we can provide you financing. And again, I I can't be all things to all people, and I can't provide credit to everybody, but I'm going to tell you quickly whether or not you can. I I I I can or I can't. And then I'm going to go through the process fairly quickly. Um and then the other is an SBA loan. Um the SBA loan is traditionally very very u paper intense time consuming and we've spent a lot of time digitizing it and using scorecards to you know be able to make credit decisions within the guidelines of the SBA that allow clients um to I guess you know again answer 15 versus 50 questions that will allow them access to that credit that they're looking for. So, it's just a, you know, I hate to make it this simple, but when you think about how we used to operate day in and day out in all of retail and how timeconuming it might have been, all we're trying to do is reduce all that friction using technology. >> It sounds like you're addressing the biggest frustration that I've heard from owners, which is they talk about how how difficult the process can be to apply for a loan, especially an SBA loan. But what really bothers them is [snorts] how long it can take to get an answer of no. Uh and they often go away suspecting you knew you weren't going to make this loan or you could have known uh almost instantly but you kept me waiting for a month or longer. Um can you give me the idea how how when you say fairly quickly, how quickly might that be? >> Well, yeah. First, I'm going to start with a culture, right? So first of all the culture of client first is really important when you think about what we've tried to you know kind of develop inside the company and it's really you know I I use these kind of old school analogies but I mean if you think about the branch network and and I'm I'm not being critical of anybody who uses their branch network but you know the branch network tells you I'm open from 9 to 3 and come on in and get in the queue and wait in line to cash a check to get my money and or to do business and and today we've said that's not the that's not client first. That's that's like business first. So the idea has got to be client first. The idea is how do I solve the client's needs, help them solve their needs. And the attitude that's put into everybody and and the culture says, I'm not going to delay a decision. I'm going to do the best I can. Now, I want to make a good decision, so I may have to ask for more information, but other than that, the answer is no. and and and we're given no and yes answers in like uh I'm not say well okay I got to be careful but it's uh less than an hour >> wow >> less than an hour you're going to get a response from us yes or no or I might need more information but but but you're going to get a response from us >> if you give a yes is the offer uh going to have a rate that's closer to what traditional banks offer or closer to what fintexs and alternative lenders offer >> Oh much closer to what banks would offer. This is a bank-driven product. We're a, you know, you know, we we are not really a non-prime type of company. So, we operate in, you know, what you would normally see in the bank environment. Um, SBA loans are prime plus two. Some of our um term loans may be a little bit higher from a maybe a 100 basis points more than that, but but you're in the same range. Um, so, um, this is, you know, again, we're we're not a non-prime lender, so the rates are bank-like. >> Are your standards any different from a traditional bank, uh, in terms of whether you will make a loan or not? >> No, I' I'd probably say tell you that the people who work around me would probably say that, you know, our credit appetite isn't as big as maybe some others, especially in the non-bank world. Um, that's, you know, if like if 12:00 is perfect, we like to say we're 11:00, maybe slightly more conservative. But I think the the the the answer for us is that we're using a digital platform that can reduce the friction as it relates to the approval or the the application and approval process. And so speed is kind of important here for us. Um, you know, credit's credit is hard. You know, given you know, you know, lending money is hard. And so, um, we like to make sure that it's, you know, saying yes to everybody is not our idea of client service. Let's put it that way. >> Well, it's not a way to run a business either. >> Right. Right. >> Is it your sense that access to capital is getting any easier or harder right now? Well, I would probably say that access to capital is probably easier than it's been in the past because of the evolution of digital lenders and non-bank lenders in the marketplace and and that's good for small businesses and frankly good for competition. We all need competition and I think that the use of technology by people outside the bank to help make good solid credit decisions and to understand why it's good or bad to make a loan I think has advanced. So there's there's more places to go today than there has been for small businesses to get credit in my view. Are there types of businesses that are not a good fit for Grasshopper whether because of the industry, the the region or any other the size, any other aspect? >> Well, yeah. I mean, you know, we're not, you know, certain we would think that there are certain um uh niches that you need to be an expert in to lend money. So today we are not um lending money into the cannabis um sector and the reason is is because we think in order to do that you have to do it really really well and requires a great deal of resources and a focus to get that done. So those would be the areas that we try and avoid areas that might be perceived as riskier that would require some expertise. Um, so maybe, you know, direct to, uh, direct crypto, um, cannabis, um, you know, some international payments businesses are hard for us to deal with, but but they're fewer and far between than the normal businesses that are out there. And we've tried to embrace the kind of um, evolving what we call gig economy that's out there in which these, you know, there's individuals doing business, you know, they're they're themselves. They're their own brand. and and and that's something that we embrace and that's something that you know working those are dig those are technopile usually kind of people the evolution of the small business owner from owning a manufacturing company to being in the gig economy is really where we've also I think done well providing our products and services >> one thing owners have traditionally been told to do is to try to develop a real relationship with their banker uh especially if they're interested in borrowing money. Um, and [snorts and clears throat] it's it's the kind of thing that's, you know, can pay off in terms of uh, you know, getting a normal loan or it was something that people said was relevant during the the early days of the pandemic with the PPP loans. Is that something that you do despite not having branches? Is there still a possibility to develop a personal relationship or is that not part of the equation? Well, you know, it's the definition of relationship, right? So, I and and again, this is there's a couple parts to this answer, but first I first and foremost, I tell you that, you know, we have a relationship with you as soon as we open an account and and we get to know you. Maybe not with a, you know, with a direct human touch, but we get to know who you are. We understand who you are. We understand how you transact and we understand the quality of your business from all the data that we would have. So that's that's great. And and so you could use chat to talk to a customer service rep or you could use just I want to talk to somebody. You know that that's one of your choices. Now people wouldn't always define that as a relationship, but in today's digital world, you know, that is a relationship. Um more more on that is that we've said there is benefit to a human in the loop. So, so what we tend to do is after like as you you would open a new checking account with us and you'll get a reach out from us that says would you like to talk to somebody, right? And and and if you would, we're here to talk with you. You don't have to, but but if if you would, we're here to talk to you, help explain maybe the accounts to you a little bit better, help you get over some questions you might have, but that's your choice. So, so we offer you the choice. and and I think today the last piece of data I got is about 15% of the new clients who open accounts do ask for a conversation with somebody and and and we have it with them. Um then I would say you know we do have some kind of specialties that are dedicated towards startups right so so because of the technology nature that we're involved in and you know our work with you know fintex we you know we're pretty close to the startup community and and we have dedicated more human capital to talk to the startups that might be going through fundraising um you know activities there where we can connect them even to other parts of our organization that work with venture capital firms and we also if you went to our website I think um have a marketplace in which we offer kind of non banking products and services at some level of discount or priority into the client base in which they can also get some solutions to their problem. So, so that all in is is I think today's relationship versus, you know, walking down to the corner and talking to Frank and saying, "Frank, [laughter] you know me because I'm, you know, running the um, you know, the hardware store." And I mean, the problem is Frank's not there all the time. And, you know, uh, people change. And so, so we've tried to put that relationship in the form of a digital solution package. Well, it goes even beyond that because one of the thing you hear owners complain about is that they do develop that kind of personal relationship with a smaller bank and then the smaller bank gets bought by a bigger bank and suddenly everything changes. >> Yeah, those things happen. >> Now you actually have a uh a merger pending with uh another company called Anova. Um can you tell us about that? Yeah. So, this is really one of the u I've been in this this business for a long time and mergers and acquisitions inside the banking industry have taken place you know a lot over the years and it's a you know we we you know we used to have 15,000 banks today we have four um a lot of it has become because of the digital nature of the clients demands um but with with Anova this is a fintech that is serving the small business community with predominantly digital lending capabilities and in partnering and marrying up with a company like Grasshopper that has developed digital deposit gathering capabilities and is was growing into more digitized lending just like we talked about with our SBA product and with our term loan and and now to partner with somebody who's been doing it for 15 or 20 years, you know, at a a level that Anova's been doing it is just a great opportunity for bring two companies together that I think the the revenue synergies are, you know, pretty dramatic. But but the one most important thing that we have with this transaction is you're talking about a a fintech that thinks like a fintech and a bank that thinks like a fintech. And so by bringing this is the cultural part of this that's so important with you know any acquisition that you take place and surely in the financial services sector that you've got cultural connections. You know when you talked about that bank that was bought and you know that you know the same people aren't there a lot of that is usually because there's maybe a different culture that has o overridden what was there before. Um, and what we're excited about with the Innova Trends action is that we are incredibly culturally aligned from a client perspective, the use of digital, you know, um, you know, quick answers, serving the business community, focused on the business community, those things are going to really enhance the opportunities for both companies to now offer better products and services together. >> And Nova has its uh, its roots in kind of higher cost lending. it it owns on deck which I think many listeners are probably familiar with as a a digital lender. Uh do you see any conflict between uh the two approaches to lending? >> No, I really don't. Um you know uh I don't want to get too specific on some of those, you know, the um the lending part of it, but serving serving businesses that need money. You asked me the question before is do you think there's more access to money than there has been before? And I my answer was yes. Well, Anova has been a part of that to be able to understand the small business community and provide loans where otherwise companies wouldn't be able to get them because they understand it and they use some of their technology to understand the client better. Um, so it's a you know there's there's good things that come from lending money to companies that otherwise wouldn't get it from traditional banks. The thing that the alternative lenders often get criticized for is for not disclosing uh the uh actual APR that um that they're charging for a loan. Do do you think um small business borrowers should always know what the APR is? Well, it's well, yeah, you yes, that's a good that that's a good thing to know, but APRs are, you know, kind of like they're they're not always indicative of the value that the um lender is providing the, you know, the length of the loan and the size of a fee impacts your APR, reported APR. I mean, I'm not the expert here and I don't want to come across as I understand exactly the financial calculation here, but it is it is as simple as that. And if a small business needs a loan for 30, 60, 90 days to be able to, you know, maybe finance some inventory that it otherwise wouldn't be able to finance that leads it to more profitability. Paying a fee to get that over the short term seems to me that the the business owner is making the right decision to get that loan. And then the resulting APR is really the result of the the length of time that the um borrower used the loan which you know it kind of in a weird way the quicker you pay it back the better off it is and it creates a higher APR so people like overreact to it but the business isn't complaining because the business got the loan that it needed to buy the inventory that led it to a more profitable position. Um, so I, you know, there's, if if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if, if if if you're a small business and you have access to credit and that fee doesn't re wipe out your profitability and it's a good business decision, that's a good deal." >> There's no question that that happens all the time and that businesses do benefit hugely from that. There are situations where businesses turn to that type of lending because they're kind of desperate and often it it spirals downward from there. Is is there a line you see where you can draw between those two outcomes? >> Well, yeah. It's, you know, it's the I don't know. It's it's hard because there's really a moral issue of do you lend money to somebody who you don't believe can pay you back. Um, and you know, nobody wants to do that. That you know, at the same time, I can't make decisions for the borrower, right? So if the borrower chooses to take some money and then that's a spiral then it's just uh you know it's just not the right you I can't control that decision right the borrower has to control that and and you know you know if you went to our website you know you'd probably find a couple of tools out there that would help the businesses understand when or when not to borrow money and those are the things that we try and help them with but that's a it's kind of a borrower decision there >> is AI changing the way Grasshopper does business. >> Yeah, for sure. We're very focused and disciplined with AI and um what we've done is we've taken the approach that it's most important for everybody in our organization to know how to leverage AI to do their jobs better and more efficiently. And what we believe is that AI will not take your job, but somebody who knows how to use AI will take your job. So, so it's kind of like a cultural thing where we've said, um, guys, you got to know how to use this. And we provide tools and training and we monitor the the effective use of AI inside the company at the employee level first. and I just did a presentation and presented a graph and I think we're at 90% of our employees are using AI daily. And so that makes me feel really good that we've provided our employees with the right tools for them to be successful in both the business world and frankly, you know, we talk about the work life balance and and all the things associated with it is but but using AI in your day-to-day world is probably good for you too as the world evolves. you know, and I'm and we take this from a real kind of slow perspective. I'm not trying to get to the moon. I'm not trying to do things that are crazy, but I am trying to use it day in and day out because it's kind of like the personal computer. If you want to ignore, you know, if you wanted to ignore the personal computer 30 years ago and pull out your abacus or whatever we call it, you know, you you wouldn't have a job. So, that's where we start. And then and then amazingly we we also are very sensitive to people's fear of AI and their job and and so when you get them engaged in using it and they become more productive and start to create more opportunities to use it they feel more in control of their job than fearful of it. So getting them to use it overcomes the fear and then that fear leads to more and more kind of bottoms up ideas about how to create efficiencies in everything that we do and then it's evolved inside our company from really backroom um u oriented now into some of the things that we just launched our MCP which is allowing our small businesses to use claude to ask questions about their checking account which we think is an unbelievable tool um for businesses to be able to again save time, understand their finances better by using AI that's connected right to their checking account. >> What kind of questions would someone ask Claude about their checking account? What is it you have in mind? >> Well, you know, who's my largest accounts receivable? Who's my largest accounts payable? I see. >> Um you know, have I received a payment from XYZ? So all the things that you might be scrolling through your kind of statement to find Claude can find that for you. And so moving our moving our AI kind of culture into now s serving the small businesses with better tools is where where we're getting to and and the next part of this is using AI to improve even turnaround time. you know, you know, I quoted some turnaround time for um you know, credit and and you know, loans, but those are usually like deals up to 500,000 or 350,000, but if you're applying for three or four million loan and small businesses are, you know, you can be doing that that those take a long time in most banks. Now, we've we've been deploying AI to reduce turnaround times in that more complex area. And that's that evolution of kind of where AI can get you to in more complex ideas. But you got to start at the very beginning, our view is, and get your people trained on it, know how to use it, overcome that fear, create efficiencies in your organization, and move into more customerf facing concept. You can't jump from zero to get to the moon, right? You know, you have to build it inside your company or or or at least that's our belief. Do you think small business banking will look very different in say five years or so? >> Well, I think you know. Yeah. I I I mean I think it's hard to say five years with this technology and things are going to stay the same. I think first of all, you hope that there's more companies like Grasshopper that have embraced the digital side of it and have leveraged AI in a positive client-f facing world so that you you you have more choices. I mean, everybody likes choices. So, I think that's going to evolve. And and I do think the credit part of it is going to get better and better and going to go to larger and larger transactions. And then I think the the customer service side is going to be, you know, um far improved with talking to people that I mean I mean we all know we can talk to somebody who's not that person, right? But that that that concept of being able to have a conversation with somebody who's incredibly knowledgeable about their account is is going to play a bigger role in customer service, I think. >> Have I missed anything? Is there anything you'd like [clears throat] to uh impress upon our listeners before we wrap up? No, I I I think that, you know, one of the things I always say is um you know, if if you're going to serve a group of people, I go, you know, goes back to my comment of of niches is you you got to really be dedicated and focused on it, right? So, I say to any listener, make sure your bank understands small businesses and that they've got real tools for you to be able to be successful that can help you day in and day out. and and and remember that you're the client and and you know um you you you deserve great service and great products. That that's a really interesting point to make sure that the bank understands small business. Is there a question you would suggest uh a business owner ask uh his or her bank to to determine how do how do you figure out if a bank really cares and really understands small business? Well, I think it's, you know, the simple part of it is when when you're a small business, do they understand that time is really important for you and you don't have like four or five people working for you who can wait in line or come back next week or call back later, right? So, those are the early stage I think things when you when you go to somebody's website, does it really prominently promote small businesses and are there really digital tools there for you to be able to use? you know, just like any other kind of business or website that you use, you can tell whether they've really committed to technology and serving you in a different way. And I think that's what you can do easily is [music] just, you know, find out from that perspective. >> Mike Butler is CEO of Grasshopper Bank. Mike, thank you so much for taking the time. It was a pleasure. >> My pleasure. Take care, everybody.