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In the last millennium I was in-house consultant for Bank of Boston — now part of Bank of America. When considering potential acquisitions, executives instructed me to find targets that owned bank branches in desirable locations.
The branches were seen as a way to bring in deposits — which could be lent out at a spread between the interest rates that borrowers paid the bank and the rate that the bank paid depositors.
Back then I wondered how the bank could ever earn back the cost of investing in the physical branches and operating them. Simply put, why couldn’t banks attract deposits solely online?
Decades later, banks still operate physical branches — a legacy mindset that I imagine has been particularly painful during the pandemic.
But one thing has changed — a new generation of bankers is beginning to see the advantages of raising deposits through an app.
And today, MANTL, a fast-growing, New York City-based supplier of such an app, is announcing that it raised a $40 million Series B round to fuel its rapid growth led by CapitalG — Alphabet’s independent growth fund which also holds stakes in Stripe, Robinhood, Credit Karma and LendingClub.
Does this represent a threat to publicly-traded banking system vendors such as FIS, Fiserv and Jack Henry?
Given the slow rate of change in the banking industry, I see no immediate threat. However, over the longer-term, MANTL’s 2.1-fold growth in 2020 puts FIS’s growth rate — whose organic revenues fell 1% in 2020 — to shame.
Jacksonville, Fla.-based FIS — which provides “technology solutions for merchants, banks and capital markets firms globally” — reported a decline in organic growth for the fourth quarter of 2020.
FIS — whose stock has risen 24% in the 12 months ending April 19 — blames the pandemic for its woes. According to the company, “On a GAAP basis, consolidated revenue decreased 1% to $3,316 million, primarily due to negative consumer spending trends associated with the ongoing COVID-19 pandemic.”
FIS has chosen to acquire its way to growth. Despite a 1% decline in organic growth for all of 2020, the company enjoyed a 21% increase in GAAP revenue to $12.5 billion “primarily due to the acquisition of Worldpay.”
FIS expects a significant uptick in growth in 2021. “For the full-year, we anticipate revenue of $13.5 billion to $13.7 billion. This represents 8% to 9% organic revenue growth, which is higher than the 7% to 9% range that we initially expected,” said CFO, James Woodall, in a February 9 investor conference call.
FIS is clearly excited about all its new products. As CEO Gary Norcross said in the conference call, “We continue to invest in cutting-edge technologies for the future, including contactless, voice-enabled and self-service solutions as well as AI and automation. We launched over 60 new products in 2020 with a focus on enabling our clients to grow their revenues and operate more efficiently.”
Quontic — a New York City-based mortgage lender — is an FIS customer that operates without branches.
It was born from a Long Island thrift that was about to go away. As Steven Schnall, CEO of Quontic, explained in an April 19 interview, “After selling a publicly-traded REIT in 2007 before the financial crisis, I saw an opportunity to use a bank charter to provide mortgages to underserved immigrant communities.”
He captured the opportunity quickly. As he said, “I found a thrift in Great Neck that was about to go away and offered to acquire it. The Office of Thrift Services (OTS) approved the change in control. I recapitalized and rebranded it as a New York City based residential mortgage lender.”
Quontic charges higher loan rates because its borrowers are perceived as riskier and it pays higher rates to attract depositors. “While the rest of the world pays 3.25% mortgage rates, we charge 5%. Our higher loan rates allow us to pay higher deposit rates. While Goldman Sachs’ Marcus pays deposit rates of 0.60% we pay 0.65%,” he said.
Quontic did not want to operate bank branches — and it has gotten better at digital deposit gathering. “In 2010, we went online without a real strategy. We have good relations with FIS that provides our core technology. They have many products including a digital account product. It works but it is intended for banks that have physical branches,” said Schnall.
Quontic was looking for a more flexible solution that was best in class and did Know Your Customer (KYC) due diligence. Schnall spent time at the Money 2020 conference and chose Jumio — which as I wrote April 3 — verifies online identity by comparing a government-issued ID to a selfie.
Quontic was not satisfied with Jumio because it did not have sufficient “pull through.” By that he means that too many depositors were beginning the process of opening an account but abandoned the process before completion.
Quontic chose MANTL. As he said, “We checked out a number of their references, got good feedback, and had good chemistry with their executives. Their service is more sophisticated. Potential customers can become depositors in under three minutes. Their pull-through is higher. They enable us to operate with a small team. They partner with Alloy to handle KYC. Our priorities are important to them.”
Founded in 2016, MANTL’s customers have raised “billions in core deposits to date.” The chief benefit of MANTL’s service is that it has the potential to enable the 9,500 community banks — 95% of the total — to raise deposits fast at a much lower cost than they would incur by building new physical branches.
How so? MANTL says that its “average time to open an account is 2 min 37 seconds. The system automates application decisioning for over 90% of cases, all while reducing fraud by over 60%. This results in deposit growth that’s typically four times faster than other solutions on the market and up to 10 times more cost-effective than building a new branch.”
MANTL has made rapid progress with this highly-focused value proposition. As CEO Nathaniel Harley said in an April 15 interview, “In 2016, 20% of banks used online account opening. It’s now 50%. Our customer Cross River raised $250 million in deposits in 15 days. Quontic reduced its cost of raising deposits by 90%.”
MANTL is benefiting from banks’ fear that if they don’t innovate they will face “existential risk.” Harley said, “Account opening is table stakes. It’s a must have. We have enjoyed 2-fold revenue growth in 2020. Covid-19 has accelerated banks’ digital transformation and given us a 300% increase in volume in 2020.”
Legacy vendors like FIS, Fiserv and Jack Henry are not offering comparable products. “We reduce account opening time from 20 minutes to two; we grow conversion rates from 8% to 80%; and we help our clients raise billions of dollars in deposits in days. We are adding a business account opening service and expect to enjoy the same sort of growth in 2021,” he said.
CapitalG is impressed with MANTL. As Partner Jessie Wedler told me in an April 15 interview, “We looked at startups that are trying to enable digital banking and concluded that MANTL had developed a solution that offered a much better resolution of a big customer pain point — digital account opening. They were executing in measurable ways — enabling their customers to raise deposits fast.”
CapitalG liked MANTL’s team and its competitive strategy. As Wedler explained, “We liked the team — Nathaniel is thoughtful and focused. Other banking software companies offer a new core system. Banks perceive replacing their current core system as too risky. There is a long sales cycle and low adoption. MANTL has a near term focus” on a product that is much easier to sell because it delivers tangible value to customers quickly.
If MANTL can enable its customers to add deposits fast while complying with KYC rules, it could some day offer compelling alternatives to other kinds of banking systems and become an existential threat to incumbents like FIS.
However, if FIS and other incumbents can convince banks to replace MANTL with their new products, the Goliaths will triumph.
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