[The Bankers’ Bank Northeast has] a major advantage in the marketplace because we aren’t involved in competition.”
– Peter J. Sposito
A unique bank celebrating its five-year anniversary isn’t resting too much, despite earning 20 percent of the market share within its short lifetime.
The Bankers’ Bank Northeast started as an idea in 1994. After four years of legislative legwork and raising capital, the bank opened its doors five years ago, looking to fill a void left in correspondent banking.
“Like other participants in the domestic economy, banks need banks to provide services. Therefore, you need a bankers’ bank,” said Peter J. Sposito, president of the Bankers’ Bank Northeast, which is based in Glastonbury.
Having spent almost his entire career involved in correspondent banking, Sposito said it was a natural transition to start up a separate bankers’ bank.
“Back in 1994 I left Shawmut Bank abruptly, after running their correspondent banking group in Boston and Hartford. It was clear to me that the big banks didn’t have an interest in correspondent banking anymore, and that it had become a small part of a large organization,” said Sposito.
Sposito started his career in 1968 at Hartford National Bank, which, depending on the quarter, was the largest bank in Hartford alongside the Connecticut Bank and Trust.
“This was a very competitive situation, and it was a great time to be in banking,” he said. “We competed for correspondent banking head-to-head. We had relatively large staffs calling on banks in Connecticut and New England.”
His bank was also in direct competition with at least half a dozen banks from Boston and a dozen more from New York City. Correspondent banking was a major service provided by many East Coast financial institutions, and Sposito’s bank was just one of them.
But then something happened, and as bank after bank was swallowed up by larger regional institutions, correspondent banking started to take a back seat to other services. Soon there were only a tiny handful of banks offering correspondent services, and a void opened up in the marketplace.
“What used to be half a dozen banks in Boston is now down to one, and where there was once a dozen banks in New York only one remains,” said Sposito. “We formed this bank in 1998, and our timing was perfect in the sense that our competition was fading away. Instead of two banks in Hartford and dozens elsewhere, you had next to nothing.”
Although he admits his bias toward community banks, Sposito argues that small local banks can offer just as many services as the bigger banks while retaining the feel and customer relationships that are the hallmark of community banking.
“I think most people that do banking would prefer to deal with community banks, and I still think that banking is a very face-to-face business. I mean, it’s your money that you’re concerned about. And I think that most small businesses would rather deal with a local bank they can see and touch every day. Community banks will have a lock on their marketplace in that regard,” said Sposito.
Offering ‘Singles’
But in order to survive in the marketplace, community banks need to operate in an economy of scale. The Bankers’ Bank offers to those smaller banks services that only large banks used to have. By creating bulk purchasing and selling power, the Bankers’ Bank gives community banks the muscle they need to stay in the fight.
“We don’t offer these banks home runs,” said Sposito. “What we do offer them is singles. And while the single might not show up on your bottom line right away, after a while all the singles start to add up.”
One of the basic services offered by the bank is coin and currency. Banks need a certain amount of cash on hand to handle day-to-day operations like cashing checks and making change. Banks usually try to keep that amount to a minimum, allowing more money to be freed up for investments.
“The advantage that we offer community banks is that we have a network of more than 655 branches and we use two major armored-car couriers,” said Sposito. “The more stops that trucks make, the lower the per-stop cost can be. It’s not a lot of magic, but we have a large route structure that lowers the cost.”
He added, “A community bank can beat a big bank any day of the week. What a big bank has in its favor is an economy of scale. A bank like Fleet can probably afford to have their own trucks because they have so many branches to service. We can do exactly the same thing, but we’re servicing many banks instead of one.”
While the bank provides bulk purchasing power, it also creates the same effect on the revenue side. That comes in the form of Fed funds. At the end of a day, a bank typically has excess reserves that it wants to invest; that is usually done in the Fed Funds Market, a national marketplace involving money borrowed from bank to bank.
“We are able to aggregate hundreds of millions of dollars every day – right now, just over half a billion a day – that community banks funnel through us. We act as their agent and we find high-credit quality banks across the country that borrow every day. In general, community banks are net sellers of excess reserves, and large banks are net buyers of excess reserves,” said Sposito.
The Bankers’ Bank collects all the reserves and sells them on the national market, earning a rate 15 to 20 basis points higher than a bank would on its own. Sposito said that might not seem like a big deal, but noted that over time the 15 basis points start to add up. Plus, a community bank may have $4 million it wants to invest in Fed funds, but that’s “only a drop in the bucket,” he said.
The bank also offers international services, which is another area that allows community banks to compete with larger banks. The Bankers’ Bank can wire funds all over the world.
“So if a small-business owner needs to make an international payment, they don’t need to go to a large bank to do it. We can handle a payment to anywhere in the world just as easily as we can to a building across the street. This lets a little bank become closer to a full-service bank,” said Sposito. “Not only does the community bank get international business, but it means the customer doesn’t have to move their account just because they need international wire services.”
A Major Benefit
The major asset that has allowed the bank to attract 112 customer banks, however, is the fact that it doesn’t compete with them. A bankers’ bank holds a bank charter and is allowed to do anything a bank can, such as take deposits and make loans.
It took the support of the Legislature to create the Bankers’ Bank in Connecticut, because there was no law in the books that allowed what they do. The bank holds a special charter that contains two special exceptions.
First, banks must own the bank. The general public can’t own it, and its board of directors is made up of chief executive officers and chief financial officers of client banks. Secondly, it can only do service with other banks, and the general public is excluded.
“These are major restrictions on our charter, but they’re also a major benefit to our business plan. Banks will do business with us knowing that we aren’t not going to steal their customers,” said Sposito.
For example, a community bank is restricted by a legal lending limit that won’t allow a bank to loan more than 15 percent of its capital to any one borrower. Therefore, it is sometimes necessary to have another bank participate in the loan so that they retain the business and stay under their limit.
“If they bring it to us they don’t have to worry about losing the customer, as they might if they introduced the borrower to a larger bank,” said Sposito. “The potential exists for the bank to lose the whole borrower relationship, but not if they deal with us. We have a major advantage in the marketplace because we aren’t involved in competition.”
Now five years old, the Banker’s Bank Northeast isn’t resting on its laurels. Expansion plans continue to manifest in three specific areas.
First, the bank is expanding its territory geographically, marketing itself to banks throughout New England and beyond. With a 20 percent market share already, the bank is looking to expand farther into areas where it already has a small presence, such as New York, New Hampshire, Vermont and Maine.
Secondly, the bank continues to add new services. One such service is a “lockbox” feature that will enable community banks to do business with municipalities.
“What happens in a lockbox situation is that you have a central location provided by a third-party processor, and the community bank goes to a town and offers to handle tax receipts on behalf of the town. All the payments go directly into the lockbox, and the credit is provided to the community bank. We would collect checks on behalf of the bank,” said Sposito.
He added, “This speeds up the time it takes to get deposits into the bank so that the municipality can invest sooner. It also provides a mechanized method to process checks and provide reporting back to the town.”
Sposito explained that historically, only the biggest banks could offer a lockbox feature, and the service is another tool for community banks to win back deposits and fee income from towns in which they operate.
“I really want to see them win back these deposits, and lockboxes are one way to do that,” he said.
Finally, the bank is looking to cross-market its products back to its current clients.
“One of the things that’s making us successful is that we’re having fun,” said Sposito. “We visit with our clients and we’ve developed a rapport.”
However, the bank is still planning to improve its communication system to make things easier for its client banks. Features such as an automated system that enables clients to initiate international wires, order coin and currency and buy or sell Fed funds over the Internet will be launched later this year.
“We want to enable our clients to grow by creating more services,” he said. “We expect that more of our banks will be using more of our services.”
Of the three new generators of growth, Sposito feels that the current clients are the best prospects. However, word of mouth is starting to spread.
“All organizations take time to catch fire, and we’re getting calls from banks that we’ve never called on before that have heard about us from other community institutions,” he said. “That’s a major milestone for us because initially no one even knew what a bankers’ bank was. But there are only 20 of us in the country, so I can’t expect to be a household name. We’ve got to continue to work on spreading our name.”
“We also bring a certain amount of expertise to the table,” added Sposito. “Most community banks don’t have the expertise that we do.”
Sposito offered the example of the Y2K bug at the beginning of 2000, and how representatives from his bank were sent in at the ground level to help prepare the entire banking system. Basically, that involved making large amounts of cash available at branches in the event that computers stopped working.
“We weren’t so concerned with getting ready – that was the easy part. The real problem was after the event, on Jan. 2, when all this excess cash needed to be returned. We had anticipated this and dealt with it quickly. It’s not that banks can’t do this on their own, but they have better things to do with their time,” said Sposito.
