William Hockey walked into a bank... and bought the bank
Why I think Column (NorCal) will be a unicorn
What Happened
The most exiting fintech news last week came out of the most boring corner of finance: banks. Plaid co-founder William Hockey bought a California-based bank for $50mm to build the first “financial infrastructure bank”.
The target, NorCal, was a community bank that offered checking, savings, basic mortgage, HELOC, and commercial lending.
Chloe’s Take
A 🦄 in the making
This is perhaps the most straightforward part of the story. Column is not the first bank-not even the first tech-enabled bank-to build a fintech sponsorship business. The business model is proven and has been repeated by banks across the country.
Fintech sponsorship is a billion dollar business. Case in point: Bancorp (USB). As an early mover in the bank sponsorship world, USB has supported big programs such as Chime, SoFi, and PayPal for the past decade. USB’s fintech sponsorship has brought in over $5 billion in fresh deposit for the bank at a low-low cost of 0.10% 👀 (see graph below).
Source: Bancorp investor presentation
If USB’s trajectory is any guide, Column can be riding on $1bn+ deposit in 3 years.
Yet I think Column can grow even faster than USB, thanks to two tailwinds.
For one, the fintech sponsorship landscape is still a supplier’s market. The record-setting VC investment in fintech in 2021 means that many bright-eyed founders will be searching for their inaugural bank sponsor in 2022 and beyond. More banks are dipping their toes into the sponsorship model, but the market is not yet saturated.
For another, the market is eager for an alternative sponsor/BaaS platform. Column’s late entrance to sponsorship banking may actually be to its advantage. Some incumbent sponsors/ BaaS platforms are sources of endless horror stories among fintech practitioners. In contrast, Column’s tech-forward core means that its fintech clients will enjoy faster and more pleasant integration with fewer capability constraints. Column is set up to enable a faster implementation cycle, which is a top pain point for fintech founders. As long as Column shows reasonable economics and runs a reasonable due diligence process, Column has a great shot at signing up fintechs looking for their first sponsor. Column could even unseat some incumbent sponsors on its road to becoming a unicorn.
Who is Column for
The most obvious answer is debit sponsor banking. (So obvious I won’t elaborate)
Next, I see Column serving companies seeking a best-in-class money movement solution.
Presently, fintechs have three bad options to move money. First, they could rely on their core processor (FIS, Jack Henry, etc.). This option is the most common one, but comes with decades of tech debt and thus poor user experience and an unreliable system. You can always count on a core processor’s payment process to break.
Second, fintechs could use a third party payment processor such as Stripe to move money. While fintechs will enjoy ease of integration, they give up speed and some control. Specifically, solutions such as Stripe stretch the lag between customer payment time and the moment when fintechs can actually access their funds, leading to lost interest revenue at best and liquidity crunch at worst.
Lastly, fintechs can try to leverage their sponsor bank to move money. This option comes with a long negotiation time, a high bar for internal processes and controls, and a long time to build, modify, and expose the bank’s API. And this option is only available from select sponsor banks.
With Column, however, the third option can be quite viable and attractive. Column (allegedly) is built to support open banking, and it’s connected to the Fed already for the ACH rail. A Column-backed money movement program will foreseeably be faster, more flexible, scalable, and reliable. Logically, fast money movement will be high on Column’s priority list.
When Column grows up, it wants to be… a bank?
This is where the Column story gets interesting. Does Column want to be a bank or a SaaS company when it grows up?
To imagine Column as a SaaS company, at least a big chunk of the revenue has to come from SaaS (right? right?). However, industry precedents point to the opposite direction. Take JPMorgan ($JPM), which powers payment processing for numerous financial institutions in the country. JPM recorded $7.4 bn payments ARR in 1Q2022. This may sound like a lot, but the payments business is dwarfed by lending handsomely. In the same quarter, JPM’s lending revenue stood at 7x of its payments revenue.
Surprisingly? Hardly.
After all, a bank’s dominant P&L driver is lending.
Plus, the next frontier in sponsor banking is dual sponsorship. Currently, a sponsor bank either specializes in debit sponsorship or credit sponsorship, but rarely both. This is an acute pain point for fintech practitioners, because the bank sponsors are not providing platform value for fintech clients to launch and scale into new products. This results in slow execution, and worse, poor customer experience. Neobank customers find themselves dealing with uneven terms and uneven user expectations from different sponsor banks, although these products are all under the same fintech umbrella. Column’s clients will certainly be interested in dual sponsorship.
My imagination led me to see a tech-savvy, super sexy, unicorn-to-be…. bank.
Change my mind? Leave a comment below.