Niche Banking with Glenn Grossman, Director of Research with Cornerstone Advisors

Caleb Steven: Well, hey everybody and welcome back to the Community Bank podcast, thanks for joining the conversation today. I’m Caleb Stevens, and today we are talking all about the topic of Niche Banking, I speak with Glenn Grossman from the Cornerstone Advisors, he’s doing some great work in the area of researching niche banking. If you don’t know what that is, stay tuned. It’s a fascinating conversation, we dive into a lot of different, helpful examples of how this is playing out in day-to-day community banking all across the country, so you’re not going to want to miss this. I think it’ll be a thought provoking for you and your team as you think about, is there a certain segment of customers or of geography or any area or segment that we think we could do a good job of serving. So, we talked about that with Glenn Grossman.
Before we get there, we’ve mentioned a number of times now, if you are not sure where your cost of funding is projected ahead, relative to short-term rates over the next 10 years, we have a report that we can run free of charge for you and your bank that shows your bank’s historical cost of funding all the way back to 1990 if your bank exists that far back and it also shows where your cost of funding is projected ahead over the next 10 years. Get the clarity you need to make better decisions, understand your cost of funding, and get our free report. All you have to do is click the link in the show notes of the episode, fill out the form on the page and we will be in touch with your custom report shortly. So, thanks for joining us, and here’s my discussion with Glenn Grossman.
Well, Glen, thanks for hopping on the podcast, it’s great to be speaking with you. How are things up your way in Charlotte?
Glenn Grossman: We’re doing pretty good, it’s getting a little chillier and we can wear some sweaters today and enjoy some cooler weather in the Charlotte region. So doing great, thank you.
Caleb Steven: This episode is coming out in 2023, but as we’re recording it, we are just a few days before the holidays and so, it is cold, I think on Saturday, at least where I live in Athens, Georgia, just outside of Atlanta, I want to say it’s a high of 28, so a little cold for this guy from the South.
Glenn Grossman: Yes.
Caleb Steven: Well, Glenn give us a quick flyover of your career, how’d you get into the banking world? Tell us about what you do at Cornerstone Advisors, I don’t think Cornerstone advisors need much of an introduction, I think a lot of people are familiar with them. You work on Mr. Ron Chevron’s team, he’s got quite a following on LinkedIn and on the speaking circuit but tell us about you and what you do.
Glenn Grossman: So I didn’t start directly right out of college, if you want to go back that far. But I did graduate from college, I had an economics degree and I got a degree as an economist and worked for the Bureau of Labour Statistics. And little did I know that initial job would have a big bearing on things because the way I look at the world and investigate things was partly crafted by the academic training and that first job, even though I wasn’t there for very long, and got a good sense for analyzing things which has gone full circle. If you want to say today, where I have the opportunity to do research within banking but there was a little gap there and did a couple other things. And career wise, I did a stint in technology and worked for a company called Ticketmaster, which I think people know, some people don’t like as much.
Caleb Steven: All of the dads out there who are trying to get Taylor Swift tickets for their kids, I’m sure are well aware and maybe a little frustrated.
Glenn Grossman: So, I worked there for over eight and a half years and what was interesting about that, it introduced me to a lot of technology and how technology was used in payments and such and that accelerated from there. I did get into banking and I worked at Bank of America and interesting enough as a much younger self, I went to work for Bank of America and I interviewed in the fall of 2007. Now, if anyone has a calendar history timeline things looked good back then, wasn’t too bad but by the time I started it was legal day one for Countrywide and Merrill Lynch was right around the corner and I was like, what did I get myself into?
Caleb Steven: Welcome to Banking.
Glenn Grossman: But I got to ride through a pit of history in banking and was right on the front line at B&A with a lot of changes, helped come up with strategies you know, due to Durban regulation and things like that. So, that was a very interesting time and the last 10 years I’ve been mostly focused on FinTech and right before our Cornerstone, I spent just over five years working with FICO, and then in that role I worked not with our credit score side but their strategies to help banks deliver solutions and I was mostly focused on retail banking deposits. So that brings me full circle to where I am right now.
Caleb Steven: Well, you’ve run the gamut as far as getting exposed to all different aspects of the industry and I think that’s probably a good segue. First question I’d love to hear from you and get your thoughts on is what are some general trends you’re seeing in the banking world? I know that’s a big topic and we could go a thousand different directions as far as trends go but what fascinates you the most or what’s the most interesting trend or trends that you’re seeing right now that you’re paying attention to in terms of your research capacity?
Glenn Grossman: So, you sometimes go back to where your roots are a little bit, and I just mentioned deposits. And for me right now one of the trends that I think iswell, interesting is to see how community banks respond to the rising rate environment for deposits compared to 2000, roughly, 18 was our last jump in rates. And, everyone knows the storyline here, we were flush with deposits a year plus ago, now we have an incredibly much lower savings, personal savings rate, and the slope of that curve is so steep on how rates have gone up and what’s different. This time everybody’s like, you pull out your playbook and what’s interesting is playbooks aren’t very reusable,in this category because 2018 we had a lot of banks starting digital banks.
There were a few out there, and now they’re there and so it’s how do we respond this time? And it’s a bit of when do the banks decide that it’s time to get serious about liquidity? Some are taking, like, we have plenty of deposits, we’re pulling back on our credit risk policies and we don’t feel like we’re going to lend. So, I find it interesting because there’s to be honest Caleb, there’s a lot of diversity out there and a lot of new strategies. And for the viewers or listeners, one interesting strategy, it won’t consume a lot of your deposits, but you have folks now looking at something called I-Bonds from Treasury Direct, which is RUS Treasury, where you can get inflation adjusted savings bonds. And that was something I don’t know the history precisely on how long they’ve been out there, but that’s something new that wasn’t in the playbook before and so, there’s a lot of interesting things that could be happening there and how banks will respond marketing-wise, how to retain those deposits that count.
Caleb Steven: I got a text from my brother probably a year or two ago and he said, hey, have you ever heard of I-Bonds before? And I was thinking, maybe I’m just not up with the times and ashamed to say that as a banker, I guess she was just out of college and trying to get on his feet financially and figuring out where do I put my money and park my money. And he saw these I-Bonds and that was an educational experience just for me.
Glenn Grossman: So, for anyone’s listening, I think it’s treasurydirect.gov, you can google that real quick and see if you can put some of your savings into that potentially.
Caleb Steven: Well, it’s interesting how the pendulum swings, a couple of years ago we had liquidity coming out of our ears and here we are and that seems like that’s going to be one of the big trends. Certainly for 2023, is how do we maintain liquidity and what are ways that we can compete to retain our core deposit franchise and continue to build franchise value when it’s going to become more and more of a battle out there between banks to hang on for those deposits.
Glenn Grossman: And in the research where I spend good amount of time studying what consumers do, the one thing, as bankers, we like to chase primacy. We believe that once I get our definition of primacy, and there’s a variety of definitions out there, we’re good in the sense that I get that direct deposit and some people have an equation. If I get so many products plus direct deposit, I own the customer or I’m primacy and if we look at the generations that may be true for older generations, baby boomer gen X but if you start looking at our generational shift primacy to them it’s less of an issue. Now they do like working with banks and they like branches, we know branches are not dead but they’re okay with managing multiple relationships and so chasing the core deposits is like I said, that playbook is not quite the same. And so, it would be interesting over 2023 how the banks respond at a marketing level and also at a balance sheet level to that liquidity.
Caleb Steven: Well, I know one of the things that you are doing some research on right now is this whole concept, this idea of niche banking. And I have to be honest, when you first told me about this concept of niche banking, I immediately thought of Redneck Bank in Oklahoma, they’re an online bank and they tout themselves as they’re for rednecks, I forgot what the CEO’s quote unquote name is, but it’s like cousin Porky, or something silly like that. And,I was like, wow, that’s certainly a niche, would guess the customer segment that they’re trying to target; is that what you mean by niche banking or tell us about this topic?
Glenn Grossman: Yes, it kind of is, and I’m putting a little more rigor into it as I do more research into the effectiveness of a niche banking strategy for community banks but yes, that’s one. And there are other illustrations I could get into in a moment, but it’s not radically new and this idea of being differentiated with a niche is a very common strategy that that bankers and other industries consider. The key thing is if we look at one of our examples we’ll talk about is that there’s a distinct set of services and another way to look at it is that the audience is not being served well elsewhere and there’s an opportunity now for listeners.
It’s like, well, gee, can I create a bank just for women? Would that be a niche? That’s not a niche that’s too big to be fair. Now you could maybe say that a characteristic that you are a female and a few other things, and that’s a niche that’s possibility and such. So, the key thing is it can’t be too broad but it’s got to be big enough, to matter, to make the investment. And like I said, they’re being underserved in a couple different ways, which is a key attribute.
Caleb Steven: dive in a little deeper into that, because I think, a lot of listeners may say, well, we serve our community and we do find just sort of being having a broad appeal. Why should we zero in on a niche? What’s the benefit to our community bank in terms of market share or profitability? What are the benefits of maybe considering a niche that you want to attract and target?
Glenn Grossman: Yes. So, the way I would for most of our conversation, look at it as the community bank that may want to a little bit larger brand beyond their current market, because the niche could extend beyond where you typically operate. So, there is a community bank called Ozark federal Savings and Loan, and they launched a niche bank called hitched. And Hitched is a bank for newlyweds and it’s a moment in life where there’s a lot of financial things going on, and under the financial wellness side, there’s saving for goals. I got all this stuff, maybe consolidation of accounts and maybe some loan opportunities and things like that. And so that’s an example. So, they’re not focused on people who are getting married in their market area, they’re broader than just that area. Now, for some banks, they may have practices that are kind of on the road to a niche banking model. A very common one is serving certain professional sets, like medical practices and banks doing that. And I’ll illustrate one for the audience is that KeyBank acquired an organization called Laurel Road, and they’re a specialty of their lender, and they have created a niche around physicians. It could be a dentist and things like that. If you go to their website, it immediately hits you what they’re doing, a different dedicated team that knows your needs. So when you call, they are like, kind of know your needs, such as how’s that medical debt you’ve got going? Can we help you refinance that?
Now, the typical community bank may just treat it as debt, and not do anything with it. You see what I’m saying? So they’re serving that market and they’re putting their staffing against that, and they’ve built marketing partnerships and things like that, so they’re able to grow that audience. And then on the consumer side we’ve talked about hitch, probably the one that a lot of people maybe will think about on the FinTech side is aspiration. And it’s a consumer based FinTech and it’s not about being cheap. A lot of FinTech’s,, it’s about like everything is low cost free. They actually do charge for their services because they kind of have this giving back model. Their lowest tier actually recommends you ch sort of like, choose a price to give back. So, a little bit different, and they’re go plan a tree, they said with every payment, I believe.
Caleb Steven: Well, it reminds me a little bit of Live Oak Bank, I want to say they have a pretty robust SBA department, and I think that they do a lot of work with veterinarians and things. So, that’s probably a good example of they’ve carved out something that they think they can win in and, and be good at, and a community they can serve.
Glenn Grossman: Yes, and I think that’s also another good way for community banks that are strong in serving small businesses and enterprises. And they already have done a pretty good job at saying, Hey, we understand your needs now if we take a very common unique need, what about contractors. And so, They already bank with community banks, but they have other needs depending on the type of contracting they do. So, a custom home builder that maybe builds two homes a year, three years, it looks very different from the contractor that does, let’s say heating and cooling may have like a fleet of trucks and goes out to maybe 50 residences every day. Very different business to payroll needs, cash flow needs are different. And so you think how are maybe your H V A C customers or clients being served and you’re like, gee, could we do something?
We maybe rehab a lot of those already and then so what some community banks are doing, instead of saying, let’s just serve them, they get a some people call it a sidecar core. So, we’re not going to pile it onto what we have now because we’re going to try to be very digital, our current core maybe doesn’t meet all those needs very well, it would be cheaper, faster to use something different and you could launch a service like that. Now, I’m just using one illustration of a segment inside of contracting. But with the right due diligence, there are other things. And the other thing is I think for the Live Oak Bank, you mentioned them, they have not only gone after it, they’re developing services to sell to the industry. Who’s to say that the community bank that establishes a very effective niche can’t, we’ll just franchise it or resell it. I’ll leave the business strategy to the creative community bankers to figure out, but you see where I’m going for that. It could be broader than just acquiring customers that sit on your balance sheet directly, so.
Caleb Steven: Right. Do you ever see pushback in terms of, well, gosh, Glenn, if we get so focused and concentrated in one area, isn’t that just asking for more risk? Are you saying I got to load up on one specific customer segment that doesn’t sound necessarily like a wise idea if that industry goes south? Talk about that dynamic.
Glenn Grossman: Yes, so that’s, Caleb, that’s a very good point for some financial monitoring and governance that you’re definitely going to need. And I guess we could say there’s no such thing as a risk-free strategy out there, but I’ll just say it’s just a valid point that you could get too top heavy with a certain kind of customer. Maybe the married couple has a lot less risk than my contractor example. But you’re right yes, so maybe certain niches with a higher risk premium are potentially involved for sure.
Caleb Steven: Yes. Well, let’s say I’m part of a bank’s executive team, and I’ve been thinking for a while, gee, we probably ought to think more deeply about carving out some kind of niche, even if it makes up a small percentage of our overall focus or deposits or loans or whatever it is. Where do you even start? I mean, is it some executive leadership team meetings to kind of think this through? Is it usually one person who kind of spearheads the idea? Does it sort of emerge by OSM Moses as you look at where we have done well historically in the past? Where do you see these ideas sort of bubbling up from?
Glenn Grossman: Yes, I see more than one approach, but the two I see as one you’re already doing good work, potentially with a good segment and maybe geography wise, you know a certain category well, and you’re able to identify them. Maybe you’ve cut a couple and you do a little competition, see which segment you can serve better for example, a niche I just heard about is teachers now I’m personally not totally convinced about teachers, but let’s say that’s what you were to go after. Again, we know TIAA went after the higher end model, so, once you identify it, then of course, it’s very much a lot to do with marketing, because a lot of customer acquisition.
But then see, can you add the value added services or do you already have those value added surveys? I think if you’re good at the value added services that need to serve that market, then that’s great. So Caleb, it does flip side, so you already know something, we literally do the old fashioned innovation process we’re talking the room full of sticky notes and color and mind maps, and you just idea it and I am sure within an hour you’d have more niches than you could count on one hand, but then you of course, you quickly start going through a refinement process. So, for example I’m sure someone’s going to say, what about gig employees, gig economy employees? Can I be the bank of ride sharing, and said, well, gee, car insurance is a value added service.
Do I have the best deals on replacing tires, they’re going to go through tires faster or whatever it may be. And if you’re like, we’ve got the right connections and all that, maybe you can make a go of it. And I don’t have all the details, but I remember reading a while ago, I think Uber has a bunch of financial services that they were looking at because their core customer or customer, their independent contractor was not being served very well by current financial service products. And some FinTech things have sort of emerged, but you see, that’s where these niches get defined, and the opportunity can be there. And I’m just making this up if three community banks are all going after ride sharing, that doesn’t necessarily mean that they all can’t survive. It could be that diversity is part of the success you can choose from one or two, just like you can choose from banks today and you find what works for you.
Caleb Steven: How important in this process is marketing, because I would think it’s probably not enough just to build a new product and hope people in this niche show up. I would think there’s some intentional branding and some marketing that’s got to take place to really get your message out there that this is who we are, this is what we’re about, this is a segment that we’re really, you know, wanting to to be part of and to serve.
Glenn Grossman: Caleb, I would say that marketing and branding is important. Community bankers know how to run a bank, and they get the service now. Some of those value added, I use the term value added services, the things that are not core banking products such as maybe some insurance products that compliment the niche that you want to focus. You don’t have to run those, but you’ve got to bring that brand value together. So you mentioned at the start of our conversation, the redneck, I think you said, was it Redneck Bank?
Caleb Steven: Redneck bank?
Glenn Grossman: Yes. So everyone on this listening podcast is probably looking that up, see if it’s still there. But think about the branding there the wording and everything. So, you got the right brand name and the right channels to message it, to attract them. And the banks have been doing affinity level marketing for a while, and this is very similar. It’s different, but it’s very similar. So we’ve had affinity banking products for quite some time, the large banks I’ve had a love affair with, and some have exited it too also from different things from major league baseball banking concepts to universities and such. So banks, this is not totally foreign this is not reinventing the wheel. We definitely have been here before, but we’re looking at it with a slightly different value proposition than in the past when people thought of affinity banking and affinity credit card.
Caleb Steven: One niche that stuck out to me recently, and I don’t know if you’ve been following these folks or not, but we had Mike Fernandez on our podcast not too long ago. He’s the CEO of Texas National Bank out in Sweetwater, Texas, fairly smaller community bank, and they’ve created a little niche called Banker’s Lender, where they’re offering loans specifically to other bankers across the industry, helping other bankers access personal loans and credit and that kind of thing and it seems like it’s going well for them.
Glenn Grossman: As I said, there are a lot of niches out there that I may not be aware of that I would classify that as a form of niche banking.
Caleb Steven: Well I heard a quote a while back, and I think this was more of a business principle in general, but the quote was, there are riches in the niches, which I would think that’s certainly true in banking as well as just a business principle in general, is find something that you can be good at in a segment that’s underserved, and there’s probably a lot of potential in that area.
Glenn Grossman: And for community bankers you’re in a better position to go after this then we’ll just say the top 10 15 banks because of their budgeting process and it’s a world that I lived in at one time. The niche could be, man, that looks big. Well, to the community banker it would be, but to the large national bank, that’d be, I don’t know, that may be a distraction, we’ve got a big tanker, we set a pretty big wake, so let’s just keep doing what we’re doing. So, you could see this could be a space where they can carve out, serve the customer incredibly well and hope to generate good revenue from it, where the National Bank won’t even touch it. So it’s a space, I think, for community bankers to explore.
Caleb Steven: Yes, no doubt. Well when will your research project be complete? Will there be a final report that folks can access and learn, or how will you be sort of sharing your findings with our fellow bankers?
Glenn Grossman: Yes, so this research topic is in progress as of the time of this recording. I would say check our cornerstone cornerstone website cornerstone Advisors and look at our commissioned research area somewhere in that February, march timeframe. And if you’ll find it towards the top of the list I’m sure that’s a great place that should be where you should be able to find it.
Caleb Steven: Fantastic. Well, I know I’ll be certainly taking a look at that, and I hope our listeners will as well. If folks want to get in touch with you, Glenn, and learn more about everything that you do at Cornerstone Advisors, how can they contact you?
Glenn Grossman: Yes you can contact me via my email’s, probably the most sufficient so our my email address is ggrossman@crnrstone.com and Cornerstone is CRNR stone stone.com. So it’s a little bit different, doesn’t spell out the floor, or you can go to our website and you can find me on our team page and there’s a way to contact me through there also.
Caleb Steven: Fantastic. Well, Glenn, it’s been a pleasure speaking with you. Excited to see all the work that you’re doing on niche banking and hope to learn more and read all about it here pretty soon.
Glenn Grossman: Great. Thank you, Caleb, for the time.