Unlike some regional banks, KeyCorp isn’t looking for a good old-fashioned bank merger to drive growth.
Instead, KeyBank’s Cleveland parent takes a less flashy, more methodical approach that involves build a niche digital bank from scratch that targets doctors and dentists.
A big step in this direction came last week with the launch of Laurel Road for Doctors, a digital bank for doctors and dentists that offers products and services for healthcare professionals. This attempt to attract such a high-paying, low-risk clientele is part of a series of steps the company has taken in recent years in its efforts to create a national consumer bank.
If the approach works, KeyBank could reap similar benefits to what it could derive from a traditional bank acquisition – increased market share, deeper customer relationships and improved profitability, said Jamie Warder, head of business. digital banking at KeyBank. And it would do so without the cost of adding and maintaining more branches and the headaches that often come with integrating another bank.
“It’s about choosing our seats and, in those places, being very, very good,” he said.
KeyBank, with $ 170.3 billion in assets, has not bought a bank since 2016, when it acquired First Niagara Financial Group in Buffalo, New York, for $ 3.7 billion. dollars. Instead, he bought ancillary businesses such as the 2018 acquisition of a small business software platform created by Bolstr, the 2019 purchase of the Laurel Road digital lending platform and, the last month, the acquisition of AQN Strategies, a data and analytics start-up based in McLean, Virginia.
Laurel Road has contributed to an almost 20% increase in KeyBank’s consumer loan portfolio over the past two years, according to documents filed by the companies. Most of the activity concerns the refinancing of student loans.
The niche strategy is emerging at a time when peers such as PNC Financial Services Group, M&T Bank and Huntington Bancshares are looking to traditional bank mergers and acquisitions to increase their market share.
His approach could also become more mainstream as banks try to differentiate themselves in a crowded industry, said Steve Williams, president and partner of Cornerstone Advisors, a financial services consultancy. In addition, the pandemic has accelerated the transition to digital banking, forcing banks to improve digital offerings while finding ways to build and deepen relationships, he said.
“The new community in the virtual world is the niche, and it can be industry or lifestyle segments,” Williams said. “So I think that’s another trend in the air, that people are turning to digital to serve specific segments and personalities and do it really well.”
And when banks are successful in niche banking, they focus their resources on certain customers and “try to silence the outright noise of unlimited banking choices,” he added.
KeyBank’s search for healthcare professionals dates back a few years. In 2017, KeyBanc Capital Markets, the corporate and investment banking unit of KeyCorp, acquired Cain Brothers, a New York-based boutique investment bank that focuses on the healthcare industry.
But it was the acquisition of Laurel Road which paved the way for a digital bank focused on healthcare workers. Over the past two years, KeyBank through Laurel Road has provided school loans to medical students, refinancing student loans, and personal loans, and mortgages to doctors and dentists.
In 2020, the company refinanced $ 2.3 billion in student loans via Laurel Road, according to the filings. By the end of the year, the acquisition had brought in 33,000 new homes for KeyBank, the company said.
Meanwhile, KeyBank has “worked secretly behind the scenes” to create special banking products by leveraging Laurel Road’s brand and software engineering capabilities, Warder said.
The result: a digital bank that offers a credit card that pays off 2% in cash to pay off student loans, a new savings account for those who refinance student loans, and a high-yield savings account with no minimum balance that pays 10 times the national average annual percentage return.
KeyBank plans to add personal checking accounts later this year and expand the customer base next year to include nurses, therapists and other healthcare professionals, Warder said. Subsequently, funding for medical practice, equipment loans and accounting management services will be added.
“We’re going to develop everything a doctor needs from a consumer to business banking perspective,” he said.
The emphasis on relationships is played out in other areas of KeyBank’s business. Last fall, CEO Chris Gorman said the company quit indirect car credit, which tends to involve one-off loans that usually don’t lead to deeper relationships, and to invest in mortgages and Laurel Road.
“If you’re in an indirect business, by definition, it can’t be a relationship product,” Gorman said.
While the Laurel Road Accord initially raised questions According to Peter Winter, analyst at Wedbush Securities, this turned out to be a good game for KeyBank from some investors and analysts. Not only did this diversify the bank’s loan portfolio, it also increased margins without compromising credit quality and helped accelerate its digital expansion, he said.
“This acquisition was a home run for them,” he said.
There are no immediate plans to target another customer segment this way, Warder said. But if the time is right, the company could leverage its existing capabilities for another industry.
“I think we have strategic options, but the real focus now will be health care, I think, for the next few years,” he said.