Digital Banking Pioneer Shares Secrets of Success

Jim Marous:
Hello, and welcome to Banking Transformed. I'm your host, Jim Marous, owner and CEO of the Digital Banking Report, and co-publisher of The Financial Brand. What can legacy financial institutions learn from the first online only digital bank? Founded in 1999 First Internet Bank re-imagined the traditional banking model as the first state charter FDIC insured institution to operate entirely online. What makes First Internet Bank different from other competitors that were established at the same time that were later either closed or absorbed by other entities? To understand what makes First Internet Bank unique, and how complex services can be offered by a bank with no branches, we have Nicole Lorch, the President and COO of First Internet Bank, on the Banking Transformed podcast. Nicole shares her perspectives on how to combine technology, advanced analytics, innovation, and a challenger mindset for an improved customer experience.

Jim Marous:
The evolution of online banking started in the 1980s, when the definition and practice of digital banking was far different than exists today. The earliest examples of online banking began in 1981, with New York's biggest banks, such as Chase, Citi, Chemical, and Manufacturers Hanover offering at home banking accessibility. The evolution of internet banking continued with the emergence of online only banks, such as NetBank, Wingspan, and ING, as well as several online only subsidiaries of traditional banks. Many of these organizations were established as deposit gathering entities, offering higher rates on money market accounts. The vast majority of these organizations have either been closed or acquired by internet based organizations since then.

Jim Marous:
First Internet Bank is somewhat unique, not only because it was the first state chartered FDIC insured institution to operate entirely online, but because of the expanded services beyond just basic transactional accounts, including serving small businesses. I'm joined today by Nicole Lorch, the President and COO of First Internet Bank, which is headquartered in Indiana. Nicole has been part of First Internet Bank since its inception, where she started as the organization's first director of marketing. To start us off, can you share a little about yourself, Nicole, and a brief history of what has changed at First Internet Bank over the past two decades?

Nicole Lorch:
I would love to. Thanks, Jim, for having me today. I would say what hasn't changed at First Internet Bank? We started as this idea that our founder and CEO had while he was sitting around a kitchen table talking about bad banking experiences with some friends, and how would we make it better if we could? And today here we are, a $4.3 billion organization serving consumers, small businesses, and even larger entities across the country. We have constantly grown and started new lines of business, started new ways of thinking, always challenged ourself to do better and to do more, and as a result we are now a fairly sophisticated complex organization, which is a lot different from the organization I joined in 1999 with a pretty basic roundup of checking, savings, and a credit card.

Jim Marous:
As I mentioned in my intro, the majority of your peers in the late 1990s were focused on using the lower cost infrastructure of an online bank only as a deposit acquisition platform. What prompted First Internet Bank to expand beyond that to loans, and then even just serve beyond consumer markets, such as small businesses?

Nicole Lorch:
Really the desire to do more than just deposits, and to be a full service bank, came from our CEO and founder, David Becker, who was not a banker by trade, but rather a small business owner himself. He has been an entrepreneur since the age of eight when he had his first paper route, and he's owned a business ever since. Through that process, he was running software companies in the late eighties and early nineties when I first started to work with him, and he always found that his bankers wanted him to structure his business differently than he thought he ought to, or they were restricting access to capital that he felt would have helped him to grow his business. Through those experiences he wanted to be able to truly serve a business owner, and help them to grow their business, and not to dictate how to run their business.

Nicole Lorch:
His idea about building a better bank, always in the back of his mind was, let's be able to work with the small business owner. But the direct to consumer market, certainly in the late nineties when we were getting off the ground, was a clearer path. Amazon had launched, maybe not offering the robust lineup of products that it does, but we were starting to see more online only direct to consumer models, and that was a very clear path forward. So as we've been able to expand our small business offering into small business lending, which we launched in 2019, and even continue to diversify the products and services we're offering, that's been a long time goal of ours, and so we're so pleased to be able to be fulfilling that.

Jim Marous:
So when the position of online banking started to move to digital banking, or mobile banking, especially mobile banking, what did your organization needs to do to adapt to the way consumers wanted to engage on a smartphone, as opposed to their computer?

Nicole Lorch:
Mobile banking has really been a game changer for us, primarily because it brought the ability to do a check deposit in a very fast way, and it was something... that was always a hangup for us, was getting deposits into the bank. Sure, we had ACH, and wires, and direct deposit of payroll, but you always get that one little check, maybe from a neighbor or a friend or your grandmother on your birthday, and how do you get that deposited into the bank?

Nicole Lorch:
So the ability to do mobile deposit capture was really important for us, but also because we have such an on the go customer base, we tend to have a customer who is perhaps traveling for work, very much not tied to a desk, but I'm constantly on the go, and being able to carry that phone, or that that bank in your pocket, was critical to our success. So having that robust banking experience right there in the palm of the hand, we knew was going to be important. So important, in fact, that almost quickly after we launched in 1999 we were offering mobile banking on flip phones with lines of texts, so certainly not the user interface that we see today with touch-tone phones, or touch screen phones rather, but offering mobile banking very early, and that has been a very important format for us.

Jim Marous:
So while your competition was limited two decades ago, virtually every financial institution offers digital banking services today. There are also dozens of digital only banks. What's the difference between the way you serve the marketplace, and the way most traditional banking organizations currently deliver mobile or digital banking services?

Nicole Lorch:
I think what really sets First Internet apart, Jim, is that we are customer centric and customer obsessed, and have been since we launched. In fact, the idea behind First Internet Bank was, how do we make banking better for our customers? And it's that idea of wanting to do better by the customer that really makes us think about not just the online experience, or the user interface, but also the processes that are behind the scenes. We call it digital DNA at First Internet Bank, and it's just this ability to understand that the online, the mobile, the digital banking experience needs to be inherently different than the in-person banking experience, and to be able to make that seamless to the customer in a digital format sometimes means we're like that duck that looks calm on the surface, but is paddling like hell underneath. So we'll have processes in place to make the user experience as frictionless, as seamless as possible, because we understand that the digital experience is just what they are seeing, and maybe not so much what's behind the scenes.

Jim Marous:
Now because this has been the way your organization have been since the beginning, do you see that your customers, both small business and consumer based, may expect more from you to do it better than a traditional bank that are locally based are doing digital banking? And does it help you that your continuous thought process is only on improving the digital experience?

Nicole Lorch:
If you're going to call yourselves First Internet Bank, you better be darn good at the online part of it, right Jim? And I think that, yes, there is an expectation from our customers, and there's an expectation from our teams that we will do better and be better. And, like I said, it extends beyond just what is on the user interface, but also what we are doing behind the scenes to make that easier for the customer.

Nicole Lorch:
From the start we've offered an expanded range of services through our website, through online banking, as well as through mobile banking, that many other banks did not offer. We understand that you may need to make a decision at two in the morning that you want to open a CD, so we make that an instant process for customers who already have a relationship with us to lock into the rate on their CD. We understand that you may have an inquiry that goes beyond the traditional balance and last 20 transactions. So we have, from the very beginning, offered a variety of services online that we constantly hear from other providers that other banks are not asking for this, but because we have to deliver just as much of the bank as we can through five inches of screen real estate, we need to be able to deliver an enhanced experience.

Jim Marous:
So you took the role of President and COO during an unprecedented time of crisis and disruption. Now you started as the head of marketing, I'm a marketer by trade, so we're wired just a little bit differently, I think. But as you've progressed up the organizational ladder, I would assume that being marketing person by trade, that customer-centric focus really became part of your DNA within the organization. What was the first thing that you focused on when you started in your current role as the head of the organization?

Nicole Lorch:
Well, yes, I am passionate about the customer experience, and anyone who has the misfortune of working with me would tell you that I'm pretty relentless in the pursuit of enhancing that experience. But yes, this is an unusual time, and there've been no shortage of things for us to focus on, everything from offering PPP in a very fast way to our customers who so badly needed it during these difficult times, working with our SBA line of business to continue to grow that capability so that we're able to bring capital to even more small business owners than before, those have been two very big points that I've been focused on.

Nicole Lorch:
But also I'm working with our IT team, and well, I'm hearing from our IT team, I'm certainly not overseeing that process, because they're so capable, but we are working on a new experience for our consumer and small business customers for the online banking, mobile banking, to bring an even better user interface and online experience to them. So that we will be able to roll out likely Q1 for new customers, and then we'll be migrating existing customers over during the course of '22. But it's just been that idea of, well rather it's been the avoidance of complacency in this organization. Words that you will not hear echoed in our halls are, "Well, because we've always done it that way." When we ask why do we do something a certain way, that's never an acceptable answer.

Nicole Lorch:
So we will sit down with customers, we will watch them walk through a process that may make sense to us on paper, may make sense to us as bankers, but when you watch a customer struggle through something, that's when your eyes are open, the light bulb goes on and you realize that there is in fact a better way. So we're really excited about the enhancements that we're going to be bringing to the digital experience for our customers, which will include better payments options. I think it's been a source of frustration for a lot of customers to go into a site and not know, do I want to send an ACH, or do I want to use bill pay? Do I want to do a wire? So really we'll be working on some new experiences to help point them in a better direction as far as payments are concerned.

Jim Marous:
So I've written several articles for The Financial Brand, and done research for the Digital Banking Report, on the importance of a digital culture, digital leadership, and employees that really embrace the role in a digital organization. So as an organization that, you have 20 years of legacy, so there is a legacy there beyond being a small startup, in a way, 20 years ago. How do you maintain that challenger mindset? The fire in the belly, as it were, to make it so that you're always trying to improve what you did well yesterday?

Nicole Lorch:
The first thing we do is we don't always hire bankers. In fact, in our relationship banking group, we've recently brought two people on from hospitality. And if you can serve customers in a restaurant, frustrated customers in a restaurant, you can be taught the nuts and bolts of banking. But to teach people how to be kind, to care about the customer, that I haven't figured out how to teach people how to care, so we start with people who perhaps don't have a traditional experience, at least in terms of banking, they may not have ever worked a teller line, but they're passionate about customers, and they're passionate about delivering a great experience.

Nicole Lorch:
And from there we listened to the questions that they're bringing, why does this work this way? How do I do this? And by listening to the questions that we get from our new employees, that we get from our customers, we're able to take those questions and use them to transform the experience for our customers. I hate to say it, but we even use complaints that we get as a source of inspiration for new ideas, and so we're able to bring our compliance department to the table, as they've been tracking complaints, to look for ideas for ways we could make things better and clearer and cleaner.

Jim Marous:
So let's take a short break here and recognize the sponsors of this podcast.

Jim Marous:
This episode of Banking Transformed is sponsored by FIS. The way we move money is changing. We want to send money in real time to the other side of the world, we want everything in one place, integrated, seamless, and on our devices, embedded, fast, standardized, and frictionless, as well as secure, these are our financial futures. The Financial Futures Podcast by FIS explores FinTech innovation, and the trends that are already transforming the way the world pays, banks, and invest across the globe, and the mechanisms we'll need to prosper in this new brave landscape. Is the world's technology up to the challenge? Are we? Are those around us? FIS, advancing the way the world pays, banks, and invests.

Jim Marous:
Welcome back to Banking Transform. So I am joined today by Nicole Lorch, President and COO of First Internet Bank, one of the first digital only financial institutions in the U.S. So Nicole, what is the biggest challenge in meeting customer expectations as a totally digital organization?

Nicole Lorch:
As a regulated bank and an SEC registrar, there are certainly expectations on us to meet quarterly projections, and we have to be very clear about the progress that we intend to make, and the goals that we will be able to achieve. So expectations are going to constantly evolve, and we do need to move with those as rapidly as we can. I think that it's important we are building an organization that is nimble. We have four tenets that we lay out for all of our employees, and one of those is adaptability.

Nicole Lorch:
We, as a leadership team, sat down several years ago and we said, what is the key to being successful here at First Internet Bank? And it wasn't years of experience, and it certainly didn't have anything to do with IQ, but it had a lot to do with being able to be innovative, take initiative, focus on the customer, and be adaptable. So as we are looking for people, we are looking for people who can change with the times and keep an eye on what the customer wants, and bring that feedback to the right teams so that we can make the adjustments.

Jim Marous:
It's interesting because you're really referencing culture in leadership again, and in the interviews we'd done for this podcast the one thing I keep on telling listeners is that you can't fix bad leadership. And I don't mean bad that they're not good leaders, it's just that may be leaders that continue to lead as they did 30 years ago. And the challenge is, the banking industry, just in the last year, has changed so much that unless you embrace that change as an organization, not just as leaders, but the entire organization, then you're going to be left behind. And that's interesting, you keep on referencing back to the people, the leadership, the culture, and that's been key in the organizations we've interviewed.

Jim Marous:
So I've also written quite a bit lately on the difference between allowing consumers to access products on digital channels, and actually creating digital experience, I call it faking digital, when a new account opening, or digital loan application process takes 10 minutes or more. How does First Internet Bank continue to remove friction and simplify digital engagement when you probably do it pretty well already?

Nicole Lorch:
Well, thank you. We do it with a stopwatch, and eyes on it. We did have an online application, and we've had an online application from day one, but again, it's about not being complacent. Also recognizing that, I hate to say it, but fraud is pervasive, and the bad guys out there have every financial incentive to trick the systems. So not only do we need to create an experience that is seamless to the customer and fast for the customer, but also is working very hard to identify the person behind the application. So some of it is driven by necessity, and the need to continue to be ahead of those who would want to do us wrong, but the rest of it is driven by, again, just this idea that we need to provide a continually heightened experience for our customers. It needs to be better than what you could do in the branch, and it frankly needs to be better than what we could do three years ago.

Nicole Lorch:
We recently took that mindset and we revised our online mortgage process. We were doing an online mortgage application in under 20 minutes, offering mortgages to consumers in all 50 states, and to do a mortgage application in under 20 minutes we thought was pretty good, but we said, you know what? We might be able to do better, and we might be able to provide more consistent pricing to those customers, because that changes from market to market based on what's available in the secondary market. So we didn't have to do it, but we chose to do it, and we were able to take the online application from 20 minutes down to about five for a mortgage application, and even go ahead and start securing the documents that we need from the borrower in order to get them to the closing table.

Nicole Lorch:
So if we can provide greater certainty to them on when their closing date will be, that starts with gathering the mortgage applicator, the mortgage documents, proof of employment, and other identity information, if we can collect that right when they are applying, then we're going to keep them engaged in the process, and also be able to provide greater certainty on their closing date.

Jim Marous:
Boy, five minutes. There's a lot of financial institutions probably listening today that wish they could have that just for a checking account opening process, so congratulations to you guys. Our research shows that the vast majority of financial institutions do not feel prepared to address the challenges of data and advanced analytics as it relates to the personalization of communication, and the recommendations of products to customers. How does First Internet Bank leverage technology like AI and API to fuel your growth?

Nicole Lorch:
Data is where it's at, Jim. A couple of years ago we recognized that things were moving toward personalization, things were moving toward our ability to help our bankers make better recommendations, and to help our customers also make better selections for themselves. So the ability to make a better decision comes down to having better data. We built an enterprise data warehouse and tied in about 20 different systems worth of data in order to integrate that and provide better real time information to our bankers, and that in turn we can use to inform our customers of products and services that might be right for them that they weren't even aware of.

Jim Marous:
I would be remiss if I didn't address one other unique aspect of First Internet Bank in the industry. It is a digital bank that is headed by a woman. I think I only know of two women that head up digital only banks. What's the advantage that you believe your gender provides in an industry that historically is male centric?

Nicole Lorch:
Oh, that is a terrific question. I don't know if I've ever really thought of it. Constantly, as a woman, we're being told of all the things that women aren't getting, and all of the disadvantages of being a woman. I would say maybe it's not just being a woman, but being a human, being a parent has taught me compassion for others, has taught me patience, has taught me to listen. None of us is as smart as all of us, and we are working here together as a team, and the ability to take information and ideas from a variety of sources, put those together, synthesize them, and come out with a better outcome, I think stems maybe not from being a woman, but from trying to be human, and relating to people where they are.

Nicole Lorch:
But I will say that I could never do what I do here at the office without a terrific support team behind me, and I'm so grateful that I work for an organization that values family, and values those connections, and really allows people to bring their whole selves to work, as flawed as we all may be, and as distracted as we all may be, but to recognize that there is life outside the office, and my life outside the office makes me, I believe, a better person inside the office.

Jim Marous:
Who do you consider to be your competition? Are you trying to keep up with the top five financial institutions, the FinTech providers, the big tech firms, or simply trying to beat your local competitors?

Nicole Lorch:
I've said from the beginning that we have no shortage of competition, and in the early days it was the large regional banks that are now national banks. It was perhaps less so the smaller community banks that really weren't in the digital game when we got off the ground. But over time, I mean, we've seen investment banks, like Schwab, TD Ameritrade, they're increasing their capabilities in the banking space. We're seeing non-bank competitors bring Wallets, I mean, you could even say that the Starbucks Wallet is a competitor for our checking product. If money is being kept there and transactions are being conducted that ordinarily would have been kept in a checking account and using our debit card, I admit that I did it this morning, used my Starbucks Wallet and denied the bank the 1.5% interchange income on the debit card.

Nicole Lorch:
There is no shortage of competition, and that even extends now to challenger banks and to FinTechs that are out there serving the customers. I think we can certainly keep an eye on the competition, it's important to understand what is being offered in the market, and help to dial in where we can differentiate ourselves as a result of that. But I think one thing that we do exceedingly well here, it's been part of our heritage, and it will be part of our future, is that eye on the customer, and that that customer experience that extends beyond the digital experience. There are some challenger banks where it's very, very difficult to get ahold of a live human because they can't offer it at scale, they can't offer live service, but that's so important to us, and we don't outsource our service. Every single representative that is customer facing of this bank is employed by this bank, and that allows us to infuse not just the banking knowledge, but also the culture that drives First Internet Bank, and that includes customer service.

Jim Marous:
So as you know, Google is starting to offer and partnering with financial institutions, traditional financial institutions, and giving the back office that they build to financial institutions, in many cases for smaller organizations to grow to markets they may not have served in the past, maybe to offer digital banking experience that they haven't had in the past, and for obviously one of the biggest banks in the country, in Citibank, to possibly expand beyond their relatively modest branch network for a bank that size. Do you see them as a competitor? Do you see them as simply just to another organization that's competing with you, or do you see them possibly as a partner in the future?

Nicole Lorch:
I think in the short run Google will be a partner to banks, I think that's one to keep an eye on. Google's ability to synthesize data and use that to its own gain is significant and should not be overlooked as a competitive advantage. We worked with Google back in the mid-2000's when we were building out our nationwide mortgage platform, Google was offering a rate shopping service, and it was similar to getting a price quote on an airline ticket. You plug in where you want to go, and Google brings up seven airlines and their prices, it was the same thing with mortgages, and they were offering leads to us through that engine, and it was very successful for us. And then one day Google decided they didn't want to be in that space anymore. So I think we will keep an eye on what Google is doing, I think for now it's definitely a partner to banks, could foreseeably become a competitor to banks, and, like I said, they're not one to be overlooked.

Jim Marous:
You handled that very diplomatically, by the way, in that if Google provides a very good back office capability, and the ability to process that, as you mentioned, but if you wanted to change your mind, or if they wanted to change your mind, you're held hostage. I don't mean that negatively to Google, the reality is any partner, if you get too intertwined and you become reliant on the platform, just core processors, you become sometimes negligent to the fact that you realize, I'm not moving forward the way I want to, I'm moving forward based on their pace.

Nicole Lorch:
That's a great observation, Jim, and it goes to your earlier question around APIs and how we're using those, and it also goes to this idea of banking as a service that so many banks are doing right now. And First Internet Bank is looking at doing some FinTech partnerships where we might provide banking as a service, we've been working with a FinTech lender in the past, we worked with Lendeavor, which then changed its name to Provide, offering healthcare loans. And we're now working with ApplePie Capital, I believe that release will go out before this podcast air, so it's safe for me to say that, in order to offer loans to franchisees across the country.

Nicole Lorch:
But at the same time, we believe it's critical to our success that we continue to build our own future here, develop relationships directly with customers and control our own destiny. So we're able to do this through APIs by creating the experience we believe our customers want, to be able to partner with the providers that we believe best serve our needs, as opposed to those that may be the ones selected by Fiserv, or selected by Jack Henry. So with the advent of APIs, it has opened up a world of possibilities to our organization, both in terms of offering banking as a service, but also just building a better mouse trap for our own customers.

Jim Marous:
Finally, you have had 20 years, 22 years, I think, of a digital transformation journey. Many of our listeners are in the beginning stages of their own digital transformation journey. No matter what size organization we're talking about, what recommendations would you give to an organization, maybe as to where to start, or what to avoid, to succeed in their digital transformation process, which really never ends.

Nicole Lorch:
I think, Jim, that it's about listening, it's about speed, and it's about humility. If you are listening to what the customers want, then you need to be able to work quickly to bring something to market that satisfies that need, because that need will change. But I think the other thing that's important about that is be willing to fail fast. It's better to fail fast than to try to get to perfection slowly, again, because those needs are constantly evolving, and if you're trying to build the perfect experience A, you won't get there, and B, by the time you've gotten to where you think you should be, nobody wants that anymore.

Nicole Lorch:
So failing fast and speed, get into this idea of humility, which is be willing to evaluate your success and be honest about it, and be willing to pivot or make adjustments as needed, because any strategy that looks perfect on paper is not perfect in real life. We have learned through this process that it's better to get something out there, get it in front of customers, take the feedback, make adjustments. There is no end to our roadmap, it will continue to lengthen, it will continue to grow, and we'll continue to march along it. But I'd say listen, be willing to be fast, and be humble.

Jim Marous:
That's interesting, because those are the exact same elements... I was fortunate to go to Shenzhen, China in the beginning of 2020 and visited WeBank. WeBank's technology group has four cloud-based servers running at the same time where they're testing products on a continuous basis. They go from concept to implementation in less than 15 days, and in some cases seven days or less. To your point, they're willing to fail fast, they are continuously listening to the consumer, they will unwind a product and take that hit, but they will not hesitate to do something that may not succeed. I talk about the difference between risk avoidance and risk management, banks are really good at risk avoidance, but as a result they leave a lot of things on the table. You talked a little bit about your partners, and to be able to select your partners, we all made mistakes at the beginning of digital banking where we spent forever evaluated who's the best mobile banking partner? And in effect we waited 18 months to do something we should have done the first day we thought about it and then adjust along the way.

Jim Marous:
So your comments were so key because they're not in the mindset of a legacy bank, they're very hard to accept fail fast, have humility about you, be willing to accept what you've done right or wrong, and then quickly transform your organization. Nicole, I really appreciate your time today, you obviously have a completely unique perspective on how to do banking, compared to the legacy financial institutions. It is also great to see a person that started in marketing, and moved up in an organization, from its birth to today, and are doing quite well at what you're doing, so thank you again for being on this show.

Nicole Lorch:
Jim, the privilege is mine, thanks so much for having me.

Jim Marous:
Thanks for listening to Banking Transformed, rated a top five banking podcast. I genuinely appreciate the support you have provided over the past two years. If you enjoy what we're doing, please be sure to follow the Banking Transformed Podcast on your favorite podcast app. In addition, if you could take 30 to 45 seconds to show some love in the form of a review, it would mean a lot to us. Finally, be sure to catch my recent articles in The Financial Brand, and check out the amazing research we're doing as part of the Digital Banking Report. This has been a production of Evergreen Podcasts, a special thank you to our producer Leah Longbrake, audio engineer Sean Rule-Hoffman, and video producer Will Pritts. I'm your host, Jim Marous. Until next time remember, to win you don't just need to be customer-centric, you need to be customer obsessed.