Aaron Marsh
Hello and welcome to The Buzz, a Bank Automation News podcast. I’m Associate Editor Aaron Marsh, and I recently had the chance to speak with Seke Ballard, founder and CEO of Beta Financial Services, a holding company that has applied for a bank charter with FDIC and the state of Illinois for BetaBank. This branchless digital bank will have a mission of fair lending for those who have at times been, quote, in the shadows of the banking system, such as minorities, women and immigrants. As part of BetaBank’s motivation, Ballard cites the experience of his father, who decades ago was denied loans 13 times to expand his logging business. He talked about how BetaBank will use automation in achieving its goals. Seke thanks for being with us today.Seke Ballard
Thank you for having me.Aaron Marsh
So what is the current status of this? What is the news? And where are you in your application process?Seke Ballard
We submitted our application with the regulators just a few days ago and we anticipate that process will resolve itself within the next six to nine months. So it puts us at around the end of this year, very beginning of next year. The second track is the technical build of the bank. As you mentioned, we are building a digital commercial bank, we won’t have any branches. But we will provide full services that typical legacy banks provide, meaning we will provide checking and savings accounts, debit cards, credit cards — table stakes — but what’s special about what we’re building, and what I think is of value to our future clients is that we have also automated commercial lending. And so completing that build, which, you know, we anticipate will require about 66,000 software development hours, is a pretty sizable undertaking. But we are fortunate and having partnership with Google and Deloitte. And so we kicked off the build of the bank in March of this year, we are currently on track to be fully functioning, but not yet with the mobile application, mobile web, we anticipate that will be completed, also in the very beginning of q4, so around the same time as the regulatory process is resolving itself. Both of those, if they go according to plan, and they have gone to plan thus far, we’ll be in a position to open our digital doors for clients in q1 of 2023.Aaron Marsh
Okay, so there’s work to be done. It’s a work in progress. One of the things that stands out to me in hearing about this is the motivation that is behind it. Can you tell us a little bit about what’s driving this effort? Why form Betabank and what has been your motivation?Seke Ballard
The central motivation is that lending is fundamentally broken. If I go into a bank, and I’m a Black guy, if I go into a bank, and a white guy goes into a bank, and we have the exact same financial profile, same balance sheet, income statement, cash flow, we are the same person apart from the color of our skin, and we’re applying for a small business loan, I am 2.7 times more likely to be denied that loan. And in the event that I do get it, I’m going to pay on average, about 180 basis points more for that loan. And that’s true across all forms of debt financing. It’s also true for women to a slightly lower degree. It’s true for immigrants. It’s true for working class white people. There are there are a number of subgroups in the nation that aren’t being adequately serviced by legacy banks. And the root cause of why is when Sally goes into a bank, she’s sitting across the table from a banker, a loan officer, who is not just evaluating what’s written on paper about the performance of Sally’s business. They are applying what I’ll call a subjective character test. They’re looking at Sally and they’re making determinations about her trustworthyness. Does she look like a successful businessperson who’s responsible and going to pay back her loan? And it’s that subjective component that introduces inefficiencies in the system that result in equally qualified people being denied loans and financing. The second big problem with how legacy banks originate loans, I’ll just set up as a as an example. Let’s say they get a $100,000 loan application, and they get a $1 million dollar loan application. The cost of diligence, meaning the cost of evaluating whether they should make that loan is essentially the same between the two. But because the $1 million loan is more profitable, the bank is going to choose that loan every time. And so what that means is that if you’re applying for small dollar loans, that bank is either going to sort of tag you along, they want to overtly say we don’t make loans of that size, you’ll find your application at the bottom of the pile, until you’re ultimately denied. And if you’re not denied you’re routed to products like credit cards, that of course have a really high interest rate and are not properly suited or the need of that small business. And so what we’ve endeavored to do is to completely rethink and rebuild that whole process of how someone applies for a loan, how the risk of lending to that business is evaluated. And ultimately, what determines whether that entrepreneur receives the loan that they’re applying for. And where we focused is in data aggregation and data analysis. So the loan flow that data bank will employ will automate the process of gathering information about the business and gathering information about the owners of that business, we will leverage our what we call credit box as a filtering mechanism. So we have a perspective on the financial operating metrics of that business. And the question then becomes do they meet our threshold or not? We’ve significantly lowered the cost, you know, it’s much cheaper to have a computer, take in information and analyze it versus having a loan officer taken paper applications and do maths and run ratios. To the furthest extent that we believe we were able to at this point, we removed opportunities for that human bias to show up in the loan process. And so ultimately, the result of that is when we make loans to our depositors, we will be we will be judging their credit worthiness based on the merits and demerits alone. And the the outcome of that is going to be a portfolio of borrowers, small businesses, entrepreneurs around the country, primarily in Chicago MSA, but around the country who reflect the rich diversity of the nation that we live in.Aaron Marsh
What are the kinds of things you have to consider if you’re going to have like a fairer system in lending? Does it come down to things even like just geographies? I know you said that this is going to be mainly in the in the Illinois and Chicago areas. But are there other things that you’ve got to filter out to get it a fair system?

Seke Ballard
You mentioned geography, and I think that’s a big one. Bankers often make loans based on zip codes, you know, and in decades past, you know, the most cynical manifestation of that was redlining, you know, where they would literally draw red lines around whole communities and put X’s on them and say, We will never lend in in those communities in those zip codes. But of course, there are successful businesses that are operating in those zip codes. They might not be as plentiful, as in others, but there are successful businesses. So you know, just just using this hypothetical, I’m a banker at a legacy bank. And I am considering making a loan to a business that operates from Chicago’s loop which is kind of our central business district, versus making a loan to a small business, let’s say in Gary, Indiana, which is, you know, a stone’s throw away from Chicago. Gary, Indiana, is an economically challenged City at the moment. And that banker is, you know, even if it’s subconscious or conscious, it doesn’t matter. The end result is the same. That banker is going to have a perception about that business, simply because of the city where it operates. But what we’re striving to do is go a step deeper. So yes, this is your zip code, but show us your financial statements. My view is that financial statements are novels; they tell a story, they tell you exactly how well that business is run. And if you look at that, and you really focus your analysis on how the business has been run, and whether it has the capacity to take on debt and service that debt, then you would make that loan to that business in Gary, and you probably make the loan to the business and Chicago too in the loop. But in our process, that business in Gary has a shot.

Aaron Marsh
Without really involving that much more risk — you’re saying you want to get to the actual operations of the of the business itself?

Seke Ballard
I actually think it lowers the risk. My view is, you know, if you if you build the technology smartly, then number one, you can lower your cost of going through that analysis. And number two, you can remove the sort of biases, that human involvement creates opportunity for it.

Aaron Marsh
You and I were talking a little bit before we began, and it sounded like some of this process, some of this technology that you are developing, or that has been developed will be employed at BetaBank, but it sounded like it might be applicable to other banks, maybe you look to sell the technology to others. Is that is that the case?

Seke Ballard
Our focus today is getting BetaBank up and running. And making sure that what we build as BetaBank, making sure that that is serving our customers in the way that we intend to serve them. But our long term strategy is that what we are building for BetaBank, which is cloud based, full service, banking services, what we’re building for BetaBank has utility more broadly. Today, if you were to serve a community bankers, and this is nationwide, if you were to serve a community bankers, their biggest, number one concern is automation. It’s how challenger banks, how fintech companies are chopping off pieces of their business. Either they don’t have the technical acumen to be able to modernize their own systems, or maybe they’re locked into onerous contracts with, you know, the biggest core providers who aren’t willing to give them that degree of flexibility. Or they don’t have the financial resources to do it. And so we’re in the process of building a technical infrastructure for BetaBank that I envision, those banks would also have an interest and possibly using, we’ve got the backing of two of the most successful companies in the world, Google being one of them Deloitte being the other. I think it’s reasonable that others might want to benefit from that as well. I received a message from a representative at Google on LinkedIn, in early 2020. He had come across an interview that I’d done with NASDAQ, where I discussed our algorithm where I discussed my ambitions for creating broader financial impact, using our approach to lending. And he was interested in how Google could support us in that endeavor. For them, the first motivation is mission alignment. They believe that fair access to capital is an important goal. And their values align with creating the kind of architecture that could allow for that. Ultimately, for me, it’s about measuring people everybody using the same yardstick. And, and to me, that is fairness. Not everybody is going to is going to be approved. There are a lot of people out there who simply are not credit worthy. But if you if you look at them on the merits of how they’ve performed, then you’ll I just think you’ll start seeing some equalization — you’ll start seeing much better access.

Aaron Marsh
You’ve been listening to “The Buzz,” a Bank Automation News podcast. Thanks for your time, and be sure to visit us at BankAutomationNews.com for more automation news in financial services. Please don’t hesitate to rate this podcast on your podcast platform of choice.

Aaron Marsh
Hello and welcome to The Buzz, a Bank Automation News podcast. I’m Associate Editor Aaron Marsh, and I recently had the chance to speak with Seke Ballard, founder and CEO of Beta Financial Services, a holding company that has applied for a bank charter with FDIC and the state of Illinois for BetaBank. This branchless digital bank will have a mission of fair lending for those who have at times been, quote, in the shadows of the banking system, such as minorities, women and immigrants. As part of BetaBank’s motivation, Ballard cites the experience of his father, who decades ago was denied loans 13 times to expand his logging business. He talked about how BetaBank will use automation in achieving its goals. Seke thanks for being with us today.Seke Ballard
Thank you for having me.Aaron Marsh
So what is the current status of this? What is the news? And where are you in your application process?Seke Ballard
We submitted our application with the regulators just a few days ago and we anticipate that process will resolve itself within the next six to nine months. So it puts us at around the end of this year, very beginning of next year. The second track is the technical build of the bank. As you mentioned, we are building a digital commercial bank, we won’t have any branches. But we will provide full services that typical legacy banks provide, meaning we will provide checking and savings accounts, debit cards, credit cards — table stakes — but what’s special about what we’re building, and what I think is of value to our future clients is that we have also automated commercial lending. And so completing that build, which, you know, we anticipate will require about 66,000 software development hours, is a pretty sizable undertaking. But we are fortunate and having partnership with Google and Deloitte. And so we kicked off the build of the bank in March of this year, we are currently on track to be fully functioning, but not yet with the mobile application, mobile web, we anticipate that will be completed, also in the very beginning of q4, so around the same time as the regulatory process is resolving itself. Both of those, if they go according to plan, and they have gone to plan thus far, we’ll be in a position to open our digital doors for clients in q1 of 2023.Aaron Marsh
Okay, so there’s work to be done. It’s a work in progress. One of the things that stands out to me in hearing about this is the motivation that is behind it. Can you tell us a little bit about what’s driving this effort? Why form Betabank and what has been your motivation?Seke Ballard
The central motivation is that lending is fundamentally broken. If I go into a bank, and I’m a Black guy, if I go into a bank, and a white guy goes into a bank, and we have the exact same financial profile, same balance sheet, income statement, cash flow, we are the same person apart from the color of our skin, and we’re applying for a small business loan, I am 2.7 times more likely to be denied that loan. And in the event that I do get it, I’m going to pay on average, about 180 basis points more for that loan. And that’s true across all forms of debt financing. It’s also true for women to a slightly lower degree. It’s true for immigrants. It’s true for working class white people. There are there are a number of subgroups in the nation that aren’t being adequately serviced by legacy banks. And the root cause of why is when Sally goes into a bank, she’s sitting across the table from a banker, a loan officer, who is not just evaluating what’s written on paper about the performance of Sally’s business. They are applying what I’ll call a subjective character test. They’re looking at Sally and they’re making determinations about her trustworthyness. Does she look like a successful businessperson who’s responsible and going to pay back her loan? And it’s that subjective component that introduces inefficiencies in the system that result in equally qualified people being denied loans and financing. The second big problem with how legacy banks originate loans, I’ll just set up as a as an example. Let’s say they get a $100,000 loan application, and they get a $1 million dollar loan application. The cost of diligence, meaning the cost of evaluating whether they should make that loan is essentially the same between the two. But because the $1 million loan is more profitable, the bank is going to choose that loan every time. And so what that means is that if you’re applying for small dollar loans, that bank is either going to sort of tag you along, they want to overtly say we don’t make loans of that size, you’ll find your application at the bottom of the pile, until you’re ultimately denied. And if you’re not denied you’re routed to products like credit cards, that of course have a really high interest rate and are not properly suited or the need of that small business. And so what we’ve endeavored to do is to completely rethink and rebuild that whole process of how someone applies for a loan, how the risk of lending to that business is evaluated. And ultimately, what determines whether that entrepreneur receives the loan that they’re applying for. And where we focused is in data aggregation and data analysis. So the loan flow that data bank will employ will automate the process of gathering information about the business and gathering information about the owners of that business, we will leverage our what we call credit box as a filtering mechanism. So we have a perspective on the financial operating metrics of that business. And the question then becomes do they meet our threshold or not? We’ve significantly lowered the cost, you know, it’s much cheaper to have a computer, take in information and analyze it versus having a loan officer taken paper applications and do maths and run ratios. To the furthest extent that we believe we were able to at this point, we removed opportunities for that human bias to show up in the loan process. And so ultimately, the result of that is when we make loans to our depositors, we will be we will be judging their credit worthiness based on the merits and demerits alone. And the the outcome of that is going to be a portfolio of borrowers, small businesses, entrepreneurs around the country, primarily in Chicago MSA, but around the country who reflect the rich diversity of the nation that we live in.Aaron Marsh
What are the kinds of things you have to consider if you’re going to have like a fairer system in lending? Does it come down to things even like just geographies? I know you said that this is going to be mainly in the in the Illinois and Chicago areas. But are there other things that you’ve got to filter out to get it a fair system?

Seke Ballard
You mentioned geography, and I think that’s a big one. Bankers often make loans based on zip codes, you know, and in decades past, you know, the most cynical manifestation of that was redlining, you know, where they would literally draw red lines around whole communities and put X’s on them and say, We will never lend in in those communities in those zip codes. But of course, there are successful businesses that are operating in those zip codes. They might not be as plentiful, as in others, but there are successful businesses. So you know, just just using this hypothetical, I’m a banker at a legacy bank. And I am considering making a loan to a business that operates from Chicago’s loop which is kind of our central business district, versus making a loan to a small business, let’s say in Gary, Indiana, which is, you know, a stone’s throw away from Chicago. Gary, Indiana, is an economically challenged City at the moment. And that banker is, you know, even if it’s subconscious or conscious, it doesn’t matter. The end result is the same. That banker is going to have a perception about that business, simply because of the city where it operates. But what we’re striving to do is go a step deeper. So yes, this is your zip code, but show us your financial statements. My view is that financial statements are novels; they tell a story, they tell you exactly how well that business is run. And if you look at that, and you really focus your analysis on how the business has been run, and whether it has the capacity to take on debt and service that debt, then you would make that loan to that business in Gary, and you probably make the loan to the business and Chicago too in the loop. But in our process, that business in Gary has a shot.

Aaron Marsh
Without really involving that much more risk — you’re saying you want to get to the actual operations of the of the business itself?

Seke Ballard
I actually think it lowers the risk. My view is, you know, if you if you build the technology smartly, then number one, you can lower your cost of going through that analysis. And number two, you can remove the sort of biases, that human involvement creates opportunity for it.

Aaron Marsh
You and I were talking a little bit before we began, and it sounded like some of this process, some of this technology that you are developing, or that has been developed will be employed at BetaBank, but it sounded like it might be applicable to other banks, maybe you look to sell the technology to others. Is that is that the case?

Seke Ballard
Our focus today is getting BetaBank up and running. And making sure that what we build as BetaBank, making sure that that is serving our customers in the way that we intend to serve them. But our long term strategy is that what we are building for BetaBank, which is cloud based, full service, banking services, what we’re building for BetaBank has utility more broadly. Today, if you were to serve a community bankers, and this is nationwide, if you were to serve a community bankers, their biggest, number one concern is automation. It’s how challenger banks, how fintech companies are chopping off pieces of their business. Either they don’t have the technical acumen to be able to modernize their own systems, or maybe they’re locked into onerous contracts with, you know, the biggest core providers who aren’t willing to give them that degree of flexibility. Or they don’t have the financial resources to do it. And so we’re in the process of building a technical infrastructure for BetaBank that I envision, those banks would also have an interest and possibly using, we’ve got the backing of two of the most successful companies in the world, Google being one of them Deloitte being the other. I think it’s reasonable that others might want to benefit from that as well. I received a message from a representative at Google on LinkedIn, in early 2020. He had come across an interview that I’d done with NASDAQ, where I discussed our algorithm where I discussed my ambitions for creating broader financial impact, using our approach to lending. And he was interested in how Google could support us in that endeavor. For them, the first motivation is mission alignment. They believe that fair access to capital is an important goal. And their values align with creating the kind of architecture that could allow for that. Ultimately, for me, it’s about measuring people everybody using the same yardstick. And, and to me, that is fairness. Not everybody is going to is going to be approved. There are a lot of people out there who simply are not credit worthy. But if you if you look at them on the merits of how they’ve performed, then you’ll I just think you’ll start seeing some equalization — you’ll start seeing much better access.

Aaron Marsh
You’ve been listening to “The Buzz,” a Bank Automation News podcast. Thanks for your time, and be sure to visit us at BankAutomationNews.com for more automation news in financial services. Please don’t hesitate to rate this podcast on your podcast platform of choice.