Getting Ambitious and Opportunistic with Eric Sprink

Coastal Financial isn’t your ordinary bank, and Eric Sprink isn’t your ordinary CEO, which is why we’re cranking up the banking talk to a 10 on this new episode of Plugged In.

Eric, it’s good to see you.

Thank you, Al. You’re most generous in your introduction. I don’t know if being different is so good some days.

You know, who wants to be the same? That’s boring.

Eric decided a few years ago to buy the ticket and take the ride, to borrow from Hunter S. Thompson, and got into the banking-as-a-service space before a lot of folks did.

You might be familiar with Coastal. You might be familiar with Eric. But the BaaS business model is one that’s being tried by some 90 or so financial organizations at the moment.

I find them all very interesting to watch, but Coastal is one that I’ve long admired. I’m delighted to have Eric here to share his perspectives on what’s really moving and grooving in the world of banking today.

But I have a tough question to start you off with.

Are you prepared for this?

I’m prepared.

All right. How much MTV did you watch when you were younger?

You know, not a lot.

I enjoy music, but I was always an outside kid, so not very much.

Oh gosh. This might get off the rails fast because we named Plugged In as a play off the old Unplugged setup that MTV had.

I was going to tell you five different songs that I was going to reference in our conversation today.

I’m not going to tell you the artist. I might pick your brain on those.

There are things like “Don’t You Forget About Me,” “Learning to Fly,” “More Than a Feeling,” “That’s All,” and “Take the Money and Run.”

When we talk about getting Plugged In together, we’re going to use that as our musical inspiration for the conversation.

I love it. I am an ’80s music fan. That’s still my number-one go-to today.

Well, that’s perfect.

We’re going to have a good time as Simple Minds kicks us off because “Don’t You Forget About Me” is one of those catchy titles, much like one you tried to coin at our Acquire or Be Acquired conference last year.

I was on stage with you and our good friend, our shared friend Ira Robbins from Valley.

We were talking about diversification and differentiation, and how it’s both really hard to do as a bank and also so important to model as a leader.

You tried to coin the phrase “evolve or be acquired.”

In the last 10 months, it has become even more prevalent to think about, “How am I evolving? How am I iterating off of what I do so I stay relevant, stay competitive, and am able to do things in an industry that’s still marked by making loans, taking deposits, and competing on price?”

We debated this concept on stage.

I’d like you to bring it forward and talk a little bit about that evolve-or-die spirit of yours.

I appreciate it.

You’re right. It was a play on words from “acquire or be acquired.”

We kind of moved that to “evolve or be acquired” because the acquisition market is tough.

You have to be one of the top acquirers to get Fed approval and go through all of the regulatory constraints today.

We were kind of picking at it, and Ira is a prime example of this and one of the leaders in the country.

What I do in BaaS is not necessarily required or sought after by most banks, but evolution is.

I’m not talking about revolution. I’m talking about evolution.

The last two or three years have really cemented the theory that customer behavior is changing, and banks may or may not be evolving to meet customer and small-business customer expectations.

We look at it and say, “Fintechs are this,” or “Fintechs are doing that.”

My greatest fear to our BaaS model is that the collective banking organizations wake up and evolve to where fintechs aren’t needed.

But right now, fintechs are evolving quicker than banks are, and they’re taking some market share.

What Eric is talking about reflects a concept that the largest disruptive force to banks today is the mindset of the leader.

You’ve got your cultural DNA. You’ve got your cultural identity.

It’s hard to steer a ship. You’re not going to have a large cruise line make a quick move to the left or the right.

An organization like Eric’s has a little bit more flexibility and agility given its size, but also its leadership mindset.

When you’re talking about evolving, how do you keep the leadership team on its toes so you don’t get complacent and accidentally invite mediocrity into a really great organization?

I think it starts with the board of directors at our bank.

Our board is absolutely committed to looking through the windshield, not the rearview mirror.

They are continually looking out, and we work really hard to enable them to think five, 10, 15 years into the future and get them out of the board reports that tell them how we did last year and last month.

We really lean into our board to keep challenging management to think about adopting and evolving.

Then that translates to the staff and the leadership team at the bank.

We are very fortunate, and it took seven years to get us here, to be fully frank and transparent.

There was known resistance and unknown resistance to evolution.

The known resistance is easy to deal with because they care, but they’re concerned. That includes staff members, executives, and maybe even some board members.

It’s really the unknown resistance that’s tougher.

It’s the inertia. It’s the fear embedded in a conservative, highly regulated industry that will always bring the rubber band back to its original format.

The leadership and the board are the ones constantly stretching that.

I’d love to say, and I believe this, that at about the fourth or fifth year, the leadership team and employees of the organization not only fully bought into evolving and change, but they started leading it and pushing management and the board for further change.

They started seeing the benefits. They started seeing the vision.

Then they started coming up with their own ideas.

At that point, you could tell the ownership of change had changed.

It was refreshing because that allowed me to do different things.

But if you’re a normal bank out there, this is going to be tough.

It’s going to be a couple of years of continuing to stretch the rubber band, motivate and excite people, and also hold them accountable to that change philosophy.

You obviously have a great group of people who are willing to take risks and who are looking at partnerships differently than most traditional banks have in the past.

I’m curious, you mentioned consolidation and how it’s hard to do a deal.

I think most people associate that quickly with bank-on-bank acquisitions and activity.

But I’m curious about potential consolidation for those players in the middle of the BaaS space right now.

The Bonds, Synapses, Units, Nymbuses, Treasury Primes, Moves. Those are six examples of really strong companies doing meaningful work.

But are they going to be around in a few years?

Is there going to be consolidation in their ranks as well?

How do you see the support-type companies continuing to evolve?

That’s an intuitive question.

I’m a big fan of all six of those companies, plus there are more that you and I both know.

I just cherry-picked off the top of my head six that I think people will be familiar with.

They’re all great.

I think the evolution of what we do, banking as a service in particular, will continue.

Investment will continue, and there will be winners and some that don’t quite meet the expectations of their investors.

It will evolve itself.

I think we’re in the early innings of how banks partner with other companies, whether that’s fintechs or brands.

We all know the example of T-Mobile partnering with BMTX very successfully. T-Mobile is a brand.

We all know our partnership with one of the largest retailers in the country.

We know Amazon is working with Goldman Sachs. That’s a banking-as-a-service relationship.

As more and more banks enter the space, you said 90 or 100, and I believe you and think it’s growing as well, there may be better ways to do what we do.

The innovation in the venture capital world is pushing some of those boundaries to see if there are more efficient, streamlined, and better regulatory processes.

I think that testing will go on for a couple more years.

That’s really exciting.

We should all step back and say, “This is amazing that so much capital is coming into the banking space.”

Historically, we don’t get a lot of innovative, evolutionary capital from venture capital.

We’re stuck in the PE world, which is great, but they want solid, stable, recurring early earnings at a discount.

The venture capital world is taking bets on our industry and really trying to motivate it to solve problems three, five, and 10 years from now.

I couldn’t be more excited about those middleware companies, even though some of them may not ultimately be the winners, however that’s deemed.

There are going to be a bunch of them that are.

Totally.

What you’re talking about naturally brings us into Tom Petty because we’re all learning. We’re all “Learning to Fly.”

I could nerd out on all the fintech stuff that you’re discussing, but I want to introduce you to a debate I’ve been having with the chief research officer here at Cornerstone, Ron Shevlin.

Ron and I have been talking about the pros and cons of an embedded finance versus an embedded fintech strategy, where you basically have to pick one or the other.

How do you reconcile the pros and cons of those two different opportunities in front of bankers right now?

We’ve had these theoretical debates about what those words mean and the application of those words.

I will tell you, if you’re truly an innovative culture or have an entrepreneurial spirit, in our case I give the board full credit for being an entrepreneurial board, which transcends down to the executive staff, I don’t believe you have to choose.

I don’t.

I think a lot of the definitions are still in flux.

Each bank is different.

Each bank has different risk tolerances.

Each bank has different regulators.

Over time, each bank CEO and leadership team will define how they’re going to evolve.

It’s that old adage where we label something and then put everything into it.

I’m not saying Ron is wrong.

I love Ron. I think he’s brilliant.

I read his articles all the time and bring them back to the staff to debate ourselves.

But what I will tell you is, I go out and meet with our peers.

I love our bank CEO group because, one, they tend to be very focused on the consumer or business owner.

They deliver community banking, and that’s a spirit, not necessarily defined geographically.

Then they’re always trying to solve for, “How do I continue to deliver this?”

Whether that’s putting their own products into a partner, or whether they are going to borrow somebody else’s products and deliver those to a different community.

In Coastal’s situation, we actually do a little of both.

That’s why I’m a little sensitive to putting it into one box or the other.

We maintain that flexibility to say, “Hey, this partner is expecting X from us, and it’s really about their customer.”

Who’s our customer?

How do we solve those issues?

Can we help in this way, or can we help in this way?

We really lean into our flexibility to differentiate us.

I don’t know if that really answered your question, but it is a truth.

Well, that’s why you and I get along so well, because what you said is how I try to articulate to somebody like Ron.

The answer “it depends” is an okay answer.

It’s like the old Yogi Berra quote: “I came to a fork in the road, and I took it.”

Yes.

You mentioned the BaaS space that you’re in.

I’m curious about the journey, so to speak, that Coastal has been on.

I took note that CCBX, which is the, how do we describe that to listeners?

You’ve got Coastal and CCBX.

We have CCB, which is our traditional community bank, a $2 billion commercial-lending, real-estate-focused bank in the geography.

Then we have CCBX, which is our branded banking-as-a-service division.

The CCBX seven-year journey.

First and foremost, we should acknowledge the patriarchs in this community.

You said we were an earlier adopter.

With that said, listen, we’re coming into banking as a service on the backs of the great ones.

I think of The Bancorp, Green Dot, Pathward, which is the old Meta, Cross River, et cetera.

We got to learn a lot from them, and we feel an obligation to help those who have come in after us.

We’re all community bankers.

We’re all trying to figure our way in this environment that seems to get tougher every year, not only banking as a service, but community banking.

It was a lot of fits and starts.

A lot of attorneys.

A lot of regulatory conversations.

It was slow and steady.

Then you jump to the end and say, “God, you’ve got 19 live, 29 total that you have some type of agreement with, in launching, or LOI, friends and family, et cetera.”

What you’re failing to mention too is that we’re unwinding some this year.

Not necessarily mistakes, I would say.

Generically, either their business plan didn’t work out or we were unwilling to continue with product matches for the fintech based on what they needed.

Long story short, we’re probably going to exit five or six relationships for different reasons this year.

As we look at next year, the future, and what we’ve learned, that’s just natural evolution for ourselves.

We started one way, and as all good evolutionary companies do, they pivot.

They say, “Okay, we learned. We’ve improved X, Y, or Z. Let’s reevaluate.”

Our board is constantly asking us, “No harm, no foul. Do you feel our path is still going the right direction? Do you want to alter the path, and why, Eric? Tell us.”

To answer really quickly, probably the most important thing in this regulatory environment is just to stress that banks should be talking to their partners in the regulatory agencies a lot.

We’ve been really, really fortunate to have the Federal Reserve Bank and the state of Washington DFI.

We’re fortunate because they committed resources to us.

We’ve been on 90-day exams for five, five and a half years now.

Most banks would cringe at that.

My response is, I’m asking them to do monthly now. I’m asking them to do weekly.

As more and more things go on in society and regulatory bodies become aware of new risks or new processes that they’re concerned about, I’m telling you, no matter what relationship you’re in, with your spouse, your family, or your employees, it boils down to good communication, transparency, and trust.

We’re so fortunate that those resources have been committed to us over time.

I can’t get ahead of the regulators.

We’re talking all the time.

As turbulence comes up, I’m just thinking of the crypto winter today.

One of the products we have avoided is any type of crypto exposure, not that it’s bad or whatever, but just our risk tolerance.

Man, it’s been great talking to them and learning from them.

Right now, I believe they’re reacting to what’s going on, rightfully so.

If you saw the House testimony and you see some of the stuff that’s going on right now with the Senate, they’re focused on this topic.

The fingers are being pointed.

I’m leaning heavily into, “Hey guys, my regulators, you know us. You’ve been talking to us. You kind of know everything we’re doing before anybody else does, even my board in some cases.”

It’s times like this that you love that transparency and relationship with the Fed.

Again, I stress that because times are not going to get easier.

I think the next year is going to be tumultuous, whether it’s a recession, regulatory new guidance, or whatever it may be.

Double down on your relationships and communicate even more.

That’s my two cents out there.

Well, I’m going to send this pod over to your wife so she hears that you respect the sense of transparency, honesty, and great communication all good spouses should understand is the bedrock for a happy life.

I will tell you this.

I have many bosses in my life, whether that be the board, the regulators, or my wife.

I’ve learned to just say, “Yes, ma’am. How can I help? What did I do wrong now?”

Eric, we know there’s one boss.

I won’t use her name, but we know who she is.

Oh yes, you do know.

I’ll use her name.

Stephanie is the love of my life, and she is the one.

Well, Stephanie, this podcast is for you.

You’re talking about having a great relationship with regulators and seeing the world moving on the blockchain front.

We won’t go down this path, but there are some really fascinating things going on with data solutions, on-chain identity, integration, digital asset custody.

I think banks like yours are going to continue to lean into and try to figure that out.

It brings to mind a song that keeps going on my Pandora playlist.

It’s on my Genesis playlist, on repeat for some great reason.

It says, “Just as I thought it was going all right, I find I’m wrong when I thought I was right. It’s always the same. It’s just a shame. That’s all.”

That’s by Genesis.

I just want to make sure that my memory of our past conversation about wanting to be a data provider is still your aspiration going forward.

In the history of banking, we make loans, take deposits, and compete on price.

But we have incredible understanding of our customers’ behavior and patterns, and things that could actually help us create some diversification and differentiation.

You have talked to me in the past about that whole concept of data being fundamental to your overall business strategy.

Where does that line up with your thinking at the moment?

You also talked about some different versions of data authentication, which is maybe that true identity on blockchain.

We’ll park the car there in a second.

But yes, I would say for Coastal, we are only accelerating and doubling down on this theory that someday it would be a huge compliment to us if people referred to us as a data management company versus a bank.

Nothing wrong with being called a bank.

But really, that expertise that you’re talking about of know thy customers, know thy partners, and add value while protecting the safety, soundness, and integrity of the precious resource called data, and making sure the bad actors don’t get at it and nobody misuses data, is paramount.

Right there, I think smarter people in society than I have figured out that you have access to so much information that, if used appropriately, you can add value.

To start with, I’ll tie it back to this blockchain theory.

I’m a huge fan of blockchain.

Again, my comments talked about crypto, not blockchain.

Eventually, I would love for true identity, a blockchain-based type of identification, to be adopted by the federal government or some other entity to avoid fraud in the digital space.

Fraud is rampant.

Fraud is awful.

We’re trying to fight it.

We think there are things the nation could do collectively to help in fraud prevention, BSA enforcement, and doing all the right things.

But it boils down to data.

How do you authenticate data?

On our side, one of the reasons we think data is so critical is we would love to share a bad IP address, if we find one, with other banks.

Think about the OFAC list.

Imagine if it expanded to bad IP addresses across the world or across the nation.

If somebody’s trying to open an account here and we discover it’s a bad IP and there’s fraud involved, they can’t use that IP address.

It shuts down a vehicle versus them just going from digital bank to digital bank to digital bank with the same IP.

We could make it at least a little bit more difficult.

Also, if we did get to that blockchain-based true identity, I’m a big fan because if the chain is broken, the identity is broken.

It allows us to figure out better ways to authenticate that Eric is opening an account or Eric is authorizing this transaction.

We have multiple sources of truth recording it, so it makes it even tougher for fraud to occur.

Specifically with Coastal, I’m also really excited about some different things we think we can do with data.

Not only with fraud and BSA and compliance monitoring and good old-fashioned banking stuff where data can help you be safer, more sound, and secure, but also to highlight our partners.

We’ve got a beta right now in our own Coastal World.

If you go to coastalworld.com, selfish plug there, it’s in beta, but we have the digital adaptation of our virtual marketplace.

The metaverse, we’re in it.

We’re highlighting our partners.

It’s gamified. It’s interactive.

That exemplifies what we’re trying to get at.

We’ve got these 20-plus partners that have some of the coolest products, adding value or serving some of the coolest demographics of communities that are traditionally unbanked.

How can we have these companies help each other?

How can we help get these products and services out?

This virtual marketplace, or mall, is just a visual adaptation of data management, of using data to add value to others.

That’s so cool.

I don’t mind the shameless plug because I think people should go check this out.

If you want an alternative to what Mark Zuckerberg is building, maybe you take a peek at what Eric’s got up his sleeve because he’s got some great stuff.

Ours can plug into Mark’s world.

I just can’t afford to plug into his world.

Not many can.

Okay, so that brings us to our last point.

In short order, I was thinking about all the different layoffs that we’ve been seeing, whether it’s Chime, obviously Twitter is doing its own thing right now, Stripe has had some announcements, that’s on the heels of Blend and Fiserv and MX.

These are companies that have really hired a lot of smart, talented people.

They’re having to shed some pretty incredible talent.

Boom times are over.

I think we’re going to see some lessons starting to be appreciated differently.

You’ve long been a magnet for talent.

What are some of the things you’re discussing within Coastal as you watch this reduction in force play out?

I guess there are two different angles to answer this.

First and foremost, we hire mostly bankers.

For us personally, we’re operations, compliance, BSA, audit, reconciliation.

We’re the bank in these relationships with these awesome companies that are usually referred to as fintechs, tech companies, or brands that are forward-leaning into technology.

I love it when a bank merger happens.

That’s what I look at.

Or when banks lay off people, that’s when I get real excited because we can go in and hire an audit team.

Wow. That’s cool stuff for us.

Or BSA members.

We’re actually in 32 states with our employees now, and Canada, just because we’ll go where the talent is.

Now, to answer your question a little bit on the other side, because we do have a lot of exposure to the technology world and we’re a big VC lender that invests in tech companies via one of our partners, Carta.

I think all of these companies had 10, 15, 20 years of boom.

Even the stalwarts that are fantastic, Microsoft and Amazon, sitting on hundreds of billions of dollars of cash, are using this window to reevaluate whether they have all the right people on the bus.

A year ago, they couldn’t get away with layoffs because they would have been branded, shunned, or highlighted as different.

Now, I think everybody is using this, right, wrong, or indifferent, as a get-out-of-jail-free card to reevaluate their employment base.

It’s big.

It hasn’t been done in a long time, so the cuts are going to be deep.

My heart goes out to those employees.

I agree with you, Al.

There’s going to be some good talent that is now saying, “Well, one, shitty timing, excuse my language, but right before Thanksgiving and Christmas? Thanks, everybody.”

I agree.

I wish there would be a better thought process to the process, but they don’t want to miss the window, these companies, I’m assuming, to jump on the bandwagon.

Two, they’re going to find homes.

Digital adoption is not going away.

Evolution is not going away.

When Microsoft in our community or Amazon, through their attrition, when people are shed because they either want to leave or they want to do their own deal, the innovation that comes from these smart people in a year to 18 months is going to rock our world.

You’ve got to get through this period.

Especially, my heart goes out to the individuals right now as they get the shock of getting that email in some cases or that phone call.

Let’s hope they’re going to be fine.

They’re going to aggregate to the startups, and they’re going to raise money next year because the venture capitalists are sitting on huge piles of cash waiting.

Man, I’m really even more excited about digital adoption and evolution in two years than I am today because of the layoffs.

You’ve got to unlock that talent from Amazon and Microsoft so they can go be free and build.

Well, I mentioned at the start, Coastal Financial isn’t your ordinary bank.

As you’ve heard, Eric Sprink really is not your ordinary CEO.

My friend, it was wonderful spending a little time with you.

He’s Eric Sprink. I’m Al Dominick.

Thanks for getting Plugged In with Cornerstone Advisors.

Thanks, everybody.