Central Pacific Bank of Hawaii adopts BaaS to collect deposits on the mainland

Geography will no longer be a limiting factor in Hawaii-based Central Pacific Bank’s ability to collect deposits beyond the state, according to executives at the Honolulu lender.

The bank made its first foray into banking as a service this year with the spin-out of Swell Financial, the digital bank it incubated during the COVID-19 pandemic.

Central Pacific wants the partnership to be the first of several such combinations, said David Morimoto, the bank’s senior executive vice president and chief financial officer, who added that the ability to provide banking services to fintechs is an effective way for the bank to access the larger American market.

“Hawaiian banks have been exploring ways to gain more access to the US banking market rather than being geographically limited,” he said. “In the past, this required a physical presence on the continent. In today’s environment, this physical presence is no longer so important.

The Hawaiian banking market is unique. Major companies in the country, such as JPMorgan Chase, Bank of America and Wells Fargo, have no physical presence in the state, and the market is dominated by four Hawaii-based institutions.

Bank of Hawaii, First Hawaiian Bank, American Savings Bank and Central Pacific collectively hold 93% of the deposit market share, according to Federal Deposit Insurance Corp data.

While local lenders have a strong hold on the state banking market, Mainland-based neobanks like Chime and MoneyLion have been successful in attracting Hawaiian consumers amid the pandemic, Morimoto said.

“During the pandemic, they were attracting hundreds of thousands of consumer customers across the country, including Hawaii,” Morimoto said. “As we were thinking and going through a strategic planning process at Central Pacific, the discussion was, ‘How can we respond?’

“We could continue business as usual and continue to focus on traditional community banking in Hawaii, or we could take a different approach,” Morimoto added. “We have chosen to participate in the disruption rather than simply allow this disruption to occur and impact our business.”

In 2020, the bank hired fintech veteran Kevin Dahlstrom as chief marketing officer. Dahlstrom helped launch Swell and formulate the institution’s broader BaaS strategy.

Swell, which helps clients automatically control spending and invest in private market opportunities, plans to remain in invite-only mode for a year before officially opening to a wider audience, Dahlstrom said.

A month after its spin-off in January, the startup raised $10 million in a Series A funding round, attracting investment from Elevate Credit, a lending technology company, which is also partnering with Swell to offer personal lines of credit through the platform.

Central Pacific has about a 20% stake in the fintech, Morimoto said. Paul Yonamine, CEO of Central Pacific Financial Corp., is also a member of the startup’s board.

“Swell is much more than a bank sponsorship of CPB,” Yonamine said in a February statement. “This is a deep strategic relationship that has already resulted in significant innovation.”

CPB’s BaaS initiative could become a lucrative business, Dahlstrom said.

“CPB has a great banking business in Hawaii,” said Dahlstrom, who previously held chief marketing positions at Mr. Cooper and Elevate Credit. “And that may slowly become a new line of business for the bank, but it doesn’t have to happen overnight. I think Swell and the bank are looking at this as a long-term, multi-year game.

Central Pacific is in the early stages of due diligence with several other fintech companies to which it could potentially provide banking services, said Laurie Okinaga, the bank’s senior vice president and chief operating excellence officer.

“We don’t just go out and partner with any fintech,” she said. “We really try to make sure that the fintechs we partner with fulfill what the bank was founded on, which is to provide financial services and access to financial services to communities that don’t have great access.”

Modeled similarly to other tech-savvy community banks like Fort Lee, Cross River Bank in New Jersey and Coastal Community Bank based in Everett, Washington, which have successfully scaled their BaaS operations, the technology platform Central Pacific Bank’s integration program can be repurposed to serve other fintechs, Morimoto says.

“It really makes sense if we can leverage what we’ve built to partner with and help other fintech companies,” Morimoto said. “Traditional banking is changing. And all we’re trying to do is participate in that evolution.

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