A bitcoin rewards checking account. A wearable ring that acts as a payments device. An early outpost in the metaverse.
These are just a few of the unique approaches that a New York City-based community development financial institution, or CDFI, is trying as it proves that you don’t need to be a large bank or fintech to push the digital envelope.
To better understand what Quontic Bank is up to—and what other institutions can learn from its example—we sat down with CEO Steve Schnall for an episode of Banking with Interest. He talked about why his institution is experimenting with new tech, the challenges in getting regulators onboard, and where Quontic is going next.
What follows is our conversation, edited for length and clarity:
You founded Quontic in 2009. What was your vision for it then, and how has it changed?
In 2009, it seemed like traditional brick and mortar retail banking would eventually go extinct. So our vision was to go digital. We also changed our lending strategy because the market for home loans and small borrowers had been disrupted—banks were reeling from the credit crisis, and it was very difficult for some otherwise creditworthy prospective homebuyers and property owners to get mortgages. We saw an opportunity to fill that void.
Quontic’s tagline is that it’s an “adaptive” digital bank. What does that mean?
When we were trying to define what kind of bank we wanted to be, we knew we had to adapt to changing trends and customer needs. Banks haven't done a good job at adapting, which is why the number of institutions in the country is contracting very, very rapidly.
A lot of banks are wary of crypto. You have a bitcoin rewards program. How it’s going?
It's really catapulted our visibility. It was a heavy lift, but we knew that there would be a lot of upside. We want to be innovative, on the cutting edge. We want to achieve firsts. And so it was important for us to be the first bank to do this, because we believe bitcoin is going to hold a very important place in the world in the coming years.
How do you deal with the volatility of bitcoin?
It's actually pretty simple. At the end of the day, we tally how much each customer spent in eligible purchases. We calculate a 1.5% cash equivalent reward, then go out and purchase bitcoin with that cash. We don't own any bitcoin on our balance sheet, so we're not taking on any market or price risk. The customer has to deal with the volatility, but they didn't pay for the bitcoin. And it’s a reward that can appreciate in value, so that differentiates us.
How did you get regulators on board?
We called them and told them we wanted to do it, and they said, “That's a great idea, go ahead.” [Laughs.] It was a process. We were talking with the OCC for the better part of two years. They engaged us very deeply and forced us to think through all the compliance and disclosure issues. Ultimately we got to the finish line.
You've talked about adopting a wearable banking device, such as a digital ring. Is this something you're still pursuing?
We actually launched it last week! Wearables have become huge in the health and fitness industry, so we thought, why not have a wearable that can do other things in a way that’s even more convenient? Plus it fits with our vision of being an adaptive digital bank.
How does it work?
Like any contactless debit card or credit card, only the chip is embedded in a ring instead of a card. From a security standpoint, if you lose the ring, it's unlikely someone will know it's a debit card. But you can use your mobile app to turn it on and off as you need.
Do you have any plans for the metaverse?
How did you know? We've purchased some land in Decentraland and hired a contractor, and we're in the midst of building a virtual branch. JPMorgan already opened a lounge in there, but we wanted to be the first community bank. Another one of those things that we wanted to be the first to accomplish.
You think the metaverse will take off?
There are an awful lot of deep-pocketed, smart people spending a ton of money to bring it to reality. Until the metaverse becomes immersive, it won’t be that interesting. But it will be more interactive than the internet in general. My 15-year-old son recently put his Oculus goggles on me and set me up at a Texas hold’em table. After ten or fifteen minutes, I forgot I wasn’t actually playing cards. It felt real.
Given the amount of liquidity in banks, most will probably wait to raise deposit rates. As a digital bank, do you feel more pressure to move faster, or do you think some of the other items you're offering, such as bitcoin rewards, will make up for that?
We offer one of the highest rates for savings accounts and CDs. That works for us to a point. Also, the loans on our balance sheet are generally at higher rates than most banks, because we do a different type of niche mortgage lending. So we can be amongst the highest-yielding deposit savings accounts and CD accounts and still have some outsized net interest margin.
We do face more rate sensitivity than a large commercial bank, and our goal over time is to evolve toward a more front-of-wallet (or with the ring, out-of-wallet) type of depository where we're not so rate sensitive.
As a CDFI, how does your mission impact your digital mindset and vice versa?
One supports the other. As a CDFI, at least 60% of the loans we make by dollar volume and number have to be either to low-income families nationally or low-income census tracts near our headquarters. We're also working on getting an additional target market approved, which would include credit for more lending to black and Hispanic homeowners. Being a CDFI is hard—we have to stay true to our mission and find broader opportunities to lend to our target audience. That plays well with the digital depository because it provides the funding we need to make loans.
The next step of our evolution is a direct-to-consumer digital channel for our lending products. Gig economy workers, immigrants who are low-income, and minorities can now apply for a mortgage online, and we provide them with innovative, flexible underwriting guidelines. So the digital bank supports the lending business, and as our lending business evolves, it will become more digital.
When I interviewed Gary Cohn, former director of the National Economic Council, he said community banks aren't very innovative. I don't think anyone would say the same about Quontic, but do you think his larger point is correct?
Community banks haven't been very innovative historically. It's hard—there are technology challenges, regulatory challenges, cybersecurity challenges, human resources challenges. Most community banks simply can't afford to innovate. Even if they could, they usually don't possess the expertise internally. Also, banking doesn't move fast, and there are lots of regulatory constraints around doing anything new. These things make it nearly impossible for community banks to innovate with any great speed.
Do you feel pressure to constantly come up with new, exciting things?
Yes, but it’s self-imposed. I love things that are new and interesting, and I’m surrounded by people who drink the same Kool-Aid. When we started, if I had tried to attract the same talent to come work at Quontic that we have today, but we weren't going to do all this innovative digital stuff, none of them would have joined.
What’s your take on the crypto landscape?
There are thousands of tokens and cryptocurrencies, but I think bitcoin is the most well-positioned to become the new digital gold. Humans have always ascribed value to gold because of its scarcity. That’s why I think bitcoin will have value. But it’s quite volatile. It's not something that people should put more than a very small percentage of their net worth into.
What's your take on stablecoins? Should banks be the only ones issuing them?
I think there's a lot of opportunity for stablecoins, but there are tremendous risks as well. What happens to banks if the government is the wallet for all digital money? What happens to everything? These are not easy questions. Ultimately, I think there's a place for stablecoins as long as the right guardrails and regulations are in place. But should banks be the only ones to issue them? I have no idea.