CBC Featured in OCBJ: Q&A: WHAT ONE BANKER THINKS OF FINTECH

Ash Patel Describes Tools CBC Is Investing In

By Peter Brennan   Nov. 5, 2018 

Tech companies that want to break into what they consider the stodgy, old- fashioned world of banking often don’t understand the one word that means survival in the industry, says OC industry veteran Ash Patel, chief executive of Irvine-based Commercial Bank of California.

“The banking industry is based on one word: trust,” he told the Business Journal’s Peter J. Brennan this month.

“You cannot develop trust without history. Technology companies have an 18month cycle for a product. Here today, gone tomorrow.”

 He continued, “The trust and respect that a bank gets, technology companies don’t get” when it comes to forking over one’s money for safekeeping. “They are good at innovation and marketing. We’re good at relationships and regulatory issues.”

Fintech has become a buzzword in recent years. While some consider it an overhyped concept, others, such as banking startups king Ed Carpenter, owner of Irvine-based. Carpenter & Co., are helping tech companies get into the industry.

Patel, nevertheless, sees an opportunity to give fintech more of the trust credibility it needs to inspire confidence among the public. He wants to partner with technology companies to improve his bank’s offerings to commercial businesses. The bank is developing its own software; incubating startups; and acquiring or partnering with tech companies. It’s invested in the intellectual property of Camino Financial Inc., an online finance platform that made it profitable for financial institutions to fund microloans, or those less than $50,000. A year ago, CBC bought Atlanta- based payment processing system Vericheck, Inc.

“We’re actively looking to invest for the right opportunities,” Patel said.

The bank is spending $6 million on fintech this year and plans to put in an additional $ 10 million in the next two years. That’s more than the $4.3 million in 2017 net income it reported.

“Our owners have decided that investing in technology is worthwhile,” Patel said. “Since we are privately owned, we can make entrepreneurial bets that publicly traded companies cannot.”

This past May, the bank completed a reorganization to become private. When it was public, the thinly-traded stock hovered around a $134 million market cap. Patel has been involved in OC banking since 1996, founding Premier Commercial Bank in 2001. It was sold in 2012 for $38 million to California United Bank. In 2013, Patel took the top spot at CBC, which has a board of directors with influential local executives, such as Chairman Paul Folino, chairman emeritus of Emulex Corp., William H. Lyon, chairman of William Lyon Homes, and Alex Meruelo, a developer who also started chain La Pizza Loca. Patel has grown the bank’s assets from $ 200 million to almost $ 1 billion. It’s now the seventh- largest bank based in Orange County. He spent an hour with Brennan explaining his bank’s move into fintech. Here are edited excerpts of his comments:

Q: What is your definition of fintech?

A: Banks that are using technology to deliver better products. Historically, banks have not been very innovative. Venture capital is trying to disrupt the banking industry through technology. Banks were slow at the start. Technology companies said we can do your business better, faster, cheaper. Bankers said you don’t know what we are doing. Today there is so much new technology that we can deliver a better, quicker experience. That’s why we are partnering with technology companies.

Q: Why have bankers been reluctant to embrace fintech?

A: Technology companies don’t understand fraud risks as well as banks do. Banks are governed by the FDIC. We have different rules. The government doesn’t govern technology companies as strictly on privacy rules as they do banks. When technology companies breach the privacy of clients, a regulatory agency might get involved much after the fact. In comparison, banks take a preventative approach to prevent security breaches from happening. That’s one of the biggest issues, tech companies not understanding the governing rules that bankers have to follow. Tech executives are freewheeling and take risks where banks cannot take risks.

Q: Where are the opportunities for fintech?

A: We’re focused on technology related to customers’ experiences, what we call the customer’s journey map. There are only two things a business does, collects money and pays money. There are four rails in which money moves: checks, wire transfers, credit cards, which are for consumers, and ACH—automated clearing house— which is for businesses. Our $16 trillion economy moves in one of these four ways. Our strategy is to vertically integrate into our customer’s journey, collecting money, being a receptacle and making payments. There are verticals we are involved with, like healthcare, autos and school districts. For example, in property management, instead of collecting rent through checks, we can provide a portal to pay through ACH. Or we can build a portal for a manufacturer to collect receivables. We want to present technology to your business so you can become more valuable to your customers. We don’t want to be known as a bank; we want to be known as a partner. We don’t want them to just park money; we want to develop products with them, increase their profits. I’m willing to put my money where my mouth is. Let’s co-develop the technology, and you can take it to the market.

Q: Are people still writing checks? 

A: Checks and wires will still be there, but the volume is going down. Checks are shrinking annually. ACH is growing double digits. We are betting on ACH. Payments are moving away from brickand-mortar to mobile. Mobile banking is really, really big— 60% of millennials don’t go to a bank. They use their mobile phones. Our focus isn’t consumers, but commercial businesses. The commercial payment side is about a $ 5 trillion market. Wire and credit cards are the most expensive. Credit cards take about 2.75% [ of each transaction]. The average ACH cost is 5 cents. That’s why the payment industry is moving to ACH. ACH is a much cheaper cost, but it’s not yet everywhere.

Q: What about wire transfers?

A: Our customers send about 800 to 1,000 international wires a month. They complain that cross-border payments take too long and are too costly. They hate paying fees and waiting four days for the money to arrive. We are asking, is there a better way to do that?

We’re looking at blockchain technology. We’re working with two companies: Ripple [which has 100 banks in its private network] and Adyen [which handles business payments worldwide].

We are not there yet in making it cheaper. We hope to have technology available at the end of next year.

Q: What do you look for when you make a technology investment?

A: I follow technology very closely. We are looking for critical services that our customers can utilize. We don’t want to be too far out of our core offerings. We are looking for robotics that can do the same mundane tasks over and over again. Then we want machine learning on top of robotics, and then artificial intelligence. [That would mean employee reductions]. If we’re going to invest in any technology, it would be robotics, machine learning and AI.