CBW Bank, A BaaS Pioneer, Is Up For Sale: Exclusive

Fintech partners have included BankSimple, Moven, Ripple, and, more recently, Bond, Solid, and TabaPay

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CBW Bank, A BaaS Pioneer, Is Up For Sale

Before developer-focused banks like Column and Lead, there was CBW.

While the name may be unfamiliar to some in fintech, the bank has a lengthy history, through to the present, of partnering with fintechs, long before the term “banking-as-a-service” rose to prominence.

Previously known as the Citizens Bank of Weir, owing to its single branch being located in the Kansas town of about 500 people, the 132-year old bank was acquired by Google veteran Suresh Ramamurthi and his wife, Suchitra Padmanabhan, a former Lehman Brothers banker, during the fallout from the 2008 global financial crisis. The bank had just $7 million in assets and posted a net loss of $92,000 in 2009, the year the couple bought it.

Prior to its acquisition, then-Citizens Bank of Weir struggled to turn a profit. Since pivoting to an innovation focus, CBW significant grew its non-interest income and posted return on equity ranging from about 9% to about 35%.

The rural Kansas bank became an unlikely testbed for early fintech innovation. Ramamurthi set up a separate company, Yantra Payments, to focus on developing software to be deployed through the bank.

CBW grew under its new ownership, from just over $7 million in assets at the end of 2009 to over $90 million in assets by the end of 2023.

The idea was to offer direct APIs to enable startups or other banks to build directly on top of CBW, accelerating their time to market. A Fortune article about the bank in 2016 described the effort as follows:

“Ramamurthi is currently testing an application program interface (API) store with some 500 APIs that he says will let any startup, or traditional bank for that matter, build a digital bank within six months, as opposed to up to two years, which is the time it takes now.”

According to the website for affiliated firm CBW Payments, the companies developed their own technologies for key banking capabilities, including online banking, deposit accounts, debit and virtual cards, issuer-processing, remote deposit capture, KYC/KYB, bill pay, remittances, and instant disbursements and real-time payments.

The bank was an early innovator in instant payment disbursements, leveraging debit rails to push funds into users accounts more quickly than traditional ACH payments and more cheaply than wire transfers.

CBW was also the first bank partner for early fintech innovators like neobanks Simple, originally known as BankSimple and later acquired by BBVA, and Moven, which spun off an enterprise business before shutting down its consumer offering in 2020.

It was also one of two initial US partners, alongside fellow tech-forward bank Cross River, for “open-source distributed transaction infrastructure” startup Ripple Labs.

More recently, CBW has partnered with banking-as-a-service middleware platforms Solid and Bond (acquired by FIS) and payment orchestration platform TabaPay.

Why Is CBW Selling Now?

But now, CBW has put itself up for sale, with investment bank Jefferies looking for buyers, numerous reputable sources told Fintech Business Weekly and CBW President Suchitra Padmanabhan confirmed, saying the bank hopes to finalize an offer this summer.

The news is the latest sign of continuing stress in bank/fintech partnerships and banking-as-a-service.

CBW has been operating under a consent order since 2020, stemming from violations of the Bank Secrecy Act — an area leading to numerous other BaaS banks facing enforcement actions in the last 18 months.

As part of the order, CBW agreed to terminate its foreign customer and cross-border transaction businesses, along with necessary actions to remediate the BSA/AML compliance issues cited in the order.

CBW grew capital through its retained earnings. Despite the consent order, the bank was and is well capitalized, ending 2023 with a tier 1 leverage ratio of 26.27% and a tier 1 capital ratio of 163.67%

A bigger factor at play in CBW’s decision to sell may be its regulator, the FDIC’s, shifting views on “innovation” in banking.

Under previous FDIC Chair Jelena McWilliams, the agency had developed a more innovation-friendly posture. During McWilliams’ tenure in 2019, the FDIC launched an innovation office with the goal of fostering a more welcoming environment for banks to experiment with and adopt financial technology.

At the time, McWilliams said of the initiative:

“We have created the regulatory framework where we have actually discouraged banks from innovating for a number of years. So innovation has been happening outside of the banking primarily and a very small percentage of it has happened within the community banks in particular that don’t have the resources, nor are they able to enforce the compliance mechanisms in place that would be needed where the regulators would look positively at innovation.”

But, in the five years since then, the leadership at and attitude of the FDIC towards innovation aren’t the only things that have changed.

The rise and growth of BaaS middleware platforms, like Synapse, Unit, and Synctera, simplified launching new financial products and services, just as VC funding to fintechs went supernova in 2020 — drawing more, many unprepared, banks to the seemingly easy source of cheap deposits and fee revenue, ultimately resulting in the heightened scrutiny and ongoing spate of enforcement actions currently unfolding.

When the FDIC’s first innovation chief, Sultan Meghji, stepped down from running the office McWilliams created after just a year in the role, he penned a scathing op-ed in Bloomberg.

In it, he described the federal government as “both hesitant and hostile to technological change,” which he viewed as putting the US’s leadership of the global financial system “in jeopardy."

Meghji described what he saw as a bureaucracy resistant to change, with the majority of agency staff lacking an understanding of the technologies they were suppose to be regulating.

And the current FDIC Chair Martin Gruenberg, who replaced McWilliams in early 2023, is not exactly known as a proponent of innovation in banking. In a budget proposal in 2022, he supported eliminating all funding for the innovation office setup by McWilliams.

Shortly after Gruenberg took the reins at the FDIC, the agency overhauled the FDiTech office, eliminating the portion focused on fostering innovation in banks the FDIC oversees and, instead, focusing only on adopting technology within the FDIC itself.

Republicans on the House Financial Services Committee said in a letter last month to the FDIC regarding the matter, “We are concerned that the FDIC’s approach could, within the examination processes or otherwise, be used to prevent the development of innovative products and services that benefit consumers and businesses.”

For CBW — and the local consumers and businesses the community bank still serves — the bank’s innovation-focused business model appears to have been a lifeline.

From when Ramamurthi and Padmanabhan bought the bank in 2009 through to the end of 2023, fintech- and BaaS-related business has helped CBW grow assets and deposits and increase its non-interest income.

CBW is well-capitalized by any measure, ending 2023 with $22.45 million in equity against total assets of $91.69 million, and regulatory capital ratios well in excess of those needed to be considered “well capitalized.”

Whether or not residents of Weir will still have a local bank may depend on if CBW can find a buyer that regulators are willing to sign off on that wants to juggle running a one-branch community bank while also taking on the seemingly thankless task of attempting to build and operate an innovation-focused banking business alongside it.

Other Good Reads

The Rise and Fall of Fast.co (Fintech Brainfood)

The Billion-Dollar Unraveling Of The ‘King’ Of Silicon Valley (Forbes, paywalled)

Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)? (NBER)

Listen: Unpacking the 1 Year Collapsiversary of SVB (Bank Nerd Corner)

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