BetaBank, a Chicago-based digital de novo, is looking to launch a federally chartered financial institution that will provide deposit and lending services to underserved small businesses, and it’s partnering with Google to build it entirely on the cloud.

The startup bank submitted its application for deposit insurance with the Federal Deposit Insurance Corp. (FDIC) in April, and plans to use a proprietary lending algorithm to provide small business owners unbiased access to flexible capital, founder Seke Ballard said.

“It’s a totally different methodology for assessing credit risk in issuing loans,” Ballard said. “It allows us to address a market that has been underserved by legacy or traditional banks.”

The bank will target entrepreneurs or businesses that are less than $10 million in revenue, Ballard said. 

BetaBank is working with Google to build the bank on the cloud rather than on a traditional mainframe. Deloitte, which partnered with BetaBank to design the initiative’s technological infrastructure, estimates the project entails approximately 66,000 developer hours, Ballard said. 

Deloitte will continue to provide a full suite of managed services to support BetaBank's operations once the bank opens for business, according to a press release. 

Head in the cloud

BetaBank’s decision to build directly on the cloud is a rarity in the U.S. market, said Zac Maufe, managing director of financial services at Google Cloud. 

“The U.S. market has been kind of behind the times in terms of building truly digital native cloud-first banks,” Maufe said. “We have seen some examples in the U.S. now, but if you go to Europe or Asia those geographies have been doing this for a number of years before us and I think we are now rapidly in the U.S. catching up with the rest of the world.”

“What BetaBank is doing is really interesting because they're trying to pick the best in breed in technology and build it in a cloud environment to serve really underserved people in a very mission-driven and really exciting way,” he said. 

And while some legacy institutions are making moves to migrate their data to the cloud, many are still hampered by early tech investments, Maufe said.

“Legacy banks were very early adopters of technology, but because of that, they have massive technology debt that they're all trying to figure out how to modernize,” he said. “It still amazes me that it's 2022 and the financial infrastructure of the world is still primarily built on mainframe systems.”

While building on the cloud has its benefits, a lack of mainframe maintenance, for example, the feat is not without its challenges, Maufe said.

“Others have done this, but it's not like there are hundreds of use cases of how this is done, so you're charting your own path in a lot of ways,” Maufe said. “There's a technology challenge that comes with starting from scratch, just in terms of picking the architecture, making all those decisions and figuring out how to go about things together.”

Leaning on AI

Ballard said he was inspired to launch the bank after witnessing his father struggle to secure the necessary financing to expand his business in North Carolina. 

“I'm a Black guy. If I go into a bank and a White guy goes into a bank, and we have the exact same financial profile … I am 2.7 times more likely to be denied that loan. And in the event that I receive it, I'm going to pay roughly 180 basis points more in interest for that loan,” Ballard said.

In an effort to eliminate bias, BetaBank will not use manual underwriting for small business loans, and instead use a proprietary AI model, Ballard said. By removing the human from the equation, BetaBank aims to decrease the risk of commercial bankers making personal judgments about borrowers, Ballard said.

“When my dad went into those banks, he sat across the table from a loan officer who wasn't just evaluating what was written on the paper about my father's business, but he was applying a subjective character test to my father as well,”  Ballard said.

In its proposal to regulators, BetaBank envisions an initial capitalization of $25 million, Ballard said. That capital raise, Ballard said, will begin once the bank receives permission from regulators to organize.

“When you evaluate a business on merit and nothing else, people are going to pay you back at higher rates, and the people who you lend to will be more reflective of the rich diversity of the nation that we live in,” Ballard said.