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

The bank made its first foray into banking-as-a-service this year with the spinout 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 tie-ups, said David Morimoto, the bank’s senior executive vice president and CFO, who added the ability to provide banking services to fintechs is an efficient way for the bank to access the broader U.S. market.

“Hawaii banks have explored ways to access more of the U.S. banking market rather than limit themselves geographically,” he said. “In the past, it required a physical presence on the mainland. In today's environment, that physical presence is no longer as important.”

The Hawaii banking market is a unique one. The nation’s major firms, such as JPMorgan Chase, Bank of America and Wells Fargo, don’t have a 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 market’s share of deposits, according to data from the Federal Deposit Insurance Corp.

While local lenders have a strong hold on the state’s banking market, mainland-based neobanks like Chime and MoneyLion have managed to attract Hawaii consumers amid the pandemic, Morimoto said. 

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

“We could be business as usual, and continue focusing on traditional community banking in Hawaii, or we could take a different tack,” Morimoto added. “We chose to participate in the disruption rather than just allow that disruption to occur and impact our business.”

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

Swell, which helps customers automatically control their 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 spinout 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 maintains about a 20% ownership interest in the fintech, Morimoto said. Paul Yonamine, Central Pacific Financial Corp.’s CEO, is also a member of the startup’s board of directors.

"Swell is much more than a bank sponsorship to CPB," Yonamine said in a February statement. "It's a deep strategic relationship that has already resulted in significant innovation."

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

“CPB has a great banking business in Hawaii,” said Dahlstrom, who previously held chief marketing positions at home loan servicer Mr. Cooper and Elevate Credit. “And this can slowly become a new line of business for the bank, but it doesn't have to happen overnight. I think both Swell and the bank are thinking about this as a long-term, multiyear play.”

Central Pacific is in the initial stages of due diligence with several other fintech firms to which it could potentially provide banking services, said Laurie Okinaga, the bank’s senior vice president and director of operational excellence.

“We're not just going out and partnering with any fintech,” she said. “We're really trying to make sure that the fintechs that we do partner with fulfill what the bank was founded on, which is to provide financial services and financial service access to communities that don't have great access.”

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

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