A Brand Name University Launches a Trade Name Bank in Cyberspace
By: Christopher J. Zinski
DePaul University recently launched a trade name Internet bank called DePaulBank.com (www.DePaulBank.com). How DePaul did it is well worth studying for others who would like to successfully graduate to offering financial services on the world wide web.
An Idea Is Born ... and a New Course Is Set
In late 1998, when many commercial firms were applying to establish captive de novo federal savings bank affiliates, we at Schiff Hardin & Waite had an idea. What if a major university were to establish a captive bank and offer banking services to its alumni? DePaul is a regular client of our firm, so we bounced the idea off Ken McHugh, its senior business development officer. He thought it had potential. DePaul wanted the Internet to be a dominant distribution channel for the banking services. Ken took our idea and improved upon it, understanding how the concept fit into DePaul’s operations and strategic plan.
DePaul Does Its Homework
Launching a first-class financial services function is not simply academic. It requires comprehensive study and preparation. DePaul did an extensive market analysis over a two year period, including surveys and focus groups. It hired experienced consultants and technology experts all of whom concluded that offering Internet banking services to alumni had strong profit potential.
A Bump in the Road Leads to a Path to Success
While the project was underway, the Gramm-Leach-Bliley Act became law, and it foreclosed the option of creating a captive bank for DePaul. Moreover, the federal regulators became increasingly concerned about the profit potential for Internet-only banks. So, they were making it difficult, if not impossible, to obtain an Internet-only banking charter.
DePaul believed it had a viable business plan, but obviously knew the structure of the venture had to be radically changed to overcome the legislative and regulatory obstacles. We recommended that DePaul execute its Internet banking strategy relying on a fresh new concept: creating a trade name bank. We advised that DePaul could bank on the fact that federal regulators recently had approved a similar plan by the Canadian Imperial Bank of Commerce and had issued several regulatory pronouncements suggesting that trade name banks, if properly structured, would not create regulatory objection.
DePaul Earns Its Degree in Internet Banking
Creating the trade name bank required that DePaul become schooled in finding an existing bank that had strong Internet banking capabilities. Its research lead it to Sutton Bank, a brick-and-clicks commercial bank based in Ohio.
As a result, DePaul entered into a contract with Sutton Bank, an Ohio-based financial services institution. Sutton Bank provides Internet banking services under the DePaulBank.com moniker. DePaul has responsibility for marketing the Bank to its alumni through periodic mailings and other normal marketing distribution channels available to DePaul. DePaul’s home page includes an icon that markets alumni banking services and the icon links to the DePaulBank.com home page.
Alumni Niche Marketing Pays Internet Dividends for Both DePaul and Sutton Bank
As the largest Catholic university in the United States, DePaul has a large alumni base. The University also has a strong brand identity. Alumni are loyal to DePaul, and, indeed, they have an affinity to their alma mater. That affinity is the central marketing theme for the Internet bank. DePaul built the Bank and has developed a marketing program to leverage its alumni relationships. Here is how it works. A visitor to the DePaulBank.com web page is offered "DePaul branded" financial products and services. The page discloses that Sutton Bank is the underlying product and service provider. DePaul earns a referral fee for the alumni traffic it drives through the Bank web site, a feature that appeals to alumni in that their banking activities financially benefit their alma mater. Sutton Bank builds its balance sheet in the process.
For a financial institution like Sutton Bank, offering Internet banking services through an affinity relationship like the one it has with DePaul is a more targeted and cost effective marketing approach. Rather than building its Internet banking business one customer at a time, which some Internet banks have reported can cost between $60 and $200 per account, a bank can reduce its marketing expense and hence its account acquisition cost by relying on the brand identity of its partner.
A Successful Lesson in Internet Net Worth for Colleges and Community Banks
The DePaul University/Sutton Bank strategic relationship can be viewed as the textbook case in "win/win" on the worldwide web. Colleges can follow this example to add income while providing a useful service to alumni and further building loyalty and involvement with graduates. Community banks and thrifts who might be struggling to justify the cost of operating a web page because they believe they must offer on-line services to keep customers, could turn the Internet into a new profit center rather than an obligatory drain on resources.
For instance, by utilizing their web architecture and adding this new Internet-based marketing strategy, community banks can create a trade name for a large commercial entity, such as a local college, commercial lending client, local insurance company, etc., it can spread the cost of its cyber-presence over a larger universe of potential customers. Moreover, it allows community banks to generate new customers through a targeted affinity relationship, and not one-by-one, which has been the downfall of other Internet banks. It also avoids a common problem that can occur when the customers of a traditional brick-and-mortar bank shift their business to a new "clicks" channel. Instead of adding new clients, banks in this situation are merely shifting clients from being served by a different unit of the same institution, but have not added clients nor increased the bottom line.
Meanwhile, by utilizing this new Internet-based marketing strategy, colleges, similarly, can earn additional credits by depositing additional services to their Internet banking sites. DePaul has created a "virtual mall" as a companion to its bank, which directs clients and browsers to the web sites of other service providers and merchants. In return, DePaul receives a commission for the visitors it directs to them.
Tips for Getting an "A" Instead of an "F" in E-Commerce/Internet Banking
There is a whole lot more than just a whole lot of banking law and good marketing to setting up a successful Internet bank. Doing it right involves the complete range of intellectual property rights. These include trademarks, trade dress, patents, copyrights, and trade secrets, as well as a particular knowledge of Internet, computer, and high technology contracting, licensing, and web-related financing and commercial transactions. Fortunately, our Financial Institutions Group is able to draw upon the talents and experience of Schiff Hardin & Waite’s Intellectual Property Group, which is the largest among large, Chicago-based law firms, and has particular expertise in the Internet and e-commerce, to assist in this project.
Article used by permission.
By: Christopher J. Zinski
Website: www.schiffhardin.com
