Banking on the Internet

by Mike Taylor, MBA '13 Bulls vs. Bears at the Stock Market

Banking-business woes are as high as they've ever been. Bonuses at large Wall Street firms are plummeting as Occupy Wall Street protestors give voice to a profound public mistrust of financial institutions. Meanwhile, implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act contributes additional regulatory uncertainty. Amid all the turmoil, the Bank of Internet (BOFI) is thriving.

Helmed by CEO Greg Garrabrants, BOFI is on an expansionist tear. The Internet banking firm has not reported a quarterly loss since November 2008. It currently employs more than 200 people, up from 90 in June 2010; and carries a base of 36,000 customers, deposits of $1.6 billion and total assets exceeding $2.2 billion.

The bank is currently headquartered in an unassuming office just east of Del Mar, California, right next door to its only physical branch (a move to La Jolla, California, is planned for sometime in 2012). The décor is Spartan — just a few potted plants at the entrance, and an absence of paintings or posters on its walls. The unassuming look gives credence to the bank's main proposition: it costs a lot less to run a bank without having to maintain thousands of retail branches, as institutions such as Wells Fargo or Bank of America do; and BOFI can pass those savings on to its high-credit customers in the form of low interest rates and fees.

Curiously, this austerity idea was born during the Internet boom of the late 1990s, when now-defunct companies such as and Webvan were scrambling to deliver just about any service over the Internet, at seemingly any cost. BOFI founders Jerry Englert and Gary Evans saw an opportunity to deliver products similar to those found at the major banks, but without the overhead. A charter was issued in July 2000, and in March 2005 the company went public. Since then, shares have delivered a 45 percent return, handily besting banking big boys JPMorgan Chase (up 5 percent), Wells Fargo (up around 1 percent), and Bank of America (down 82 percent).

Like other branchless banks, Bank of Internet does not believe that retail branches are an advantage. In fact, they're a source of unnecessary costs. According to Garrabrants, it costs somewhere between $150 and $200 a year to maintain a checking account. And as he explained, "People don't want to pay." Because BOFI skirts this fee by skipping the brick-and-mortar branches altogether, the company possesses a "fundamental inherent structural advantage" that can lead to more attractive rates for consumers, technological innovation or simply higher profits.

When the housing market was at its peak in 2007, Bank of Internet avoided the California housing market. The subsequent collapse of other Southern California banks became an advantage to BOFI. When Thornburg Mortgage went under in the crisis, for example, BOFI was able to bring aboard the entire team of salespeople and underwriters. When other banks such as Imperial Capital, Bank of La Jolla and First Federal were imploding, Bank of Internet was there to pick up the talent. Both BOFI's chief marketing officer and chief risk officers were plucked from the wreckage of Imperial Capital, which collapsed in 2009. All that opportunistic hiring means that "the bank's staff is really much more experienced than you might find at a bank that didn't have the opportunities that [we had]," said Garrabrants.

Historically, Bank of Internet has dedicated itself to two major propositions. First, if a bank foregoes the additional costs associated with a large brick-and-mortar retail presence, it can offer significant value to its clients. Second, conservative lending is the safest way to conduct business.

"We've always had strong credit standards at the bank, and those credit standards have carried through the entire culture of the institution," Garrabrants said. He added, "We're also careful about the market we're in." The company pulled away from the Southern California housing market just as mortgage troubles became apparent. High credit standards, coupled with a common-sense approach to lending, have allowed Bank of Internet to sidestep the worst of the housing downturn and lend to qualified borrowers whose options were slim in the low-liquidity times of the credit crisis.

But a fussy attitude toward borrowers — lending exclusively to extremely creditworthy customers — hasn't quenched Bank of Internet's motivation to innovate in other areas. Garrabrants prided himself on the company's banking platform, touting email- and phone-based money transfers, unlimited ATM reimbursements and data-driven customized rewards (such as coupons that automatically transfer to the user's credit card and ring up at the point of sale).

All those bells and whistles, of course, can and probably will eventually be replicated by competitors. In the meantime, however, Bank of Internet offers some attractive propositions. Checking accounts with the bank can yield up to 1.25 percent interest annually, a market-leading rate. Although Dodd-Frank has just about every other banker concerned about implementation of new rules and higher costs associated with following them, in one respect BOFI is turning the new law to its advantage. Regulation Q allows banks to award interest to business checking account customers, and now BOFI is rolling out a business banking group to serve both San Diego and the national market.

Going forward, the company is concerned with maintaining its high standards as it manages a serious expansion. "I spend a lot of time worrying about the culture, worrying about making sure that we're maintaining the proper environment for people to be able to achieve, be able to work hard, those sort of things," said Garrabrants. That, coupled with Dodd Frank - related uncertainty and global sovereign finance concerns that continue to hang over the financial services industry, serves as a reason for caution as BOFI continues to expand.

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Summer 2012

Table of Contents

Editorial & Production Staff

Joseph Dodson ('12), Co-Editor-in-Chief

Berna Kamyar ('12), Co-Editor-in-Chief

Mike Taylor ('13), Editor

William Seith ('13), Associate Editor

Drew Beal ('13), Associate Editor

Patrick Kelly('13), Business Manager

Barbra Blake, Editorial Director

Melinda Battenberg, Managing Editor

Maria G. Tasigiannis, Creative Director

Faculty Review Board

Robert S. Sullivan, Founding Dean,
Stanley and Pauline Foster Endowed Chair

Terrence W. August, Assistant Professor

Vish Krishnan, Professor,
Sheryl and Harvey White Endowed Chair

Rossen Valkanov, Professor of Finance