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Small Bank in Kansas Is a Financial Testing Ground

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The redbrick bank in Weir, Kan., in a building cater-corner from the mortuary on Main Street, does not look much like a candidate for the bank of the future.

Inside, an Emerson boombox with a fully extended silver antenna is tuned to KJMK, Classic Hits. The huge steel vault, from the Mosler Safe Company, was used to lock up former owners of the bank overnight during an armed heist in 1959. And the storage room in the back contains an old, unlabeled bottle of brown moonshine.

Beneath these holdovers, though, the Citizens Bank of Weir — or CBW, as it was renamed — has been taken apart and rebuilt, from its fiber optic cables up, so it can offer services not available at even the nation’s largest banks.

The creation of the new bank, and the maintenance of the old one, are the work of a couple who were born in India and ended up in Kansas after living in Silicon Valley and passing through jobs at Google and Lehman Brothers.

Suresh Ramamurthi, 46, and his wife, Suchitra Padmanabhan, 44, bought CBW largely with their savings in 2009, just after the financial crisis.

Suresh Ramamurthi and his wife bought Citizens Bank of Weir, right, in a small Kansas town, with a goal of clearing industry logjams.Credit Steve Hebert for The New York Times

They were happy to continue the business of making loans and holding the deposits of residents of Weir, a town of 686 people (though that count was taken before a few residents ended up in the mortuary across from the bank). But their real goal was to find solutions to logjams that continue to vex consumers all over the country, such as the obstacles that slow money moving from one bank to another and across international borders.

Their work is an unusual experiment: a new kind of mom-and-pop business trying to reshape a highly regulated and innovation-resistant industry. The new services that CBW is providing, like instant payments to any bank in the United States, direct remittance transfers abroad and specialized debit cards, might seem as if they should be painless upgrades in an age of high-frequency trading and interplanetary space missions. But with most banks, it still takes longer to send money to another country or even to another state than it does to travel the same distance.

The slowness of current methods of moving money is a widely acknowledged problem in the financial industry. The Federal Reserve has been holding meetings for its initiative, called Faster Payments, which has the goal of devising safe and speedy payment methods.

But hastening the movement of money creates risk for banks, because it generally means less time to catch fraudulent transactions. Having paid fines and penalties for the outsize risks they took before the financial crisis, banks are loath to take on new risks. They have been occupied with “getting their house in order,” rather than introducing products, according to Steve Kenneally, the payment systems specialist at the American Bankers Association.

CBW, on the other hand, is starting from the ground up, with one tiny bank, so it has less to lose. The experiment is a long way from changing the world, and it could easily flop, but it is already winning praise.

“I can’t think of another chartered financial institution that has a similar profile,” said Elizabeth McQuerry, a former payments specialist at the Federal Reserve Bank of Atlanta, who is now a consultant at Glenbrook Partners, which is based in Menlo Park, Calif. “They are an innovative institution for a bank of any size.”

Suchitra Padmanabhan is at the Lawrence, Kan., office of Yantra, a company her husband founded in 2012 to build software that could be introduced through the bank.Credit Steve Hebert for The New York Times
Citizens Bank of Weir was renamed CBW and turned it into a laboratory for banking innovation.Credit Steve Hebert for The New York Times

At the largest annual conference for global banks, in September, Ms. McQuerry said “the biggest idea” she saw at the entire event was new CBW software that can judge the risk involved in any transaction in real time.

CBW is already providing its new services to businesses far from Weir — including several start-ups in Silicon Valley — and is positioning itself to provide accounts to ordinary consumers who live outside Kansas.

In the coming weeks, it is expecting to roll out what it refers to as a bank account of the future, which will make it possible to send wire payments and create customized debit cards online. As with many upstarts, though, CBW could have its broadest impact from larger banks eventually imitating it.

Mr. Ramamurthi and Ms. Padmanabhan live in Topeka, the state capital, but they make frequent trips to Weir, almost three hours away in Kansas’ southeastern corner, to check on their only physical branch. They stand out with their Silicon Valley ways — Mr. Ramamurthi wears a Fitbit bracelet — and rapid conversational patter. But they view Weir as a crucial part of the business. It was running the Weir bank that taught them how to cash checks, make loans and, yes, deal with bank robberies.

“These are things I never would have learned sitting in Silicon Valley,” Mr. Ramamurthi said.

How to Buy a Bank

A federally regulated bank is not an impulse buy. For Mr. Ramamurthi, the idea ripened when he was working for Google in its Mountain View, Calif., headquarters in 2004 and 2005. Assigned to work on Google Checkout, the company’s financial software, he saw how even a tech colossus like Google was leashed, unable to try new things because it was not a bank, and did not have direct access to the basic networks for transferring money.

It is a rare passion, but Mr. Ramamurthi is the sort who gets exercised about bottlenecks in the financial system. One of his beefs is with the Automated Clearing House, or A.C.H. system. The A.C.H. was designed to replace checks and to bring money transfer into the electronic age, and it does facilitate direct deposits and online bill payments — both widely used conveniences. But the technology was created in the 1970s and has not changed significantly since. The clunky system, which takes at least a day to deliver money, has become so deeply embedded in the banking industry that it has been hard to replace.

Ms. Padmanabhan became accustomed to her husband’s frequent rants about settlement and clearing — a passion that grows out of a broader curiosity about the way money works. During a long drive through the flat expanses of eastern Kansas, Mr. Ramamurthi talked about growing up in southern India. Before long, he was extemporizing on monetary policy, trade restrictions and resource allocation.

“There is inequity across time in resources among human beings,” he said, recalling the ebbs and flows of wealth in Bangalore, India, his hometown. “You may be poor today, but when the harvest comes you will be richer for a few months.”

“When you are managing inequity across time,” he said, “a bank — which is a store of value of many people — has the ability to alleviate and smooth those inequities.”

The original bank charter dates to 1892.Credit Steve Hebert for The New York Times

He finally got around to pursuing a bank when he left Google in 2005 and moved to Topeka. His wife and their two sons had moved to the city in 2002, when she got a job at Security Benefit, a money management firm; Mr. Ramamurthi then started commuting between California and Kansas.

Once in Topeka, he worked on a few projects — advising the state pension board, for instance — but he mostly worked on convincing his wife of the wisdom of buying a bank.

She was the ideal partner for the project. Her early career was spent at Lehman Brothers and Bankers Trust, in New York and Hong Kong, analyzing bonds and other loanlike securities. She was also the practical balance to his dreamy instincts. Or, as she puts it: “I’m the mom, who’s like ‘You know what? I don’t want any of the messy stuff on the carpet.’ ”

Once she was on board, the couple began working with a bank turnaround specialist, who scouted out potential banks for sale. After a few miscues, the consultant found the Weir bank, which was owned by a local family and had hit hard times.

Getting a bank charter, even one from a troubled bank, isn’t easy. Start-ups and enormous companies, like Walmart, have been turned down by regulators, who are responsible for protecting insured banks from the risks involved in nonbank business activities. Last year, for instance, 10 bank charter transfers were approved, out of 17 applications.

The couple had to apply to the Federal Reserve and the Federal Deposit Insurance Corporation, as well as Kansas bank regulators, to buy the bank in Weir.

The process began with a seven-page application; regulators responded with 26 pages of questions. In their application, the couple said they wanted to keep the bank in Weir alive, while working on new payment systems, which they described in detail. After 10 months, including many sleepless nights spent gathering thousands of pages of evidence, the couple received regulators’ approval.

They bought the bank at a difficult time for Weir. A coal and lead smelting center for the area early in the last century, it had once supported multiple newspapers and an opera house. But the town had a decades-long decline, and, in 2008, the brick plant and the last grocery store closed, leaving only the funeral home and the bank on the desolate main street.

“We were afraid we might lose our bank,” said Saundra Stricklin, the mayor of the town for the last seven years. “But we trust God and do a lot of praying, and it’s worked out well.”

Cookies and Check Scanners

In their first year owning what was then the Citizens Bank of Weir, Mr. Ramamurthi and Ms. Padmanabhan spent a lot of time at the Economy Inn and Suites on the outskirts of Pittsburg, Kan., the nearest sizable town — Weir being too tiny to sustain a hotel.

From the start, Ms. Padmanabhan was responsible for the bank’s basic business, which at that point included about $7.5 million in deposits and $3.5 million in loans, most of them for mortgages on houses and farms.

The couple had no big ambitions to change this business. They maintained the outward look and feel of the place — including the bank calendars with a “Domestic Animal Gestation and Mating Table” on the back, and the beat-up green stools behind the teller desks. But they did want to understand and improve it.

Mr. Ramamurthi, always the public face for the couple, took up a place behind one of the three teller desks. He immediately noticed inefficiencies. Checks were scanned and entered into the system only at the end of the day. He brought check scanners to each teller window, while rewiring the phones and computers himself.

Another innovation was free cookies and cider on Friday afternoons.

“It’s kind of a town thing,” the mayor said, “ ‘Did you get your cookie yet?’ you’ll hear people say.”

The couple also invested in new security cameras after a robbery in 2011, when employees were forced, at gunpoint, onto the floor. The robbers, who made off with a few thousand dollars in cash, were caught within hours and later convicted. But the robbery shocked Mr. Ramamurthi and Ms. Padmanabhan, who hadn’t expected it in a town with a name that is jokingly said to be an acronym for “Where Everyone Is Related.”

Battling the Bottlenecks

While business at the Weir bank continued as usual, bigger changes were occurring under the surface, as Mr. Ramamurthi went to work on the digital plumbing of the expanding online bank.

As he and his wife had hoped, buying an established institution allowed them to examine how money transfers and payment technology worked in a traditional bank — something that was hard to see in detail from the outside — and to consider how to make changes.

His first discovery was that nearly all banks rely on a few big, and not terribly agile, outside vendors to provide all the software that makes bank computer systems work. Mr. Ramamurthi found a small technology provider that would be more flexible and allow him to begin tweaking the software.

The most obvious problem to attack was the difficulty of making instant money transfers from one bank account to another. This is already possible in many countries, including Mexico and Britain, but in the United States the primary option that consumers have to transfer money is still the A.C.H. payment. Requests for A.C.H. transfers are collected by banks and submitted in batches, once a day, and the banks receiving the transfers also process the payments once a day, leading to long waits. Wire transfers move faster, with some being settled in hours, but they cost significantly more, and are still not instant.

An old Paymaster check writer is still used occasionally at CBW, but the bank has developed new ways to perform transactions, such as making instant payments to any bank in the nation.Credit Steve Hebert for The New York Times

Last year, big banks helped scuttle a plan that would have expedited the A.C.H. system, in part because it would have jeopardized the fees they earn from wire transfers. Large banks are experimenting with faster transfer systems, like QuickPay from JPMorgan Chase, but these are generally instant only between customers of certain banks.

CBW went to work on the problem by using the debit card networks that power A.T.M. cash dispensers. People use debit cards to make payments or withdraw cash from their accounts, but Mr. Ramamurthi’s team engineered a system so that a business could collect a customer’s debit card number and use it to make an instant payment directly into the customer’s account — or into the account of a customer of almost any other bank in the country. This costs the customer a few dollars, but is still significantly cheaper than a wire transfer, which generally costs $10 to $40.

A few other companies offer a similar service, but they are not banks, and most have less reach than CBW’s program. Some health insurance companies already use CBW’s instant payments to disburse claims payments.

The process of sending money internationally is even more cumbersome. Most American banks use a few so-called correspondent banks to wire money overseas, requiring multiple steps, each one adding fees and eating up time. To avoid this gantlet, Mr. Ramamurthi flew to India and Mexico and struck deals with banks to accept transfers directly from CBW and deliver the money the same day. CBW offers transfers to India through a site it created called that charges $2.50 for the first $1,000 transferred.

CBW was also one of two American banks that signed up with a Silicon Valley start-up called Ripple that is trying to pioneer a cheaper way to move money between any currencies.

The fees from all of this work now dwarfs the money that CBW makes in Weir. In the last quarter, the bank earned $60,000 from its loans, and $720,000 from the rest of its business, up from around $57,000 in the years before the new owners took over.

Executives at big banks grumble that the sorts of innovations that CBW is trying are possible only because regulators don’t watch smaller banks closely, and that regulators would never let larger banks try such untested methods. In the past, a number of banks that have worked with start-ups were slapped by regulators for allowing problematic transactions. So far, at least, CBW has not been on the receiving end of any such regulatory action, according to government records.

Early on, Mr. Ramamurthi said, he realized that he had to dedicate much of his programming muscle to finding new ways to spot questionable transactions. He has hired a dozen engineers, who mostly work out of Topeka. They have developed a back-end system that can almost instantly rate the risk of any transaction by looking at 20 to 40 factors, including a customers’ transaction history and I.P., address where the transaction originated. It was this system that Ms. McQuerry, the former Fed official, praised as the “biggest idea” at the recent bank conference.

Much of the initial work on these projects has been done by a technology company called Yantra, which Mr. Ramamurthi founded in 2012 to build software that could be introduced through CBW. This year, he opened a Yantra office in Lawrence, Kan., the home of the University of Kansas. The office occupies a storefront that had housed a hookah bar.

Yantra and CBW have tried many of their new systems with other tech start-ups. The instant money transfers are used by Omney, a Silicon Valley payments firm, and Moven, which allows customers to sort transactions and spend money with a wave of a smartphone.

But Mr. Ramamurthi and Ms. Padmanabhan are eager to do the biggest work through CBW. Within the bank, one of the most significant projects is creating “contextual” debit and credit cards, which can be set for particular purchases, such as those at specific stores, or at specific times. A parent, for example, could create a debit card for a child that could be used during lunch hours only in the ZIP code near the child’s school.

Like most other banks, CBW offers online banking services, but the town’s mayor prefers to do her banking on Main Street, especially when her niece, who is a teller, is working, or when the cookies are out.

“Hank gets his oatmeal raisin,” the mayor said of her husband. “And I get my chocolate chip.”

Mr. Ramamurthi did get the recently opened Quik Shop on Main Street set up with a new device that lets customers pay with their smartphones. Even with all their big ambitions, Mr. Ramamurthi and Ms. Padmanabhan are continuing to keep a close eye on Weir.

“It’s like a bonsai tree,” he said. “It’s still a full tree. It’s just smaller.”

Read More at the New York Times

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