How Eastern Bank Launched a Lending Startup

By Scott Kirsner |  September 20, 2017

Plenty of big companies working on new business ideas talk about the potential for spinning them out. What better way to give a fledgling concept the freedom and flexibility to develop into something substantial?

But few actually follow through and do it.

Dan O’Malley, CEO of Numerated Growth Technologies. Formerly head of Eastern Labs and Chief Digital Officer of Eastern Bank.

So when Eastern Bank announced in May that it would spin out a company called Numerated Growth Technologies, we got in touch with Dan O’Malley to hear about how it happened. O’Malley, an entrepreneur and former Capital One executive, had joined Eastern Bank in 2014 to create an innovation group, Eastern Labs. He also took on the mantle of Chief Digital Officer at Boston-based Eastern, the largest and oldest mutual bank in the country, with about $10 billion in assets. (We’d previously written about O’Malley and Eastern Labs in 2015.)

Numerated launched with $9 million in funding from a group of investors including venture capital firms, the bank technology provider FIS, and Eastern Bank. O’Malley explains how it happened.

Early Days

We created Eastern Labs with the idea of creating a company and spinning it out. It was probably never a sure thing, but we’d talked about it explicitly from Day One. That’s what allowed me to bring in a team of entrepreneurs to build [new offerings].

When we were closing up shop at [my fintech startup] PerkStreet Financial, there was [press] coverage of that, and [Eastern Bank president] Bob Rivers had put out some questions to his network — does anybody know these PerkStreet folks? We got connected, but to be totally honest, I was pretty skeptical that we were going to end up doing anything. My thought was, “They’re a mutual bank. Is this for real?”

We started talking, and I laid out my idea. Let’s bring a team of people in, get access to the [bank’s] data, and access to teams inside the bank to run some tests. Eventually, we [may] want to start a company. Bob said, “We have already decided to invest money in trying to transform the bank.” We spent six months talking to see if we were aligned.

Focusing on Revenue Growth, Not Cost Savings

We decided to have small businesses as our focus, but our first test was not in small business lending. We said, “Let’s have the key problem we’re trying to solve [for the bank] be revenue growth, because it’s hard to sell cost savings internally. Growth is really the existential challenge for the banking industry, as people move online and away from the branch.

We did an insurance test as the first test, which did not work. We found [small business] customers who were buying insurance, and it turned out that 95 percent of the customers that were buying insurance weren’t buying it from Eastern. So we set up [Eastern’s] insurance reps with cross-sell opportunities. “Would you sit down and talk with us about buying insurance from Eastern?”

We didn’t actually wind up selling anything, but we had a 93 percent connect rate, and more than 30 percent of the customers we talked to would take a meeting. The response was usually, “I had no idea you guys sold insurance.” But they were all buying insurance from somebody else.

Then, we did a series of lending tests that delivered really large response rates. We knew we were on the right track when six percent of a few hundred businesses we reached out to applied for a loan. I’m an ex-Capital One guy, and that was the single largest response rate I’d seen. That was outreach to existing Eastern Bank customers by e-mail, followed up with a phone call.

Like any good entrepreneurs, we were trying to figure out what secular shifts to ride. What we ended up latching on to was, it feels like customers want to buy without coming into a branch. That’s going to be true of every bank. You just don’t find customers who are like, “Mobile banking – I hate that!” It’s slowly taking over everything.

So we incrementally built out the [real-time lending platform.] We learned that what we originally had built probably wasn’t enough; customers don’t magically find your loan application online and apply. So we needed to build some marketing automation technology to drive people to the application. Our first lending test was in November 2014, then another test in December, and then a pilot in the spring of 2015. Then we rolled out the offering at the end of 2015.

We’re working with four banks now. We’re not spending a ton of time talking with the larger banks; we’re focusing on those that are from $2 billion to $50 billion in assets. We’ll work with larger banks over time, and we will work with smaller banks, too.

The value proposition [for us within Eastern was] growth; that’s the problem we set out to solve. When people don’t walk into the branches anymore, and you require people to walk into the bank for every single transaction, well, you need to find a way for people to buy [things] without coming into the branch – something that could be executed over the phone or online.

What We Avoided, and What was Difficult

We did consciously decide to not do [let Eastern Labs become a consulting resource consult to the business units and functions of the bank.] I could see many times along the way where we could’ve created a lot of value, if that had been our model. But if we had decided to change what our strategy was, we would’ve ended up losing the thread and not having been successful at anything. We wanted to create something new that was marketable and valuable outside the bank.

When I took on the Chief Digital Officer title, though, we basically decided that my time could be split between the new platform we ended up building, and other initiatives at the bank where a CDO would be expected to play. We firewalled the resources of the new people we brought in to work with me on the new stuff [that became Numerated,] but I did participate in other projects, like overhauling mobile online banking, and relaunches of other products within the bank, and [deploying] some new technology for the call center to do voice authentication. Those reponsibilities took up between 25 percent and 75 percent of my time.

It’s very easy to tell the story of how we magically spun out a company, but the reality was, it was hard to maintain conviction that this was the right path forward. And it was hard for a few reasons.

Bob Rivers, Chairman and CEO of Eastern Bank.

We built up a lot of very successful, sought-after resources in Eastern Labs that could’ve been used for a variety of projects in the bank. It was a hard thing as an institution to let people go, when they’ve shown the ability to have an impact in the organization. But we’d told people as we staffed up the team that we’d be creating a company [eventually].

Second, the existing business could always use those extra resources we had. All the other projects I worked on would’ve loved to have the lab’s resources as well. It was extremely hard to firewall the resources and maintain that firewall.

It was extremely difficult, but one of the reasons this worked is the fact that Eastern is a pretty unique company. It’s a mutual bank. It’s big enough to have some scale behind it, but it doesn’t have quarterly shareholder pressure to deliver a return over the next 90 days. This is a longer-term investment with a longer-term payout. And the fact that Bob [Rivers, who brought me in,] had been at the bank for 10 years, and they knew he was going to be the next CEO was really great.

The Spin-out process

We eventually scaled up to 20 people, and the fact that we had talked somewhat publicly that we’d consider spinning out a company was key to attracting that talent. My background, and the background of the other three co-founders of Eastern Labs, was that we’re all entrepreneurs. That provided the credibility. Of course, nothing is assured, but that attracted folks who are entrepreneurial, who love to build, and who were willing to work hard, and put in long hours.

In 2016, we had nearly 100 banks reach out to find out more. We had no salespeople, and we were not doing marketing; it was just me going to conferences to talk about it. …It felt like [the market was] a little broader than what we initially had thought. We said, “There probably is a chance to create a company here that would be attractive to venture investors.”

Numerated employees Justin Sousa (on the screen of the telepresence robot) and Ben Petrin.

 So we decided to say “yes” to a few of the banks that wanted to license the platform, in Q4 of 2016, and on the heels of that, we started to talk with venture investors about doing a [funding] round. In addition to venture investors, we also talked to FIS, which is the largest bank tech company in the world. [FIS became an investor in Numerated.]

It took us until April to get [the funding round] done, and we didn’t announce it until May. We’re now an independent company with an independent board, though we moved into bank-owned space, and we’re subletting from Eastern. Eastern Bank is a large shareholder, but they don’t own a majority, and they don’t sit on the board. It is a separate entity. We’re on our way.

The real opportunity for us is doing [real-time lending] for consumers as well, for home equity loans, and expanding to be able to automate and drive real-time sales for every product in a bank.

Eastern Labs 2.0

Eastern Labs continues to exist. But the people who had been at Eastern Labs – myself and a team of 20 – and the technology we developed for real-time lending, all of that was completely spun out of the bank. Probably sometime soon they will start to use the Eastern Labs vehicle again. It may be different next time – it may not be four entrepreneurs running it. It may have other priorities. My bet is that Eastern Labs 2.0 is going to be more inward-focused, maybe running design challenges focused on particular problems, and not necessarily spinning something out. But I think that can be just as valuable to the bank.