Even a bank needs a bank of its own. And if you use a community-based financial institution, the chances are good that its bank is the aptly-named Bankers’ Bank Northeast, which provides support services to dozens of banks throughout New England and New York.
BBN is an FDIC-insured correspondent bank — an institution that provides services such as international wire transactions, merchant card processing, and check clearing to small banks, thus providing economies of scale that make it possible to offer those services to their customers at an affordable cost. Large organizations such as Bank of America have long offered correspondent services, but in recent years, new institutions have been chartered specifically to serve other banks.
BBN is one example. It has no branches, no tellers, no checking accounts, no ATMs — no consumer services at all.
“We’re strictly a bank for other banks,” said Pete Sposito, president and CEO of the Glastonbury-based institution. “Services like check clearing are expensive for small banks, but it’s less expensive with more volume. Our clients look to us to aggregate volumes from a lot of banks to achieve economies.”
The concept isn’t new. For many years, large city banks routinely cleared checks for small rural banks for a fee. The larger institutions became known as correspondent banks because they received explanatory letters along with bundles of checks from their small-bank clients. The practice simplified and expedited the check clearing process and enabled community banks to handle more volume than they could have managed on their own.
Over time, the relationship changed as large banks went national and began opening branches in smaller communities. “This put them in a position to compete directly with the community banks because they knew who their customers were, so the small banks didn’t trust them anymore,” Sposito said.
In the mid-1980s, small institutions began banding together to form their own correspondent banks to provide those services at a lower rate than the large banks were charging, and without the fear of competition.
BBN was formed in 1998 with $5.8 million in investments from 35 founding banks. Today there are 55 shareholder banks, but not all of BBN’s clients are shareholders. “If a bank uses our services for a while, of course we encourage them to become investors, but they don’t have to do that,” Sposito said.
Check clearing — the process of collecting the funds from the institution that issued a check — is BBN’s most popular service, partly because it enables all its client banks to exchange checks with each other without the extra, more expensive step of going through the Federal Reserve.
“We get our funds quicker, and we know quicker if there are insufficient funds to cover the check,” said Patricia A. Magao, senior vice president of operations for Chelsea Groton Bank, one of BBN’s founding institutions.
Chelsea Groton uses BBN for about a dozen services including processing wire transfers and lockbox services. “We could do all of those things on our own, but it would be very expensive and we would definitely have to charge our customers more,” Magao said.
Another popular correspondent service is coin and currency, the process of moving cash into and out of individual bank branches. It’s an expensive undertaking involving armored trucks, security guards and complicated logistics, so BBN helps by setting up routes for the trucks to travel among its client banks. “When branches in Newington, Enfield and Simsbury, for example, share a route, it keeps the costs down for everyone,” Sposito said.
Anyone whose child has taken part in a foreign exchange program knows the importance of being able to wire money overseas, but smaller banks might not have direct relationships with foreign banks to facilitate such transactions. Rather than forgoing the service altogether, Simsbury Bank & Trust Co. is among those that use BBN for that service, enabling them to pass the cost savings on to the end user.
“Surprisingly for a small community bank, we have quite a few customers who need to wire money to the United Kingdom, Spain, Italy and Canada, for example,” said Barbara Wallace, vice president and operations officer. “This way, we can provide the service at a rate our customers can still afford.”
As relationship manager for Connecticut and southern New York, Geoffrey Gibbons is charged with finding more ways for BBN to serve its clients. “Sometimes our banks come to us with requests for new services, but more often we look at what they’re already doing and notice areas where we can create efficiencies for them,” he said.
Future areas for expansion might include new municipal services for government entities and wholesale broker services, providing an alternative to investment bankers or Wall Street, said Susan Salecky, BBN senior vice president for service and sales. “We look for any way to reduce our clients’ costs and generate revenue,” she said.
As huge financial institutions continue to gobble up smaller ones, enabling small banks to provide a full menu of services helps level the playing field. “If customers can’t get everything they need at a community bank, they’ll eventually leave and go to a larger one,” Sposito said. “Community banks prefer to do business with us because they trust us. We don’t compete with them for customers the way the big banks do.”
The picture isn’t entirely rosy though. When the financial crisis hit, correspondent banks began to suffer along with their clients. Consequently, in 2009 BBN saw its lowest net income since the company became profitable in 2000, primarily because of losses on loans in which BBN participated with its client banks.
Still, BBN added six new clients during 2010, so Sposito remains optimistic. “Our future is totally dependent on the future of our clients. When they do poorly, we do poorly, and when the local economy does well, the banks do well too.”
FACTBOX
Bankers’ Bank Northeast
Headquarters: 300 Winding Brook Drive, Glastonbury
Established: Sept. 8, 1998
Number of employees: 31
Number of investor banks: 55
Number of client banks: 195
Regulated by: The Federal Reserve and the Connecticut Department of Banking
