How five banks gang-tackled one nagging escrow problem

Like virtually all community banks, Kearny Financial in Fairfield, N.J., faces a technology challenge: limited time and resources to create in-house the solutions it needs. In a recent effort, the bank and several other small banks co-developed software with a fintech to solve one of these problems — in this case, for handling escrow.

The $7.3 billion-asset Kearny Bank and four other community banks worked with ZSuite Technologies in Burlington, Mass., which creates digital tools to help businesses and individuals automate rent and monthly fee collection and manage security deposits, another form of escrow.

“Like many banks, we’ve all tried to have an innovations group and incubator to make things happen, but the reality is we don’t have the time or funds,” said Craig Montanaro, Kearny’s CEO. “The cost of hiring people to do research and development internally is exorbitant.”

The result of the collaboration is ZEscrow, a cloud-based digital system for handling escrow specifically and subaccounts more generally. The system is in beta testing with the five original banks now and will become available to all banks in June.

By working together on a product that all five will benefit from, these banks have shared the development costs, advised on which features they want ZSuite to prioritize, and will be first in the market with the final product that can compete with larger banks that built their own solutions. The agreement also gives the five banks deeply discounted product licensing fees.

Five community banks joined forces with ZSuite Technologies to create a digital escrow solution, ZEscrow, for financial institutions. “[Core systems] are not good at managing that third party relationship between the trustee and the beneficiary,” said Nathan Baumeister, CEO of ZSuite.

In fact, the five banks did not even shoulder the entire development cost themselves — ZSuite invested its own cash to create a product it can sell to other institutions. The other four participants are Bank of New Hampshire in Laconia, Haven Savings Bank in Hoboken, N.J., Leader Bancorp in Arlington, Mass., and Patriot National Bancorp in Stamford, Conn. (In 2019, ZSuite was spun out of Leader.)

Escrow involves one organization holding money in a subaccount that belongs to someone else; municipalities, attorneys, property managers, landlords, title companies and real estate offices are the main users of these tools. Managing these accounts is largely manual, from disbursing the money to creating statements to splitting interest between the entity holding the funds and the beneficiary. On top of that, the requirements for reporting these accounts, calculating interest, sending out statements and issuing notifications account openings and closings will vary between states and industries.

Banks that manage escrow and other subaccounts face a number of complications when holding these funds for their clients. Kearny, for example, has struggled with manually performing complex interest calculations and splitting requirements for subaccounts in its growing municipal banking business.

ZEscrow will offer digital access with custom permissions to multiple users, allow account opening, funding and paperwork tracking to happen electronically, and let users define interest disbursements and calculations with settings in the software.

“Core systems within banking are really good at handling access and management and compliance when one entity is holding the money and it’s that entity’s money,” said Nathan Baumeister, CEO of ZSuite. “They are not good at managing that third party relationship between the trustee and the beneficiary.”

The group of community banks came together in August 2020 and began development in September. The six parties have not met in person because of the pandemic. Instead, they meet virtually for an hour once a month as a group, and then ZSuite checks in with each bank, and perhaps clients that will use the system, separately.

“These one-on-one sessions were extremely helpful because we were able to dig deep into individual use cases and say, ‘We’re thinking about solving this problem this way’ and they would look at us and be like, ‘you can’t do that because you didn’t think of this or this,’ ” Baumeister said.

He finds that too many fintechs don’t know enough about banking to solve financial institutions’ problems.

For example, “we had no clue about the intricacies of how and what municipalities have to do with escrow and sub-accounting in New Jersey,” he said. “It’s nuts.”

For his part, Kearny’s Montanaro said that working closely with a fintech has had ancillary benefits outside of the soon-to-be-finished product, such as inspiring his own team to be more innovative. The bank has also benefited from getting advice about separate projects, including one involving application programming interfaces.

“There is so much you draw out of being involved in a partnership with a fintech that goes beyond the product,” said Montanaro. “You start to think differently. That’s very positive for most community banks, because they’re not exposed to that on a regular basis.”

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