Branchless Banking

Pacific & Western Bank has no retail storefronts, which means less overhead and a higher bottom line than traditional banks

When launching Pacific & Western Bank, David Taylor, president and CEO, utilized his experience writing software programs as a biologist.

David Taylor didn’t follow the typical career path when he decided to launch Pacific & Western Bank of Canada (PWBank), so it stands to reason that PWBank is not your typical bank. In fact, being atypical is the key to its success.

Originally a biologist who wrote software programs for science projects, Taylor conceived a program that would allow banks to utilize the Internet for deposits and lending, eliminating the need for tellers. In the early 1990s, he hired two college graduates to create the program.

In 1993, Taylor launched the bank, a branchless entity that uses the software and the model he created to gather deposits from a nationwide network of deposit brokers and lend those funds to low-risk markets. “We have less overhead,” says Taylor, who was named president and CEO, “so more of our net-interest income drops to the bottom line.”

In 2002, PWBank received Schedule-I status—the same as traditional banks. And in 2006, Taylor launched Versabanq Innovations to sell the software program to the banking world and made both companies wholly owned subsidiaries of Pacific & Western Credit Corp.

Another one of Taylor’s creative ideas was Discovery Air. “This was an endeavour we undertook to help a customer,” he recalls. In 2004, Taylor and his team took the small company, which “was providing aerial forest-fire services to the Ontario government, and decided to make it bigger and stronger,” he says. “But then, once we did, the bank had no interest in it any longer, so we spun it off and listed it on the Toronto Stock Exchange.”

When the financial crisis struck in September 2008, Versabanq was hit hard, and the software was back-burnered. PWBank, because of its unique model, was fairly well guarded from the recession. “Our distribution network, from which we get deposits, includes financial advisors and financial planners across Canada,” Taylor explains. “To complement their suite of products, we provide a GIC-guaranteed banking deposit investment. So when their clients want to park some money for a period of time, they deposit it with us.”

While PWBank wasn’t in quite the desperate situation as large banks, Taylor says, “the situation caused a rapid depletion of the bank’s capital that we were forced to replace with expensive debt, and the spread we were formerly able to earn on loans to public-sector entities evaporated.” The experience exposed weaknesses in PWBank’s model, and the executive team decided it was time to start diversifying the bank’s asset mix.

In its endeavor, PWBank called upon leasing companies and offered to electronically acquire their leases, clearing their balance sheets so they could borrow more and grow their businesses. “We modified our software to allow for the electronic transmission of their leases to us, then scrubbed the leases to ensure they meet our criteria,” Taylor says. “This gave us a new asset class with a high spread and a low risk. The vendors also provide cash collateral to ensure our risk is low.”

In January, PWBank launched a credit card in partnership with Home Hardware, Canada’s largest independent retailer, with approximately 1,100 stores nationwide. To date, “the card has been well received, and the rate at which customers are signing up for the card is ahead of target,” Taylor says.

Its most recent project is a partnership with bankruptcy trustees, who collectively have $2.5 billion in trust deposits at any given time. Pacific & Western Bank is working with two of the largest trustees in Canada to develop software that would allow it to access their funds and use it as a loan source. “That gave us an entirely new source of deposits that were not interest-rate sensitive,” Taylor says. “Our ability to create timely reports saved the trustees some administrative work.”

The liquidity crisis, Taylor admits, taught them some hard lessons and caused them to undertake some unique measures to reduce risk and diversify. But thanks to Taylor’s vision and everyone’s hard work, PWBank has emerged as a much stronger and more diversified bank. “We’re on solid footing,” Taylor says, “and looking forward to what we’re seeing evolve as a very bright future for Pacific & Western Bank.”