You Bankin' With Me?
When Medallion Financial lost its main lender, it opened a bank of its own.
By David Dent

(Business 2.0) – The end of 2001 was a bleak time for Andrew Murstein. As if dealing with the psychological aftermath of 9/11 weren't enough, the president of New York City-based Medallion Financial was also faced with a personal crisis--one that began with a surprise phone call that threatened to destroy his multimillion-dollar family business.

For 30 years Medallion had executed a business model pioneered by Murstein's grandfather, company founder Leon Murstein: Borrow money from banks, then lend it to taxi drivers to buy medallions--cab permits that can cost as much as a house. By 2001, Medallion was a publicly traded company with interest income of $41 million and cumulative loans of more than $1 billion to cabbies in 11 U.S. cities. Then came 9/11, followed by the ominous call from Fleet National Bank, Medallion's primary lender. In the wake of the terrorist attacks, Fleet had decided that New York taxis were simply too risky, and it asked Medallion to pay down a $300 million line of credit. "I was in so much shock that I didn't try to change their minds," Murstein recalls.

Medallion paid back the money over the following year, but the experience got Murstein thinking about how to make his company less vulnerable to the whims of its lenders. Then he read about a California real estate company that had started its own bank, taking money collected in savings accounts and investing it in building projects. The idea that Medallion could likewise finance its loans to cabbies by opening a bank seemed outlandish at first, but the more Murstein looked into it, the more sense it made. After all, why pay 6 percent for a commercial loan when you could pay 2 percent on someone's savings?

When firms need capital, they sell equity or take on debt. Both can be expensive, however. Stock sales dilute current shareholders' ownership, and debt--commercial paper or bank loans--can mean high interest payments. Only banks enjoy access to the deposits of individuals, who earn less interest in part because their money is insured by the Federal Deposit Insurance Corp. But the 1956 Bank Holding Company Act prohibited nonbank firms--unregulated by the Federal Reserve--from taking deposits, ostensibly because such businesses might more readily default and spark a financial crisis.

In recent years, though, firms in industries ranging from manufacturing to retailing have begun taking deposits by launching industrial banks--savings institutions operated by nonbank companies. Legal in only seven states but able to offer FDIC-insured accounts nationwide, industrial banks saw their total assets balloon from $11.4 billion in 1995 to $141.1 billion in 2004. BMW, for instance, offers checking and savings accounts to new-car customers through its industrial bank, as do Volkswagen and Toyota. To be sure, the chance to put one's logo on consumer checks is a big branding opportunity, but it's also a financing strategy. "Deposits are a cheap source of money right now," says Thomas Billings, an attorney who has ushered American Express, General Motors, Merrill Lynch, and others through the process of starting industrial banks. "These companies can use that cheap money to fund car loans and other lending, just like a regular bank."

Medallion's Murstein estimates that it cost his company $750,000 to start a bank. First he hired a consultant in Utah, home to 29 industrial banks, more than any other state. (Utah and industrial banks go way back: Senator Jake Garn sponsored the 1982 legislation that extended FDIC insurance to industrial bank deposits.) Then Medallion had to assure the Utah Department of Financial Institutions that its taxi business was viable. Even FDIC officials got to weigh in on whether loans to cabbies were dangerously volatile. "The biggest obstacle was convincing Washington," Murstein says. A track record of less than 1 percent of Medallion loans ending in default helped make his case.

Medallion received its bank charter--technically, permission to run a Utah industrial loan corporation--in December 2003. The company doesn't offer retail banking; like many industrial banks, it sells certificates of deposits through brokers. For instance, you can now buy a six-month Medallion CD with an interest rate of about 2 percent. Medallion sold its first round of CDs in January 2004, raising $70 million, and now holds more than $200 million in deposits. (To cover early withdrawals, Medallion maintains cash reserves equal to 15 percent of deposits.)

Thanks to cheaper money, Medallion's gross profit increased 10-fold in 2004 to an estimated $21 million. Loans to its customers increased 54 percent to $700 million, and Murstein no longer worries about losing funding. "In order to have a good bank," he says, "we had to become one." -- DAVID DENT