MonJa's Digital Banking and Lending Monthly Roundup | July 2020

MonJa’s Digital Banking and Lending Monthly Roundup| July 2020

In Commercial Lending, Industry News, Small Business Loan Underwriting, Underwriting Automation by Yulia GnatyukLeave a Comment

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Digital banking and lending is evolving rapidly. Recent fintech-banking partnerships and innovation in technology with the introduction of AI, ML and blockchain herald a new era in lending. Fintech’s are changing the competitive ecosystem,  empowering lenders to process loans faster and smarter.  In a world full of noise, understanding how the technologies and developments may impact your financial institution’s credit decisions and credit portfolio is of critical importance. With MonJa’s Digital Banking and Lending Monthly Roundup, it’s easy to stay up to date on what’s happening in the space. Get the latest updates, analysis and commentary on digital banking and lending segment!


MonJa's Digital Banking and Lending Monthly Roundup | July 2020

The pandemic has been tough on all but it did bring an unlikely advantage with it. The use of digital transfers and wallets has accelerated remarkably. Governments could utilize digital stimulus to help consumers get financial assistance in minimum time. Advocates argue that transferring money directly to citizens would stimulate the real economy and would be far more efficient than helping financial markets. Malaysia and Colombia have already tried this format by transferring money directly to the people. In contrast, millions of families in the US were still relying on paper checks for their funds. What the economy needs right now is an efficient way to provide financial help to people. “If the need for stimulus payments translates into a stimulus for money with an API, then COVID may well unleash the next generation of creativity in money, payments, and banking,” writes David Birch.

The state senate and assembly of New York recently passed two important bills underpinning guidelines for fintechs and nonbanks. The institutions coming under these laws will be required to share metrics on each loan which would include the estimated annualized percentage rate, the total repayment amount including the finance charge and the total cost of capital. The purpose of the introduction of these bills is to let the borrowers have the information needed to compare multiple loan offers. Companies like Kabbage and OnDeck Capital have lauded the move. Sam Taussig, Kabbage’s head of global policy, believes that the bills were intended to let small businesses have a uniform pricing-comparison model.

Goldman Sachs’ digital brand, Marcus, has been seeking inspiration from large consumer-obsessed online companies. Mentioning Amazon for retail and Apple for music, Harit Talwar (partner and global head of Goldman Sachs) expressed interest in innovating for better distribution and consumer experience. He said, “We want to give consumers a bank on a phone with products which are valuable, easy and transparent.” He also referenced the research by Goldman Sachs according to which over 25% of consumers are less keen to visit branches even its declared to be safe. Lately, Marcus has been facing competition due to the substantial growth of digital challenger banks. But Goldman Sachs believes in its essential characteristics such as its lack of legacy technology, in-house prowess, and its balance sheet. Goldman is also utilizing Clarity Money which merged with Marcus after Goldman acquired it.  Goldman also plans to utilize insights and AI for a more personalized experience. Talwar added, “Our overall vision is to help consumers take control of their financial lives.”

Kabbage has launched a checking account for small businesses. The product offers some convincing features for its target users. The account boasts features like no minimum opening deposit, no overdraft fee, free ATM access, and Kabbage Debit Mastercard. According to Kathryn Petralia (co-founder and President of Kabbage), many of Kabbage’s PPP customers said they cannot wait to leave their bank when they got to know that Kabbage was going to offer a bank account. It should be noted that Kabbage, which is not a bank itself, will partner with Green Dot Bank to offer Kabbage Checking. They will also work with several retailers across the country to offer 90,000 cash deposit locations. These would include the likes of Rite Aid, Walgreen Stores, and CVS Pharmacy. While people may not be able to open a Kabbage Checking account yet, the waitlist has opened up and an official launch will take place later this year.

Most banks have turned out to be hesitant in offering credit to small businesses. Despite the guidance issued by the bank regulators and the approval by CFPB for installment loans and credit lines, banks are still not open to embracing small-dollar lending. The major concern revolves around its profitability. The elections are also a factor for the banks since the current “eased” guidelines could discontinue a new administration turning back to a more rigid approach. With the situation looking dicey for small-dollar loans in the coming months, most banks are reluctant to put their time and resources into them. 

In a recent earnings conference call, U.S. Bancorp executives said that the Company will reduce its branches beyond the target set in early 2019 which was about 10-15%. This has come at a moment when more and more clients had to adopt digital platforms. The Company CFO Terry Dolan said, “Additional closures will be driven by changes in customer habits and behaviors.” He also indicated that future branches will be smaller and advice-oriented. As per the Company, digital use has increased in a number of ways. It claims that nearly half of loan sales over the three-month period that ended on May 31 were handled online, including more than 80% of mortgage applications. 

Zopa’s CEO, Jaidev Janardana, believes the Covid-19 crisis is the biggest test of the UK’s peer-to-peer lending industry (though not the only one). According to him, this crisis could send a large number of firms out of business. Zopa has been the industry leader since its very early days. Being a consumer lender, its fortunes correlates to the overall economic ups and downs. On the investor side, it is also affected by the loan demand from retail and institutional investors. Pointing to the fate of some of the competitors, Janardana talked about the industry going through a “moment of truth.” He said, “It seems to be one of those inflection points where if the industry – three, four of the big players – can survive and deliver good customer outcomes that can be a huge proof point in the future.” 

Banks are now being seen as vital players in ending the racial wealth gap. But to achieve that banks would first need to straighten things in-house which calls for greater diversity especially in the mid and upper management. Such changes could allow the capital to flow in more diverse channels and eventually narrow the wealth gap. Given the skewness of current statistics, the need for banks’ role as a capital equalizer is required without a fail. Currently, black families own only 2% of the median wealth of white families. Inside the banking sector itself, things aren’t very diverse either with only one person of color being on the executive management teams of the top four banks.

Leading fintech, Sofi, has applied for a full bank charter; filing a de novo application with the OCC very recently. The Company has chosen a full bank charter unlike the ILC like before. About three years ago, the Company had applied for an industrial loan charter which got discontinued after Mike Cagney (co-founder, former CEO) resigned from the Company. The Company has confirmed formally submitting an application to the OCC for a proposed de novo national bank. SoFi might draw advantage from the fact that the heads of both the banking regulators, OCC and FDCI, are reform-oriented. The new acting head of the OCC, Brian Brooks, knows fintech closely having been on the board of Avant. On the other hand, Jelena McWilliams, the FDIC Chairman, is also known to be innovation-minded. SoFi seems to be in a good place for speedy approval, unlike Varo that had applied in 2017 and is still waiting for the final approval from the OCC.

As per the data collected by the Federal Reserve, the first half of June has seen about a 1.5% fall in total loans. Chances are the new volume could be tied to the Paycheck Protection Program. Many banks might even report lower loan balances despite the PPP originations. “It’s going to be very difficult to develop new business,” said Jon Winick, CEO of Clark Street Capital. “It’s just a very hard environment to see what borrower is going to be a good credit and who’s going to be a challenge.” The situation will lead banks to narrow down their focus to deals that bring in more fees like mortgage refinancing, expense management, and niche lending. But the loans will start to roll off the books as the programs begin to wear off and replacing them will be hard. In a recent note to clients, Piper Sandler’s research team pointed to a “lower demand in general” tied to a sluggish economy hampered by the pandemic. While the uncertainty remains, the initial recovery is expected to be slow.

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