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

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MonJa’s Digital Banking and Lending Monthly Roundup – Why Subscribe?

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!

To adjust to the post-COVID-19 economy, credit unions will have to open up to partnering with fintechs along with working together with their respective communities. As fintech 3.0 is readying to include credit unions, the latter will have to open up to fintech partnerships and leverage their advanced technology and fast services. AI/ML will definitely be the key in (ethically) utilizing available customer data for better and faster results. However, credit unions might have to turn to alternative data sources since old attributes may not paint the real picture in the post-pandemic scenario. These alternative sources could be public records, social media, spending habits, frauds and risks, utilities, employment, and more. To succeed in the coming year, credit unions will have to tread into newer territories (embedded financial services, AI/ML, real-time financing) while keeping pace with their communities.

Biden administration’s approach to housing finance could be significantly different from that of the outgoing administration. Trump admin had been working to recapitalize GSEs (like Fannie Mae and Freddie Mac) by releasing them from conservatorship, but these efforts were foiled by Covid-19. The incoming administration’s approach to GSEs could be quite the opposite, and Fannie and Freddie could remain under federal control. The Biden admin would most likely utilize the GSEs as a sociopolitical tool against economic inequality as it could offer lower-interest mortgages and thus, greater access to affordable housing. Biden’s approach to using GSEs could be adopted from that of the Obama Administration. These plans could, however, get complicated if Biden is unable to change the FHFA leadership, especially director Mark Calabria. A lot would be riding on the Supreme Court’s final word on whether the structure of the FHFA is unconstitutional, which would only come after December 9, as the oral argument begins. 

Fintechs have played a critical role in making SBA Paycheck Protection Program (PPP) a success by clearing the loan application bottleneck. Despite the evident success, their role isn’t over yet. As of June 5, 2020, Congress sanctioned the Paycheck Protection Program Flexibility Act. The updates are available on the Federal Register, US Government’s daily journal. One of the most important changes implies a reduction in the PPP loan percentage proceeds used for payroll costs from 75% to 60%. While the changes do have their benefits, they do come with some catch. A major issue could be the increased complexity of paperwork and the requirement to attach various schedules to document how and when PPP funds were used. All this can be quite exhausting for a borrower, but fintechs can make use of these challenging new updates as an exceptional opportunity to make themselves indispensable for their clients. 

Given the financial turmoil of 2020, “Buy Now, Pay Later” (BNLP) has emerged as an appealing option for people. Although only 7% of Americans have reportedly made BNLP purchases by September 2020, it accounts for 50 million BNPL purchases (amounting to over $20 billion.) The indulging demographics include Millennials, high-income individuals, and credit cardholders. Experts advise against this trend for its obvious risks, such as cutbacks on the credit card limit. The real appeal of BNLP lies in psychological money management. Budget limitations are significant as well. The BNLP landscape in the US boasts a $24 billion purchase volume, dominated unmistakably by PayPal Credit. It’s not like PayPal doesn’t have competition. The BNLP turf is actually quite busy, but PayPal has far more users than most of its competitors combined. However, it’s not a market where the winner takes all, a service provider’s compatibility with merchants is a critical factor.

A report by “COVID-19 Restart and Recovery Task Force” claims that big banks pose a challenge to credit unions. However, digital growth opportunities remained strong. The report considered factors like brand loyalty, digitalization, broadband initiative, along with a comparative analysis. It claims that over 50% of new accounts went to the top four big banks, which comes as a clear threat to credit unions. The report also recommended credit unions to adapt to the changing financial landscape by improving on scaling, digitalization, member service, and innovation while also adjusting to changing demographics and workplace challenges. 

As per the Project on Government Oversight, half of the loans related to PPP frauds were approved either by fintechs or banks working closely with them, despite fintechs being better at catching and reporting fraud. The likelihood of PPP fraud occurrence depends on issues like digital identity confirmation, shortcomings in due diligence, and fraud identification. Proving digital identities was particularly difficult for fintechs as their digital platforms assisted quick loan approvals without much hassle. The banks that focused on existing clientele automatically rejected such fraudsters. Banks fared better on due diligence, while fintechs fall behind due to a lack of institutional historical knowledge, which makes them vulnerable in the short term. 

New deposits are flooding prize-linked savings accounts of credit unions. It should be noted that not all credit unions offer such prize-linked savings programs. Also, the rewards aren’t big enough to significantly impact a customer’s balance sheet. However, the increase in deposits in such programs has been significant for credit unions. The Wisconsin Credit Union League’s Wincentive saw a 76% increase in deposits this year, while Minnesota’s Wincentive program saw a 45% increase in balances. Save to Win, the biggest prize-linked savings programs (run by CU Solutions Group), saw over 1200 new accounts between March and September. However, the program organizers couldn’t pin down the exact source of these new funds. The possible source could be the additional $600 federal unemployment compensation along with benefits from the states. Reduced spending could also be a reason for additional funds. The lack of clarity about the influx of deposits in prize-linked savings makes it quite difficult to predict their future growth. However, there seems no indication of credit unions stepping back from these programs.

In a recent article, the President of BankDistributionStrategies.Com, Jon Voorhees, discussed four apparent trends from the data of the annual Summary of Deposits from FDIC. Firstly, it was identified that it was mostly the Megabanks that were closing down their rural branches. The trend is mostly precise as due to increased digitalization and reduced retail interactions, and banks are retreating from physical branches. Secondly, it may seem that rural and small towns could become more unbanked, but reality differs significantly. The rural branches only experienced 11% of branch closures despite contributing to over 16% of branches countrywide. The third trend indicated closing down in-store and supermarket branches and was quite accurate as nearly 11% of closures were traced to unprofitable supermarket branches. 

Bank of America has received a “no-action letter” from Consumer Financial Protection Bureau (CFPB) for their small-dollar loans, thus enhancing security against legal action for a credit product on offer in the coming year. BofA has planned a short-term, payday loan beginning in January next year, which would require consumers to have a checking account for a year. They would also be required to make repayments in three equal installments over a 90-day period. The move aims to assist small-dollar lending in helping those affected by the pandemic. The application from Bank of America came after the CFPB released a template for banks to seek a no-action letter for offering smaller loans amounting up to $2,500. CFPB’s template offers approved parameters for such products. Recently, the CFPB has also submitted a Paperwork Reduction Act notice to the Office of the Federal Register. CFPB has been trying to identify information to release to assist consumers in making informed choices.

Despite the percentage of the unbanked household dropping further to 5% (from 7.7%), financial inclusion still remains a dream. It should be noted that all banked individuals/households may not exactly be addressed as well, which is evident from the fact that 25% of people still have to choose alternative financial institutions for financial assistance. There is a very evident need to make basic financial services just as accessible for all citizens as other basic rights like healthcare. It would require identifying measures to make mainstream financial services affordable for marginalized consumers. However, this ambitious journey faces some massive roadblocks in the form of blanket-underbankedness, racial disparities in banking, regional and local ‘banking deserts,’ and a lack of access to capital for small businesses. 

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