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

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

The pandemic and the subsequent recession have left bank account holders a lot more cautious in spending. While the bigger deposits and lower spending are great for customers’ financial health, they prove unfavorable for banks’ earnings. Despite deposit service charges are (comparatively) improving, overdrafts and other customer activities that generate charges are still limited. Technology and lenient overdraft policies have further limited these charges from actualizing, and banks have been at the receiving end of it. Notably, the decline in service charges has been more punishing for smaller banks than for the bigger players. However, many experts seem hopeful with the holiday season being around the corner. The idea of holiday spending is keeping the hopes high for an improvement in service-charge income.

While traditional banks may seem slow on innovation, they are gradually moving towards integrating better and more advanced technology like Artificial Intelligence (AI). The interesting thing is that much of the source of innovation (or rather the inspiration for it) is internal. Financial institutions are opening up to homegrown solutions that can be developed with external expertise. The idea that’s catching up the most is the development of an ‘AI Loop,’ a technology ‘that’s at the core of Google’s business model. An ‘AI Loop’ is a data processing system where generated insights lead to more data and more insights. Such a loop could make internal innovation exchange a lot more dynamic and safe, thus significantly empowering a financial institution’s data operations. However, this would require a thorough approach involving research, understanding, and a sharp assessment of goals and competition. An alternative to such internal innovation could be innovation support from primary tech providers. The biggest challenge would be finding the perfect balance between internal knowledge and external expertise for smaller players like community banks and credit unions. They have decades of data but not the right domain expertise. 

The last decade has seen fintech’s momentous rise to the top. Its immense success as a parallel finance industry is understandable, given its unmatched benefits like financial inclusion and money-saving features. A recent report by Plaid (an open banking platform) has highlighted how fintech has helped the US population. A significant number of respondents recounted the positive effect of fintech on their finances, which included saved money, saved time, personalization, and greater control of finances. With valuable properties like these, nobody could be imagined to oppose the growth of an “all-benefitting” sector like fintech unless their sheer existence is threatened by it. The only entities falling in this category are the traditional banks that have been challenged by the innovation provided by fintech. Nonetheless, fintech remains crucial for the future of finance. However, it will be up to the policymakers to help fintech be of greater help by being more competitive and inclusive. After all, regulations must be crafted, keeping the end-user in mind.

With the recession still lingering over the economy, midsize banks are faced with a host of challenges in the coming days. The pressure has been mounting on net interest margins while loan demands are wavering, and credit losses are rising. Credits (especially in hospitality and retail) are being paid close attention. There have been government stimulus and delayed loan forbearances, but it’s still unknown if things will be delayed long enough for people’s financial situation to normalize. This uncertainty surely affects stocks. Meanwhile, experts are indicating that balances will keep declining. The customers are cautious and thus deleveraging. Commercial borrowers are no different. 

Covid-19 has impacted all industries, but banking is one sector where it has made some of the biggest disruptions. It pushed forward changes that could have taken years to come by. As a result, customers’ trust and satisfaction are through the roof, and they are lesser likely to switch (especially due to the pandemic). Bigger banks are thoroughly enjoying this situation as challenger banks are having a tough time gaining acceptance across demographics. Despite being better (technologically) equipped with the challenges posed by the pandemic, challenger banks have fallen behind in the race to gain customer trust. Incumbents have a clear advantage over them. But a bigger threat awaits them in the form of big techs and megabanks (often together). The future of banking looks more experience-based. Banks will have to become flexible and open enough for ‘ubiquitous banking’ where they would be able to have ‘integration at the point of consumption’ as needed, whether it’s instant loans and crowdfunding or something as simple as payments and deposits.

Community Development Financial Institutions (CDFI) have long enjoyed awards from the Treasury Department’s CDFI Fund. They aren’t typically the kind of banks that emphasize returning capital to investors. However, there seems to be a shift in the trend. As CDFI, like Southern Bancorp, are beginning to realize that they need more capital to meet consumer demands in struggling neighborhoods, they are choosing to return capital. Southern Bancorp has recently laid heavy emphasis on returning capital to its investors through steady dividends and a stock repurchase program as well. As demand is expected to grow, this trend could catch up further. Conventionally, CDFIs are not a favorite among investors. However, trade groups like OFN have managed to find community banks like Southern Bancorp promising enough for them to participate in its capital raise. While some are hoping that Southern Bancorp’s strategy acts as a model for other CDFIs, many others still have their reservations.

The economy seems to be gradually getting back on track with improved payment performances. However, some experts believe that this could just be a façade of positivity. The ground reality could actually be much worse, especially for small businesses. Despite an improvement in delinquency rates in certain categories (auto loans, credit cards, mortgages, and personal loans), many troubled borrowers could very likely experience further losses and thus struggle to exit their lenders’ accommodation programs. On the other hand, consumers’ heightened caution with spending has also affected the market. While these rates may seem promising, lenders are aware of the risks operating in the background. Some are even apprehensive about delinquency increasing once the stimulus funds dry up. Amidst all this, small businesses have come out to be the most harshly affected segment. TransUnion’s ongoing research suggested that 13% of the consumers (small business owners) had to close their firms or experienced a decline in their business. Meanwhile, another study by LendingTree found that only 13% of small businesses were able to return to full operation.

With new options like DepositAccounts.com and Bankrate, customers can now easily research savings accounts with top yields. SaveBetter.com is one such online portal. The portal is German fintech Deposit Solutions’ first venture in the US. It enables customers to shop and sign up for accounts in multiple banks while their funds are managed through a single account in SaveBetter. While it helps customers choose from a range of banking options, it also helps participating banks to get greater exposure to potential clients and raise more deposits. Small banks have especially welcomed such platforms as they offer greater visibility to them among customers who have possibly never even heard about them. New York’s Ponce Bank, a community development financial institution, is one such participant. While being immensely beneficial to both customers and the banks, fintech platforms like Deposit Solutions may have some downsides. The customers could see their financial relationship to be with the fintech instead of with the banks, thus diminishing the banks’ potential to cash in on its other products. Despite the apparent drawback, small banks have welcomed fintech platforms like SaveBetter.com. 

While community banks have been able to successfully adjust to the pandemic, this spirit of innovation will have to be realized into a more sustainable pattern if they want to remain competitive.

Small banks have been plagued with a range of concerns, whether it’s their limited scale of business, fading rural communities, or the declining need for physical banking. The growing concern could lead more community banks to rethink their strategy and re-approach their market by working with fintechs. Some experts are hopeful for small banks, assuming they will adapt. However, policies will remain crucial to the matter.

Goldman Sach’s digital-only bank, Marcus, is headed for a shift in its leadership. Harit Talwar was recently named the chairman of Goldman’s consumer business (Marcus). With that change in progress, Omer Ismail (a Talwar protégé) is set to become the global head of the consumer business starting January 1. While this succession takes place next year, Solomon said Talwar would remain active as a strategic advisor (and partner) to the company. Talwar, under whom Marcus charted 5 million customers, said in an interview, “We want to make sure that this transition is smooth, and I am excited to continue to help Omer and the business and the team to develop this business to greater heights.” Currently, Marcus has $92 billion in deposits, $7 billion in loan and credit card balances, and $1 billion in annual revenue.

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