8 of the biggest issues facing the banking industry today

March 21, 2024 9:20 AM

Enjoy complimentary access to top ideas and insights — selected by our editors.

From cybersecurity crises to potential mergers that would reshape the payments industry, the banking world is poised for a year of change and regulatory challenges.

A major shake-up in the payments world is underway with Capital One Financial's recent agreement to buy Discover Financial for $35.3 billion, or a 26.6% premium based on Discover's Feb. 16 closing price. The all-stock deal, announced in February, would create a credit card behemoth with its own payments network.

"Our acquisition of Discover is a singular opportunity to bring together two very successful companies with complementary capabilities and franchises, and to build a payments network that can compete with the largest payments networks and payments companies," Capital One CEO Richard Fairbank said in a news release.

If combined, the two companies would have a 19% share of the $1.3 trillion market in revolving consumer loans, according to Brian Foran, an analyst at Autonomous Research. JPMorgan Chase is currently No. 1 with a 16% market share.

The two companies expect the deal to close in late 2024 or early 2025, pending approvals from regulators and both companies' shareholders. Three Discover board members, who will be named later, would join Capital One's board as part of the deal.

In the world of cybersecurity, a recent data breach at Infosys McCamish impacted more than 57,000 Bank of America customer accounts. The breach occurred on Nov. 3 — yet was not reported until 90 days after the incident on Feb. 2, raising concerns not only about why there was such a long delay, but also over who should take responsibility.

The unauthorized party — a ransomware group known as LockBit — accessed the name, address, date of birth, Social Security number and other account information of deferred compensation customers through Infosys McCamish's system, not Bank of America's, according to a letter Infosys McCamish sent to affected customers that was published by Maine's attorney general.

Many organizations require vendors to go through mandatory security audits to maintain a chain of trust, said Ray Kelly, a fellow at Synopsys Software Integrity Group, but the case still reflects poorly on Bank of America. In this instance, Infosys McCamish "certainly bears the weight of this breach," Kelly said, as its systems were attacked by the ransomware.

Regulators, however, take a different view of this type of third-party cybersecurity risk. Banks are responsible, according to the Federal Reserve's vice chair for supervision, Michael Barr, who said in January that banks need to fill the "gaps" in their efforts to manage these risks.

In Washington, D.C., the future of the Basel III endgame proposal remains uncertain after Treasury Secretary Janet Yellen declined to take a position on the contentious regulatory plan that would raise capital standards for the largest banks.

In lively discussions during a House Financial Services Committee hearing in February, lawmakers on both sides of the aisle were critical of the proposal. Rep. Bill Huizenga, R-Mich., chairman of the House Financial Services oversight subcommittee, pressed Yellen on her decision to avoid commenting on the specifics of Basel. In reply, Yellen said that she gives her thoughts on a regular basis to the heads of the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Fed. She said that she hasn't had a meeting with President Biden on the topic.

Catch up on our recent coverage of these and the other issues that banks are watching in 2024.

Commercial lending: NYCB strife with rent-regulated loans causes investors concern

Banks have been making rent-regulated apartment loans for decades, but the confluence of watershed legislation in 2019, rising interest rates and inflation has made it more difficult for landlords and property managers to turn a profit, according to Wedbush Securities analyst David Chiaverini.

New York Community Bancorp's concentration in the sector makes it an outlier among regional banks. Roughly one-fifth of all loans held by the Long Island-based bank are exposed to the New York rent-regulated multifamily market. This has contributed to the bank's recent struggles and put investors on high alert about the rapidly declining value of rent-regulated apartment loans in New York City.

New York Community built its business with landlords and property owners in the rent-regulated sector over the course of decades. But challenges, including an unexpected dividend cut and a poor fourth-quarter earnings report that included a large loss provision, have intensified scrutiny of the bank's vulnerability to weaknesses in the commercial real estate market.

Read more:

Troubles at NYCB highlight pain in rent-regulated real estate

Succession planning: Will TD’s beleaguered CEO be pushed or jump?

A "series of missteps," including possible federal anti-money-laundering violations and the cancellation last year of TD's planned acquisition of First Horizon, could put pressure on TD Bank Group CEO Bharat Masrani to step down sooner rather than later, said a recent Jefferies analyst note, written by John Aiken, John Ng and Aria Samarzadeh.

Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, told American Banker Staff Writer Catherine Leffert that he thinks Masrani will stay at the helm of the $1.96 trillion company at least until the dust has settled on the Justice Department's anti-money-laundering investigation so that the next leader can start with "a clean slate." He said the board and shareholders would prefer if current management saw the company's issues through.

Rizvanovic says there's been a lack of transparency from the bank regarding the investigation, which has fueled "angst" from investors. "He's definitely toward the later innings of his tenure," he said. "It'd be tough for him to leave in the midst of what a lot of investors are very concerned about right now."

Read more:

TD's 'million-dollar question:' Who will be its next CEO?

Credit cards: Capital One-Discover merger aims to shake off underdog status

A proposed merger between Capital One Financial and Discover Financial Services, two of the six-largest U.S. card issuers, requires approval from federal regulators and is likely to invite heavy regulatory scrutiny. The companies, however, say the deal would help the Discover payments network compete against larger rivals such as Visa and Mastercard.

In a joint announcement in February, the two companies portrayed Discover as a relative underdog, even as it has built a "rare and valuable global payments network" that's accepted at 70 million merchants in more than 200 countries and territories. Despite its growth, Discover is "the smallest of the four U.S.-based global payments networks," the companies said.

Analysts had mixed reactions amid news reports that the deal was coming to fruition. The benefits of gaining its own payments network "could perhaps justify" paying a sizable premium for Discover, according to Brian Foran, an analyst at Autonomous Research. But a Capital One-Discover merger would combine two major players in the credit card market, which may raise competitive questions for regulators, Foran wrote in a note to clients.

Read more:

What Capital One would get from buying Discover

Data breaches: Is responsibility a gray area or black and white?

A data breach last November at the financial software provider Infosys McCamish by a ransomware group known as LockBit compromised the name, address, date of birth, Social Security number and other account information of 57,028 deferred compensation customers whose accounts were serviced by Bank of America.

"Reliance by banks on third-party service providers has grown considerably in recent years, and with that reliance comes the potential for greater cyber risk," Michael Barr, the Federal Reserve's vice chair for supervision, said earlier this year. "It is ultimately the responsibility of banks to manage their third-party risk."

Read more:

Data breach affects 57,000 Bank of America accounts

Politics and policy: Yellen defers to bank regulators on Basel III proposal

Treasury Secretary Janet Yellen told several lawmakers during testimony before the House Financial Services Committee in February that she would leave the fate of the Basel III endgame proposal to the bank regulators, amid an intense lobbying campaign from the country's largest banks and bipartisan pushback against the rule.

The Basel proposal would raise capital standards for the largest banks and has been the target of TV advertisements, many public letters from lawmakers and even veiled threats of a lawsuit as banks fight against the rulemaking.

"I'm not going to take a position on the details with the rule," she said.

Lawmakers on both sides of the aisle criticized the proposal during the hearing. In response to Rep. David Scott, D-Ga., who expressed concerns about potential small-business and consumer lending impacts of the proposal, Yellen said she believes it's important that the country has a strong banking system with adequate capital, but she qualified that by acknowledging the nature of the largest criticisms against the proposal.

Read more:

Yellen refuses to back banking agencies' Basel play

Consumer banking: Soaring betting epidemic has banks on alert

Over the last six years, legal gambling has spread like wildfire across the United States. In early 2018, before a pivotal U.S. Supreme Court decision, only Nevada allowed sports wagering. Now 37 states do, plus the District of Columbia. State lawmakers have moved quickly amid fears that standing pat will result in a loss of tax revenue as their residents gamble in neighboring states.

Gambling is a growing source of revenue for banks. "The opportunities for them are overshadowing the risks and dangers," Brianne Doura-Schawohl, a lobbyist who advocates for policy responses to problem gambling, told Kevin Wack, national editor at American Banker.

But judging by the experiences of the United Kingdom, which has a longer history of widespread legal gambling than the United States, banks here may eventually be dragged into the burgeoning debate over how to address problem gambling. After all, banks provide credit to bettors who have already depleted their savings. Banks are also well positioned to offer ways to make it easier for problem gamblers to protect themselves from their own self-destructive impulses. And banks hold reams of transaction data that can indicate which customers have gambling problems.

Read more:

Why gambling addiction is suddenly a problem for banks

Regulation and compliance: Fintechs rethink their banking-as-a-service partnerships

A recent analysis by S&P Global Market Intelligence found that banks that provide banking as a service to fintech partners accounted for 13.5% of severe enforcement actions issued by federal bank regulators in 2023, a disproportionately large number considering how few banks in the U.S. engage in BaaS, the analysis said.

A fintech or other company tied to a bank experiencing a regulatory crackdown may be limited in the products it can launch or modify, or face increased scrutiny from new banking partners if they wish to jump ship. Even entities that have not run into trouble may experience ripple effects in the BaaS space. This is causing a shift in how fintechs view their banking-as-a-service relationships and how they should position themselves moving forward.

"As recently as two years ago, it was common practice to figure out the path of least resistance for a fintech-bank sponsor relationship," Clayton Mitchell, principal at consulting firm Crowe, told Miriam Cross, tech reporter at American Banker. "That mindset has changed over the last 18 to 24 months. Fintechs are looking for business partners who are in banking-as-a-service genuinely and strategically. That means the due diligence is likely harder."

Read more:

Fintechs contend with banking-as-a-service fallout

Mortgages: Claims of racial disparity in lending plague Navy Federal

A lawsuit was filed against the $168 billion-asset Navy Federal Credit Union after a CNN report in December that the credit union approved about 77% of mortgage applications from white borrowers, but only 56% of applications from Latinos and 48% from Black applicants in 2022.

Citing Consumer Financial Protection Bureau data, CNN found that this represented the greatest disparity among the 50 largest residential mortgage lenders in the U.S. The gap remained "even after accounting for variables such as applicants' income, debt-to-income ratio, property value and down- payment percentage," CNN reported.

"As a private institution that bears the name of an esteemed branch of the United States military, Navy Federal must explain both to Congress and their members how such practices took place, what immediate steps are being taken to correct the harm done, and who in management will be held responsible," Rep. Maxine Waters of California, the ranking Democrat on the House Financial Services Committee, said in a statement.

Read more:

Navy Federal faces lawsuit, allegations of racial bias in mortgage lending