Protests, CRA revamp, fintechs' payday: The year in banking (Part 2)

November 30, 2020 9:00 PM

In the first part of our year-end slideshow, we looked back at banks’ extraordinary response to the coronavirus pandemic and celebrated the shattering of industry’s thickest glass ceiling.

In part two, we look at how the protests that gripped the nation during the summer — first over the death of an unarmed Black man at the hands of the Minneapolis police and then more broadly over racial and income inequality — accelerated banks' efforts to close the persistent wealth gap between white families and households of color. We also reflect on one regulator's efforts to update the decades-old Community Reinvestment Act and examine why this was the year challenger banks truly became contenders.

Here are the other storylines that defined banking in 2020.

An unlikely pair teams up on creative — and speedy — pandemic relief

Jill Castilla and Mark Cuban, at first glance, make for an unusual pairing. Castilla is the chief executive of Citizens Bank of Edmond, a small community bank in Oklahoma, and Cuban is the high-profile owner the NBA’s Dallas Mavericks and an investor on ABC’s “Shark Tank.”

It took a pandemic to bring them together.

Their first collaboration came about in March, after Cuban urged banks in a tweet to get creative in helping cash-strapped customers get through the early days of the coronavirus crisis.

Castilla saw the Twitter post, reached out to Cuban for advice, and together they quickly drew up plans for Citizens to create a no-fee overdraft program to advance cash to customers waiting on stimulus checks from the Internal Revenue Service.

Castilla and Cuban next set their sights on helping borrowers navigate the Paycheck Protection Program’s complicated forgiveness process.

With help from Teslar Software, they created ppp.bank, a website borrowers can use to prepare forgiveness applications. The site went live in late May — just 10 days after Cuban emailed Castilla to brainstorm solutions. “Mark set the challenge — I just responded to it,” Castilla said.

“I called a couple of fintech friends and found one willing to write a guided application,” she added. “Mark ended up bankrolling the hosting costs associated with it. We’ve got hundreds of thousands of small businesses that are able to use it.” — Paul Davis

Banks commit billions of dollars to address racial and income inequality …

In October, when JPMorgan Chase pledged $30 billion to advance racial equity, the largest U.S. bank joined a long line of other banks that, in 2020, committed large dollars to fight structural racism.

“We can do more and do better to break down systems that have propagated racism and widespread economic inequality, especially for Black and Latinx people,” Chairman and Chief Executive Jamie Dimon, above, said in a press release. “It’s long past time that society addresses racial inequities in a more tangible, meaningful way.”

In a year when the country experienced the largest swelling of racial justice protests since the 1960s, and people of color were disproportionately affected by the coronavirus pandemic and resulting job losses, banks have pledged billions of dollars toward community development, diversity hiring, small-business lending and affordable housing initiatives.

Bank of America was among the first to act. A week after the George Floyd died at the hands of Minneapolis police on May 25, BofA pledged to invest $1 billion over four years to address racial and income inequality. U.S. Bancorp, PNC Financial Services Group, Capital One Financial, Huntington Bancshares and many other large and regional banks followed up with significant commitments of their own.

JPMorgan will spread its dollars out over several areas: affordable housing and homeownership; financial support of Black and Latinx-owned businesses; financial health and access to banking in Black and Latinx communities; philanthropic capital; and internal workforce diversity. The latest effort also holds managers throughout the bank more accountable to ensure they diversify their employee base.

Now it’s time to see if those dollars will make a difference. — Allissa Kline

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… And prioritize leadership diversity

The financial services sector responded to a summer of social justice protests by taking steps to diversify their own workforces, with an emphasis on their leadership ranks and boards of directors.

Large and small institutions, from Wells Fargo to Piedmont Federal Savings Bank in North Carolina, have announced plans to work more closely with historically Black colleges and universities to recruit Black candidates from those schools.

Piedmont teamed with North Carolina A&T State University to create year-long banker development program, with a goal of diversifying its leadership ranks. Under Chief Executive Charlie Scharf, Wells has pledged to increase Black representation in leadership from 6% currently to 12% within five years.

Banks and credit unions alike announced plans in the summer and fall to increase their internal diversity, with many making hires at the C-level to focus on broadening equity and inclusion efforts. PNC Financial Services Group and JPMorgan Chase both added officers at the executive level to focus on diversity, and a number of midsize and large credit unions have taken similar steps. Such measures aim not just to broaden the perspectives of these institutions’ executive teams, but also to ensure financial services providers reflect the broader demographics of the communities they serve.

In the wake of social justice protests this summer, some financial institutions also announced plans to diversify their boards. SchoolsFirst Federal Credit Union, one of the nation’s largest credit unions, recently added a Black member, a Hispanic member and an Asian member to its board after coming under fire earlier in the year for its lack of diversity.

Banks ranging from Fifth Third Bancorp to smaller ones like Emprise Bank have recently announced the addition of a Black female director to their boards.

The trend is part of a broader one across many industries. A September study by the nonprofit group 2020 Women on Boards found that this year women gained board seats at a faster rate than men among companies in the Russell 3000 index. Women of color advanced faster than any other group, though they still hold the fewest board seats overall.

For public companies in at least one state, legislation is a contributing factor. In September, California followed up on its 2018 board mandate on gender diversity by adding a requirement that at least one director be from an underrepresented group, whether by race or sexual orientation. — Aaron Passman

Catered meals and COVID tests: Financial firms go the extra mile to take care of employees

This year has forced banks and credit unions to get creative with their employee benefits.

Some institutions have become makeshift day care centers for employees who have children learning virtually because of the coronavirus. United Bank in Atmore, Ala., converted spare offices into computer labs to let parents bring their school-age children to work while ensuring the students could still participate in their virtual classes.

Others have taken it upon themselves to make sure employees are well fed. Landings Credit Union in Tempe, Ariz., completed a massive order from Costco so workers wouldn’t have to venture out for groceries. It even threw in $50 for each worker to spend on whatever they needed.

American Savings Bank in Honolulu has provided more than 206,000 meals to employees. The bank catered breakfast, lunch and dinner for workers seven days a week for two months.

Vista Bank is thinking about the emotional and spiritual needs of its employees. John Steinmetz, the Dallas bank’s president and chief executive, was considering hiring a part-time chaplain for workers who need additional support right now.

Credit Union of Texas in Allen has added a benefit that addresses the pandemic more directly. It started providing free COVID-19 antibody tests for all of its employees in July. The process takes about 90 seconds with a medical technician drawing a small amount of blood with a finger stick. The worker gets the results about 15 minutes later.

Keeping workers safe and healthy and supporting them emotionally have been high priorities for bank and credit union leaders because it’s the right thing to do and because staffers are likely to spread the word that their employers are being helpful during these difficult times.

“I believe our next generation of workers is looking at how companies and institutions responded to COVID-19 and it may be the deciding factor if they want to build a career here,” said Patricia Husic, the president and CEO of Centric Financial in Harrisburg, Pa.— Jackie Stewart

Despite resistance, OCC forges ahead on CRA revamp

Some rulemaking is propelled by the passions of a proponent, one who doggedly plows forward in the face of extraordinary odds.

Or amid a pandemic.

Such was the case for former Comptroller of the Currency Joseph Otting, who championed reforming the Community Reinvestment Act immediately after taking office in November 2017. His two-year effort to update the CRA seemingly met resistance at every turn.

The CRA encourages banks to meet the credit needs of low-to-moderate-income communities and is meant to combat redlining. This law, passed in 1977, requires that federal regulators assess how well each bank fulfills its obligations.

Otting, above, who spent 35 years as a banker, said he witnessed firsthand the lack of progress made by the CRA over decades on many economic indicators spanning wealth, income and housing.

When he released a proposal in December that called for changing some metrics for how the CRA gets assessed, the plan became mired in politics. Though the Federal Deposit Insurance Corp. signed on initially, the Federal Reserve refused, setting up the possibility of competing regulatory frameworks.

Community groups assailed the plan, arguing that a new scoring framework and its emphasis on the dollar value of CRA activity would lead banks to prioritize financing big projects, such as sports stadiums, over smaller community development projects. FDIC board member Martin Gruenberg called the proposal “misconceived, unworkable and damaging.”

Fed. Gov. Lael Brainard, who was assigned by Fed Chair Jerome Powell to coordinate the approach to CRA, took issue with the proposal’s scoring methodology as well. With tensions running high, Otting called Brainard, a Democratic appointee confirmed to the Fed under the Obama administration, “partisan.”

By the time the pandemic hit, it appeared Otting’s proposal would be shelved. Bankers and trade groups said that they were too busy helping businesses and consumers deal with the economic fallout of COVID-19 to handle compliance changes for a revamped CRA.

But Otting would not back down and the OCC ended up going it alone, releasing a narrower but final CRA rule in May without the backing of any other regulator. Then, suddenly, Otting was gone — he resigned in late May — leaving it to acting Comptroller Brian Brooks to hash out the details.— Kate Berry

Challenger banks become contenders

The growth of challenger banks accelerated in 2020 and bankers should take note. Several surpassed the million-user mark at which they are considered true contenders in the financial services industry.

In part, this was because these startups were already on a trajectory of growth. But they also got a tailwind from the pandemic and resulting quarantine restrictions in the spring, which forced banks to close some branches and limit access to others, and drove some customers to check out alternative online banking options.

Varo, for one, has seen 200% growth in its customer base this year, roughly the same percentage growth as in 2019, but last year's base number was much smaller. It now has 2 million customers.

“The lockdowns and social distancing made people more comfortable with digital solutions of all kinds," said Wesley Wright, Varo's chief operating officer. "Just as people became more comfortable with online grocery shopping and online ordering from restaurants and other local businesses, they also became more comfortable with fully digital banking, designed specifically to serve customers virtually, with no need to visit a branch in person.”

Varo also marked another significant milestone in 2020. After three years of trying, it finally received a banking charter from the Office of the Comptroller of the Currency.

Current, one of the newer entrants, hit 1 million users in June. That number had ballooned to 1.75 million as of early November and the fintech expects to reach 2 million before the end of 2020. It's added more than 100,000 users each month this year since April. Last October, by contrast, Current had 500,000 users.

"You don't want to see a global crisis validate your business model, but we were able to serve people in a time of a need and the economic trends we saw are a signal of a larger, fundamental shift in the workforce that highlighted the need for faster access to money, which can be solved through financial technology," said Stuart Sopp, above, the founder and CEO of Current. "I believe the disruption in finance and banking is just beginning."

At the largest U.S. challenger bank, Chime, transaction volume and revenue is three times higher than it was in 2019, the company said. Chime now has more than 8 million accounts and it's opening hundreds of thousands of accounts each month.

Another challenger bank, Dave, now has 7 million users. MoneyLion passed the 5-million-user mark this year.

Most of these providers work with a traditional bank partner and are limited in what they can offer, so far. But they are gaining momentum, brand recognition and popularity.

In a recent research note, KBW analysts estimated that challenger banks have organically grown their market share at a 25% compound annual growth rate since 2010, with the momentum likely to continue now that millennials have become the largest population group in the United States.

The analysts also said that even though many incumbent banks still downplay the potential impact of digital disruptors, investors appear to have more confidence, considering that they are pumping significant capital into the sector. Both privately held and publicly traded challengers garnered higher relative valuations in 2020. Chime, for example, is now valued at $14.5 billion. — Penny Crosman

'Buy now, pay later' emerges as hot new payments trend

It started as a way for young adults without much money to pay for sunglasses, clothes and cosmetics. With a few clicks, an $80 purchase became four interest-free payments of $20. Many of these shoppers couldn't qualify for a credit card, and they were already spending a lot of time on their phones.

So they turned to the likes of Afterpay and Klarna, fueling strong growth at so-called buy now, pay later lenders.

Then came COVID-19. Shopping malls — those vast temples to an earlier era of commerce — were closed for months. Issuers of store-branded credit cards, which consumers typically associated with swiping a plastic card at a cash register, suffered revenue declines.

Suddenly, the target audience for installment loans at the digital point of sale wasn't just 22-year-olds. It was all of us.

"In light of COVID-19, there have been changes in consumers' spending priorities and behaviors and a sharp shift from offline to online shopping," Klarna, which is based in Sweden, said in a recent financial report. "The attractiveness of our services opposed to credit cards has accelerated."

So far this year, shares in Australia-listed Afterpay have climbed by 233%. Affirm, the largest U.S. entrant in the nascent category, is eyeing an initial public offering that could value the company at $10 billion. Meanwhile, large incumbents like Synchrony Financial and PayPal are rolling out their own competing products.

The buy now, pay later companies earn money by getting a cut of the merchants' revenue, as well as late fees from borrowers and, in some cases, interest income. They have yet to prove their long-term staying power, but they have achieved a feat that's rare in the consumer finance industry: growing at a rapid clip during a decline in the credit cycle. — Kevin Wack

Surprise Fannie and Freddie fee is 'doomed from the start'

To Fannie Mae, Freddie Mac and their regulator, a 0.5% fee on most refinance mortgages is necessary to prevent catastrophic losses resulting from the pandemic. But lenders and some lawmakers reacted as if the fee itself were a catastrophe.

The point of the adverse market fee is to build an extra loan-loss cushion for Fannie and Freddie in case the economic slowdown carries well into next year and homeowners, with grace periods expired, begin to default in droves. The government-sponsored enterprises imposed a similar fee in 2008 to recoup losses from the mortgage crisis.

The fee was originally set to take effect in September, but the Federal Housing Finance Agency delayed the start date to Dec. 1 following criticism that the cost will badly hurt homeowners.

"At a time when consumers are struggling in the worst economy since the Great Depression, to add what amounts to a $1,400 fee on every refinance is outrageous," Mortgage Bankers Association Chief Executive Robert Broeksmit said in August, when the policy was announced.

Not to mention, lenders' bottom lines are especially vulnerable right now to anything that could dampen the refi market. Refinancings have produced strong noninterest income in recent quarters to offset tight margins and weak commercial borrowing — conditions that could linger.

Some analysts said the fee would add only a modest cost for borrowers. But House Financial Services Committee members from both parties clashed with FHFA Director Mark Calabria, above, when the fee came up at a September hearing.

Rep. Maxine Waters, D-Calif., who chairs the panel, said it would "redirect" the savings homeowners could gain from low interest rates "into the pockets of Fannie and Freddie."

Rep. Patrick McHenry of North Carolina, the committee's ranking Republican, said the fee's rollout in mid-August was problematic but that he understood the GSEs' need to manage financial risks.

"The way this was announced, and the initial three-week timing for its implementation, doomed it from the start," he said.

Calabria countered that he "can't simply ignore instability" in the mortgage market.

"This fee amounts to about 5 basis points annually on the loan," he said. "That's less than mortgage rates have been fluctuating during the time this hearing has been going on." — Joe Adler

Libor is on its way out, but what will replace it?

Like it or not, the global financial system has only a year left to transition away from the London interbank offered rate before the longtime floating-rate benchmark ceases to float on Jan. 1, 2022. If banks aren't prepared for the shift, it could spell big trouble for everyone.

Libor is based on the rate at which London-based banks make unsecured cash loans to each other, and over the course of several decades it became a near-universal component in trillions of dollars' worth of interest rate swaps, adjustable-rate mortgages, business loans and other products. But when it was revealed in 2012 that banks were manipulating Libor, its days were numbered.

There are several viable alternatives to Libor, and Federal Reserve Chairman Jerome Powell said in February that the central bank is supportive of all bank efforts to transition away from Libor. But the Alternative Reference Rates Committee — a group convened by the Federal Reserve Bank of New York to identify an alternative — has settled on the Secured Overnight Financing Rate, known as SOFR, as its preferred choice.

Fixing Libor in a contract is relatively simple: Banks just include fallback language that identifies an alternative rate that would go into effect in the event that Libor ceases to be published. And a great deal of progress has already been made to smooth the transition, particularly in the derivatives market, which accounts for the vast majority of Libor-facing contracts. But the extent of the Libor-facing market that is still out there is unknown, and likely is in the tens of billions of dollars of notional value.

The risk that banks are trying to avoid here is litigation. Federal law requires that contracts with multiple counterparties — which includes many Libor-facing contracts — have the approval of all counterparties to be binding, and that can be impractical or impossible in some cases. That could lead to a wave of lawsuits in 2022 that could take several years to sort out.

For banks that are hoping to put the headaches of 2020 behind them next year, it's important to make sure they don't invite a new one in 2022. — John Heltman

FDIC shelves plans to modernize its logo

Most bank regulation is — how should we put it? — not cool. Important? Sure. But cool? Not so much.

Still, for a brief moment in February, it looked as though the Federal Deposit Insurance Corp. was prepared to do something that passes for cool in the world of bank
supervision: modernize its sign for the digital age.

When the idea of deposit insurance was first introduced in the United States, the government needed a way to convince customers that their savings would be safe from financial panics.

In 1934, regulators eventually settled on a heavy, brass sign to be displayed inside branches that read, in all caps and somewhat long-windedly: "Deposits in this bank insured under U.S. government insurance plan."

Ever since, deposit-taking banks have been required to display an official "symbol of confidence" from the FDIC, and over time, the agency's bold, block-lettered shorthand name became synonymous with the full faith and backing of the U.S. government.

But with fewer customers using traditional bank branches, that big metal placard feels a bit dated. Agency officials decided it was time to change the FDIC sign to reflect the fact that many day-to-day banking transactions now take place online or in hip coffee-shop-style cafes.

Notably, in its regulatory filing, the FDIC asked if it should consider modifying its sign "beyond a two-dimensional placard."

What that means, we're not sure, because in April the FDIC suspended its modernization process, citing the pandemic. But whenever the process starts back up again, we'll have suggestions at the ready. A hologram perhaps? — Brendan Pedersen