Bank fintech partnerships: Leveraging fintech to improve financial services in LMI communities

Learning Objectives: 
1. Why low-moderate income communities disengage with financial service companies.
2. Learn about various products and services banks can utilize in LMI communities. 
2. Describe how banks can rebuild  trust in low- and moderate-income (LMI) 

Transcript:

Penny Crossman (00:07):

We have a really interesting panel, kind of a diverse panel of people from very different corners of the financial world. So just getting my cheat sheet open here. So we have with us Brenda Bruce, Director and Product Line Manager at FIS. We have Ian Maloney, Head of Policy and Regulatory Affairs at Cross River Bank, and we have Jonas Lornell, Commercial Director at Majority. I wonder if we should start by just explaining each of these companies and where you guys fit in the sort of ecosystem. So maybe we start with you, Jonas, you're a challenger bank for immigrants, and when was it founded and what was the sort of mission, the goal for the new company?

Jonas Lornell (01:02):

Sure. So I'm going to take my time now because Ian wants to talk about regulation for 30 minutes. Yeah. So basically we're a digital bank and more for immigrants who just came to the us. So basically we're banking the unbanked and the founder team. We started 2019. The founder team or majority have been working with international target groups and migrant target groups for many years, but mostly in the telecom space. But we quickly realized that there's more needs for immigrants and it's just telecom and mainly the financial services, getting access to financial services and also international services such as money transfers. If you take me as an example, I'm from Sweden. I migrated to the US four years ago. I speak fairly good English. I had a job when I got here, but still for me it was a challenge understanding the US system. It was a challenge like credit score, what the heck is a credit score? I was when I was a kid, don't get a credit card, state debit. And then I come to the US like you need a credit card with credit. But then imagine coming here to this country not knowing the language. Maybe also in your home country, you don't have actually a bank. You're coming unbanked. For instance, in Mexico you have 40% being unbanked and you don't have a job, not an income. Then it can be pretty challenging to go into one of the big incumbent banks and trying to get a bank account. You've been asking a lot of questions. You need a social security. If you get lucky and you get a bank account, you might actually have to pay for a checking account if you don't have a steady income. And also they're very, usually these people are pushed out in the sort of offline jungle where you have to cash checks and send money at kiosks, paying a lot of predatory fees for doing so and these sort of problems that we are solving.

(02:49)

So we're basically combining all the services into one subscription where you as a customer then get a bank account with a credit card, you can sign up without a social security number and you get access to international money transfers, international calling, basically everything packaged into one service. So that is in essence what we're doing. And just lastly on this before I hand over is one thing is like the product and designing the product perfect for this target group really needs it, but it's also like how you're taking it to market. We as a company, even though we're a digital FinTech or Neobank digital bank, we are heavily rooted into the grassroots communities and working very closely with the consulates, the Mexican consulate, the Colombian consulate, standing there with actually real physical salespeople and advisors working with financial literacy and onboarding people and meeting them where they are basically.

Penny Crossman (03:49):

So Ian, how would you describe Cross River in the sense of how you serve low and matter income communities?

Ian Maloney (03:58):

Sure, So just to give a quick background on Cross River, since we're not necessarily as direct to consumer as some of the other folks on the panel, we are a bank. We started as just your garden variety community bank and Teaneck, New Jersey. In 2008, right before the financial crisis, we were the second de Novo charter or second to the last de Novo charter that was issued before the financial crisis. And we had originally planned to just kind of be a community banks serve the surrounding community in Teaneck, New Jersey. Then our CEO Jill Gate, actually right around 2013, saw an opportunity, had been very involved in the tech space in some of his other positions and he saw an opportunity to start what became really our bread and butter, which is bank FinTech partnerships. And that started with a point of sale loan opportunity for people that were looking to remodel their bathrooms or purchase a toilet at Home Depot. Then that quickly developed into what it is now, which is on the lending side, we have a number of partners and overall with lending payments and really banking as a service, we have over a hundred partnerships. On the lending side, we've done over a hundred billion dollars in loans across the country with partners such as Upgrade and Upstart, some of the well-known fintechs. And so as it relates to serving loan moderate income communities, our role is to, on the lending side, to originate loans, but also on the payment side to really be that correspondent bank, the entity that is at the end of the day beholden to the regulators and we have to make sure our compliance is good for all of our partners as well as our work. And then also that we're serving individuals that were traditionally left out by traditional financial institutions. And so thinking about LMI communities, even though it's a monolithic term, they're very different people with very different needs sometimes and that really is important. So I guess just to finish off, we really try to meet the consumer where they are and educate where we can through CRA and things like that, but also really leveraging our partners to help build the consumer base and include people where they were previously excluded.

Penny Crossman (06:32):

Do you deliberately seek out partners who serve this market or does it just sort of happen that way?

Ian Maloney (06:39):

Yeah, so I think in virtue of the bank FinTech partnership model, there's almost an inherent ability to access low and modern income communities and access individuals that have been traditionally underserved in the financial services industry. And that comes down to really a couple of things. One is where's their competition in the market and where's there not where people were not previously being served? There's an opportunity from a business case we all understand that, but also there's a great opportunity to really help and to build up at leveraging new technologies, whether it be the use of full financial life data that might be trended data or rental payment data. Stuff that's not originally and definitely wasn't 10 years ago included in any credit score. And now as being, the discussions are happening in real time where there's more of a focus on how do we evaluate the individuals in this new way as opposed to just going on the traditional FICO scores that may have missed key determinants on individuals and therefore they were excluded from the financial services industry.

Penny Crossman (07:58):

So Brenda, as a technology provider, what is your kind of role when you think about serving low and modern communities?

Brenda Bruce (08:07):

Sure. I'm a Product Director for FIS, specifically the subsidiary check systems. So we started in 1971 where there's been a consortium of financial institutions that come to us for a variety of services. The products that I manage are around the new account opening. And so I got involved specifically a couple of years ago through the bank on CFE fund initiative, and I'll talk a little bit more about that later. But essentially our over 6,000 clients call out to us regardless of the platform or core that they're on can call out to us to do the risk screening. So once you've done your KYC, you're comfortable with that person is who they are, then the next step is do I want to do business with them? And that's really where we come in with our risk screening. We have strategies both custom and standard that our clients can choose from to determine the criteria that is the consumers are run through to decide if the recommendation is a decline, a review, or an accept. Then the bank obviously, or the credit union has the ultimate say on whether that account is opened or not. But one of the things we found is that there are sometimes obstacles with that. If there's debit history for a consumer that's stopping them from now getting another account, we wanted to partner with bank on to figure out how do we get those unbanked underbanked or folks that are reentering the financial system back in. And so with, when you think about a person's financial journey, typically a checking account is the very first thing they have. And with the data that we have with the debit history, we have about 37% coverage where there isn't a credit history. So they're not seen it. I think so important that we all work together, both the FIS's, the fintechs, the governmental agencies, et cetera, we all work together to try to come up with this solution for the LMI community.

Penny Crossman (10:24):

Sure, That makes sense. How do you guys feel that we stand today in terms of how far have we come, especially with the support of the FinTech community, the support of the bank on the companies like majority, and how far is there still left to go? What's kind of the state of banking to the underbanked today as you see it?

Jonas Lornell (10:55):

I mean, right now we're doing pretty well and right now we have a very good relationship with regulators. Like when we started 2019 and we said we were trying to find a bank partner and we said we're going to make remittances to Africa and we're going to bank the unbanked in the us. It was a pretty hard sell initially, to be honest right now though, after operating a few years and also we have some other competition in the industry, I think there's a lot of things to do in terms of from a consumer perspective and doing what we're doing and doing what colleagues in the industry are doing, like Chime for instance, more addressing the mass market. There's a lot of things to do, but we feel right now that from a regulatory perspective and we're getting the support we need.

Ian Maloney (11:39):

So I would say there's been progress that's been made clearly, but there's still challenges that remain. So the progress that's been made I think comes down to the conversations that we're having at events like this and just around the water cooler, the virtual water cooler now and in a bank environment, it's changed primarily from these fintechs are competitors, which was the narrative in 2015 and 2016 to now we can build an entire industry around banking as a service around these bank FinTech partnership and that model and see the benefit of it. And that specifically relates to low and moderate income communities because fintechs have proven very capable and I think rightly so, using the technology to enter into new markets, they've connected with consumers on their terms. And so there's a lot of opportunities that have been really made possible by improvements in the technology. And that was something that without adequate competition, there was not going to be that necessarily from traditional financial institutions, or at least not at the rate that we've seen. Where the challenges come in is really a couple. So the first is as a lot of people I see familiar faces in the room from the last panel, there is a lot of discussion around third party risk management. And I think there needs to be continued discussion around what regulators are doing and what they're maybe not doing as much as far as it relates to guidance. And I think it's helpful to have additional guidance as it relates to activities specific for financial institutions. Thinking back to 2016, you had FDIC issued their financial institution letter on FinTech lending and that kind of died on the vine, but there's an opportunity now that there's an overarching umbrella as it relates to third party risk management and the guidance that just came out last week to really start to build on that.

(13:43)

And the second area that is really a challenge is as it relates to the Community reinvestment Act, the proposed rulemaking that was last year did a great job of really pushing the envelope as it related to changing from facilities based to broadening that scope of what's allowable for counting in CRA for CRA credit that creates, and that aligns the incentives between the financial institutions that may want to invest in a low and modern income community, but they don't have the incentive currently because they don't have a facility there. And so that would realign it. And then really the third angle or the third challenge is around improving access to wifi and internet thinking broadly, as Brenda said, all stakeholders making sure that rural communities have just as much access to online financial services as their urban counterparts because low and moderate income communities exist in both urban and rural communities. And it's important to recognize the differences and the challenges that both communities may face.

Brenda Bruce (14:56):

Yeah, I think it depends really on the segment where we're talking about. I think in some areas we've made great strides in other areas. We still have work to do for sure. There's still a big community out there that's unbanked and underbanked. But I will say that I was just at the National Bank on conference a couple of weeks ago in DC and when I started working with them, probably close to two years ago now, there were 97 FIs that had offered certified accounts. And the certified account, if you're not familiar with BankOn, has issued national standards that the financial institutions have to comply with for the products. So they have to be safe, they have to be accessible, they have to have certain privileges, but they also have safeguards around them. You can't have overdraft for example, or NSFs. So that protects both the consumer as well as the financial institution from a risk perspective.

(16:03)

When I was at the conference, they said they have close to 400 financial institutions that now offer them. It's just really been exploding. And so when you look at it from that perspective, I think we are making great strides. They have coalitions that are starting all around the United States to get the word out. So I feel like it's much more top of mind for many of us, which is a great thing. And I see more and more where fintechs, financial institutions, governmental agencies are coming together like Ian talked about to solve a problem. So it's not just to sell products, but it's to solve a problem that we have here and to get folks both educated from a financial standpoint, like I said, checking accounts usually the first one, and yet there's no, not typically any financial education in high schools. That's ridiculous. So it's things like that where we hit all of those facets that I think, like I said, we have work to do, but we have made some really great progress.

Penny Crossman (17:12):

So on that point, are you seeing fintechs doing anything really effective or useful in terms of financial education and helping people understand. What are the consequences out there?

Brenda Bruce (17:23):

Yeah, absolutely. I know from an FIS standpoint, we have launched an education session or multiple sessions. It's a program. So if any of you have children that our teens like I do, I'm making do that this summer. He's really excited and I know a lot of other fintechs and organizations are offering that as well. FDIC has theirs. There is also a training through the ABA for frontline staff. So how do you approach the underserved or unbanked and what kind of experience is that for them in the branch, for example? So I also see for us specifically, we didn't start really getting involved until about two years ago when those national account standards were set and it said these are all the requirements, and then it said highly recommended check systems or EWS to look for previous fraud. And that was really the only guidance as far as who doesn't get an account. And so we started to ask a lot of questions about that and talk with them about, well, how do we help we not be an obstacle in this? Because quite frankly, the credit bureaus, and we're a national specialty bureau, also ACRA, so we're right there with them. And traditionally that has been an obstacle in many cases. So taking an opportunity to understand the problem, I'm seeing a lot more organizations do that, and I think that's really great for the greater good.

Penny Crossman (19:03):

So what do you think are the biggest remaining hurdles for low and moderate income people to get on their feet financially to whether they're immigrants or just people make minimum wage jobs or even better jobs, but just sort of struggling to make ends meet what more could be done, could and should be done?

Jonas Lornell (19:33):

No, I think from our perspective, I think that it's exactly what we're doing. I think it comes down to to companies like ourselves that creates, we talked about this before about security and KYC models. First of all, it's about getting people into the system. And if you look from an immigration perspective, if you will open up a bank account, you need some kind of identification and you need a address that you can verify. But it doesn't stop there, at least in our industry because you have so many different things right there. Take one example how Maloney in here know that there's a shortage of plastic in Venezuela. That's why they haven't been able to create new passports for some time. So now they're creating a temporary paper passports. And that is something that we then work together with our regulation unit and talking to the regulators and making sure that we can accept those identifications from a Mexican perspective, you have another type of identification that is unique to them. And then you have from an address verification perspective, you can just arrive to the country and maybe you have an address, but you haven't anything to verify it yet. Then you can use technology to look in the data. Where have they used our card or the merchants close to this address? And then we can verify it that way. So it's all about for us, working very closely in those details to get the customers on board in the first place. And then you can continue your journey. Then you can start thinking about, okay, how do I create a credit score? And then of course we seen a lot of good products out there working with secure credit products. And then off you go on the journey. So I think it's all about companies like ourselves and our competition to create good value proposition and good KYC processes and risk processes for getting the people in the first place and then take us from there.

Ian Maloney (21:25):

And so just to add on to what Jonas is saying, I think from my perspective, I promise I am a wonk, but not everything will come back to regulation because I think in this instance it really comes back to wholly the consumer and what sort of experience that they've had in the past with financial services, with the entire industry, every different facet, whether it's a traditional FI or if they've moved over to alternative financial services such as like check cashers and seen some of the issues there. It comes down to trust and what the consumer's experiences and how they've experienced it. So that's really the first step. And it's maybe a little pie in the sky, but improving the trust comes back to how are our partners engaging directly with those consumers? Are they doing it with really good interfaces? Are they doing it with really easy to understand terms and conditions? Because those are very helpful. And while there are regulatory requirements that attach themselves to each of those different pieces, whether it be FDIC sign and advertising requirements or TILA disclosures that we all love so much, it's important to recognize that at the end of it, you're serving the consumer. And so you have to be working to build that trust up. Now, I would be remiss to say that if the regulators do not, if engage properly with the banks and the fintechs, meaning across the gambit, whether it be on the policy side or on the examination side, it disincentivizes banks and fintechs from engaging with communities because they at the end of the day have risks around eCOA and risks around Tela and all the other regulations that our legal departments know so well. But you really have to do focus on the consumers.

Brenda Bruce (23:28):

Yeah, I would completely agree with what you said and to education educate themselves, because I think the traditional roadblocks aren't necessarily going to be there next week or in six months a year. So understanding that if they didn't have a good start, for example, and they have a debit history or they have a bad credit history, that things are changing and that it's not going to stop them going forward. I think I would definitely talk the KYC has been a real challenge. And again, the regulators, we have to be collaborating on that to make sure from the entire life cycle of that account at the National Bank on Conference, they talked about doing a great job at getting the word out and getting financial institutions starting to offer these accounts, marketing groups, trying to get out to more consumers. But what they are finding is happening is while the access is getting better, these folks are just, for example, keeping that account open for direct deposit. So there's one institution for example, they live by the border and they would actually go out to the businesses where they're doing the crops and they would set them up accounts for that direct deposit and work with those small businesses, but they found that they were still using those alternative financial solutions even though they had that account. So when we get one step farther, we know that there are still things out there that we have to think about. We have to think about retention, we have to think about service of those clients and make sure that we're establishing those relationships. And as Ian said, establishing that trust, right? Once they're in an account and they realize I'm not going to get these excessive fees, I don't have to have a minimum balance, that's how we start developing that trust and it's going to take time.

Penny Crossman (25:44):

And what about the idea, I think some banks have that low income, low and moderate income. People are not a great customer base, they're not the most profitable. They could be a little bit riskier. What's the counterbalance? What's the counter to that idea for those that aren't really deeply making a lot of effort in this area?

Jonas Lornell (26:12):

You mean from a pure business perspective? Yeah, that's been the case. If you look in the US, we have 50 million immigrants, which is roughly 50% of the population. So usually historically, of course then you have been thinking about, okay, I want to start this bank or do this thing. I want to focus on the 85% mass market. It seems like a pretty good deal from that perspective, but we are focusing on the 15%. And so from a pure business perspective, that is a huge opportunity. And also that is where we create the most value because there's a big need for it. So yeah, that's how we approach it. And hopefully I think also now there's a big change with technology and with FinTech and the possibilities of reaching a lot of more people more efficiently from a acquisition perspective, then these small niche, if it's immigrants or if it's unbanked, mass market, Americans now it's easier to build a business and scale on that given that we have a completely different opportunities.

Ian Maloney (27:17):

Yeah, I guess I would say, I would pose the question back to the individual of what's your risk model and what data points are you using? How are you evaluating them? Because ultimately, there have been claims for many years that certain populations are a heightened risk, and there's a long history that is very ugly and really a black mark on the financial services industry that we can discuss. But that moving from the seventies and after eCOA and the rise of FICO, I think there was a little bit of a forgetting by some financial institutions that these metrics, there's metrics that go into these scores and people may not have certain metrics, but that doesn't make them necessarily in virtue of not having those metrics a bad credit risk. So it's really, I think when you turn to the leveraging of technology and the use of FinTech within financial services, you're seeing an opportunity to bring it back to that sort of community lending that understands the individual and understands all facets of them as opposed to just their FICO score and a 10 minute conversation. So I think it is very important to really ask yourselves as financial institutions, what am I using as far as my risk model and what should I be doing? What could I be doing? And making sure that it's all above board and that you're regulators are on top of it as well.

Brenda Bruce (28:53):

One of the things we're offering now, hopefully it went out today, is the standard strategies for these bank on certified accounts or accounts that are very similar. They don't have to be certified, but they have to have those guardrails, as I call them, right? To protect the consumer and the financial institution from risk. And as we talk with clients about going with the bank on standard strategy, which is a very skinny list of criteria, right? It's looking for previous fraud, it's looking for identity theft, and above and beyond that, there's not a lot of criteria there. So it's a very open door, but they can do that because of the guardrails that you put around that at the FI, right? So the combination there, like Ian said, looking at not only the access, but then also looking at the risk that's associated with it. It's pretty early on right now, but as part of our consortium of 6,000 plus institutions, we get the closure data on all the account open inquiries that we get for if it's closed for fraud or abuse. And so far, the numbers actually come back and say that that type of an account is five to 7% less risky. So we see fewer closures and lower charge-offs in those instances. So it proves the point that just because you don't have a debit history or credit history, you haven't been in the banking system, it doesn't mean you're a bad actor. The key is finding those bad actors and making sure that doesn't become a risk for your institution, but at the same time, allowing accounts to be opened for these individuals that quite frankly deserve it.

Penny Crossman (30:50):

Alright, well I think that's a good note to end on. So Brenda, Ian Jonas, thank you so much for joining.

Jonas Lornell (30:56):

Thank you.

Penny Crossman (31:03):

And now there is a reception and wind down tables on the floor. So see you guys over there. Thank you.