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Are Fintechs Lending to Deadbeats?

It wasn’t so long ago that Brett King, CEO of Moven, boasted that his company was at the forefront of a revolution in banking that would upend everything by freeing the typical consumer from old-fashioned and timeworn banking practices.

Moven was among the first neobanks to offer a digital-only, bank-like experience, with payments, a digital wallet and other conveniences. Sure, banking has changed a lot since 2013, but it hasn’t yet panned out the way King predicted in his book “Breaking Banks,” nor does it seem likely to happen immediately as more fintechs choose to partner with banks as opposed to try and challenge them in the business where the banks hold a clear advantage, thanks in no small part to both experience and federally insured deposits.

It’s possible that some fintechs may apply for the Office of the Comptroller of the Currency’s new fintech charter, which the agency rolled out this summer, but even that won’t grant them the ability to offer insured deposits for customers.
Many experts see a much greater threat in lending, where banks are losing out to fintechs that can underwrite a high volume of loans at a fraction of the cost, in part because their credit risk assessments and data sources differ so greatly from a traditional bank’s credit evaluation.

And that’s a legitimate concern, especially with fintech lenders like Quicken and its Rocket Mortgage product, which can grant pre-approval in as little as 20 minutes. As Bank Director magazine noted in its third quarter issue this year, 12 of the top 20 mortgage originators in 2016 were nonbanks, a fact that should not get lost here.

But an academic study published in August by the Social Science Research Network found an interesting subplot within this story. Marco Di Maggio, a professor at the Harvard Business School and National Bureau of Economic Research (NBER), and Vincent W. Yao, a professor at Georgia State University, set out to determine whether fintech lenders ease credit access for borrowers underserved by the traditional banking industry, or are they selecting the best borrowers?

Di Maggio and Yao found “limited evidence” that fintechs targeted credit-rationed borrowers, but fintechs typically lent to a higher income class of younger consumers, which typically would be good-except that after about six months the borrowers “are significantly more likely to be delinquent, have higher revolving balances and a lower FICO score,” the study says, which is exactly the type of borrowers banks try to avoid in their credit risk evaluations.

So while fintech lenders are competing with banks for customers, if they’re anything like what Di Maggio and Yao have found, banks might be better off without them.

The High Costs of Misbehaving

It seems silly to put in writing, but it begs a reminder: What CEOs and directors do outside the office and boardroom can have a potentially damaging effect on their banks.

We’ve seen recently how this can play out in real time. Papa John, aka John Schnatter, the former chairman and CEO of pizza maker Papa John’s International, was forced out after he reportedly made racist comments during a conference call this spring with its marketing firm, which was specifically intended to prevent future public relations mishaps. Schnatter had already ruffled some feathers over his public comments last winter about NFL players kneeling during the national anthem.

It has never been entirely clear how closely tied a CEO’s personal behavior is to their company’s performance. Certainly it can be assumed that personal indiscretions like a sex scandal or abuse allegation would cause some decline in a company’s stock price, while more obscure regulatory or legal mishaps might not carry the same weight with the public at large.

A recent study by a trio of professors from Mississippi State University, Drexel University and the University of Missouri show with clarity that misbehavior and poor judgement by executives is especially costly.

At the revelation of an indiscretion, there is an immediate 1.6 percent loss in shareholder value that translates into an average loss of $110 million in market capitalization. When committed by the CEO, the loss in shareholder value is 4.1 percent, or $226 million,” the study found, suggesting that imprudence from top leaders carries potentially four times the weight. Papa John’s shares had declined by about 45 percent in value by late August since the same time in 2017.

Notably, Papa John’s has reached out to Bank of America Corp. and investment bank Lazard for counsel on how to help recover the company’s ailing reputation and share price, according to CNBC. A less expensive if no less effective way for Papa John’s to restore its reputation and stock price would be for Schnatter to be more measured in his public remarks.

Jake Lowary

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