Are Bank Directors Worried Enough About Fair Lending?

Bank directors and executives, be warned: Federal regulators are focusing their lasers on fair lending. 

If your bank has not modernized its fairness practices, the old ways of doing fair lending compliance may no longer keep you safe. Here are three factors that make this moment in time uniquely risky for lenders when it comes to fairness.

1. The Regulatory Spotlight is Shining on Fair Lending.
Fair lending adherence tops the agendas for federal regulators. The Department of Justice is in the midst of a litigation surge to combat redlining. Meanwhile, the Consumer Financial Protection Bureau has published extensively on unfair lending practices, including a revision of its exam procedures to intensify reviews of discriminatory practices.

Collections is one area of fair lending risk that warrants more attention from banks. Given the current economic uncertainty, collections activities at your institution could increase; expect the CFPB and other regulators to closely examine the fairness of your collections programs. The CFPB issued an advisory opinion in May reminding lenders that “the Equal Credit Opportunity Act continues to protect borrowers after they have applied for and received credit,” which includes collections. The CFPB’s new exam procedures also call out the risk of “collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis.”

2. Rising Interest Rates Have Increased Fair Lending Risks.
After years of interest rate stability, the Federal Reserve Board has issued several rate increases over the last three months to tamp down inflation, with more likely to come.

Why should banks worry about this? Interest rates are negatively correlated with fair lending risks. FairPlay recently did an analysis of the Home Mortgage Disclosure Act database, which contains loan level data for every loan application in a given year going back to 1990. The database is massive: In 2021, HMDA logged over 23 million loan applications.

Our analysis found that fairness decreases markedly when interest rates rise. The charts below show Adverse Impact Ratios (AIRs) in different interest rate environments.

Under the AIR methodology, the loan approval rate of a specific protected status group is compared to that of a control group, typically white applicants. Any ratio below 0.80 is a cause for concern for banks. The charts above show that Black Americans have around an .80 AIR in a 3% interest rate environment, which plummets as interest rates increase. The downward slope of fairness for rising interest rates also holds true for American Indian or Alaska Natives. Bottom line: Interest rate increases can threaten fairness.

What does this result mean for your bank’s portfolio? Even if you conducted a fair lending risk analysis a few months ago, the interest rate rise has rendered your analysis out-of-date. Your bank may be presiding over a host of unfair decisions that you have yet to discover.

3. Penalties for Violations are Growing More Severe.
If your institution commits a fair lending violation, the consequences could be more severe than ever. It could derail a merger or acquisition and cause a serious reputational issue for your organization. Regulators may even hold bank leaders personally liable.

In a recent lecture, CFPB Director Rohit Chopra noted that senior leaders at financial institutions — including directors — can now be held personally accountable for egregious violations:

“Where individuals play a role in repeat offenses and order violations, it may be appropriate for regulatory agencies and law enforcers to charge these individuals and disqualify them. Dismissal of senior management and board directors, and lifetime occupational bans should also be more frequently deployed in enforcement actions involving large firms.”

He’s wasting no time in keeping this promise: the CFPB has since filed a lawsuit against a senior executive at credit bureau TransUnion, cementing this new form of enforcement.

How can banks manage the current era of fair lending and minimize their institutional and personal exposure? Start by recognizing that the surface area of fair lending risks has expanded. Executives need to evaluate more decisions for fairness, including marketing, fraud and loss mitigation decisions. Staff conducting largely manual reviews of underwriting and pricing won’t give company leadership the visibility it needs into fair lending risks. Instead, lenders should explore adopting technologies that evaluate and imbed fairness considerations at key parts of the customer journey and generate reporting that boards, executive teams, and regulators can understand and rely on. Commitments to initiatives like special purpose credit programs can also effectively demonstrate that your institution is committed to responsibly extending credit in communities where it is dearly needed.

No matter what actions you take, a winning strategy will be proactive, not reactive. The time to modernize is now, before the old systems fail your institution.

Eyes Wide Open: Building Fintech Partnerships That Work

With rising cost of funds and increased operating costs exerting new pressures on banks’ mortgage, consumer and commercial lending businesses, management teams are sharpening their focus on low-cost funding and noninterest revenue streams. These include debit card interchange fees, treasury management services, banking as a service (BaaS) revenue sharing and fees for commercial depository services, such as wire transfers and automated clearinghouse (ACH) transactions. Often, however, the revenue streams of some businesses barely offset the associated costs. Most depository service fees, for example, typically are offered as a modest convenience fee rather than a source of profitability. Moreover, noninterest income can be subject to disruption.

Responding to both competitive pressures and signals of increased regulatory scrutiny, many banks are eliminating or further reducing overdraft and nonsufficient fund (NSF) fees, which in some cases make up a substantial portion of their fee income. While some banks offset the loss of NSF fees with higher monthly service charges or other account maintenance fees, others opt for more customer-friendly alternatives, such as optional overdraft protection using automatic transfers from a linked account.

In rethinking overdraft strategies, a more innovative response might be to replace punitive NSF fees with a more positive buy now, pay later (BNPL) program that allows qualified customers to make purchases that exceed their account balances, using a short-term extended payment option for a nominal fee.

Partnering with a fintech can provide a bank quick access to the technology it needs to implement such a strategy. It also can open up other potential revenue streams. Unfortunately, a deeper dive into the terms of a fintech relationship sometimes reveals that the bank’s reward is not always commensurate with the associated risks.

Risky Business
As the banking industry adapts to new economic and competitive pressures, a growing number of organizations are turning to bank-fintech partnerships and various BaaS offerings to help improve financial performance, access new markets, and offset diminishing returns from traditional deposit and lending activities. In many instances, however, these new relationships are not producing the financial results banks had hoped to achieve.

And as bank leaders develop a better understanding of the opportunities, risks, and nuances of fintech relationships, some discover they are not as well-prepared for the relationship as they thought. This is particularly true for BaaS platforms and targeted online service offerings, in which banks either install fintech-developed software and customer interfaces or allow fintech partners to interact directly with the bank’s customers.

Often, the fintech partner commands a large share of the income stream — or the bank might receive no share in the income at all — despite, as a chartered institution, bearing an inordinate share of the risks in terms of regulatory compliance, security, privacy, and transaction costs. Traditionally, banks have sought to offset this imbalance through earnings on the fintech-related account balances, overlooking the fact that deposits obtained through fintechs are not yet fully equivalent to a bank’s core deposits.

Moreover, when funds from fintech depository accounts appear on the balance sheet, the bank’s growing assets can put stress on its capital ratio. Unless the bank receives adequate income from the relationship, it could find it must raise additional capital, which is often an expensive undertaking.

Such risks do not mean fintech partnerships should be avoided. On the contrary, they can offer many benefits. But as existing fintech contracts come up for renewal and as banks consider future opportunities, they should enter such relationships cautiously, with an eye toward unexpected consequences.

Among other precautions, banks should be wary of exclusivity clauses. Most fintechs understandably want the option to work with multiple banks on various products. Banks should expect comparable rights and should not lock themselves into a one-way arrangement that limits their ability to work with other fintechs or market new services of their own. It also is wise to opt for shorter contract terms that allow the bank to re-evaluate and renegotiate terms early in the relationship. The contract also should clarify the rights each party has to customer relationships and accounts upon contractual termination.

Above all, management should confirm that the bank’s share of future revenue streams will be commensurate with the associated risks and costs to adequately offset the potential capital pressures the relationship might trigger.

The rewards of a fintech collaboration can be substantial, provided everyone enters the relationship with eyes wide open.

Using Embedded Finance to Grow Customers, Loans

Embedded finance is all around us, whether you know it or not.

Embedded finance is a type of transaction that a customer conducts without even realizing it — without any disruptions to their customer experience. Companies like Uber Technologies, Amazon.com, and Apple all leverage embedded finance in innovative ways to create impactful customer engagements. Today’s consumers are increasingly used to using embedded financial products to pay for a ride, buy large items and fill in cash-flow gaps.

But the explosion of embedded finance means that financial transactions that used to be the main focus of customer experiences are moving into the background in favor of more intuitive transactions. This is the whole point of embedded lending: creating a seamless customer experience centered around ease-of use, convenience and efficiency to enable other non-financial experiences.

Embedded lending extends embedded finance a step further. Embedded lending’s invisibility occurs through contextual placements within a product or platform that small to medium-sized businesses (SMBs) already use and trust. Because of embedded experiences, SMBs can get easier, faster access to capital.

All of this could put banks at a disadvantage when it comes to increasing their reach and identifying more and more qualified, high-intent SMBs seeking capital. But banks still have compelling options to capitalize on this innovative trend, such as:

  • Joining embedded lending marketplaces. Banks can capitalize on embedded lending’s ability to open up new distribution channels across their product lines. Banks can not only protect their services but grow core products, like payments and loans, by finding distribution opportunities through embedded lending partners that match businesses looking for credit products and lenders on a marketplace.

Banks can take advantage of this strategy and generate sustained growth by using platforms, like Lendflow, that bring untapped distribution opportunities into the fold. This allows them to easily reach qualified, high-intent businesses seeking capital. Even better, their applications for credit occur at their point of need, which increases the likelihood they’ll qualify and accept the loan.

  • Doubling down on traditional distribution channels. Another viable growth strategy for banks is to double down on providing better financial services and advice through traditional channels. Banks possess the inherent advantage of being in a position to not only supply products and services, but also provide ongoing advice as a trusted financial partner. Incorporating additional data points, such as payroll and cash flow data or social scoring, into their underwriting processes allows banks to leverage their unique position to develop more personalized products, improve customer experience and better support customers.

Embedded lending platforms can aggregate and normalize traditional and alternative data to help banks improve their credit decisioning workflows and innovate their underwriting processes.

  • Reverse engineering on digital banking platforms. Banks can replicate this approach by embedding fintech products into their existing mobile app or digital banking platforms. Consider a bank that decides to provide shopping access through their online portals. In a case like this, a customer may apply for a car loan through the digital bank portal. The bank can then connect that customer to a local car dealership with whom they have a partnership — and potentially maintain revenue share arrangements with — to complete the transaction.

Lenders’ Crossroads Choice
Embedded finance’s effective invisibility of its services and products poses the biggest threat — or opportunity — to banks and traditional lenders. The convenience and ease of access of embedded financial products through platforms that customers already know and trust is an ongoing challenge traditional financial services providers. Yet embedded lending doesn’t have to be a threat for banks. Instead, banks should think of embedded lending as an opportunity to innovate their product lines and expand their reach to identify underserved small and medium-sized businesses in highly profitable industries.

Embedded lending opens a new world of underwriting possibilities because it relies on smarter data use. Platforms can pull data from multiple third-party sources, so lenders can efficiently determine whether or not a customer is qualified. With better data and smarter data use, fewer qualified customers get turned away, saving lenders time, cutting down underwriting costs and increasing conversion rates.

Opportunities — and Questions — Abound With Blockchain

Blockchain technology could add almost $2 trillion in gross domestic product to the global economy — and $407 billion in the U.S. — by the end of the decade, according to a 2020 PwC study. The digital ledger’s potential to build efficiencies, speed and trust isn’t limited to the banking industry, with PwC identifying five broad areas for transformation across various sectors, including improvements to supply chains, identity management to counteract fraud and faster, more efficient payments.

An increasing number of banks, large and small, are exploring opportunities for their institutions in a blockchain-based world. I focused on how two banks are using blockchain to build a payments niche in the third quarter 2022 issue of Bank Director magazine. New York-based Signature Bank launched a blockchain-based payments platform, Signet, in 2019. The $116 billion bank collaborated with Tassat Group on the initiative. Now, Tassat works with banks such as $19 billion Customers Bancorp, in Reading, Pennsylvania, to deliver payments services to commercial clients via a private blockchain. 

Another group of banks has taken a more collaborative approach, launching the USDF Consortium in January 2022. The five founding banks include $7 billion NBH Bank, the Greenwood Village, Colorado-based subsidiary of National Bank Holdings Corp., and $57 billion Synovus Financial Corp. in Columbus, Georgia, along with the blockchain technology company Figure Technologies and the investment fund JAM FINTOP. The group wants to make the industry more competitive with an interoperable, bank-minted stablecoin, a digital currency that’s pegged, one-to-one, to fiat currency or another physical asset.

Rob Morgan, who recently took the helm at USDF after leading innovation and strategy at the American Bankers Association, says that the banks are working together to answer key, competitive questions. These include philosophical ones, such as: “What is a bank’s role in a digital, tokenized economy?” They’re also answering questions specific to blockchain, including how can banks use a technology that has fueled the rise of cryptocurrency and apply it to traditional financial products? 

Creating a more efficient, faster payments system looks like the logical first step for these organizations, but other use cases could run the gamut from building better loan and identity verification processes to conform with know your customer and anti-money laundering rules. 

Given the nascency of blockchain applications, bank regulators are still getting up to speed. “From a legal and regulatory standpoint, [we are] working with the regulators to get them comfortable with this technology,” says Morgan. “Broadly, we have seen a changing posture toward cryptocurrencies for the regulatory agencies,” citing communications from the Comptroller of the Currency and the Federal Deposit Insurance Corp. that underscore expectations that banks work with their regulators before engaging in activity related to digital assets, including stablecoins. “We’re working really closely with the regulatory agencies,” says Morgan, to “make sure that they are totally comfortable with what we’re doing before moving forward and making these products live.”

For banks considering blockchain initiatives, Rachael Craven, counsel at Hunton Andrews Kurth, emphasizes the need for robust business continuity and incident response plans, as well as recovery protocols. “As with any emerging technology, operational failures, cyberattacks … should definitely be things that stay top of mind for banks,” she says. And working with a third party doesn’t let a bank off the hook for a compliance snafu. “Banks ultimately own the risks associated with any regulatory or compliance failures,” she says.

One potential murky area tied to blockchain centers around the technology’s immutability: Once the transaction data — or block — is added, it can’t be amended or reversed. Erin Fonté, who co-chairs Hunton’s financial institutions corporate and regulatory practice, sees potential conflicts with consumer protections under Regulation E, which governs electronic transfers of money via debit card, ATM or other means. “There’s nothing in Regulation E that exempts cryptocurrency transactions,” says Fonté. “You cannot forget the applicability of existing regulations to potential crypto or blockchain transactions.” 

Sara Krople, a partner at Crowe LLP, recommends that banks consider their current competitive strengths and strategic goals when discussing potential opportunities and risks with blockchain. Signature Bank started its Signet platform after consulting with its commercial client base; Customers Bancorp was pursuing a competitive moat with its niche serving companies in the digital assets sector. “Make sure it makes sense for you strategically and that you’ve thought through the risks,” Krople says. Many banks will partner with blockchain vendors, as Signature and Customers did. Banks should examine the controls and processes they’ll need, and determine whether they’re comfortable with the risk. 

Krople adds that banks should also identify one or more internal stakeholders who can take ownership for blockchain and bring the organization up to speed on its potential. Before Customers Bancorp launched its Customers Bank Instant Token [CBIT] platform, it formed an employee-level committee that spent months reviewing the associated risks. That resulted in a “best in class BSA review process” that provides speedy onboarding for clients while also ensuring the safety of the bank, according to Chris Smalley, the bank’s managing director of digital banking. 

Legal, risk and compliance processes should meet the needs of the emerging technology, says Krople. Among the questions banks should consider, she says: “Who’s going to monitor it for security? How do you know the transactions are process[ed] the way they’re supposed to? Who’s reading the smart contracts for you? You need somebody to be able to do those things.” 

A bank’s needs will differ by use case, Krople adds. “There’s a huge amount of opportunity, but you need to make sure people have thought through all the steps you need to implement a process.”

How to Find the Right Title Service Provider

In a highly competitive market, bank title service providers can have a tangible impact on business outcomes. Below are several considerations for selecting a title provider who can help institutions navigate today’s challenging market.

Stability
It’s important to know that the title provider your bank selects remains consistent, whether the market is up or down. Decades of experience, minimal claims and strong financial backing all contribute to the stability of a settlement service provider. “There’s an element of risk lenders can avoid by working with a title partner that has a history of producing instant title with minimal claims. How long have they been doing it?” says Jim Gladden, senior vice president of origination strategy at ServiceLink. “What does their track record look like?”

Service
Each file matters. After all, a home is likely your borrower’s biggest investment; making sure a purchase, refinance or home equity transaction goes smoothly is critical. For that reason, it’s important to ensure that title service providers take the unique needs of the bank’s team and borrowers into account, and prioritizes each transaction.

One way to do that is to work with a firm that dedicates individuals to working with the same lenders and loan officers, so they can understand the unique expectations each of them has, according to Kristy Folino, senior vice president of origination services at ServiceLink.

Prioritizing the Borrower Experience
The real estate lending industry is increasingly competitive; attracting and retaining borrowers is critical. Investigate how different title providers think about your borrowers, and whether their service ethos and technology prioritize the borrower throughout the transaction.

Check out the 2022 ServiceLink State of Homebuying Report to learn more about today’s borrowers. Dave Steinmetz, president of origination services at ServiceLink, says the study suggests a growing number of buyers embrace technology.

“Many are open to new pathways to achieve homeownership. This indicates there is an opportunity for lenders to provide more targeted resources and guidance to buyers throughout their home buying journey.”

Operational Efficiency
In leaner times, banks need to maximize margins on each transaction. Consider where your title service provider has automated their processes, and how that shows up in your bottom line. For example, instant title technology speeds decisioning and enables shorter rate lock periods by quickly clearing the way to the closing table. In fact, many lenders are surprised at how many of their loans qualify for fast-tracking through the instant title process.

Integrating technology and approaches like instant title into your processes could allow you to improve your workflows. Using instant title complexity decisions can help prioritize clear-to-close files, getting them to the closing table faster.

Scalability
In the past few years, the mortgage industry has seen how quickly volumes can change. In this volatile environment, it’s critical to partner with settlement service providers who can flex up or down with their financial institution partner as the market necessitates. The size of a provider’s signing agent panel impacts their scalability — as does their ability to allocate vendors to your operations at critical times, like month’s end.

Geographic Footprint
Being able to use one provider for transactions in all 50 states can simplify bank operations. Partnering with a title service provider with national scope ensures that a bank and its borrowers have a consistent experience, wherever they’re located. Gladden pointed out that national coverage is especially important for lenders with portfolios that are geographically diverse.

Security
Strict adherence to local, state and federal guidelines is critical to ensuring compliant transactions. Security around data must be airtight to protect lenders and their customers from potential breaches or other security incidents.

“Each title provider uses a platform that is aggregating both public and nonpublic consumer information. It’s important to know how that information is protected,” says Gladden.

Data quality
It’s important to look at the sources of title service providers’ data. While speed is essential, assurances from your title providers about data quality is paramount, particularly when it comes to instant title.

“The product is only as good as the data source, so the quality and depth of the data is the biggest factor to look out for. Instant title providers may all be racing toward the same goal, but the methodologies we’re using to get there — whether technologies, processes or the decisions we’re making — differ significantly,” says Sandeepa Sasimohan, vice president of title automation at ServiceLink.

Breadth of product offering
When you’re considering adding to your slate of providers, consider what value can be gained by onboarding a particular vendor. Banks that partner with organizations that offer a comprehensive suite of services — including uninsured and insured title products, flood and valuations — can benefit from increased efficiencies.

These considerations ladder up to one critical theme: partnership. Your title service provider should be a strategic ally who works alongside you to navigate market conditions.

3 Reasons to Add SBA Lending

There were nearly 32 million small businesses in the United States at the end of the third quarter in 2020, according to the Small Business Administration.

That means 99% of all businesses in this country are small businesses, which is defined by the agency as 500 employees or fewer. They employ nearly 50% of all private sector employees and account for 65% of net new jobs between 2000 and 2019.

Many of the nation’s newest businesses are concentrated in industries like food and restaurant, retail, business services, healthy, beauty and fitness, and resident and commercial services. This is a potentially huge opportunity for your bank, if it’s ready and equipped for when these entrepreneurs come to you for financing. But if your bank is not prepared, it may be leaving serious money on the table that could otherwise provide a steady stream of valuable loan income.

That’s because these are the ideal customers for a SBA loan. If that’s not something your bank offers yet, here are three reasons to consider adding SBA lending to the loan portfolio this year.

1. New Avenue for Long-Term Customers
Small business customers often provide the longest-term value to their banks, both in terms of fee income generated and in dollars deposited. But not having the right loan solution to help new businesses launch or scale means missing out on a significant and lucrative wave of entrepreneurial activity. That’s where SBA lending comes in.

SBA loans provide the right solution to small businesses, at the right time. It’s an ideal conversation starter and tool for your bank team to turn to again and again and a way to kick off relationships with businesses that, in the long run, could bring your bank big returns. It’s also a great option to provide to current small business customers who may only have a deposit relationship.

2. Fee Income With Little Hassle
In addition to deeper relationships with your customers, SBA lending is an avenue to grow fee income through the opportunity for businesses to refinance their existing SBA loans with your bank. It broadens your portfolio with very little hassle.

And when banks choose to outsource their SBA lending, they not only get the benefit of fee income, but incur no overhead, start up or staffing costs. The SBA lender service provider acts as the go-between for the bank and the SBA, and they handle closing and servicing.

3. Add Value, Subtract Risk
SBA loans can add value to any bank, both in income and in relationship building. In addition, the SBA guarantees 75% to 85% of each loan, which can then be sold on the secondary market for additional revenue.

As with any product addition, your bank is probably conscientious of the risks. But when you offer the option to refinance SBA loans, your bank quickly reduces exposure to any one borrower. With the government’s guarantee of a significant portion, banks have lots to gain but little to lose.

5 Things Banks Can Do Right Now to Protect Older Customers

Your bank’s most valuable customers are also its most vulnerable.

Americans born before 1965 hold 65% of bank deposits in the U.S., according to the American Bankers Association 2021 Older Americans Benchmarking Report. They are also routinely targeted by criminals: Adults ages 60 and older reported losing more than $600 million to fraud in 2020 alone, according to the Federal Trade Commission.

Banks’ role in protecting these customers is quickly becoming codified into law. More than half of states mandate that financial institution’s report suspected elder financial exploitation to local law enforcement, adult protective services or both.

However, banks need to go further to keep older adults’ money safe. Not only will these efforts help retain the large asset base of these valuable customers, but it can drive engagement with their younger family members who are involved in aging loved ones’ financial matters. Banks can do five things to support and protect their older adult customers.

1. Train employees to detect and report elder financial exploitation.
Although most banks train employees to spot elder financial exploitation, there’s confusion around reporting suspected exploitation due to privacy concerns, according to the Consumer Financial Protection Bureau. And when banks do file reports, they often aren’t filed directly with law enforcement or state Adult Protective Services agencies.

Executives must ensure their bank has clear guidelines for employees on reporting suspected exploitation. Training employees to detect and report fraud can help reduce the amount of money lost to exploitation. A study by AARP and the Virginia Tech Center for Gerontology found that bank tellers who underwent AARP’s BankSafe training reported five times as many suspicious incidents and saved older customers 16 times as much money as untrained tellers did.

2. Use senior-specific technology to monitor for fraud and financial mistakes.
Standard bank alerts don’t go far enough to protect against elder fraud. Banks should offer a financial protection service that:

  • Recognizes senior-specific risks such as unusual transfers, unfamiliar merchants and transactions that could be related to scams.
  • Monitors accounts to determine what is “normal” for each individual.
    Detects changes in transactional behavior and notifies customers of suspicious activity and their own money mistakes.
  • Bank Director identified companies and services, like Carefull, that can offer added protection by analyzing checking, savings and credit card accounts around the clock, creating alerts when encountering signs of fraud and other issues that impact older adults’ finances, such as duplicate or missed payments, behavior change and more.

3. Ensure older customers have trusted contacts.
The CFPB recommends that financial institutions enable older account holders to designate a trusted contact. If your bank isn’t already providing this service, it should. Technology gives banks a way to empower users to add trusted contacts to their accounts or grant varying levels of view-only permissions. This helps banks ensure that their customers’ trusted contacts are informed about any potential suspicious activity. It’s also a way for banks to connect with those contacts and potentially bring them on as new customers.

4. Create content to educate older customers.
Banks should inform older customers how to safeguard their financial well-being. This includes alerting them to scams and providing time-sensitive planning support, video courses and webinars about avoiding fraud.

Banks must also provide older customers with information about planning for incapacity, including the institution’s policy for naming a power of attorney. And banks must accept legally drafted power of attorney documents without creating unnecessary hurdles. Having a policy here allows for this balance.

5. Create an ongoing engagement strategy with older customers.
The days of banks simply shifting older adults to “senior checking accounts” are fading. Banks should take a more active role in engaging with older customers. Failing to do so increases the risk that this valuable customer base could fall victim to fraud, which AARP estimates totals about $50 billion annually.

Banks need a strategy to combine training, technology and content to generate ongoing senior engagement. Working with a trusted partner that has a proven track record of helping banks engage and protect older customers could be the key to implementing this sort of holistic approach.

Is Crypto the Future of Money?

Regardless of their involvement in the financial services industry, anyone paying attention to the news lately will know that cryptocurrencies are making headlines.

As the worldwide economy becomes less predictable, regulatory agencies are wondering whether cryptocurrencies could be used to transfer money if other assets become subject to international sanctions, likening crypto to gold. According to an early March article from CNN Business, the price of gold has spiked and could surpass its all-time high before long, while bitcoin is trading 4% higher.

Crypto has also been in the news because of an executive order recently issued by President Joe Biden. The order requires the Department of the Treasury, the Department of Commerce and other agencies to look into and report on the “future of money,” specifically relating to cryptocurrencies.

As part of that order, those agencies need to outline the benefits and risks of creating a central bank digital currency (CBDC), informally known as the digital dollar. The digital dollar can be thought of as the Federal Reserve’s answer to crypto. It would act like cryptocurrency, with one big difference: It would be issued and regulated by the Fed.

How would this work? One idea involves government-issued digital wallets to store digital dollars. While the U.S. is not likely to take imminent action on creating a CBDC — Congress would need to approve it — it would not be a big leap to sell this concept to the American public. The Federal Reserve reports that cash use accounted for just 19% of transactions in 2021. Digital payments, meanwhile, are up. According to McKinsey’s 2021 Digital Payments Consumer Survey, 82% of Americans used digital payments last year, which includes paying for purchases from a digital wallet like Apple Pay. Using digital dollars, in a similar kind of digital wallet, wouldn’t be all that different. The future state of digital currency and the current state of online payments, credit cards, buy now, pay later purchases and more are, in effect, exchanging bills and notes for 1s and 0s.

What this means for financial institutions is a need to focus on education and information, and an ear toward new regulations.

Educating account holders will be vital. Pew Research reports that 86% of Americans are familiar with cryptocurrencies, while 16% say they have invested. The reason more people haven’t invested? They don’t fully understand it. This is a huge growth opportunity for banks to partner with account holders as a trusted voice of information, within the confines of current regulations.

  • Use account holder transaction data to spot trends in cryptocurrency purchases within their ecosystem and inform them on how to communicate and educate account holders.
  • Task an employee to become the in-house cryptocurrency expert, in the ins and outs of crypto’s current and future state.
  • Develop a section on the website with information for account holders.
  • Create an email campaign that shows account holders a history of investment product adoption with links back to the bank’s website for resources about the latest news on cryptocurrencies. Even if the institution doesn’t facilitate sales, it is important to set the institution up as a trusted resource for industry data.

Crypto fraud is rampant because the majority of people still aren’t quite sure how crypto works. That’s why it’s so important for financial institutions to be the source of truth for their account holders.

Further, fintech is already in the crypto arena. Ally Bank, Revolut, Chime and others are working with their account holders to help facilitate crypto transactions. And even established institutions like U.S. Bank are offering cryptocurrency custody services.

Data will be an important key. Pew Research reveals that 43% of men ages 18 to 29 have invested in, traded or used a cryptocurrency. But what does that mean for your specific account holders? Look closely at spending data with a focus on crypto transactions; it’s an extremely useful metric to use for planning for future service offerings.

The role that traditional financial institutions will play in the cryptocurrency market is, admittedly, ill-defined right now. Many personal bankers and financial advisors feel hamstrung by fiduciary responsibilities and won’t even discuss it. But U.S. banking regulators are working to clarify matters, and exploring CBDC, in 2022.

Is cryptocurrency the future of money? Will a digital dollar overtake it? It’s too early to tell. But all signs point to the wisdom of banks developing a crypto and CBDC strategy now.

3 Ways to Drive Radical Efficiency in Business Lending

Community banks find themselves in a high-pressure lending environment, as businesses rebound from the depths of the pandemic and grapple with inflation levels that have not been seen for 40 years.

This economic landscape has created ample opportunity for growth among business lenders, but the rising demand for capital has also invited stiffer competition. In a crowded market, tech-savvy, radically efficient lenders — be they traditional financial institutions or alternative lenders — will outperform their counterparts to win more relationships in an increasingly digitizing industry. Banks can achieve this efficiency by modernizing three important areas of lending: Small Business Administration programs, small credits and self-service lending.

Enhancing SBA Lending
After successfully issuing Paycheck Protection Program loans, many financial institutions are considering offering other types of SBA loans to their business customers. Unfortunately, many balk at the risk associated with issuing government-backed loans and the overhead that goes along with them. But the right technology can create digital guardrails that help banks ensure that loans are documented correctly and that the collected data is accurate — ultimately reducing work by more than 75%.

When looking for tools that drive efficiency in SBA lending, bank executives should prioritize features like guided application experiences that enforce SBA policies, rules engines that recommend offers based on SBA eligibility and platforms that automatically generate execution-ready documents.

Small Credits Efficiencies
Most of the demand for small business loans are for credits under $100,000; more than half of such loans are originated by just five national lenders. The one thing all five of these lenders have in common is the ability to originate business loans online.

Loans that are less than $100,000 are customer acquisition opportunities for banks and can help grow small business portfolios. They’re also a key piece of creating long-term relationships that financial institutions covet. But to compete in this space, community institutions need to combine their strength in local markets with digital tools that deliver a winning experience.

Omnichannel support here is crucial. Providing borrowers with a choice of in person, online or over-the-phone service creates a competitive advantage that alternative lenders can’t replicate with an online-only business model.

A best-in-class customer experience is equally critical. Business customers’ expectations of convenience and service are often shaped by their experiences as consumers. They need a lending experience that is efficient and easy to navigate from beginning to end.

It will be difficult for banks to drive efficiency in small credits without transforming their sales processes. Many lenders began their digital transformations during the pandemic, but there is still significant room for continued innovation. To maximize customer interactions, every relationship manager, retail banker, and call center employee should be able to begin the process of applying for a small business loan. Banks need to ensure their application process is simple enough to enable this service across their organization.

Self-Service Experiences
From credit cards to auto financing to mortgages, a loan or line of credit is usually only a few clicks away for consumers. Business owners who are seeking a new loan or line of credit, however, have fewer options available to them and can likely expect a more arduous process. That’s because business banking products are more complicated to sell and require more interactions between business owners and their lending partners before closing documents can be signed.

This means there are many opportunities for banks to find efficiency within this process; the right technology can even allow institutions to offer self-service business loans.

The appetite for self-service business loans exists: Two years of an expectation-shifting pandemic led many business borrowers to prioritize speed, efficiency and ease of use for all their customer experiences — business banking included. Digitizing the front end for borrowers provides a modern experience that accelerates data gathering and risk review, without requiring an institution to compromise or modify their existing underwriting workflow.

In the crowded market of small business lending, efficiency is an absolute must for success. Many banks have plenty of opportunities to improve their efficiency in the small business lending process using a number of tools available today. Regardless of tech choice, community banks will find their best and greatest return on investment by focusing on gains in SBA lending, small credits and self-service lending.

The Future-Proof Response to Rising Interest Rates

After years of low interest rates, they are on the rise — potentially increasing at a faster rate than the industry has seen in a decade. What can banks do about it?

This environment is in sharp contrast to the situation financial institutions faced as recently as 2019, when banks faced difficulties in raising core deposits. The pandemic changed all that. Almost overnight, loan applications declined precipitously, and businesses drew down their credit lines. At the same time, state and federal stimulus programs boosted deposit and savings rates, causing a severe whipsaw in loan-to-deposit ratios. The personal savings rate — that is, the household share of unspent personal income — peaked at 34% in April 2020, according to research conducted by the Federal Reserve Bank of Dallas. To put that in context, the peak savings rate in the 50 years preceding the pandemic was 17.7%.

These trends became even more pronounced with each new round of stimulus payments. The Dallas Fed reports that the share of stimulus recipients saving their payments doubled from 12.5% in the first round to 25% in the third round. The rise in consumers using funds to pay down debt was even more drastic, increasing from 14.6% in round one to 52.3% in round three. Meanwhile, as stock prices remained volatile, the relative safety of bank deposits became more attractive for many consumers — boosting community bank deposit rates.

Now, of course, it’s changing all over again.

“Consumer spending is on the rise, and we’ve seen a decrease in federal stimulus. There’s less cash coming into banks than before,” observes MANTL CRO Mike Bosserman. “We also expect to see an increase in lending activities, which means that banks will need more deposits to fund those loans. And with interest rates going up, other asset classes will become more interesting. Rising interest rates also tend to have an inverse impact on the value of stocks, which increases the expected return on those investments. In the next few months, I would expect to see a shift from cash to higher-earning asset classes — and that will significantly impact growth.

These trends are unfolding in a truly unprecedented competitive landscape. Community banks are have a serious technology disadvantage in comparison to money-center banks, challenger banks and fintechs, says Bosserman. The result is that the number of checking accounts opened by community institutions has been declining for years.

Over the past 25 years, money-center banks have increased their market share at the expense of community financial institutions. The top 15 banks control 56.2% of the overall marketshare, up from 40% roughly 25 years ago. And the rise of new players such as fintechs and neobanks has driven competition to never-before-seen levels.

For many community banks, this is an existential threat. Community banks are critical to maintaining competition and equity in the U.S. financial system. But their role is often overlooked in an industry that is constantly evolving and focused on bigger, faster and shinier features. The average American adult prefers to open their accounts digitally. Institutions that lack the tools to power that experience will have a difficult future — regardless of where interest rates are. For institutions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.

The key to survival will be changing how these institutions think about technology investments.

“Technology isn’t a cost center,” insists Christian Ruppe, vice president of digital banking at the $1.2 billion Horicon Bank. “It’s a profit center. As soon as you start thinking of your digital investments like that — as soon as you change that conversation — then investing a little more in better technology makes a ton of sense.”

The right technology in place allows banks to regain their competitive advantage, says Bosserman. Banks can pivot as a response to events in the macro environment, turning on the tap during a liquidity crunch, then turn it down when deposits become a lower priority. The bottom line for community institutions is that in a rapidly changing landscape, technology is key to fostering the resilience that allows them to embrace the future with confidence.

“That kind of agility will be critical to future-proofing your institution,” he says.