FinXTech’s Need to Know: Debt Collections and Recovery

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The Covid-19 pandemic may have stalled debt collection efforts for two years, but a partial economic recovery — paired with a looming recession — could soon send unprepared borrowers and their loans to collections.

Missed payments on certain loans are already on the rise. The Wall Street Journal reported that borrowers with credit scores below 620 — also known as subprime — with car loans, personal loans or credit cards that are over 60 days late are “rising faster than normal.” Eleven percent of general purpose credit cards were late, as compared to 9.8% in March 2021. Personal loan delinquencies have hit 11.3% versus 10.4% last year, and delinquent auto loans hit a record high of 8.8% in February.

As a result, banks may be seeing an influx in their collections and recoveries activity. It may be an opportune time to enhance and better your bank’s collections practices — doing so could help at-risk borrowers avoid collections altogether, and give your institution the chance to show customers that they are more than the debt they owe. 

Debt collections practices and agencies generally don’t have a good reputation among consumers: A quick Google search will uncover countless 2-star reviews and repulsive anecdotes. And while the Fair Debt Collections Practices Act (FDCPA) protects consumers from harsh, unfair and threatening collections tactics, a good experience with a collection agency is far from guaranteed. 

Banks exacerbate the issue by not conducting proper and continual due diligence on the third-party agencies they work with. With over 7,000 to choose from, this can be difficult to execute, but is a necessary task that could be the difference between retaining a customer and losing one.

A technology company may be able to provide your bank with the high-touch element with consumers during the collections process.

Fintechs have a few things banks might not offer (or have upgraded versions of): Predictive analytics software, APIs, rules-based platforms, self-upgrading machine learning, among others. These technologies can and should be harnessed to find problem loans before they become delinquent and reach consumers within their preferred method of communication. Traditional collection agencies can have difficulties navigating within FDCPA protections — fintechs can use their enhanced technologies to thrive within the compliance. 

Some fintechs even offer their products and services underneath the bank’s brand, which could be a strategic move if providing educational services and resources could get a customer back on track with payments.

Here are three fintechs that can help banks with their collections and recovery efforts.

TrueAccord has two products of interest to banks: Retain and Recover. Retain is a proactive solution for delinquent accounts that works with borrowers to keep the account from moving to collections. Retain primarily uses text, email and voicemail and communication methods, as preferred to cold calling.

When Retain fails to resolve the payment with a customer, banks can turn to TrueAccord’s Recover solution. Recover is primarily a self-servicing software, meaning that customers engage with Recover, and not the bank, to find a solution. Again, communication is through SMS, Facebook messaging, emails or text.

In addition, TrueAccord is a licensed collections agency.

Birmingham-based FIntegrate offers a software-as-a-service (SaaS) solution — Fusion CRS — for delinquency collections through charge-off recoveries and delinquency management. The software tracks and manages any type of account in any status, including but not limited to: commercial real estate loans, Small Business Administration loans, Paycheck Protection Program loans, deposit and share drafts, and consumer loans that are in repossession, bankruptcy, foreclosure, or have negative balances or become real estate owned.

Fusion CRS also assigns tasks, creates rules-based sequences and monitors special collection cases and statuses. It automatically generates letters, emails, texts, phone calls or other means of communication to account holders and other involved entities (such as a repossession or insurance company).

Collections technology can’t operate without customer information, which is where a company like Intellaegis can help. Its masterQueue product harnesses big data to gather, organize and track available data on a borrower. MasterQueue collects public record data and open source information from the web to track the borrower’s digital footprint and pinpoint a borrower’s whereabouts, online activity and associates.

The software then scores the data that represents the likelihood of locating the borrower based on its quantity and quality — users can then go down the list and attempt contact.

Consumers are spending more than during the pandemic, and debt levels are increasing in tandem even as rates rise and a potential recession looms. Technology can not only help banks handle the influx of overdue and delinquent accounts, but can aid in preserving and enhancing vulnerable relationships with customers as well.

5 Things Banks Can Do Right Now to Protect Older Customers

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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.

How Technology Blends Banking’s Future

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After rapidly adjusting operations at the start of the pandemic and accelerating their digital transformation roadmaps, banks are left wondering: What happens next? And what did the acceleration mean for banks’ digital strategy?

Banks need to shift their mindsets from emergency response toward using digital technologies to boost their relevance to their customer’s lives. Blended banking will become the norm. Although Covid-19 will be with us for the foreseeable future, people have returned to shops, restaurants and theatres. Similarly, customers are returning to bank branches, but in lower volumes and for different reasons. The proliferation of digital banking means customers no longer need to visit a branch for a transaction. But many retail and business customers will still visit a branch to receive advice or to buy a financial product. And although most banking journeys start online, many are still completed in branch.

Banks must recognize this and provide a consistent customer experience across channels, with human support for digital interaction and digital tools that augment human interaction. In practice, this means empowering customers with an engaging digital experience that can continue in branch. Many banks already acknowledge this evolution: They are repurposing branches as advice centers, with less emphasis on over-the-counter transactions. In addition, banks can harness modern tech devices, like tablets, to support the in-person experience. But to truly elevate the customer experience and increase engagement, banks must also harness the power of data.

Advanced Analytics
For many banks, data and analytics have great untapped potential to drive the next wave of innovation to increase customer engagement. With a wealth of customer data at their disposal, banks can gain a deep understanding of customers behavior, goals and financial aspirations, and deliver personalized experiences in a way that was never before possible.

In practice, big life events have financial consequences — buying a car, getting married or having children — but the reality is that small transactions and spending habits can also provide valuable clues to a customer’s behavior. Careful use of data and analytics allows banks to help customers align their financial services closely with real-life events. They can also use data to help their customers gain a deeper understanding of their own financial standing, providing recommendations to optimize the use of cash. For example, a customer with surplus funds may be advised to pay down a mortgage or increase pension contributions rather the leave money on deposit.

Banks can also do more for commercial customers to evolve beyond transactional banking to helping them run their business more effectively. Once again, data and integration are key. Providing commercial customers with up-to-the-minute aggregated cash positions and forecasts gives them a deeper understanding of their cash use, liabilities and commitments. As banking becomes more open and connected, commercial banks can become the heart of an ecosystem with many participants. Banks must embrace modern technologies, boost automation and integration and ultimately adopt a fintech approach to finance.

A Fintech-First Approach to Finance
The pandemic has accelerated banking’s shift to a technology business. Banks that ignore this will be left behind. To attract and retain consumers and business customers, banks need to eliminate guesswork by harnessing technology and data and offering customers what they want, when they need it.

Banks have much to learn from big technology: Amazon.com generates around 35% of sales from recommendations, while 75% of what’s streamed on Netflix is because of its suggestion algorithm. In the digital age, consumers welcome recommendations, nudges and insights — and are usually happy for trusted suppliers to use their data to personalize their digital experience. Banks must adopt a more entrepreneurial approach to customer engagement.

Retail banking: For a long time, bankers have designed banking experiences based on customer journeys. Now is the time to support customer life journeys by proactively supporting customers throughout their entire lifecycle — from large, life-changing decisions as well as everyday spending and budgeting.

Commercial banking: Banks must acknowledge that millennials are more digital savvy and entrepreneurial than any previous generation. Many current retail customers will start businesses and become the commercial customers of tomorrow. Many will need financial advice, and all will need banking.

With fintechs and challenger banks growing in scope and number, now is the time for incumbent banks to act. The digital age is here to stay.

Poll Results: Digital Transformation’s Next Phase

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NYDIG-Report.pngJPMorgan Chase & Co., which is the largest U.S. bank by assets, spends $12 billion a year on technology, investing in a vast array of technologies that include machine learning, artificial intelligence and blockchain. The second largest bank, Bank of America Corp., spends roughly $3.5 billion annually on new technology initiatives alone, according to Chairman and CEO Brian Moynihan.

It’s a lot of money — and a level of spending that smaller banks can’t hope to achieve. Executives and directors primarily representing community banks under $10 billion in assets reported a median technology budget of $1.7 million for fiscal year 2021 in Bank Director’s 2021 Technology Survey, with a median increase in spending of 10% compared to the previous year.

Those limitations should have bank leaders thinking strategically about how to allocate those precious dollars. With that in mind, Bank Director’s FinXTech division polled bank executives in January and February 2022 about technology adoption trends, and asked about specific noncore solutions that have had a recent, significant impact toward achieving their goals.

Bankers identified 20 platforms as their favorites when it came to driving that change, ranging from digital lending solutions to data analysis. You can find the companies listed on page 7-8 of the report. To categorize the solutions by type, we relied on input from FinXTech Research Analyst Erika Bailey, who manages Bank Director’s FinXTech Connect platform, a guide to financial technology companies working with U.S. banks.

While the past 18 months found many banks putting digital account opening and lending platforms in place — in response to the digital acceleration brought about by the pandemic — banks shifted plans for the next 12 months to application programming interface (API) platforms, data aggregation and analysis, and workflow automation.

To gain additional perspective on these trends, we talked to the executives of three banks that are actively accelerating their digital journeys. Mascoma Bank, a $2.6 billion mutual in Lebanon, New Hampshire, is in the early stages of implementing an API-enabled, cloud-based core platform that will help the bank customize its product and service offerings. St. Louis-based Midwest BankCentre, with $2.4 billion in assets, leveraged its digital subsidiary to expand its capabilities to all of its customers; it will expand digital account opening to business clients in 2023. And West Reading, Pennsylvania-based Customers Bancorp, with $20 billion in assets, is using data-driven insights to fuel the next phase of its digital transformation.

Click here to access the poll results and learn more about how those banks are moving technology transformation forward in this special report.

Also included is a success checklist, questions that boards and leadership teams could ask to help strengthen their technology strategy.

Bank leaders should start by evaluating their organization’s strengths and how technology can align with strategy, advises Ron Shevlin, chief research officer at Cornerstone Advisors. “Stop thinking about technology adoption, and focus more on … the business opportunity,” he says. “Focus on the business results.”

An Inside Look At One Bank’s Digital Growth Planning

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By now, most bank leadership teams understand the importance of offering well-designed digital experiences. What we’ve found is often more elusive is knowing where to start when making a significant investment in digital.

One bank that recently grappled with this was Boston-based Berkshire Hills Bancorp, the $11.6 billion parent company of Berkshire Bank.

Executives wanted to digitally transform the bank and that success would only be achievable if they unified around a core set of goals and built a robust strategic plan for reaching them. This vision allowed teams to work toward individual milestones along the way.

We recently spoke with Lucia Bellomia, EVP and head of retail banking and CIO Jason White. They gave us an inside look at what went into developing the Berkshire BEST plan for transformation, and the factors they believe will lead to their successful digital growth.

The Berkshire leadership team started by recognizing that if the plan was going to truly transform the entire bank, they needed to gather input and feedback from every department. “Executives spoke to stakeholders in every department to what milestones the bank would need to hit and what it would take to achieve those goals”, says Bellomia. They also formed groups specifically to achieve some of the components of that milestone.

Involving this many additional stakeholders extended the strategic planning phase — In Berkshire’s case, it took three months of meetings. But White felt the time spent laying a foundation of transparency and open communication will help the bank execute and fulfill the objective of the transformation.

Without some clearly defined pillars outlining your main goals, the whole process of starting the institution’s digital plan can feel chaotic and messy. White suggests that banks first investigate what it means for their institution to digitally transform, and then define the core strategic pillars from there.

Berkshire’s three core pillars were: optimize, digitize and enhance. These pillars support efforts to improve the customer experience, deliver profitable growth, enhance stakeholder value, and strengthen their community impact. Taking the time to first define core pillars that support a larger strategic plan helped Berkshire Bank recognize even greater opportunities. Rather than simply adding new digital services to their banking stack, they realized they could facilitate the evolution of their entire bank.

With the plan announced and in place, Berkshire launched into the execution phase of its transformation. Here, they were met with new challenges that required thoughtful commitments from leadership and investments in project infrastructure. One impactful early investment was developing a transformation office that was responsible for measuring, monitoring and communicating the success of the plan. Executives and sponsors worked with the office to define both date and monetary milestones.

A dedicated internal resource focused on project management helped Berkshire communicate the progress made toward each milestone through regular meetings, tracked and updated key performance indicators, and other updates.

Equally important to the success of Berkshire’s transformation plan was its commitment to scrutinizing each investment and vendor to ensure the right fit and an acceptable return on investment for the bank. The bank is a “low-code” development team with limited resources and used achievable digital goals to identify and select vendors to digitize, according to the bank’s plan.

As part of its transformation plan, the bank extended its existing fintech relationship to include digital banking platforms for consumer and small business customers. This allows the bank to innovate and digitize at an accelerated pace, without having to grow internal developer resources.

Ultimately, institutions like Berkshire Bank are realizing that developing a successful plan for digital transformation that works for both internal stakeholders and customers requires a rethinking of the way executive teams gather feedback, address challenges across departments, and monitor the success of a project.

5 Key Factors for Fintech Partnerships

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As banks explore ways to expand their products and services, many are choosing to partner with fintech companies to enhance their offerings. These partnerships are valuable opportunities for a bank that otherwise would not have the resources to develop the technology or expertise in-house to meet customer demand.

However, banks need to be cautious when partnering with fintech companies — they are subcontracting critical services and functions to a third-party provider. They should “dig in” when assessing their fintech partners to reduce the regulatory, operational and reputational risk exposure to the bank. There are a few things banks should consider to ensure they are partnering with third party that is safe and reputable to provide downstream services to their customers.

1. Look for fintech companies that have strong expertise and experience in complying with applicable banking regulations.

  • Consider the banking regulations that apply to support the product the fintech offers, and ask the provider how they meet these compliance standards.
  • Ask about the fintech’s policies, procedures, training and internal control that satisfy any legal and regulatory requirements.
  • Ensure contract terms clearly define legal and compliance duties, particularly for reporting, data privacy, customer complaints and recordkeeping requirements.

2. Data and cybersecurity should be a top priority.

  • Assess your provider’s information security controls to ensure they meet the bank’s standards.
  • Review the fintech’s policies and procedures to evaluate their incident management and response practices, compliance with applicable privacy laws and regulations and training requirements for staff.

3. Engage with fintechs that have customer focus in mind — even when the bank maintains the direct interaction with its customers.

  • Look for systems and providers that make recommendations for required agreements and disclosures for application use.
  • Select firms that can provide white-labeled services, allowing bank customer to use the product directly.
  • Work with fintechs that are open to tailoring and enhancing the end-user customer experience to further the continuity of the bank/customer relationship.

4. Look for a fintech that employs strong technology professionals who can provide a smooth integration process that allows information to easily flow into the bank’s systems and processes.

  • Using a company that employs talented technology staff can save time and money when solving technology issues or developing operational efficiencies.

5. Make sure your fintech has reliable operations with minimal risk of disruption.

  • Review your provider’s business continuity and disaster recovery plans to make sure there are appropriate incident response measures.
  • Make sure the provider’s service level agreements meet the needs of your banking operations; if you are providing a 24-hour service, make sure your fintech also supports those same hours.
  • Require insurance coverage from your provider, so the bank is covered if a serious incident occurs.

Establishing a relationship with a fintech can provide a bank with a faster go-to-market strategy for new product offerings while delivering a customer experience that would be challenging for a bank to recreate. However, the responsibility of choosing a reputable tech firm should not be taken lightly. By taking some of these factors into consideration, banks can continue to follow sound banking practices while providing a great customer experience and demonstrating a commitment to innovation.

FinXTech’s Need to Know: Augmented Intelligence

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Banks are exploring how to best develop and retain personal relationships as financial interactions move online.

Here’s what they need to know.

Replicating in-branch experiences isn’t only about providing customers with tailored responses and greeting them by name. It’s also about giving those customers the ability to control their interactions: how, when and with whom they handle their financial situations.

Some customers may want to call, some may feel more comfortable texting and some may change their mind and want to head to their local branch in the middle of a conversation. Chatbots — often powered by rules-based artificial intelligence — can automatically populate responses, but may fall short when it comes to fluid and intuitive communications that customers want, potentially complicating their issue resolution.

To address this shortcoming and improve digital communication capabilities, some banks have decided to build their own technology. Umpqua Holdings Corp., which has $30.9 billion in assets and is headquartered in Portland, Oregon, launched its customized Umpqua Go-To platform in 2018. The stand-alone app was developed and built in-house at Umpqua’s innovation lab, Pivotus Ventures, according to The Financial Brand. Umpqua Go-To allows customers to personally select which banker they want to interact with based on who was available online.

But many banks don’t have the bandwidth, resources or budget to build their own technology from scratch. Instead, a bank can choose to partner with a financial technology company such as Agent IQ.

The San Francisco-based fintech helps banks communicate with their customers using augmented intelligence. Augmented intelligence is used to enhance and assist human-based communication, unlike artificial intelligence, which often aims to replace it.

At institutions that use Agent IQ, customers can choose a specific, personal banker to communicate with through digital channels, which can include mobile messaging, web chat and SMS text messaging, as well as social media channels like Whatsapp and Facebook Messenger.

Agent IQ uses asynchronous technology: Customers and bankers can pick up conversations where they left off, at any time and through any channel. The conversation records are saved after a banker or customer leaves a session and can be referenced afterward by either party, by another banker or for compliance purposes.

Bankers are always looking to improve their customers’ experience. In fact, Bank Director’s 2021 Technology Survey found this to be the second most popular response driving banks’ technology strategy; 68% included it in their top three objectives.

And as it turns out, customers respond well to 24/7 access to personal bankers.

Independent Bank Corp., the $14.5 billion parent of Rockland Trust Company based in Rockland, Massachusetts, has seen significant engagement with the Agent IQ platform since its implementation. Since late May 2021, over 37,000 customers — approximately one fifth of their online customers — have used the platform without the bank marketing it or notifying customers of its presence, said Patrick Myron, Rockland’s senior vice president of retail network strategy and sales analytics, during a recent webinar hosted by Agent IQ. That’s an average of 500 to 600 weekly conversations that customers are opting into because they want to reach their banker digitally.

“We’ve done customer surveys,’’ he said. “The majority [of the results] are seven out of seven. They really like the engagement – the ability to talk to a banker any time they want.”

Chatbots are built to interact with customers with predetermined responses. That automation can be useful for directing traffic to certain webpages or answering yes and no questions, but many financial situations are complex and can’t be appropriately addressed solely by chatbots. Instead of being transferred to a bank representative 10 minutes into a conversation with a chatbot, Agent IQ will show the customer who’s available to communicate at the start of the interaction.

According to Bank Director’s 2021 Technology Survey, chatbots may not even be what banks want. Seventy-eight percent of respondents stated the bank doesn’t use chatbots. Only 15% had chatbots and 7% were unsure if the bank had them.

Augmented intelligence can enhance digital communication between banks and their customers, not replace it with algorithms. Firms that leverage it, like Agent IQ, may be an attractive solution for banks looking to create and maintain digital relationships with their customers.

Agent IQ is included in FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email [email protected].

Fintechs Are Starting to Buy Banks, But Why?

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A common maxim in the mergers and acquisitions industry is that very small banks have a tough time finding buyers. But last week, we learned there’s an exception. And it comes from financial technology companies, one of which announced plans to buy a $154 million bank in Seattle called First Sound Bank for $23 million.

The acquirer is BM Technologies, the Radnor, Pennsylvania-based technology company that was spun off from Customers Bancorp earlier this year and trades on the New York Stock Exchange. The price translates to a premium of 166.4% for the bank, which trades on the pink sheets, according to investment bank Hovde Group.

“Fintechs are getting more aggressive in buying small bank charters,” says Curtis Carpenter, senior managing director for the investment bank Hovde Group, which was not involved in the deal. Fintechs may also be willing to pay more for a small bank than another bank will. For a large fintech company, getting access to a bank charter may be critical for their business plan going forward; paying an extra $1 million or $2 million may not be a lot of money for the fintech, but might be meaningful for the small bank.

It’s tough to see what kinds of premiums fintechs are paying for banks, because most fintechs are privately owned or the deals are so small, the financials sometimes aren’t disclosed. Granted, there are not a lot of U.S. financial technology companies buying banks. This year, there were six such announced deals. They included San Francisco-based SoFi Technologies’ planned purchase in March of $150 million Golden Pacific Bancorp in Sacramento, California, according to an analysis by Piper Sandler & Co. using S&P Global Market Intelligence data.

U.S. Financial Technology Companies Buying Banks

Deal announcement Buyer Target
Nov. 15, 2021 BM Technologies First Sound Bank
Aug. 2, 2021 Newtek Business Services Corp. National Bank of New York City
June 15, 2021 KMD Partners Liberty Bank
June 14, 2021 Cornerstone Home Lending The Roscoe State Bank
March 9, 2021 SoFi Technologies Golden Pacific Bancorp
Jan. 1, 2021 DXC Technology Co. AXA Bank AG
Feb. 18, 2020 LendingClub Corp. Radius Bancorp
Nov. 18, 2019 Crossroads Systems Rice Bancshares

SOURCE: Piper Sandler & Co. using data from S&P Global Market Intelligence

 

There’s not a lot of banks buying fintechs either, as Bank Director Vice President of Research Emily McCormick explored recently. Banks aren’t as interested in buying fintechs as they are interested in buying other banks, mostly because of cultural hurdles and lack of comfort with valuations, according to Bank Director’s 2021 M&A Survey. Fintechs, on the other hand, have started to get really drawn to bank charters, as Bank Director Managing Editor Kiah Haslett showed in her second quarter 2021 magazine story, “The Latest, Oldest Thing in Banking” (available with a subscription).

“I think there’s a phenomenon out there; what you want is a bank charter,” says Chris Donat, a managing director and senior equity research analyst at Piper Sandler & Co. “If you go back to the financial crisis, when Ally Financial created its bank, having a bank as a source of deposits to fund loans is generally one of your cheaper ways to fund loans and is also more stable.” Fintechs also get access to the national payment rail networks and the Federal Reserve’s discount window for liquidity purposes.

As fintechs grow their businesses, a stable source of low-cost deposits is incredibly useful. “They’re interested in the paperwork if you will, the charter, and not the deposit franchise of having branches and the loan officers,” Donat says.

BM Technologies will leverage the charter to grow its national digitally focused banking services, which include student loan disbursement services to 725 colleges and universities as well as banking services to about 2 million students, plus a flagship banking program with T-Mobile US, according to an analyst note from Michael Diana, managing director of Maxim Group. But BM Technologies will keep the community bank at First Sound Bank focused on the Seattle area. First Sound Bank CEO Marty Steele will lead the community bank division and serve as COO of the newly formed BMTX Bank, the two companies announced. BM Technologies’ CEO Luvleen Sidhu will serve as chair and CEO of BMTX Bank.

“Together we are looking forward to this partnership to create a nationwide deposit gathering and lending platform with the power to deliver an integrated customer experience at the highest level,” Steele said in a release about the deal.

Diana says First Sound is a successful community bank. Plus, BM Technologies’ acquisition means it avoids having to pay bank partners to hold insured deposits.  When online marketplace LendingClub Corp. bought Radius Bancorp last year for about $185 million in cash and stock, it was for a similar reason.

“It’s all about deposits,” Diana says. “You don’t have to pay anyone else for holding and servicing.”

How the Edges of Financial Technology Could Change Regulation

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Financial regulation in the United States follows a longstanding pattern: The presidential administration changes, the other political party takes power and the financial regulation pendulum swings. Those working in compliance inevitably need to recalibrate.

President Joe Biden’s messaging so far has aimed to minimize polarization. This bodes well for moving beyond the typical “financial deregulation” versus “more regulation” dynamic. It gives the industry an opportunity to turn our attention towards pulling the overall framework out of an old, slow, manual and paper-based reality. What the U.S. financial regulatory framework really needs are large, fundamental overhauls and modernizations that will support a healthy, ever-changing financial services marketplace — not just through the next presidential administration, but further beyond, through the next several decades.

The incoming leadership could make regulation smarter and more effective with reforms that:

  • Measure success by outcomes and evidence, as opposed to procedural adherence.
  • Leverage technology to streamline compliance for agencies as well as providers.
  • Catch up and keep up with the ongoing advancements in financial technology.

The time for these sorts of changes just so happens to be ripe.

Digital or cryptocurrencies and charters for financial technologies have an awkward fit within the existing regulatory framework. Cannabis, another fringe area of finance, poses extra layers of legal and regulatory challenge, but its status could change on a dime if the new administration resolves the state and federal disconnect. All three of these peripheral business opportunities have gained significant momentum recently and may force regulators to adapt. To support these new use cases, which would otherwise break existing bank infrastructure, technology providers would have to modernize in ways that would benefit financial service compliance across the board.

As the emerging regulatory lineup takes shape from the legacies of the outgoing agency heads, the swing from the past administration to the present may not be all that dramatic. There are strange bedfellows in fintech. In the last six months of Donald Trump’s administration, there was already a balance between Acting Comptroller of the Currency Brian Brooks and U.S. Treasury Secretary Steven Mnuchin.

Brooks was indeed very active in his short tenure. Under him, the Office of the Comptroller of the Currency issued full-service national bank charters for fintech companies, published interpretive letters supporting digital currencies and published a working paper from its chief economist, “Chartering the FinTech Future,” that lent support to the use of stablecoins.

In contrast, Mnuchin spent his last month in office encouraging  Financial Crimes Enforcement Network, or FinCEN, to issue a controversial proposed rulemaking that would affect crypto wallets and transactions. Critics argue this would make compliance impossible for decentralized technologies.

The Biden administration may have a similar dynamic between these two regulatory roles, albeit less dramatic. The confirmation of Treasury Secretary Janet Yellen, with her experience and moderate stance, conveys a great deal of stability. Still, she may not champion stablecoins, given her public statements on cryptocurrency.

At writing, Michael Barr is the anticipated pick for comptroller. His extensive and diverse résumé shows a long history of supporting fintech. We anticipate that he would continue the momentum towards modernization that Brooks started.

Gary Gensler, the nominated chair of the Securities and Exchange Commission, has a great deal of expertise and enthusiasm for digital currencies. Since his tenure as chair of the Commodity Futures Trading Commission during Barack Obama’s administration, he has served on faculty at MIT Sloan School of Management, teaching courses on blockchain, digital currencies and other financial technologies. Chris Brummer, the Biden administration’s anticipated choice for the CFTC, currently serves as faculty director at Georgetown University’s Institute of International Economic Law, has written books on the regulation of financial technologies and founded D.C. Fintech Week to help promote discussion of fintech innovation among policymakers.

When we get to the outer edges of finance — to crypto, charters and cannabis — the divide between political camps starts to disappear. But there’s still quite a bit of rigidity in the traditional financial industry and regulatory framework. Combining the slate of steady, open-minded regulators with the building pressures of technology yields reasonable hope for regulatory overhauls that will pull compliance along into the future.