Banks avoided a COVID-19 meltdown thanks to their ability to work with borrowers and other customers, and to a healthy dose of federal programs — like the Paycheck Protection Program, beefed-up unemployment assistance and other initiatives — that directed money into the pockets of individuals and businesses. But financial institutions are now facing some other challenges, including the rise of fintechs. Bankers in the Garden State, however, plan to hang tough.
Some of the angst was captured in an annual shareholder’s letter from JPMorgan Chase CEO Jamie Dimon, which raised an alarm about fintechs. Dimon called them “an enormous competitive threat,” complaining that fintechs are generally not subject to the same costly capital requirements, community reinvestment and other requirements.
“He’s correct, because bankers want a level playing field,” warned John McWeeney, CEO of NJBankers. “Fintechs generally aren’t treated the same way as banks are, when it comes to expensive regulatory conditions like the CRA [Community Reinvestment Act], capital level maintenance, and other standards. So NJBankers and others are speaking out for a level playing field, where everyone’s held to the same standard.”
Valley Bank Chief Operating Officer Bob Bardusch recalled attending an OCC round table event a few years ago with about 80 bank executives, where “[o]nly a handful were actively working with fintechs. Most perceived them as a threat.”
But Bardusch — who was an architectural engineer before going into banking (he tackled projects like Pittsburgh International Airport) — has long been a “tech-forward” kind of guy and is comfortable around fintechs. “We’ve got a very sophisticated internal technology team, and Valley has also partnered with and made investments in fintechs and venture capital and other funds that are oriented toward them,” he said, noting that Valley has partnered with fintechs to create tokenized, or digital payment systems in addition to construction-loan monitoring and other initiatives. “We each have advantages, so even if fintechs get charter approval, it won’t be a game changer.”
Cross River Bank has also been partnering with fintechs. In June, the New Jersey state-chartered, FDIC-insured bank’s parent company, CRB Group Inc., announced that it acquired Synthetic P2P Holdings Corp. d/b/a PeerIQ, a data and risk analytics firm that helps institutions analyze, assess and manage risk in the lending sector. In 2019, Cross River announced it acquired Seed, an online small-business banking technology platform. This summer the bank also announced the launch of Cross River Digital Ventures, which “seeks to invest in companies that sit at the intersection of lending, payments, investing and fintech, and are of strategic value to both the Cross River ecosystem and the broader technology industry.”
“Banks that can’t or don’t innovate will cease to exist in the future,” said Phil Goldfeder, Cross River’s senior vice president, global public affairs. “So Dimon is half right. Fintechs are quickly offering opportunities for consumers, but innovative banks can ensure trust and reliability if they work together with fintechs to offer more benefits.”
That approach can also open up doors to connect with under-served communities, he added, citing reports indicating that Black-owned businesses turned to fintech firms at higher rates when applying for funding from the Paycheck Protection Program. “We have supported the most vulnerable small businesses in our communities,” added Goldfeder. “We did by increasing efficiency and decreasing latency.”
Some others aren’t so sure. Peapack-Gladstone Bank CEO Douglas L. Kennedy believes that fintechs have a generally unfair advantage, but isn’t overly worried because, “[i]n wealth management and commercial lending we leverage our close relationships with customers. We also partner with fintechs to provide solutions for PPP and other programs. Last year, we processed 3,400 PPP loans in one week, and about half of them were not even previous clients of our bank. The difference is that we deliver personalized service, as opposed to the impersonal service that pure fintechs offer.”
Some other banking leaders, like M&T Bank Regional President for New Jersey Tom Comiskey, also take a nuanced view.
“While fintech companies do pose a challenge to traditional banks due to regulation requirements, they have their own challenges that traditional banks don’t face,” he said. “M&T’s strength has always been our closeness and commitment to the communities we serve and our focus on building personal relationships with our clients. This type of relationship and community building has not traditionally been a strength of fintech companies.”
M&T also partners with some of them. In one case, “Over the past year, M&T Bank’s SBA lending team scaled up by over 100 times bringing together customer journey mappers, technologists and our partners at Blend, a fintech company, who worked to develop and implement a loan application portal within 72 hours,” he noted. “At the end of the day, it is most important for banks and fintechs to work together to deliver optimal solutions for our clients.”
The CEO of Blue Foundry Bank, James D. Nesci, believes that fintechs do have a regulatory advantage, but “it’s doubtful they’ll be able to sustain it. There are few barriers to acquiring their technology, and as more banks do so we’ll catch up, even though fintechs have a first-mover advantage. Banks, however, have their own balance sheets behind them, and they also have a physical presence, and that’s an option that many customers want.”
Blue Foundry Bank works “with several fintechs for services like mortgage application and preprocessing, as well as new retail account openings,” he added. “We don’t build out the tech service, but we buy it and brand it, while a third-party party handles it. This enables us to offer top-quality service while keeping our own headcount in check.”
Investors Bank President and Chief Operating Officer Domenick Cama acknowledges that fintechs “have created financial products and delivered them to the markets in an innovative way,” but counters that there’s “a higher degree of trust and confidence in using a traditional bank.”
He noted that Investors Bank — which recently agreed to be acquired by Citizens Financial Group Inc. in a $3.5 billion deal — continues to invest in technology as well as the branch network, and warned that banks need to “adapt these technologies quickly, as younger customers mature and make more use of financial products. This requires greater investment in technology development or partnering with or acquiring a fintech. Clearly, banks that are not thinking about next steps will lose market share in the future. We work with our core provider and credible fintechs to leverage their capabilities in the digital space, so we can deliver an optimum experience to our customers.”
For Christopher D. Maher, CEO at OceanFirst Bank, the human touch still rules, but he hedges that with technology investments. “I am concerned that all participants in financial services operate under a level playing field,” he said. “I welcome competition as a positive force, but until outdated regulations like CRA are addressed, chartered depositories are held to standards not applied to all competitors. OceanFirst has invested heavily in our mobile banking tools, video teller services and our Nest Egg virtual investor advisor, among other technologies. We benchmark ourselves against the work being done by Quicken/Rocket Mortgage, Apple/Goldman Sachs, and even Walmart.”
A dark side of fintech banking?
Cross River Bank has touted its ability to expedite banking activity by leveraging technology. But in May, a Congressional Select Subcommittee on the Coronavirus Crisis blasted the bank, along with some other fintech-related financial institutions, for allegedly issuing “a large number of loans connected to ineligible companies and fraudulent applications.”
In one instance, according to the subcommittee, “a Texas man submitted 15 fraudulent applications to eight different lenders seeking approximately $24.8 million in PPP loans. Cross River approved seven of the loans. A modicum of due diligence by the bank should have identified the fraud. The individual that submitted the application used PPP loan funds to purchase multiple homes and buy a fleet of luxury cars, including a Bentley convertible.”
Cross River Senior Vice President, Global Public Affairs Phil Goldfeder disputes that, saying the bank “went above and beyond SBA standards and served more small businesses than any other bank in the country. The [subcommittee’s] investigation was premised on 15 loans that were determined to be fraudulent out of 487,000 loans — totaling some $13 billion and averaging $27,000 per loan — made by Cross River.”
Biden and banks
Another challenge could emanate from Washington. Despite the recent delta variant surge, it’s likely that federal authorities will be able to rein in the pandemic, sooner or later. Some bankers wonder if the Biden administration will then turn its sights on the banking industry.
“I’m concerned that the president has already thrown the gauntlet down,” said Provident Bank CEO Chris Martin. “He’s got a very progressive agenda and appears to want to fix a lot of issues through the banking system.” He’s also worried about the possibility that Biden may name “heavy handed” and “overzealous” regulators to open positions at agencies like the FDIC, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.
Biden’s pick to head the CFPB, for example — current Federal Trade Commissioner Rohit Chopra — has been praised by Democrats as consumer friendly, but blasted by some Republicans. House Financial Services Committee Ranking Member Patrick McHenry, R-N.C., said Chopra wants “to weaponize the CFPB to go after financial services companies they simply don’t like. Banks are an easy target. People use the term ‘bank’ and it sells well.”
For his part, Martin is also worried about reports that banks may face stiffer climate-related lending disclosure and other rules. “Being a good corporate citizen is fine, but the idea that someone wants us to make [climate change] disclosures even though we’re not involved in fossil fuel production raises a lot of issues,” he added.
A “modest increase” in regulation doesn’t worry Columbia Bank CEO Tom Kemley, but he warns that “if the pendulum swings too far everyone will suffer from unintended consequences. In the past, when the regulatory costs to banks increase too much, mortgage lending for example becomes more difficult and complex for consumers. People ask, ‘why is it so hard to get a loan,’ but we have to follow the rules.”