FRIDAY JUNE 11, 2021 VOL. 186 No. 111 AMERICANBANKER.COM Follow us on Twitter @AmerBanker Massachusetts is latest state 5 vying to become fintech hub A new public-private network is pursuing Governance matters a more comprehensive approach than other states to cultivate a strong financial Fitch is far more likely to incorporate governance issues technology industry by uniting banks, into a financial institution's rating than environmental or insurance companies, startups, government social factors agencies, investors, universities and students. Page 8 See story on page 6 Factors affecting financial institutions' ratings as of March What Marqeta’s IPO says about 6 the future of super apps 250 The company’s payment processing platform supports the likes of Uber and 214 200 Square in their ambitions to create all-in- one offerings that bundle financial and 150 other services. Page 9

100 Amazon explores replacing 7 JPMorgan in credit card tie-up 50 Amazon.com is fielding bids to replace 41 JPMorgan Chase as the issuer on its popular 14 0 co-brand credit card as a fresh wave of competition for new card customers EnvironmentalSocial Governance emerges. Page 10 Source: Fitch Ratings Lucy Ito’s legacy: Lowering 8 a vexing regulatory cost for credit unions dailybriefing Governance flaws are starting The retiring head of the National Association 3 to hurt banks’ credit ratings of State Credit Union Supervisors spent years Fitch says it will be weighing failures of working to rein in a contentious funding Growing pains: How the Big management standards and practices at mechanism used by the National Credit 1 Four banks plan to overcome banks more heavily when considering Union Administration that drew money from size constraints possible downgrades. ESG advocates are the Share Insurance Fund. Page 10 The four largest U.S. banks face investor cheering the development. pressure to deliver the returns of smaller rivals, (See chart above.) Page 6 Mastercard focuses but they complain that the federal deposit cap 9 investment on fintechs and capital rules make that difficult. So they’re Pandemic drove up costs of founded by minorities pouring money into wealth management, 4 complying with anti-fraud The card brand has added a dedicated lane payments and digital banking to seize more rules: Report to its startup program to address the venture market share in existing businesses and fend off Financial institutions spent nearly $214 funding gap for race and gender. Overall, less nonbank challengers. Page 2 billion last year — an 18% jump from 2019 — than 3% of VC funding goes to startups with to meet regulatory requirements for fighting Black or Latinx founders. Page 11 Lawmakers aren’t ready to financial crimes, a new study says. The 2 rubber-stamp Fed digital dollar spending included more staffing to manage There’s no return to normal The Federal Reserve has signaled the need for risks posed by customer growth. Page 7 10 for small-business lending congressional authorization if the central bank Just as small and midsize businesses had to moves ahead with creating a digital currency. adapt to survive the coronavirus emergency, But senators raised questions at a hearing lenders need to adopt new underwriting about whether it would help consumers, how practices and technologies that modernize it would complement private-sector banking how they evaluate borrowers’ creditworthiness, and other issues. Page 5 Codat CEO Peter Lord writes. Page 12 FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 2

and competitiveness. The Big Four have not always been this GROWTH STRATEGIES But at banks as large as the Big Four large, and there have not always been four. — which hold a combined $10.8 trillion The industry has been shrinking for of assets and operate a sprawling array of decades, ever since the 1980s savings and Growing business lines — finding ways to grow is loan crisis precipitated an extinction event harder. They generally can’t just buy a rival for small banks. Federal data shows that pains: How bank to add cheap deposits to fund more between 1984 and 1999, the number of loans. commercial banks fell from 14,000 to 9,000 Their sheer size, scope and market power while the average size of the remaining the Big Four make growth exceedingly complicated banks grew. — indeed, they face perhaps the most Today there are 5,001 federally insured banks plan to complicated tangle of politics, regulatory banks, still far more than most other scrutiny, deposit limitations, public image, countries, where there are typically just a customer and shareholder satisfaction and handful. Part of the reason is the United overcome size competition in international finance. States’ vast size and preference for local “The bigger you get, the more scrutiny you credit, as well as an abiding distrust of constraints receive,” said Piper Sandler analyst Jeffery centralized power. Harte, who covers Citi, JPMorgan and Bank The 1994 passage of the Riegle-Neal By Allissa Kline of America. Interstate Banking and Branching Efficiency June 09, 2021 So how can the megabanks achieve Act played a major role in allowing bigger Citigroup is switching things up and it’s growth in face of these challenges? While players to expand by permitting them to moving at lightning speed. each company is on its own path, and the open branches across state lines and buy The $2.26 trillion-asset bank, led as of regulatory constraints they face are different, out-of-state rivals for the first time in seven March 1 by Chief Executive Jane Fraser, is the largest U.S. banks are seeking to bulk up decades. One of the lesser-known features cutting loose the business lines that don’t in ways that do not set off alarm bells inside of Riegle-Neal is that it imposed a 10% cap perform, ratcheting up the focus on those the government. That can mean geographic on any single bank’s deposit share, meaning that do and pouring billions of dollars into a expansions of their branch footprints rather that a bank could not acquire another bank massive risk management overhaul to make than acquisitions. It may also mean a greater if the merged entity would hold more than the firm safer, sounder and more secure. focus on wealth management than lending. 10% of the nation’s deposits. The moves are designed to address two “Given capital and liquidity rules that But it was the Gramm-Leach-Bliley Act issues: In addition to heightened scrutiny penalize risk taking, it seems that one of 1999 that set the stage for a new era of from U.S. banking regulators — which fined regulation-friendly business everyone wants bank consolidation. GLB, as it came to be Citi last fall for gaps in risk management — to enter into is private wealth management,” known, pared back the Depression-era shareholders are demanding more value said Greg Baer, president and CEO of the Glass-Steagall Act that formally separated from the bank, whose share price is down Bank Policy Institute, an advocacy group commercial banking and investment more than 50% since the financial meltdown representing the nation’s largest banks. banking. of 2008. Suddenly, banks were able to create Fraser has vowed to return capital to The big liberalization financial holding companies that house not shareholders and to do so at or near the levels of other large U.S. banks. “We’re a team on a mission to get this done,” Fraser Established 1836 One State Street Plaza, 27th floor, New York, NY 10004 said in January. “And we will get this done.” Phone 212-803-8200 AmericanBanker.com While the circumstances driving Citi’s urgent makeover are unique to Citi, the Editor in Chief Alan Kline 571.403.3846 Copy Editor Neil Cassidy 212.803.8440 pressure to do more and be more is present at Managing Editor Dean Anason 770.621.9935 every U.S. megabank. Shareholders demand Reporters/Producers that banks of all sizes focus on improving Executive Editor Bonnie McGeer 212.803.8430 Laura Alix 860.836.5431, Kate Berry 562.434.5432 their profitability, but the calculus is far more Washington Bureau Chief Joe Adler 571.403.3832 complex at Citi, JPMorgan Chase, Bank of Executive Editor, Technology Miriam Cross 571.403.3834 America and Wells Fargo than it is at smaller Penny Crosman 212.803.8673 Jim Dobbs 605.310.7780 institutions where whole-bank acquisitions BankThink Editor Rachel Witkowski 571.403.3857 offer a relatively straightforward path to John Heltman 571.403.3847, Allissa Kline 716.243.2679 Community Banking Editor Paul Davis 336.852.9496 greater scale. Hannah Lang 571.403.3855 Banks generally like to get bigger in order Contributing Editor Daniel Wolfe 212.803.8397 John Reosti 571.403.3864, Gary Siegel 212.803.1560 to spread out their fixed costs. The more Digital Managing Editor services they provide, the more money Christopher Wood 212.803.8437 Kevin Wack 626.486.2341 they can save. Cue an uptick in profitability

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 3 only banking subsidiaries, but also securities One underappreciated truth about the in capturing new clients, extending their firms, insurance companies and more. U.S. banking industry is that size does not reach into existing markets and fortifying “Banks were slowly getting into secondary necessarily confer profitability. Only one their technology, all with a goal of improving industries from 1987 on, but there was a big megabank, JPMorgan, is ranked among the efficiency and profitability. liberalization,” said Arthur Wilmarth Jr., top 10 banks in return on average equity, a “I think of it more as expanding wallet a retired law professor and the author of key metric that investors use to determine share in business lines,” Harte said. “Most “Taming the Megabanks: Why We Need a a bank’s profitability, on a list of large of the growth initiatives here are about ways New Glass-Steagall Act.” “What had been a and midsize banks compiled by Capital to expand and deepen their presence in slow and steady takeoff morphed into full- Performance Group. Citi, Wells and Bank existing business lines.” on universal banking.” of America rank below far smaller banks The challenge is to keep growing The 2008 mortgage crisis sped up that like Zions Bancorp, Fifth Third Bancorp and organically without taking on additional trend. As it unfolded, investment firms Bear Ally Financial, which makes institutional risk or regulatory scrutiny. And wealth Stearns and Merrill Lynch teetered at the investors less likely to pick up the biggest management is perhaps the most obvious edge of insolvency, and JPMorgan Chase banks’ shares. way to do that. and Bank of America were able to step in None of this is to say that anyone should Consider the example of JPMorgan Chase. and acquire them. Meanwhile, Wells Fargo feel sorry for the biggest banks — few do. The largest of the Big Four, with $3.7 trillion snapped up the struggling Wachovia — once The Big Four have the largest customer of assets and a global portfolio of businesses, the fourth-largest bank holding company in bases to go along with diversified business JPMorgan has been concentrating on the nation — in a $12.7 billion deal that more lines, and boast significant political clout building its wealth management unit at than doubled Wells Fargo’s assets and gave it and economic power. That’s why so many the same time it has been on the hunt for nationwide reach. politicians, academics and ordinary people acquisitions in that area and across the The crisis proved to be a turning point, have zeroed in on the megabanks as a entire company. Wilmarth said. “It really solidified these shorthand for the abuse of consolidated In his annual shareholder letter, JPMorgan four as the banks that clearly separated power and wealth. Chairman and CEO Jamie Dimon wrote that themselves from everybody else,” he said. While calls for the biggest banks to be “acquisitions are in our future and fintech is It also resulted in stricter regulations that broken up have quieted down in recent an area where some of [the bank’s excess] transformed the way that banks — and big years, there is still a widespread skepticism cash could be put to work.” banks in particular — are supervised. The of these companies and the market power But he is also looking for other Dodd-Frank Act of 2010 required banks to that they wield. Wilmarth argues that the opportunities. “We’re completely open- maintain more capital and liquidity than biggest regulatory problem with the Big Four minded,” Dimon said during the company’s they previously held. And the international is that they’ve become too complex. first-quarter earnings call. “It could be Basel III accords established a set of global With fewer business lines, he said, “you payments. It could be asset management. standards across G-20 countries to ensure can be really excellent in those business It could be data. It could be anything like that banks, especially the so-called global lines, and then you’re not so complex. that. It cannot be a U.S. bank, so I’m just systemically important banks, or G-SIBs, You can keep better track of what you’re reminding people, if you got ideas let us have common rules. doing and be more successful at it. I just know. “These last 12 years, we’ve been living in think when you get these enormous, giant Meanwhile, JPMorgan continues to a different world,” said Saule Omarova, a universal banks, you get all these problems expand its branch network. By the end of professor at Cornell Law School, who noted of risk management and risk controls, and July, it will have at least one branch in each that the big banks came out of the 2008 crisis often your best units end up subsidizing of the lower 48 states, Chief Financial Officer not only much bigger, but also operating your worst.” Jennifer Piepszak said in April. with greater scope and scale. Big banks say that the heightened Similarly, Bank of America continues There are eight U.S.-based G-SIBs — the regulatory standards that apply to them to open branches in new markets while Big Four along with Goldman Sachs, Morgan should give comfort to the public. simultaneously investing in technology and Stanley, State Street and Bank of New York Paul Donofrio, Bank of America’s chief digital banking and tapping into wealth Mellon — and while many post-crisis rules financial officer, said that “big banks have management to drum up more business. eased for smaller banks in recent years, a lot of regulatory oversight and are held to In 2020, the Charlotte, North Carolina- nothing has gotten easier for the G-SIBs. a higher standard with respect to how they based company entered new markets in “Our members devote a considerable operate and conduct themselves because if Ohio and Utah, Chairman and CEO Brian amount of time and energy to risk there was an issue, it would have an effect Moynihan told shareholders in his annual management and other management on more people and more companies and letter. Since 2015, the bank has spent about processes to make sure everyone is rowing potentially affect people’s lives.” $18 billion on technology, bulked up its sales the boat in the same direction,” said Sean team by 15% and opened 300 branches while Campbell, chief economist and head of Growing ‘wallet share’ renovating 2,000 others, Moynihan said. policy research at the Financial Services Today each of the Big Four is looking to A focus on “responsible growth” drives Forum, an economic policy and advocacy grow, but they are not necessarily in search Bank of America’s strategy, Donofrio said. organization that represents G-SIBs. of more assets. Instead, they are interested That means incorporating customer and risk

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 4 frameworks and a sustainability lens into organization on a path to deepen its reach in checking and savings account. the business plan, he said. The frameworks core existing markets — particularly in the Theoretically, Citi could bulk up by buying define who the bank wants to work with United States and Mexico — straighten out another bank because, unlike the other and how much risk to take on, while the its myriad compliance issues and ultimately three megabanks, it is far from bumping sustainability aspect allows the bank to think achieve something that’s been lacking for a up against the federal deposit cap. But about long-term objectives and outcomes. long time: returns to shareholders that are at acquisitions aren’t necessarily in Citi’s plan, “Within those frameworks, there is plenty or near the levels of other large U.S. banks. Selva said. of opportunity to grow, to deliver our purpose So far, Citi has combined two wealth “At this point, our focus is [on growing] in a way that’s consistent with our values,” management units into a single global organically through our business within Donofrio said. “We won’t go out there and division, put consumer retail franchises in those centers we already have and digitally do things short-term to boost profits or 13 overseas markets up for sale and turned growing the capabilities we’ve built,” he said. revenue in one quarter or a few quarters if over a handful of key management roles. “We firmly believe the partner ecosystem it can’t be repeatable and sustainable and Citi has “tremendous opportunity” in the will be a big play for us. What we have set out grow as our customers grow.” wealth management space, in part because to do, we have to do. It’s already in motion Buying other companies isn’t a priority, it has so much room to grow in comparison for us.” Donofrio said. While Bank of America might with wealth management units at the other Citi’s revamp, however, coincides with make some acquisitions to fill small gaps in large banks, said Jim O’Donnell, head of an expensive reconstruction of its risk technology, it can generally develop what it global wealth at the New York-based bank. management and internal-controls systems. needs internally, he said. That gives Citi more runway in terms of Last fall, the company received a pair of At Wells Fargo, executives are also thinking expansion, perhaps as much as an 8% or 9% consent orders from the Fed and the Office about growth, even as the San Francisco- rate per year, he said. of the Comptroller of the Currency, which based lender continues its slow recovery “We have the platform and the base to identified deficiencies with Citi’s current from a phony-accounts scandal that cost the build upon that, and I think by expanding systems. The OCC imposed a $400 million firm billions of dollars in fines and resulted our product mix and growing the investment civil money penalty. in a limit by the Federal Reserve Board on its side … we can significantly grow our wallet The orders came two months after Citi asset size. and market share,” O’Donnell said. accidentally paid $900 million to creditors The $1.9 trillion-asset company is focused There’s similar optimism at Citi about the of the cosmetics company Revlon. They on “core, scaled businesses,” CEO Charlie prospects for its consumer businesses in were the latest in a series of regulatory Scharf told shareholders in an annual countries where it operates at a large scale, slaps against the bank for shortcomings in memo. “Our strategy is about becoming even as the bank exits smaller markets. its management of risk and data programs. even crisper about serving our target market In April, Citi said that it would sell The OCC said the penalty was the result of and taking actions necessary to leverage our consumer franchises in 13 markets, “longstanding failure” to fix those problems. strong competitive position,” he wrote. including China, India and Australia, where Chief Financial Officer Mark Mason said The $1.95 trillion-asset cap, however, it is not large enough to compete, and focus that the company expects to submit a full continues to be a burden, keeping Wells instead on building four “wealth centers” remediation plan to regulators no later than from making as many loans as it wants to and in London, Singapore, Hong Kong and the the third quarter. growing as fast as its peers. Wells has been United Arab Emirates. The consent orders have paved the closing branches and has sold off or exited At the same time, the company plans way for a “transformation” that offers Citi several business lines, including student to stick with its “market-leading scaled an opportunity to invest in operational loans, international wealth management franchise” in Mexico, known as Banamex, capabilities that will not only enable the and direct equipment finance in Canada. and “grow and deepen” relationships in the company to run more efficiently, but also Scharf has promised that when the asset U.S. market, which makes up two-thirds of to better serve its clients, “which leads to cap is lifted, Wells will have more latitude to Citi’s consumer revenue, said Anand Selva, growth and more business,” Mason said. grow its business and increase returns. Citi’s CEO of global consumer banking. “That strategy is going to drive everything, Citi plans to use both its digital presence and this refresh that Jane is driving is core to ‘What we have set out to do, we have and its existing branch network, which is our growth and improved returns,” he said. to do’ smaller than those of its main competitors, to “The good news is that you’re starting to see At Citi, Fraser and her team are taking capture more business. Specifically, it hopes signs of that already.” what she has called “a dispassionate view” to dig deeper into urban markets in the U.S. of all business lines. The point is to cut out where it has branches, while continuing to ‘They’re not utilities’ what’s not working and lean heavily into tap into its myriad credit card partnerships. The pursuit of growth is a logical strategy already-scaled businesses that, with some Cit’s deal with American Airlines was even for banks that are already at the top of more investment and focus, could produce expanded last year to allow customers who the industry heap. even higher returns and generate more have the airline’s co-branded credit card “From the bank level, it gives you a income. to open online Citi savings accounts and fortress balance sheet you can use to Citi executives say the changes it has earn mileage points. Citi is also partnering support the kind of lending that other unveiled and those yet to come will put the with Google to offer its first bundled digital financial institutions can’t hope to match,”

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 5 said David Zaring, professor of legal studies central bank would need authorization from and business ethics at Wharton School of DIGITAL CURRENCIES Congress in order to maintain “wallets” the University of Pennsylvania. “You can or digital accounts to store a digital dollar. use depositors to support your investment Powell has also pledged to seek congressional banking efforts and to support … really a Lawmakers support before the Fed would issue a digital variety of other uses for your capital that you dollar, or even launch a pilot program. can finance through all those depositors to aren’t ready But senators said there were still too many whom you’re paying 0.1% in interest. unanswered questions about central bank “So an enormous balance sheet should digital currency. offer you opportunities to finance businesses to rubber- Sen. John Kennedy, R-La., the ranking that other banks can’t finance,” he said. member of the subcommittee, said a digital “There’s profit that lies in that, potentially, stamp Fed dollar should be narrowly defined so it would for the big banks.” not supplant existing currency. Like the other megabanks, Citi’s focus on “I’m not convinced that CBDC should be growth comes down to establishing itself as digital dollar used to replace the paper dollar, or to replace a profitable organization. Getting bigger, in bank deposits,” Kennedy said. “If the U.S. other words, isn’t just about building assets. By Hannah Lang chooses to hold the CBDC, it needs to do so, “I don’t think the Big Four need to grow June 09, 2021 it seems to me, in a way that complements in terms of size,” said Karen Petrou, a WASHINGTON — The Federal Reserve has our current financial system.” bank policy expert and managing partner indicated it would need congressional help if Several nations are exploring a central at Federal Financial Analytics. “The real the central bank moves ahead with a plan to bank digital currency as cryptocurrencies pressure is always on profitability.” create a digital dollar. But lawmakers aren’t such as Bitcoin and Ethereum gain Investors care most about the return on yet ready to give their stamp of approval. popularity. One of the major players is their investments, Petrou said, and if a public At a hearing Wednesday, Senate Banking China, which is farther ahead of the U.S. in company’s profitability falters, the stock Committee members raised questions about developing a CBDC. value shrinks and investors are unhappy. how a Fed-designed digital currency would With private cryptocurrencies having That can lead to a bank getting smaller, not be structured, how it would complement the proven volatile and having facilitated illegal staying the same size. private sector and whether a digital dollar is activity, Warren said the Fed does have an “These are all businesses. They’re not even necessary, among other concerns. opportunity to offer a better alternative. utilities,” Petrou said. “They need to satisfy Some Democrats have appeared opened “In theory, a digital currency issued and investors because their compensation to the idea of a central bank digital currency, backed by a central bank could provide the depends on it.” especially if a digital dollar is paired with a advantages of cryptocurrency without those What comes next for the Big Four proposal to provide free digital wallets. Yet risks,” said Warren. “The Federal Reserve, a depends on several factors: whether they pleaded for caution at the hearing. trusted institution, could provide a digital regulatory burdens will increase under the “It could help improve financial inclusion, version of cash to the public that is secure, Biden administration, whether there will efficiency, and the safety of our financial stable and accepted everywhere.” be renewed calls by lawmakers to break up system — if that digital public money is well- Separate from a digital dollar, Senate the big banks and to what extent fintech and designed and efficiently executed, which Banking Committee Chairman Sherrod Big Tech companies make inroads into the are two very big ‘ifs,’ “ said Sen. Elizabeth Brown, D-Ohio, has called for the creation of banking industry. Warren, D-Mass., who chairs the economic free FedAccounts that any American could Five months into the Biden administration, policy subcommittee. access at a bank, credit union or post office. there have been no widespread calls to split Republicans, meanwhile, warned that the He has previously called the Fed’s study of up the companies like there were after the creation of the central bank digital currency a central bank digital currency a “natural mortgage crisis. would turn the Fed into a direct competitor complement” to his plan. “If anything, I hear less about breaking of private banks. But on Wednesday, he made clear he was up banks and more about simplifying them,” “We don’t need a state-sponsored bank not sold on the concept of cryptocurrencies Zaring said. “The tumult of the last year interfering with this successful free enterprise in general. has shown what a good idea it is to have system,” said Sen. Pat Toomey, R-Pa., the “We hear all kinds of promises about how diversified banking businesses, but I do hear ranking member of the full committee. crypto and digital currencies would be more stuff about simplification.” In a video message last month, Fed Chair inclusive alternatives to the current banking For their part, the Big Four banks are Jerome Powell said the central bank would system,” Brown said, “but the approaches always thinking about their next move — and publish a discussion paper this summer offered by crypto companies, so often are the move after that, and the move after that. detailing its current thinking on central bank just simply not solutions they’re just another “I don’t honestly know … as to whether digital currency and digital payments. volatile risky asset for Wall Street speculation you’re ever done with strategy,” Fraser said Although the decision to move forward and putting people’s hard earned money, in April. “This world is highly dynamic. It’s a with a central bank digital currency in the and essentially our entire financial system at fascinating world.” U.S. lies with the Fed, most believe that the r i s k .”

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Powell said in the video message that However, several lawmakers also stem from governance problems at the top regardless of the Fed’s decision about expressed concern that China’s effort to of banks, have “significantly contributed” to developing a digital dollar, the Fed would develop a digital yuan would leave the U.S. a recent string of negative ratings actions, “expect to play a leading role in developing behind if the Fed chooses not to create a according to a paper published by Fitch international standards for CBDC.” central bank digital currency. That could Ratings in May. Proponents of the U.S. creating a central threaten to displace the dollar as the world’s The company’s analysts noted that the bank digital currency argue that it could reserve currency, they said. costs of governance problems have climbed expand financial inclusion to those shut China is testing its digital yuan with higher since the 2008 financial crisis. With out of the conventional banking system major retail chains such as Starbucks more investors shying away from companies and provide long-awaited access to instant and McDonald’s, and has distributed the that have problems with risk management payments. currency directly to consumers in an attempt or a poor culture, those factors are carrying “If you’re poor today, a bank account to boost adoption ahead of a launch that more weight in Fitch analysts’ scores. can be dangerous for you. It has a lot of could come as early as this year. “Tolerance by stakeholders has declined fees [and] you might not understand when “Even beyond the digital yuan, it’s no over the years,” said Sabine Bauer, who is part those fees are going to be levied,” said Lev secret that China and many other countries of Fitch’s credit policy group with a focus on Menand, an academic fellow and lecturer are well ahead of us with regard to financial financial institutions. “If you come out now at Columbia Law School and a witness at innovation,” said Sen. Steve Daines, R-Mont. with a governance failure, that would more the hearing. “One of the benefits of a CBDC “While I’m not yet convinced we need a severely have consequences for either your account offered by the Federal Reserve [is] digital dollar, I strongly support further funding or profitability.” it would be provided to the public without exploration in this area for this reason.” The Fitch analysts noted that fines have profitability concerns.” Christopher Giancarlo, former chairman been mounting against the financial industry But others were skeptical that a digital of the Commodity Futures Trading in recent years. Globally, financial institutions dollar effort could actually achieve that Commission and a witness at the hearing, paid an estimated $23.4 billion in fines from purpose. agreed that China’s ambitions to be a leader 2018 to 2020, which was up from $13.6 billion “In my view, turning the Fed into a retail in the digital currency space is “of critical during the previous three years, according to bank is a terrible idea. Our retail banks do a importance.” Fitch data. great job of serving the needs of consumers “Whether we eventually want a digital “Oftentimes, there is a governance failing, because they compete with one another in dollar or not — it’s almost a second order that is a bit of a root cause, if you will, of the private sector,” said Toomey. of magnitude issue,” he said. “The first whatever issue seems to be out there,” said Sen. Bill Hagerty, R-Tenn., echoed issue is that we lead in the technological Fitch Managing Director Christopher Wolfe, Toomey, questioning whether the central development [and] we lead in the standard who focuses on banks in North America. bank digital currency is the right answer for setting.” Fitch is not alone in elevating the role of unbanked populations. governance issues. “Can we better help those who are Moody’s Investors Service said last year unbanked and underbanked by removing RATINGS AGENCIES that environmental, social and governance costly regulations or by continuing to issues were growing in importance, and were encourage banks to expand their coverage cited in about one-third of its rating actions in rather than providing a public-run banking Governance 2019. Standard & Poor’s in April announced option at the Fed?” he said. it was launching a new group, S&P Global A growing number of financial institutions flaws are Sustainable1, that would focus on ESG issues and trade groups are angling to play a for clients. facilitating role in a central bank digital For advocates who want banks to be currency as discussions on the issue heat up starting to held to loftier ESG standards, the decisions in the U.S. One concern is that blockchains by the major credit rating agencies to put will replace the transaction processing steps hurt banks’ more weight on these issues is a major that generate fee income for banks. development. It remains to be seen how a central bank “It’s an exciting time, seeing the credit digital currency would be designed in the credit ratings agencies getting involved,” said Louis U.S., but one of the open questions is how or Coppola, co-founder of the G&A Institute, a if the banking system would be involved in By Jon Prior consulting firm that works with companies processing and storing digital dollars. June 10, 2021 looking to boost their ESG profiles. “We shouldn’t take steps that could Investors are showing less tolerance While ESG issues have typically gotten threaten to disintermediate, destabilize or for banks that have frequent run-ins with more attention in equity markets, he said, the drain significant deposits from the private regulators, and now the industry is also topic is of growing importance among bond sector lenders that underpin the strongest starting to hear from credit rating agencies on investors now that credit rating agencies are and most exceptional economy in the world,” the same topic. weighing in, especially on governance topics. Hagerty said. Shortcomings in risk controls, which often “ESG should have really been GES,”

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Coppola said. “Governance is really the customers, Leslie Bailey, vice president of cornerstone of all of this.” FINANCIAL CRIMES financial crime compliance for LexisNexis Governance issues are far more likely to Risk Solutions, said in an interview. impact a financial institution’s Fitch credit “It’s just the sheer influx, and that’s why I ratings than environmental or social factors. Pandemic think we saw the increased labor cost,” she As of March, governance issues were the said. “You’ve got all these people coming into main driver behind or a major contributing drove up the system, so to speak. You have to have a factor to ratings decisions for 214 financial means to account for that.” institutions, compared with 41 instances in Banks and other financial institutions which ratings were impacted by social issues costs of that had not incorporated digital solutions and just 14 actions tied to environmental to streamline their compliance operations considerations. complying struggled more at the onset of the pandemic, Fitch said in its report that it is specifically and may have been forced to upgrade their judging banks on the effectiveness and systems, Bailey said. makeup of their boards of directors, their with anti- “What 2020 showed is people who had financial transparency, and the controls they invested in technology, data analytics, things use to monitor the business they do with fraud rules: of that nature had a much easier time pivoting customers and other outside parties. to the change that was thrown their way,” she The most recent example of a governance said. “Those who had prepared from a layered failure leading to a downgrade came in April, Report technology perspective had a little bit of safety when Fitch downgraded Credit Suisse’s there.” outlook to negative from stable, citing poor By Hannah Lang This year’s edition of the annual report was governance controls in connection with a June 09, 2021 based on surveys of 1,015 “financial crime major loss stemming from the Archegos WASHINGTON — Financial institutions compliance decision makers” at banks as Capital blowup. saw an 18% jump in the cost of complying well as investment, asset management and Fitch has also cited governance failures with anti-financial crime rules last year, as insurance firms around the world. in ratings actions taken against Wells Fargo firms hurried to deal with an uptick in fraud Respondents were also asked to characterize during its string of regulatory problems, and stemming from the coronavirus pandemic, their top three challenges with financial crime against U.S. Bancorp after the $554 billion- according to a new report. compliance, and the report found that those asset bank was fined over anti-money- Compliance costs rose $33 billion from answers varied widely depending on region. laundering problems. 2019, totaling $213.9 billion last year, “I do think it’s fascinating that by region, While financial services companies are LexisNexis Risk Solutions found in its annual I think for the first time … we saw some also focused on climate change, as well True Cost of Financial Crime Compliance variation,” Bailey said. “Not everybody this as efforts to improve diversity, equity and Study, published Wednesday. time was focused necessarily on screening per inclusion, the foundational underpinnings Companies in the U.S. and western Europe se. You really saw a trend toward improving of an effective ESG program involves accounted for more than 82% of those costs. the profiling.” governance, said Amy Matsuo, ESG and Firms in Germany and the U.S. alone spent, In 2019, respondents from every region regulatory insights leader at KPMG. respectively, $9.6 billion and $8.8 billion more except western Europe listed regulatory Matsuo noted in an email that a break on compliance costs in 2020 than in 2019. reporting as their principal challenge with in governance can quickly result in both On average, U.S. firms with $10 billion financial crime compliance. But in 2020, financial and nonfinancial damage to a or more of assets reported spending $20.5 regulatory reporting wasn’t a top undertaking company. million on anti-financial crime compliance for any region at all. Still, it is unlikely that Fitch would operations in 2020, up 43.4% from the year Instead, 65% of North American cite governance issues as the basis for a before. respondents reported that sanctions screening downgrade before those problems are made In almost every region, hiring more was one of their top three biggest challenges, public, the company’s analysts said. personnel and investing in training made up a followed by customer risk profiling and “know Credit rating agencies were criticized for bigger chunk of compliance costs than in 2019, your customer” onboarding. Meanwhile, only being too slow to sound alarm bells in the the report said. Firms likely scaled up their 34% of firms included regulatory reporting in years leading up to the mortgage crisis. Fitch staffing to address increased volumes of loans their top three in 2020, compared with 57% in executives acknowledged that if more focus and customers as well as other risk factors 2019. had been placed on governance in the runup arising from COVID-19. In North America, Financial institutions from each region to 2008, the downturn may have been less 59% of anti-financial crime compliance costs also said that financial crime compliance severe. last year were spent on labor, up from 53% in operations were “having a negative impact “If the regulators and others had as much 2019. on productivity and customer acquisition of a focus on, say, governance, at that time, I That could be a reflection of government efforts.” Moreover, firms on average said they suspect things would not have gotten as out relief programs like the Paycheck Protection expected compliance costs to increase over of hand as they ultimately did,” Wolfe said. Program that opened banks up to more the next year. In the U.S., respondents said

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 8 they expected costs would increase 10% on Brandeis University, John Hancock and the find people doing good work closer to home,” average in 2021. nonprofit accelerator MassChallenge FinTech she said. Bailey agreed that compliance costs are — are behind the Massachusetts Fintech Thurlow looks forward to discussing her likely to grow, even with recent efforts to Working Group, which formed in early 2020 experiences with fintechs with other financial relieve banks of some of that burden. In and established the Mass Fintech Hub. Mike institutions and evaluating best practices January, U.S. lawmakers required companies Kennealy, housing and economic development together. at incorporation to report their true owners to secretary for Massachusetts, and Mike Fanning, “What I like about the plans for Massachusetts the Financial Crimes Enforcement Network head of MassMutual U.S., co-chair the group; is it’s about helping fintechs meet banks and to combat money-laundering risks from FinTech Sandbox, a Boston-based nonprofit banks meet fintechs,” she said. “When you are anonymous shell companies. The legislation that helps fintechs build products with free part of a financial institution association, they is expected to result in regulatory relief for access to data, will operate the Hub. are looking out for the banks’ self-interest. In banks, which up to now have been required As efforts to encourage fintech development this case we are looking out for the betterment to report true-owner information about their at the national and state levels increase, of the ecosystem within the state.” business customers. the Mass Fintech Hub says it is taking a The cross-sector leadership is also “In this space, we are seeing regulatory more comprehensive approach than others significant. “It’s not just bankers looking to scrutiny on digital transactions increase by uniting financial institutions, startups, meet fintechs and expecting them to follow [and] the need for digital identity gaining government agencies, investors, academics their rules,” she said. “We are looking for ways momentum,” Bailey said, “so I think this space and students in its mission to promote the state to make the rules easier.” is kind of ripe to continue to evolve, and to as a fintech leader. Moreover, by involving local investors in have the need for speed in how we conduct Programs will connect companies with the initiative, developers and founders may be due diligence.” regulators to surmount compliance issues in persuaded to stay in Massachusetts rather than their business models, entrepreneurs with early feel compelled to pitch their ideas in Silicon access to academic research and founders with Valley. FINTECH local funders. Career fairs and mentoring efforts The seeds for the Mass Fintech Hub were will introduce students to job opportunities in planted in 2018, when the Executive Office fintech; Fintech Bootcamp, a two-day seminar of Housing and Economic Development in Massachu- run by the Mass Fintech Hub that teaches Massachusetts initiated a study of emerging fundamentals, will encourage incoming college technologies and ways to bolster the state’s setts is latest freshmen from low-income backgrounds to innovation economy. Fintech rose to the top of participate. the list. The Mass Fintech Hub also will expose banks Biller names several advantages that set state vying to to fintechs that are seeking partnerships. Massachusetts apart, including top colleges “Given that the basis of economic growth in the state and the presence of hundreds of become in the Commonwealth and our country can financial institutions and fintechs. She points to be traced to Main Street businesses, we felt it the payments firm Flywire’s recent initial public was critically important at this moment that offering and the cryptocurrency services firm fintech hub the local and regional banks play an active Circle’s recent $440 million round of funding as role in the Mass Fintech Hub,” Sarah Biller, co- two Boston-based success stories. By Miriam Cross founder of FinTech Sandbox and member of “The Commonwealth is home to world- June 09, 2021 the Massachusetts Fintech Working Group, said class insurance, payments, lending and digital There is no need for fintech founders in in an email. currency companies,” she said. Massachusetts to head west to pitch their Reading Cooperative in the past has relied The Fintech Working Group commissioned a ideas, or for bank executives to venture to on fintechs, including Summit Technology study by Ernst & Young in 2020 that found more conferences across the country to learn about Consulting Group to assist with loan than 350 fintech startups are headquartered new technologies, when opportunities are ripe origination during the Paycheck Protection in the state. There are also 105 academic at home. Program, and it’s a founding member of the institutions; 29 fintech-focused incubators, That’s the view of Julieann Thurlow, Alloy Labs Alliance consortium of community accelerators and innovation labs; and nearly president and CEO of Reading Cooperative and midsize banks to promote adotion of new 500 capital providers. Many of the 283 banks, Bank in Reading, Massachusetts. Reading technology. 67 wealth and asset managers and 55 insurance Cooperative, which has $659 million of assets, The relationships with Summit Technology firms that are either headquartered or have a is one participant in the newly launched and the Alloy Labs Alliance stemmed from strong presence in Massachusetts readily invest Mass Fintech Hub, an initiative to encourage conferences, including one that took place in in fintech startups. innovation, retain talent and strengthen Hawaii. But Thurlow says she shouldn’t have to Moreover, the study found that Massachusetts fintech-bank partnerships in Massachusetts. travel that far to discover new products for her firms represented approximately 9% of fintech A network of 27 financial services customers. startups in the U.S. in 2019. companies, universities, venture capital firms “We could all go to Finovate in New York or Although the focus is on Massachusetts- and public sector organizations — including Money20/20 and listen to pitches, or we could based initiatives, individuals and organizations

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 9 from outside the state can participate. One Uber driving. Apple’s partnership with Goldman Sachs that has is Citizens Bank in Providence, Rhode “Payment is seamless and embedded in to issue the Apple Card has helped spark rival Island, a unit of the $187 billion-asset Citizens most software now,” said Vidya Peters, chief technology companies to build financial “super Financial Group. marketing officer at Marqeta. “Whether people apps.” It’s a trend that commands attention “We benefited enormously fom the vision are shopping online or ordering food, payment since traditional banks could expand their of the Providence-based Citizens Bank team’s is part of that experience and companies are franchise beyond deposits through embedded participation in the working group last year,” reaching out to build more of these experiences payment partnerships with technology Biller said. tied to payments.” companies, or be disrupted by faster movers. Joining the working group was a natural fit Uber, for example, has long impressed “Marqeta was among the first wave of for Citizens, says Beth Johnson, the company’s payment company executives with its slick companies working on fixing the existing chief experience officer. Citizens was a founding user experience, a benefit the ride-sharing plumbing of the financial system,” said Hussein member of MassChallenge FinTech, too. company has parlayed into a deeper move into Ahmed, founder and CEO of San Francisco- “We have strong partnerships with fintech financial services for both its riders and drivers. based financial technology company Oxygen, accelerators around the country, and get access Marqeta has also gotten a bump from adding the IPO will draw attention to other to much of the early-stage technology through Square, which provides a majority of Marqeta’s companies that offer a mix of card issuing the relationships we have with MassChallenge revenue. Marqeta supports Square’s small- and processing. “Let’s not forget that Marqeta in Boston, QC Fintech in Charlotte and Plug business debit card and Square’s Cash has been at it now for over a decade, as the and Play in Silicon Valley,” she said over email. app — which Square has used to drive its problems these companies are solving require “We believe that supporting the Mass Fintech product diversification as both consumers reconfiguring often decades old infrastructure.” Hub will provide additional avenues to source and businesses use the peer-to-peer app for Marqeta was one of the early companies to top-notch talent and technology.” transfers, paying employees and ordering use open technology tools such as application supplies. programming interfaces to support card Cash also serves as a venue for Square’s issuance and payment processing. It later IPOs bitcoin business, which has grown significantly added security technology to accommodate over the past year and is now providing more open banking regulations such as PSD2, and than half of Square’s revenue. JPMorgan more recently added credit card issuance to its What Chase, which was one of the underwriters for mix of prepaid and debit cards. Marqeta’s IPO, uses Marqeta’s technology to Marqeta’s distribution strategy relies on Marqeta’s IPO support its own commercial credit card. deployment through other firms such as the “We’ve had an incredible set of tailwinds aforementioned Uber, Doordash and Square over the past year as payments become with embedded payment functionality, says about increasingly digital,” Peters said. referred to historically as card-on-file, These companies mostly offer payment according to Crone. the future of services under their own brands, with Marqeta “But unlike the braindead card-on-file of providing the technology to manage cards and most legacy issuers, Marqeta has enhanced transaction processing. their offering with dynamic spending super apps “Marqeta is the white-labeled platform controls, widgets, point of sale lending and under the hood powering the new flashy sports other customized features,” Crone said. “For By John Adams car functionality offered by fintechs,” said example, the spending controls applied to an June 09, 2021 Richard Crone, a payments consultant. instantly issued debit card to Doordash and As the company that powers transactions Marqeta is an issuer and processor for Uber drivers.” for Uber, Doordash and Square, Marqeta is physical and virtual prepaid, debit and credit Marqeta’s competitors include API firms behind the scenes of many of the companies cards. Founded in 2010, Marqeta reported such as Stripe, which has also benefited from most pivotal to the gig economy. $108 million in the first quarter of 2021, or the digital payments migration to reach a The Oakland, California-based Marqeta double the prior year as its net loss narrowed to huge valuation; and Wirecard, the German sold more than 45 million shares in its Nasdaq $12.8 million from $14.5 million. processor that split up after an accounting debut on Wednesday. At $27 per share that Marqeta is one of a series ofpayment scandal. Other technology firms such as surpasses Marqeta’s marketing offer of $20 to technology companies that have gone public Railsbank have purchased parts of Wirecard’s $24 per share and places its market value is or plan to during 2021, joining Affirm, which business, with an eye on supporting open $14.3 billion as a result of the listing, according went public in January; Payoneer, which plans banking and embedded finance. to Bloomberg. to go public this year; and TransferWise, which The incumbent payment processors are The IPO came at a turning point for the rebranded as Wise ahead of its IPO, planned also pursuing a combination of card issuing market Marqeta serves. Delivery services for later this year. and merchant acquiring, coming off of a experienced wider adoption during the All of these firms are diversifying product series of multibillion-dollar acquisitions that pandemic — and as lockdowns and mask lines beyond core payment acceptance consolidated that industry in 2019. mandates lift, there should be a rekindled and enrollment as a way to entice their “The nimbleness of fintechs and their interest in travel-related gig work such as attractiveness to investors and clients. ability to quickly pivot to introduce innovative

For up to date and complete coverage go to AmericanBanker.com FRIDAY JUNE 11, 2021 AMERICANBANKER.COM PAGE 10 functionality, to address specific needs, is on its site and at its subsidiary Whole Foods group’s helm, but she might ultimately be causing legacy players to rethink their digital Market. That’s helped it become the fastest- remembered most for mastering a concept strategy and look harder at the partner growing portfolio among the top 10 co-brand few seem to understand. integrations available to them,” said Joanne card programs in the U.S., according to a 2019 Ito last month announced plans to retire Dewar, CEO of Global Processing Services, study by Packaged Facts. at the end of the year as president and CEO a London-based issuer and processor that “Though the massive co-brand portfolio of the trade group, which advocates for the serves challenger bank clients such as Revolut, would be a huge win for loan balances, primary regulators of 2,020 state-chartered Starling Bank and Curve. “It is vital to leverage the significant rewards associated with the credit unions that hold about $934 billion the capabilities of agile partners in the issuer- program could be prohibitive, as evidenced of assets. She has been the organization’s processing space, to reduce that risk of losing by JPMorgan potentially being willing to walk leader since 2014. relevance.” away,” Sanjay Sakhrani, an analyst at Keefe, Almost right from the start, Ito went to Bruyette & Woods, said in a note to clients on work to lower the National Credit Union Tuesday. Administration’s overhead transfer rate CREDIT CARDS JPMorgan could fetch a 15% premium — the rate by which funds are transferred on the portfolio, which contains more than from the Share Insurance Fund to the $15 billion in loans, said some of the people NCUA’s operating fund. The NCUA sets Amazon familiar with the matter. Cardholders spend the rate to cover its own costs, much like more than $50 billion a year on the card, payment card networks set interchange explores according to the Packaged Facts study. rates for accepting credit cards. The Share Amazon and JPMorgan first issued a card Insurance Fund pays a dividend back to together in 2002 and their offerings have long credit unions, so there is less money to fund replacing operated on the Visa network. that dividend if the overhead transfer rate It wouldn’t be the first time Amazon is raised. JPMorgan in worked with other credit card issuers. The NASCUS argued that the rate had retailer already offers a card with American become burdensome to state-chartered Express that’s targeted at small-business credit unions, and that the process for credit card owners. The firm has also long partnered with setting the rate was too opaque. Synchrony on its private-label card and the “It has huge ramifications for both tie-up two debuted a secured card together in 2019. state and federal credit unions,” Ito said. “The more the NCUA relies on the Share By Bloomberg News Insurance Fund to cover its expenses, that June 09, 2021 CREDIT UNIONS means taking more credit union money.” Amazon.com is fielding bids to replace The rate is currently 62.3% after sitting at JPMorgan Chase as the issuer on its popular 61.3% in 2020. It went as high as 73.1% in co-brand credit card as a fresh wave of Lucy Ito’s 2016. competition for new card customers emerges. State-chartered credit unions contribute American Express and Synchrony legacy: almost half of the amount transferred Financial are among those bidding on between those funds, and federally- the portfolio, according to people with chartered credit unions pay the rest. knowledge of the matter, who asked not to be Lowering NASCUS has argued that federal credit identified discussing the negotiations. unions’ operating fees have declined over Representatives for the lenders declined to a vexing time, which reduces the burden of the OTR comment, while a spokesperson for Amazon and provides a competitive advantage over didn’t have an immediate comment when state-chartered credit unions. reached by email on Tuesday. regulatory Pat Keefe, former vice president of JPMorgan is willing to part with the communications for NASCUS, said the Amazon portfolio, according to some of the cost for credit OTR has been one of the “most important, people familiar with the matter. Banks in arcane, misunderstood and long-lasting recent years have loaded up their cards with issues” that NASCUS and state credit rich perks, making it harder for lenders to unions unions have tackled. turn a profit, especially in the world of co- “I’ve worked for credit union trade groups brand cards where revenue is often shared By Ken McCarthy since 1984, and the issue was being argued with the merchant partner. June 09, 2021 even then,” he said. “Like the weather — JPMorgan’s current Amazon card comes Lucy Ito could take credit for many although there was a lot of talk about it — with a lucrative set of rewards, including accomplishments made by the National nobody really did anything about it, or at offering the e-commerce giant’s Prime Association of State Credit Union least, little was done to effectively address members 5% cash back on purchases made Supervisors during her seven years at the i t .”

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But Ito proved her ability and conduct a nationwide search for its next professor at UC Irvine, so she often travels effectiveness as an advocate by taking on leader. back and forth between homes in Arlington, the issue for the state system, and making Ito said she will not have a role in helping Virginia and southern California. She calls changes happen on their behalf. Keefe said to select the organization’s next CEO but it the “bicoastal cha-cha-cha.” she mastered the issue, which only a select believes that person, above all, needs to “What’s next for me is to spoil my husband few among credit unions have successfully be passionate about how the dual-charter rotten, because he’s really shouldered a done over the years. framework between state-chartered and huge responsibility in keeping households She then went to work in explaining the federally-chartered credit unions should in two different cities,” she said. impact of the OTR on the state system to work. Still, Ito said, she will miss NASCUS but members of the NCUA board — particularly “You have to want to make the state believes that this is a good time to hand the Chairmen Rick Metzger and J. Mark charters stronger and to keep pace with the reins to a new leader. McWatters. federal charters,” she said. If that happens, “We still have so much left on our to-do “She did it in such a way that they got federal charters are going to benefit if the list,” she said. “But I think NASCUS is on a it, which opened the door to the NCUA state charters are strong, and vice versa, Ito stable path financially. So I feel like we’re staff becoming more accommodating to said. in a good place even though there’s a ton changes to the OTR methodology,” Keefe State regulators and credit unions should left to do.” said. be able to work together to solve problems, Ultimately, a proposal was made and Ito said. Her successor should be willing to adopted by the NCUA board in 2017, listen to the credit unions themselves about VENTURE CAPITAL which resulted in a complete overhaul of how to write rules and how to supervise, the methodology to be more fair, more she said. equitable and more transparent. “It’s so easy to think of the regulators and Mastercard “It was the first time in years — at least the regulated as being in a confrontational in the 37 years I’ve been around — that real relationship, but they’re actually very much focuses changes were made,” Keefe said. alike and have shared objectives,” she said. Transparency was lacking in how the The pandemic accelerated consumers’ NCUA calculated the rate, but the regulator acceptance of new ways of doing things investment has made progress in that regard of late, as well as their expectations for more according to Ito. “But it still could be technology, Ito said. “Probably in one year on fintechs improved. We still don’t understand a few we got to where it might have taken us things about how the calculation is made another four or five years normally,” she and what the assumptions are,” she said. said. founded by The NCUA provided a statement Additionally, examiners and credit explaining that the rate covers, in whole unions were both surprised throughout the minorities or in part, time spent examining and pandemic at how effectively supervision supervising federal credit unions; time could be handled remotely. There are still By John Adams and costs NCUA spends supervising or situations where examiners need to be on June 09, 2021 evaluating the risks posed by federally site, but both sides learned that resources Venture capital firms have vastly insured state-chartered credit unions or can be better allocated by handling some overlooked Black and Latinx-led technology other entities the NCUA does not charter or regulatory issues at a distance, she said. firms, leading Mastercard to join a growing regulate; and time and costs related to the On the subject of state-chartered and list of financial services companies trying NCUA’s role in administering federal share federally chartered credit unions, it’s to correct the problem through targeted insurance and the Share Insurance Fund. difficult to argue that there’s an even initiatives. Debbie Matz, former NCUA board playing field today, Ito said. The NCUA Mastercard on Wednesday launched a chairman, said Ito is the consummate plays both the roles of charterer for federal Start Path track that will focus specifically professional, always well informed and credit unions and insurer for both groups. on startups founded by Black people, articulate. “Though we did not usually Ito would like to see greater clarity on the Indigenous people, people of color and agree on the overhead transfer rate, I can NCUA’s role. women. The startups will receive enterprise say unequivocally that she represents her On the issue of the banking industry’s partnership readiness training, mentorship members very well,” she said. continued opposition to the credit union and coaching and introductions to investors. Ito is most proud of deepening the tax exemption, Ito said the two industries The card brand will also consider grants or partnership and relationship between feature completely different business investments in some cases. Each participant NASCUS and the NCUA. The two sides models and “if credit unions have it so is paired with a dedicated sponsor who signed a document of cooperation in 2019. good, then banks do have the option to works to ensure the startup gets support “It’s much better today,” Ito said of the convert to a credit union charter,” she said. The first participant in Mastercard’s new relationship. So where does Ito go from here? Start Path track is SpenDebt, a St. Louis- NASCUS hired D. Hilton Associates to Her husband, Rob, is a chemistry based firm that automates debt repayment.

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The Start Path program is part of a the credit market, driving lenders to adopt added new capabilities and policies. This broader initiative at Mastercard to reach underwriting practices and technology that all needs to be taken into account as credit underserved firms, including investments will allow them to better serve small and lines come up for renewal. in equitable investment organizations such medium-sized businesses while improving Unusual financial data patterns and other as the Fearless Fund, CNote, Authentic their own operations. business model pivots mean that lenders Ventures and the Astia Fund. Of course, this situation in which small will need to look at businesses through a The card brand has additionally businesses are starved of credit predated new lens to figure out who’s risky and who’s partnered with community development the pandemic. We’ve seen a contraction not. This will be challenging but can be financial institutions such as Grameen of small-business lending in the wake of achieved with a wider data set, collected America, Accion Opportunity Fund and the the 2008 crisis, but the gap has only grown and submitted in an efficient manner, and Community Reinvestment Fund USA, all of since. At JPMorgan Chase, non-PPP loans to with a new approach to credit underwriting. which aim to expand access to capital and small businesses fell to $956 million in the Driving home the importance of financial loan relief for underserved markets. third quarter of 2020, the lowest level since data to unlocking credit for small businesses Less than 3% of VC funding goes to startups 2010. This has contributed to half of SMBs is a report released by the Federal Reserve with Black or Latinx founders, according reporting that getting financing is difficult Bank of New York. to Crunchbase. That has moved PayPal to or takes too long. A staggering 86% say they “Our work shows that bank liquidity invest $100 million over the past year to have to resort to the owner’s personal credit in bad times such as the COVID shock support VCs that specialize in underserved to gain access to capital. mostly flows toward larger rather than fintech markets, and Synchrony to invest The current state of affairs would seem smaller borrowers,” the report says. “This $15 million. to be a huge opportunity for banks to step is consistent with lenders placing stricter up to serve the companies that make up loan terms on small borrowers, which give the backbone of the economy. As a recent lenders greater discretion in providing BANKTHINK report from Accenture points out, “Banks funds. This fact, in turn, places greater have played a critical short-term role as fast constraints on smaller companies from and at-scale distributors of public-backed drawing on their credit lines to weather There’s loans to help alleviate the initial economic a downturn, which can have wider distress of eligible” small and medium- detrimental economic effects.” no return sized businesses. The authors of the report point out It went on to say that banks that helped that smaller businesses don’t get the small and medium-sized businesses access same access to credit as larger businesses to normal new capital and adapt their operations to because they lack timely, comprehensive thrive post-pandemic “will not only fulfill and reliable financial information lenders for small- their social purpose but also build trust in demand. their organization.” The course of the pandemic is shifting Small-business owners spend a — and lenders’ response must shift as business significant amount of time and energy well. PPP helped temporarily patch over managing payroll, bank accounts, invoices an already existing credit crunch for small lending and accounting. When in need of credit, and medium-sized businesses. Timely and getting the data required and reformatting cost-efficient access to a wider financial By Peter Lord it to share with a lender often takes a data set can help combat barriers to credit June 09, 2021 considerable amount of effort. Moreover, access, but requires lenders to adopt America’s small and medium-sized the picture of a company’s creditworthiness new technology and processes. As we businesses are under siege. The pandemic is often incomplete, because of a rigid move forward, we must ensure adequate forced them to change their operations, approach to a limited number of specific support to the 30.7 million businesses close or run at half-speed and lay off or data sets and a focus on bank accounts and that provide 47.3% of all jobs in our reduce hours for workers. The government tax filings. In fact, the situation today isn’t country and contribute $5.9 trillion to our and banks marshaled significant resources, that far off from that in the consumer space GDP. They are ready to capitalize on new perhaps most notably with the Paycheck five years ago. opportunities, but need the funds to do so. Protection Program — but new applications Just as they have widened the scope they We have an obligation toward them and the are no longer being accepted, and yet many use to assess consumer creditworthiness, communities they underpin to make sure small businesses remain in acute need. lenders need to adjust the way they look at they get to take their shot. This raises thorny questions about how small-business lending. Businesses may not banks and other lenders can support small look the way they did before the pandemic. Peter Lord is CEO and co-founder of businesses, which are in dire need of aid. Since early in the COVID-19 crisis, around Codat. q I believe that the crisis offers fertile ground 60% of restaurants have invested in for innovation and that the unwinding of curbside pickup. Nonessential retailers © 2021 Arizent and American Banker. the PPP can accelerate the evolution of have expanded their online presence and All rights reserved.

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