By Bradley Leimer, Co-Founder of Unconventional Ventures
It was the best of times—then, suddenly, it was the worst.
Nothing quite like a global pandemic to recast the lives of billions. As we pray for medical solutions to temper the impact of this microscopic scourge on our species; as we watch in sadness the growing numbers of cases and deaths related to this virus; as we marvel at the tireless efforts of our medical professionals and those amongst us selflessly aiding their communities; as we redefine the meaning of truly essential workers and navigate the future realities of the workplace and that of our educational infrastructure; as we long for the lost connectivity to our friends and our family and those whom we love; and as we look forward to a return to normal, fully knowing it will have to be a very different normal—we collectively cling to one word that will define a future not yet written: hope.
Beyond the physical and economic devastation caused by the COVID-19 virus and its growing toll on humanity, this very unexpected period of social isolation has triggered much soul-searching. It’s as if a genie has been uncorked and enveloped much of the world with equal doses of compassion, melancholy and perturbation. While we will never be able to simply wish the memory of these months away, this moment in time has reignited our collective empathetic dispositions as it has cleansed our material environment. Clearer air, bluer skies, empty streets, nature returning to its rightful homes; deeper respect for our physical ecosystems and complicated supply chains. This pandemic has provided an opportunity for all of us to more fully appreciate and acknowledge our connections to one another and has prompted much-needed private and public dialogue about what we do—our actions, our innate propensities, our work—and how much of it matters, and how much of it does not.
Banking’s heart and soul amidst a pandemic
What does this have to do with financial services, you might ask? Well, just about everything, really, as money or the insecurity surrounding it seems to envelop every crisis and is likely very top of mind for everyone whom we are fortunate to serve. Amassing enough personal capital alleviates certain needs and anxieties, just as much as having too little exacerbates the same. Most of those reading this will have not likely known true hunger, but I assure you, it exists. This pandemic has created a bonfire of despair—as society’s heavy sighs meet very poignant and long-unmet financial needs. Those having less tend to have been hit the hardest—more diverse communities, women, older and more contingent workers—those who were struggling even before all of this madness began.
This crisis has been wrought with vast cruelty beyond the casualties—as the number of the global unemployed and underemployed grows by the tens of millions and the number of lives impacted soars even higher (nearly 43 million people in the United States fell into these groups in April compared to 14.8 million at the same time a year ago). Trillions of dollars are being spent globally to shore up market liquidity, alongside pledges of support to our fellow citizens and businesses of every size. Meanwhile, banks prepare for losses and the added risks ahead as our societies prepare for whatever is next.
And let’s be clear, no one knows what is next.
As the most significant global shock since the Second World War, this is a moment of the utmost gravity. It is the opportune time to challenge both societal assumptions and the cadence of our lives and our work, of the actions and behaviors of the industries, brands and leadership of which we are patrons and of the financial-services industry that many of us call “home”. We may never get this chance again, as the sky is clear of contrails, and our minds are intently focused inward even as our thoughts stray beyond the horizon to make sense of tomorrow. We look at the world outside, from a safe social distance away, through the panes of glass in the windows of our homes. We look down at the glass of our phones and the panels of screens with never-ending video calls. As we look outside, can we imagine a better world beyond today? Can we imagine a better future? Can we envision our industry doing so much more? It feels that this is the financial-services industry’s opportunity for redemption.
Can’t we make banking better this time around?
The last time, it seems, we missed our chance. A decade ago, we faced a very different crisis, one that many people blamed on the global financial system itself. The relaxation of regulation intended to control an industry’s risky behaviors gave the world quite the sucker punch. While consumer behavior, soaring equity prices and real-estate bubbles were certainly contributors, banks further damaged their reputations through their lack of systemic empathy for their customers in the painful aftermath. Much of the financial-services landscape remained unscathed—notwithstanding the deaths of prominent financial brands from Lehman Brothers to Merrill Lynch to Northern Rock to Washington Mutual.
While the industry faced several years of challenging profitability, layoffs and corporate-flag swapping as brands died, it loudly complained and lobbied against new regulations, reserve levels and stress tests. All in the incessant clamor for short-term profits. This all seems more trivial now as the global banking industry acted as a modern-day phoenix. Rising through the ashes toward a decade of towering profits—US$1.356 trillion in 2018 alone—global banks captured even higher market concentration. Going into this pandemic, banks across the globe were much stronger and much better prepared than a decade before. This was thanks to the guardrails put in place by the global regulators—more limited than what was intended but equally up to the task.
How was the past decade for Main Street? As equities and home prices slowly recovered, many countries saw widening income and wealth gaps as incomes remained flat for most earners. The types of new jobs featured reduced compensation and fewer benefits. Gig work acted in servitude of often trivial Silicon Valley offerings designed for a new digital consumer demanding more and more services at their doorsteps. With the rise of more contingent employment, the expenses for many goods—from services, such as Netflix, of the new subscription economy to housing to higher education—ate into more of the average household budget, further eroding the structure of the shrinking middle class. Banks added to this financial vice by offering even more forms of credit and fee-based services to these financially stressed households. All too eager after years of tightening belts, consumers responded, and most economies bounced back in record levels of household debt, from auto loans to credit cards.
Where was Adam Smith’s “invisible hand” when people needed it most? While the banking industry got a $700-billion bailout, nearly 10 million families in the US were forced out of their foreclosed homes. People were most often on their own to try to repair their financial lives during the decade that followed. While the Great Recession changed the banking industry and made it stronger, the past decade saw a very divided impact for its broader stakeholders in society: the individuals, families and small businesses that make up the people and communities that our industry serves.
This time just has to be different.
A make-it-or-break-it moment for banking
This current crisis is the most humanizing shared experience to which the modern financial-services industry has been exposed—an industry that’s been around since before money-changing tables were turned over in temples. Around the globe, managers of physical branches and offices have quickly enacted plans to take care of customers who have been as concerned as they—anxious about their finances, their families and their futures. Banks that had resisted remote work and cloud-driven applications for decades were forced to figure out security requirements and protocols and how certain roles could be done remotely. What does one do with a disaster-recovery site in a period of forced social distancing? This situation—with the majority of employees working remotely for two to three months—wasn’t covered by most business-continuity plans. And yet the industry has survived—and will continue to survive—because we all need it to. People can access their money; systems are stable; and, as opposed to a decade ago, the majority of banks are focused less on survival and more on helping their customers in this dystopian moment toward a time when this is all past us.
While the industry didn’t cause the virus, it still has critical choices to make because of it. How will the reputation of the banking industry fare at the end of this pandemic? The initial weeks made up a confusing set of opening moves across the board, as governments enacted various support programs, and banks figured out their roles to play. While this could indeed be a time of redemption, the banking industry could worsen the impact of the pandemic by ignoring the needs of its customers who are most affected. In the US, this has required the second unprecedented public-private relief effort in less than a decade.
As relief efforts have been ratified, many banks haven’t appeared to remember the impact that the Great Recession had on their customers. The financial crisis was systemic; it was deeply ingrained in shifting our financial habits and has had lasting effects on people’s lives. The economic fallout from this pandemic is potentially much worse. In times like these, companies show us their values, and the largest banks aren’t necessarily valuing their customers.
Several large US banks have raised credit and down-payment requirements for new mortgages and HELOCs (home equity line of credits); others have dramatically lowered the credit limits that they had been raising just months earlier. Banks have been told to help borrowers defer their mortgage payments for three months or longer, but that is not always happening, as many banks are requiring lump-sum payments depending on the investor backing the loan, further confusing customers in times of financial stresses and job losses. Banks such as Chase Bank and Wells Fargo are ending the option to obtain HELOCs, even small equity loans—despite a decade of increasing property values—right when their customers need them most. The largest banks are also acting at odds with customer needs in their efforts to share much-needed government support.
The United States Congress passed the $2.2-trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included $1,200 direct payments to tens of millions of individuals based on income reported on their 2018/2019 income tax returns, as well as the Paycheck Protection Program (PPP) through the Small Business Administration (SBA). The PPP, distributing more than $610 billion one-percent-interest loans, was seen as a lifeline for small businesses and their employees. PPP loans were designed to be fully or partially forgiven if companies apportion at least 75 percent of their loan proceeds to pay employees’ salaries, rents and some utilities. The free-for-all that followed the two-tranched distribution of these loans was frustrating to watch. Banks’ involvement was uneven at best and perhaps criminal at worst.
During the first allocation of capital ($349 billion), the SBA processed 14 years of their normal loan volume in just 14 days. PPP applications were supposed to be assessed by banks on a first-come, first-served basis, treating both existing and new small-business clients with the same weighting. But many big banks ended up prioritizing larger, sometimes publicly traded businesses, representing their most profitable clients. Is it profit before purpose, or purpose before profit that demonstrates values?
Several lawsuits are now pending, alleging that Bank of America, Wells Fargo, JPMorgan Chase, PNC Financial Services, U.S. Bank and other large regional banks reshuffled PPP applications to focus on those making them the most money in processing fees. The sheer volume that these large banks submitted to the SBA—tens of thousands at a time—overwhelmed the E-Tran systems. This negated Herculean efforts of community banks and shut out many small businesses that needed assistance.
A decade after the big banks received help from the public, they were abandoning those that needed their help the most. So much for reputations. There will be books written about this.
There have been some bright spots, however, as many financial institutions and fintechs (financial-technology firms) have stepped up their efforts during this time of need. Focusing primarily on the response in the US, these include:
- Citizens Bank of Edmond, Oklahoma, led by Chief Executive Officer Jill Castilla, which quickly created a no-interest overdraft line for small businesses to manage expenses and payrolls as businesses waited for funds from PPP. The program was also supported by entrepreneur Mark Cuban.
- Richmond, VA-based Atlantic Union Bank processed more than 10,000 SBA-approved applications for more than $1.7 billion over 13 days, with a median size for all loans of approximately $45,000 and with 80 percent of these businesses having less than 20 employees.
- As Utah-based TAB (Transportation Alliance Bank) Bank worked to submit loan applications, its previously frustrated mood was buoyed by tracking the more than 20,000 jobs that it had helped retain during the second round of PPP funding. TAB Bank President Curt Queyrouze said, “I am very proud of the team. They need nothing more than to know how much they were helping small businesses as motivation. This sense of purpose could be powerful starter fuel for the rebuild of our economy. We only need to will it so.”
- Cathay General Bancorp, based in Los Angeles, created the Smart Relief Loan Program, which quickly provided small businesses with microloans of up to $10,000. It processed more than $1 million in microloans during the first few weeks of the program launch.
- Citigroup donated all profits from the PPP to a relief program for community development financial institutions (CDFIs) to help minority-owned small businesses that might not fully qualify for PPP funds.
- Texas Capital Bank, based in Dallas, offered its mobile branch, complete with Wi-Fi access, to the Parkland Health & Hospital System to support nurses and other medical staff.
- New York-based CIT Group helped its business clients—especially those based in fashion design and clothing production—finance changes to their production lines in order to produce personal protective equipment (PPE) for front-line caregivers.
- Great Falls, VA-based Trustar Bank donated 10 percent of the fee income it received as part of the PPP to two Washington, D.C. aid organizations.
- Laurel Road, a lending division of Cleveland, Ohio-based KeyBank, offered specialized pricing on its student-loan product to all doctors and nurses as well as partnering with an online therapy resource called BetterHelp to provide free online counseling for caregivers.
Not to be outdone, fintechs also helped in supporting the distribution of aid and public funding, both through direct capital disbursements to their customers and through helping with the technical platforms and data-collection requirements of the PPP:
- Fintech neobank Chime provided its customers with access to government-supported funds using its SpotMe overdraft service before the funds were made available. Chime made more than $1 billion of relief payments before funds even arrived from the government.
- Fintech data-aggregation platform MX, based in Utah, created the Easy SBA Portal, an interactive version of the SBA application that streamlined the PPP-application process for banks and credit unions from 30 minutes to 30 seconds. This open-source platform allowed any financial-services institution to quickly take applications for the PPP program and submit them to the SBA, even if the banking institution was new to the SBA program. Many institutions, including Citizens Bank mentioned above, were able to submit loans to the SBA because they leveraged this data and technology platform.
- Similar efforts to help banks help their customers with technology and data collection during this time were made by fintech companies such as Kabbage, Lendio, Alpharank, Plaid, Temenos, FINSYNC, OakNorth and Stripe.
- The financial coaches and counselors from Operation HOPE are helping clients through video calls and are serving more people than ever as this pandemic spreads. These are “private bankers for poor people”, as founder and CEO John Hope Bryant likes to call them.
- Starling Bank created Connected Card, a supplementary debit card for vulnerable seniors or others in need to give to trusted sources so that they can help to purchase groceries, medicines or other necessary items during the crisis, thereby avoiding unnecessary exposure to the virus.
- Brazil-based Nubank has connected customers with essential services such as food delivery, pet supplies, telehealth consultations with doctors and therapy sessions.
- Most interesting of all, the government of Hangzhou worked with Alibaba and Ant Financial to create the Alipay Health Code app to segment people into three categories—green, yellow or red—based on their medical conditions and travel histories to help the government trace the COVID-19 virus and limit its spread by controlling people’s ability to travel.
- (As an aside, while there was some controversy about sharing with authorities the data collected by the Health Code app within Alipay—along with the one created by Tencent for WeChat—it is strongly credited for controlling further outbreaks and additional deaths. The process of integration and bundling of applications in these super-apps continues to be a model of value-added services—in this case, potentially life-saving. Banks in other regions should consider this example as they look at opportunities within open-banking platforms and open-data marketplaces that combine scale, speed and integration into their customers’ daily lives.)
We pay tribute to these companies, the efforts and innovations of which have catered to the needs of their customers and their communities. The actions of big banks will not be forgotten—especially by small businesses left out of the PPP lifeline and by people who were simply seeking empathy from a stream of on-hold music as they attempted to restructure their mortgage payments and other credit obligations.
Never let a good crisis go to waste.
Long before this phrase was uttered by Stanford economist Paul Romer or Rahm Emanuel (President Barack Obama’s chief of staff), Sir Winston Churchill is credited with saying it: “Never let a good crisis go to waste”. Churchill had the context of the ending of the Second World War and the optimism he felt in defeating fascism alongside President Roosevelt and Chairman Stalin. In November 2004, Romer used it to reference increased business competition due to rapidly rising education levels within other countries and how firms could leverage a more educated global workforce. Emanuel employed it during a discussion with reporters amidst the degenerating economic conditions after Obama’s election in 2008 to voice his optimism from seeing the forest through the trees. Either way, this simple yet powerful phrase sounds like an oxymoron. What good could possibly come out of a crisis? Isn’t that why we call it a crisis?The thing about these moments is that they create a sense of urgency—there is an action for every reaction.
A health crisis like the current pandemic, or an economic one like the Great Recession, snaps our attention to deal with the pressing issues as well as look for ways to capitalize on the moment by improving the road ahead. There is no other choice. Leaders across industries think about how to make their companies stronger. Investors reassess their long-term positions as down arrows eventually point up. Technology firms and startups find new forms of efficiencies, new business models and new flywheels.
We should look at the pandemic this way as well, that the opportunities around it shouldn’t be wasted. The moment should be met with an equal sense of urgency and optimism. Where are the opportunities as more resources become available, as regulations become more flexible (as they did with PPP and other programs as problems were addressed)? At this moment, banking and fintech business leaders are paying more attention; they are more accessible and more creative in their responses. This is why we see so many companies being formed after a period of trauma. Times like these make us think differently.
There is a sense that the once impossible is now very possible.
Traditional financial-services firms need to think as young fintech founders did in 2008 and afterward, when they started a movement of thousands of firms, which has had a ripple effect across our business models. When they said enough with fees and certain transaction costs or bad user experiences, and they started to get funded and started to build. What can you do now that you couldn’t do before? This is how you seize the opportunities of a world turned upside down. How can banks better position themselves now, so that they will be better off once the crisis is over? A decade ago, banks were forced to repair their balance sheets and to change their business models. What will happen now?
As we saw from 2008 to 2020, often reluctant entrepreneurs from all walks of life will begin to look at solving ongoing friction in the financial-services space. Having heard of many talented banking executives being shown the door even before the pandemic began, some of these would-be-founders just needed a push, a nudge toward not letting this particular crisis go to waste. Yet, most of these companies will be founded by people who have never set foot in a bank in their lives.
This is how Stripe was founded—and Square and Betterment and TransferWise. The list goes on.
Can you imagine the companies that will be founded now? There are still many issues to be solved within financial services and many stones yet to be unturned. Venture investment doesn’t ever slow down for long; in fact, it’s on a steady pace. And—compared to 2008—venture capitalists (VCs) are now more than ready to write checks and further disrupt financial services.
A decade ago, venture capitalists nibbled; now, they are gobbling.
According to the FT Partners venture report for the first quarter of 2020:
- After the record-breaking fintech-financing volume in 2018 ($54 billion) and 2019 ($45 billion), 2020 is still trending just slightly lower at an annualized level of $43 billion.
- Despite a lower number of deals, there were 18 financing rounds of $100 million-plus (including $105 million for Acorns), with 14 announced in the January-to-February timeframe.
- Sixteen VC or strategic investors have made three or more new fintech investments so far this year.
- Fintech M&A (merger and acquisition) volume in first-quarter (Q1) 2020 reached $86.5 billion, the highest level since the record-breaking Q1 2019 (approximately $113 billion), which included the two largest fintech deals ever.
- There were 10 $1-billion-plus deals in Q1 2020, which is more than in any quarter of 2019, including acquisitions such as Morgan Stanley’s $13-billion of E*TRADE, Intuit’s $7.1-billion of Credit Karma and Visa’s $5.3-billion of Plaid.
But wait, there’s more! The second quarter of 2020 continued very strongly as well, with large funding rounds from Stripe ($600 million), AvidXchange ($128 million) and Robinhood ($280 million). Stash, with 4.5 million users, raised $112 million. Hong Kong-based Oriente raised $50 million. Stilt, a Y Combinator alum focusing on financial services for immigrants, raised a $7.5-million seed round. Treasury Prime raised $9 million to bring its banking APIs (application programming interfaces) to market. AlphaCredit Capital, a Mexican lending startup, raised a $100-million equity round from SoftBank.
The list goes on, and more founders start a fintech every day. Banks around the globe take note. It took you awhile a decade ago to wake up—so glad you can join us. Now get back to work.
During a crisis, dreamers finally act, and builders just build. That’s what they do.
The post-pandemic evolution of the business model
Nothing ever seems easy in financial services. After the Great Recession, we saw the combination of consumer behavior, technology, capital and business conditions give rise to new forms of competition. This became a growing force as fintech firms entered nearly every sector of banking. We’ve had regulatory changes and movements to open up innovation, competition and data, through PSD (Payment Services Directive) 1 and 2 and GDPR (General Data Protection Regulation) in Europe and similar efforts in other regions of the world, including the United States. The business model is being challenged, and while the industry achieved record profits during the past decade as indicated earlier, margins are compressed, and capital requirements and regulatory challenges remain. Being in banking during the past decade has not been for the faint of heart.
And now this. This pandemic. But we have to remember whom we serve, why we serve. People are sick. People are dying. People are being impacted by the tens of millions, both directly and indirectly. And the pain from this moment in time will impact billions of people for decades to come.
These are our customers. This is why we exist. We are here to help people. Period.
This pandemic only amplifies a growing divide between rich and poor, wealthy and not. Banks need to be involved in more areas that impact people’s sense of financial health. In some countries, such as the United States, the connection between healthcare and employment is tenuous when tens of millions are losing their jobs. How are you as an institution helping your customers to keep their jobs, train for new ones and retain their healthcare? How are you helping them to keep their businesses afloat? How are you helping them to optimize their spending at this most critical of times? Federal regulators in the US encouraged financial institutions to offer “responsible small-dollar” loans—so how does making credit even harder to obtain help your customers?
More changes continue to act as challenges but also opportunities. Our societies are getting older; our needs are more challenging. Our communities are becoming increasingly diverse, and while we are improving access to banking (globally, a full 700 million people became banked during the past decade), access is only one step toward financial success. The importance of how we serve the financial needs of women has never been more critical—as women are disproportionately impacted financially through the ongoing income gaps and caregiving gaps inherent in our culture. Our jobs are becoming more transient, more contingent, less beneficial overall, as our productivity and income have become more unhinged since the 1980s. Something has to give, as we see a shrinking middle class and a dwindling support system that should benefit more people in our communities.
Acknowledging the importance of your customers maintaining their income and their health—and its association with long-term financial wellness—should be at the forefront of all of your efforts to help them right now. We may not get a second chance as an industry to adapt, to recognize the changes within our own countries that will impact banking for the next century. It’s in your self-interest, too, as it is about your continued existence as a corporation. But that’s not why we choose to do the right thing.
What are you doing to be part of the future? What is your bank doing during this pandemic?
Summer will have no solace
Having been around this industry for a few decades provides a certain perspective. In 2013, I wrote an article in American Banker entitled “There Will Be Blood, The Era of Engagement Banking” and detailed the different ways the industry was changing in the midst of both digital transformation and external competition. Focusing on the rise of what would become fintech and the rapid consolidation of the players in the banking industry, I didn’t know then how the decade would end, but it’s the same feeling I have now. This is a moment to which we will point back and ask ourselves: “Did we do enough? Did we act in time? Did we make a difference?”
Only through action will we ever know for sure.
Echoing the sentiment of Andrei Cherny—founder and chief executive officer of Aspiration, the Los Angeles-based neobank that helps its customer back social causes and fight climate change—now is not the time to wait; it’s the time to act. The grave repercussions of the pandemic will be significant, entrenched and long-lasting. It is far past time to rebuild; it is far past time for action.
While this will be a summer without solace, it will have hope.
Let’s get to work.
References and additional reading
9 ways financial organizations are aiding battle against coronavirus (April 2020, Allissa Kline, Jim Dobbs, John Reosti, Laura Alix, Jon Prior and Alan Kline, American Banker)
A Terrible Thing to Waste (July 31, 2009, Jack Rosenthal, New York Times)
This is the effect coronavirus has had on air pollution all across the world. World Economic Forum.
The Coronavirus Is Creating An Inflection Point In The Future Of Work (April 16, 2020, Heather McGowan, Forbes)
The end of the office? Coronavirus may change work forever (April 30, 2020, Daniel Thomas and Stephen Morris in London and Andrew Edgecliffe-Johnson in New York, Financial Times)
Q1 2020 FinTech Insights Report (April 26, 2020, LinkedIn, FT Partners)
Virus lays bare the frailty of the social contract. Radical reforms are required to forge a society that will work for all (April 3, 2020, The Editorial Board, Financial Times)
The American Economy is Imploding—and America is, Too (May 9, 2020, Umair Haque, Medium)
The American Economy is Imploding—and America is, Too (May 9, 2020, Umair Haque, Medium)
The Men Pushing to Open the Economy Clearly Don’t Need Child Care (April 30, 2020, Elie Mystal, The Nation)
The Next PPP: Public-Private Partnership (May 9, 2020, Gregg Schoenberg and Arjan Schütte, Medium)
How Challenger Banks Are Innovating During the Pandemic (May 5, 2020, Abraham A. Tachjian, LinkedIn)
The week that was May 8th (May 8, 2020, Theodora Lau, LinkedIn)
What Banking Will Look Like After the Pandemic (May 2020, Jim Marous, Financial Brand)
There will be blood: The era of engagement banking (July 23, 2013, Bradley Leimer, American Banker).
Now is not the time to wait, it’s the time to act (April 14, 2020, Andrei Cherny, Aspiration)
Now is not the time to wait, it’s the time to act (April 14, 2020, Andrei Cherny, Aspiration)
The Coronavirus Is Rewriting Our Imaginations (May 1, 2020, Kim Stanley Robinson, New Yorker)