Thought Leadership

5 Lessons the U.S. Can Learn from India’s UPI

5 Lessons the U.S. Can Learn from India’s UPI
By Julie Muhn (@julieschicktanz) Posted on
Categories: List series, Thought Leadership

The National Payments Corporation of India (NPCI) launched the country’s Unified Payments Interface (UPI) in 2016 to serve as a real-time payments system to facilitate peer-to-peer and person-to-merchant transactions via mobile phones. Since then, the payments infrastructure has seen massive growth, having reached its peak in December of last year, when it surpassed 12 billion transactions worth $220 billion (Rs 18.23 trillion) in the single month.

The U.S. launched its real time payments initiative, FedNow, last July and has a lot to learn from India’s UPI. As the U.S. seeks to modernize its own banking infrastructure, here are five key lessons that can be learned from India’s experience with UPI.

Simplicity and accessibility

One reason for UPI’s growth is its simplicity and accessibility. The payments system allows users to transact using their smartphones with just a few taps. Notably, UPI doesn’t require the user to remember long bank account numbers or Indian Financial System Codes (IFSC). By simplifying the user experience in this way, UPI has helped drive adoption, especially among the unbanked and underbanked populations.

U.S. financial services can learn from this focus on the user experience that ultimately makes digital payments more intuitive and easy to use. When friction is reduced for end users–especially with underbanked populations in mind– adoption has the potential to skyrocket.

Interoperability

With a lack of open banking regulation in the U.S., the banking system severely lacks interoperability. UPI, on the other hand, is built on the principle of interoperability, allowing users to make payments across different banks and payment platforms. Facilitating payments among all players has helped create a level playing field for consumers and merchants alike and has contributed to UPI’s rapid growth.

In the U.S., interoperability among banks and payment platforms is still a challenge because many systems operate in silos. Many fear that cooperating will lead to a loss in competitive advantage. However, adopting a standardized, open, and interoperable approach as outlined in the proposed Section 1033 of the Consumer Financial Protection Act has the potential to not only drive innovation but also improve the overall user experience.

Security and fraud prevention

The NPCI built UPI on a robust security framework to ensure that transactions are safe and secure. The payments systems’ security has earned consumer trust and has therefore been a critical factor in driving adoption.

Security concerns surrounding digital financial services abound in the U.S., however, where many consumers worry about the safety of their financial information and are concerned for their own privacy. Established financial services firms and fintechs alike should prioritize security and adopt best practices from UPI in order to improve trust and confidence in their digital payments operations.

Low transaction costs

One things UPI transactions are known for is the low cost per transaction, which makes them an attractive alternative to cash payments. The cost savings has been a key driver of adoption, especially among small businesses and consumers.

Many digital payments solutions in the U.S., however, still carry high transaction fees, thanks to the large number of middlemen involved. The costs associated with digital payments stifle adoption, and incentivize cash usage or even paper check payments. Reducing transaction costs would change the incentives, driving more people and businesses toward digital payments.

Government intervention

One of the biggest lessons the U.S. banking system can learn from UPI is the role of government support in driving innovation. UPI was developed and rolled out by the NPCI with the support of the Indian government, as part of the country’s push towards a cashless economy. The government’s proactive approach has been key to the success of UPI and has helped create a culture that fosters innovation.

In the U.S., greater government support and collaboration with the private sector could help drive similar advancements in digital payments. This idea carries significant challenges, however, as many Americans shy away from governmental intervention, especially when it comes to their finances.

Photo by rupixen.com on Unsplash

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The OCC Fined City National Bank $65 Million: 8 Steps to Avoid a Similar Fate

The OCC Fined City National Bank $65 Million: 8 Steps to Avoid a Similar Fate
By Julie Muhn (@julieschicktanz) Posted on
Categories: Daily news, Thought Leadership

This week, U.S. Office of the Comptroller of the Currency (OCC) fined City National $65 million in a civil money penalty. The OCC said the California-based bank “engaged in unsafe or unsound practices,” stating that it failed to establish effective risk management and internal controls. The bank also allegedly violated the bank secrecy act.

Additionally, the agency sent City National a cease-and-desist order that stipulates the bank must correct its actions to improve its strategic plan and operational risk management. Specifically, the OCC wants to see the bank improve its internal controls, compliance risk management, anti-money laundering and fair lending practices, and investment management operations.

This is not only bad news for City National, but also for banks across the U.S. That’s because, given last year’s banking crisis, regulators have had their ears a bit closer to the ground than usual and are more willing to strike fines on both banks and fintechs.

So what’s a bank to do in the midst of increased scrutiny? Here are eight actions to take to avoid a similar fate.

Strengthen third-party risk management

In the era of banking-as-a-service (BaaS), multiple aspects of banking leverage third parties, and for good reason. Using a third party fintech to boost security or a lending-as-a-service provider to offer a much-needed service for customers helps bankers focus on what they do best. However, banks must establish auditable processes for managing third-party risks and implement controls to mitigate risks associated with third-party relationships, especially those related to operational, compliance, and fraud risks. And this is not a set-it-and-forget-it action. Once the process is in place, banks need to routinely monitor third party relationships.

Enhance internal controls

Once you take a look at your processes with third parties, examine your own, in-house operations. Modernize and strengthen your internal controls to detect and prevent risk management and compliance issues. And don’t slip on conducting regular compliance audits to identify and correct any weaknesses.

Improve operational risk event reporting

After surveying both your internal and external processes, establish a risk reporting system that can quickly flag any irregularities. The reporting system should be transparent and efficient in order to allow for a quick response from the right party or parties involved. A fast turnaround will help mitigate risk.

Enhance fraud risk management

While internal slip-ups pose their own threat, fraudsters are an even bigger danger, as they can be difficult to predict and control. Make sure you have robust fraud risk management practices in place, including continuous monitoring and proactive measures to prevent fraud. Because fraudsters will strike wherever they find a vulnerability, you need to ensure your entire team is on board. Stay vigilant by conducting regular training exercises for all employees to help them recognize and respond to fraud.

Address discrimination concerns

Even if your organization hasn’t been accused of redlining, proactively create a structure around your fair lending practices. Having a well-documented process in-place will serve you well if you are ever flagged for potential unfair practices. And don’t get complacent. Review your lending practices on a regular basis to ensure fairness and compliance with anti-discrimination laws.

Strengthen your bank’s financial position

Save your reputation by establishing a process that continuously monitors and assesses your bank’s financial position. Quickly address any issues that may impact your banks’ stability. Have a plan in place in the event things go wrong. Establish a strategy to address losses, such as rising costs from lower deposits. The strategy should include proactive measures that will help maintain financial health.

Create a compliance-driven culture

Regulatory action is on the rise, not only in the U.S., but across the globe. Adhering to regulations requires compliance from all levels of the organization, so permeating your culture with compliance will help ensure everyone plays by the rules. And because compliance is dynamic, be sure to regularly review and update your policies to ensure they meet current standards.

Cooperate with regulators

Let’s face it, systems fail and everyone makes mistakes. In the event the regulators come knocking at your bank’s door, be cooperative. Fostering a positive relationship with regulatory bodies and keeping communication open can go a long way. Be proactive in remediating the issues and making the necessary corrections to avoid further enforcement.

Photo by Pixabay

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Europe’s Financial Future: 5 Key Agenda Topics

Europe’s Financial Future: 5 Key Agenda Topics
By Julie Muhn (@julieschicktanz) Posted on
Categories: FinovateEurope 2024, List series, Thought Leadership

The European financial services scene is continuously evolving thanks to the pulse of innovation, technological shifts, and advances in consumer expectations. As we stand on the cusp of next month’s FinovateEurope conference, it’s not merely the agenda that awaits, but deep-diving discussions surrounding the pressing issues and new developments waiting to change the continent’s trajectory.

Here, I’m taking a look beyond the conference halls and delving into five agenda items to consider why the topics matter in 2024, how they fit into the landscape, and why I’m excited about them.

Will AI Be More Profound Than The Invention Of The Internet? What Do Financial Institutions Really Need To Understand About Generative AI?

It’s not difficult to understand why Generative AI (Gen AI) is on the top of the agenda for FinovateEurope this year. The topic spiked in conversations following the release of Chat GPT in late 2022 and hasn’t receded since. Gen AI has applications across every financial services sub-sector (and beyond) and holds the potential for major cost savings opportunities. I’m eager to hear what the speaker, Nina Schick, has to say about applications of the technology within financial services and the relatively new threat of deepfakes.

Keynote Address: From Crypto Ice Age To Crypto Winter To Crypto Spring?

For those who still feel like we are in the middle of crypto winter (the downturn in the crypto space) it may seem irrelevant to bring up the topic to a roomful of bankers. However, we started to see a rise in activity surrounding decentralized finance (DeFi) late last year. This session’s speaker, Jillian Godsil, is an award winning journalist, author and broadcaster at Coin Telegraph. She’ll be offering her take on risks and opportunities in the space; what it will take to build a new, internet-native financial system; and how regulators are feeling about crypto. DeFi holds immense potential for financial services and I’m excited to hear Godsil’s inside view.

From Competition To Collaboration & Co-Creation – Why Financial institutions Need More Than Ever To Build Strategic Partnerships.

Whether you’re a bank or a fintech, you don’t need me to explain to you the importance of partnerships. The fintech industry has shifted its mentality from coopetition to collaboration and today, the financial services realm is completely reliant on partnerships. New to the discussion– and much of why I am interested in this age-old topic– is the threat that increased regulatory scrutiny may pose. Moderating this panel discussion is Rashee Pandey, Associate Director of Membership at Innovate Finance.

Digital Payments Are Eating The World – How Will New Competitors & New Business Models Shape The Future?

Regardless of your location, income, or social status, payments are– and always will be– relevant. And with the entire globe as your potential user base, getting into the payments game can be lucrative if done correctly. With new technologies and fresh consumer expectations, however, the payments landscape is changing. I am eagerly anticipating the discussion, led by Andrew Steele, Partner at Activant Capital, around new competitors and business models.

Transforming Lending In The Cost Of Living Crisis

Europe’s cost of living crisis is no secret. The cost of housing, combined with the cost of basic necessities such as groceries and medications, have caused both end consumers and large corporations alike to adjust their habits. Lending has always been an integral element to consumers’ lives, and today’s high interest rate environment, combined with consumers’ increased use of credit, complicates this scene. I’m looking forward to hearing from Jack Spiers, U.K, Banking and Lending Sales Director at Tink, on how traditional affordability models are cutting consumers short and how data can repair the issues.

Now that you have a sneak peek at the FinovateEurope agenda, consider this your formal invitation to join us at the conference, taking place 27 and 28 February at the Intercontinental O2 in London. Register today to save.

Photo by ANIRUDH on Unsplash

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Bite-Sized Budgeting: Can it Help a New Generation of Savers?

Bite-Sized Budgeting: Can it Help a New Generation of Savers?
By Julie Muhn (@julieschicktanz) Posted on
Categories: Thought Leadership

I had an interesting conversation last week with two of fintech’s brightest minds, Theo Lau and Barb Maclean. The discussion, which was around personal financial management (PFM) and budgeting, shed light on the financial habits of Generations Z and Alpha.

The issue

As a bit of context, these generations are faced with high student loan debt and a high cost of monthly rent. In my town, the cost to rent a studio apartment is more than double the cost of the mortgage on my five bedroom, two bath home. This is only part of the problem, however.

The other half of the issue for these young adults is the lack of, or even poor, financial education. Not only is this generation growing up without Mint.com, but the best tools fintech has to offer them are buy now, pay later (which can be a useful tool but is just bad advice in general) and early paycheck advances. Perhaps the worst part of the equation is that many of these young people are heavily swayed by impulse purchases promoted by influencers on Instagram and TikTok.

Bite-sized budgeting

While it may be difficult to get folks to regularly engage in actively managing their budget, fintech may have an answer to this problem. The good part is that it already exists.

Bite-sized budgeting is a concept built to suit users with short attention spans. The PFM tools that fit into the bite-sized budgeting category have three attributes– they don’t require much input from the user, they are straightforward and easy to understand, and they only require a small amount of follow-up.

Here are a few examples of bite-sized budgeting tools already on the market:

  • Subscription management tools that highlight users’ recurring expenses to check for fraud, flag forgotten subscription expenses, and ensure the user is still benefitting from the subscription.
  • Discretionary spending tools that analyze users’ transactions, identify non-essential expenditures, and offer insights into where their money is going.
  • Automated savings widgets that allow users to schedule automatic money transfers into savings accounts on a regular basis.

According to a 2015 Microsoft study, the average attention span of Gen Z individuals is about eight seconds. That is four seconds less than Millennials’ attention span. By breaking the chore of budgeting down into manageable tasks, younger users are more likely to look at their budget.

What’s next for bite-sized budgeting?

The missing piece in this de novo budgeting method is offering an aggregated approach. Many of these tools, such as subscription management and automated budgeting exist either as standalone apps or as an added feature of an existing fintech. However, each of these needs to be brought under a single hub that is either standalone or offered by an existing fintech or bank.

As with the pie chart PFM budgeting technology of 2012, bite-sized budgeting will face the issue of miscategorized transactions. When users’ transaction data is incorrect, the tools may flag the purchase incorrectly or offer poor follow-up advice. Both of these issues will make users less willing to rely on them to help manage their finances.

Photo by Andrea Piacquadio

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Fintech Funding Surges This Week: 10 Deals in 3 Days

Fintech Funding Surges This Week: 10 Deals in 3 Days
By Julie Muhn (@julieschicktanz) Posted on
Categories: Allied Payment Network, Funding, List series, Thought Leadership

We are only three days into this week, and we’ve already seen a huge wave of fintech funding announcements come in. In fact, there have been not one, not three, not five, but 10 fintech companies that have secured substantial funding rounds this week.

This surge signals a promising comeback, hinting at a possible resurgence of venture funding in the fintech sector for 2024. Here’s a look at the funding announcements so far this week.

  • Financial software and technology provider Computer Services, Inc. (CSI) landed a strategic investment from private equity firm TA. The amount of this week’s round was undisclosed.
  • Asset and wealth management software specialist Zilo raised $31.8 million (£25 million) in Series A funding. The round was co-led by Fidelity International Strategic Ventures and Portage.
  • Unbox, a value exchange network, closed $13.2 million (€12 million) in a funding round led by HSBC. Unbox will use the majority of the funds to fuel talent recruitment.
  • Investment portfolio company Allied Payment Network received additional strategic investment from growth capital firm RF Investment Partners. The amount of this week’s round was undisclosed.
  • B2B subscription commerce platform AppDirect secured an additional $100 million investment from global investment group CDPQ. The funds will be used to support financing options for technology advisors through the company’s AppDirect Capital Invest program. 
  • Maalexi, a risk management platform assuring payment and performance for small agri-businesses in cross border trade, raised $3 million in a round led by Global Ventures.
  • Singapore-based BNPL firm Atome raised $31 million from parent company Advance Intelligence Group.
  • Digital asset custodian Finoa brought in a $15 million investment led by Maven 11 Capital and Balderton Capital. The company’s valuation remains flat at $100 million.
  • Brazil-based Conta Simples brought in $41.5 million (R$200,000,000) for its expense management technology. The company will use the funds to grow its team and expand its client base.
  • Africa-based fintech Cleva raised $1.5 million in pre-seed funding for its technology that enables African users to receive USD payments.

Overall, the 10 rounds add up to more than $237 million. This might not seem like a lot when compared to 2021 funding levels. However, it is impressive when juxtaposed against last year’s first quarter funding numbers. When looking at the funding raised by Finovate alumni, we found that 13 companies raised a total of $453 million in the first quarter of 2023. Considering this benchmark, fintechs are off to a good start in 2024.

But don’t get too excited. This week’s brisk pace of fintech funding may not be completely indicative of a comeback. The ten rounds in three days can likely be attributed to the buildup of deals that were almost complete in the fourth quarter of last year, but were put off after the holidays.

Regardless of the reason, let’s hope that 2024 is a happy and healthy year for fintech funding.

Photo by César Couto on Unsplash

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What Will Be the Top Fintech Trend in 2024? Hint: It’s Not AI.

What Will Be the Top Fintech Trend in 2024? Hint: It’s Not AI.
By Julie Muhn (@julieschicktanz) Posted on
Categories: List series, Thought Leadership

When it comes to predicting the next leap in fintech, you have to risk not only getting things wrong, but also being ok with it. So while I could play it safe and predict that the top fintech trend in 2024 will be AI, or industry consolidation, or even growth in the use of buy now, pay later tools, I’m going to step into less charted territory and say that the 2024 fintech buzzword will be quantum computing.

Why quantum computing?

The concept of leveraging quantum computing in financial services is dated; it has been around since the early 2000s. However, there are three main factors why 2024 may be the year the conversation around this topic really takes off.

  1. Cost savings opportunities
    Banks and other industry players are currently in a wrestling match with today’s economic environment, the expensive cost of capital, and an increase in competitors vying for customer attention. This, combined with an onslaught of new regulatory constraints that not only restrict operations but also result in new costs, has banks looking for new ways to both cut costs and add new revenue streams. Quantum computing’s promise to help firms increase speed, efficiency, and decrease risk appears to be a green field of revenue opportunity for organizations across the sector.
  2. Technological demands
    The financial services industry loves generative AI, but even though it is the hottest topic in fintech at the moment, it comes with its own set of restrictions. Because it relies on enormous sets of data to work effectively, generative AI requires scalable computing power. As the use of AI evolves and data sets become increasingly larger and more complex, quantum computing may become a requirement to train AI models quickly.
  3. Hardware developments
    Developments in quantum computing hardware have been slow over the past few years, making the technology inaccessible and unreasonable, even for larger financial services firms. IBM may be changing this, however. Earlier this month, the computing giant unveiled its latest computing chip, Condor, that has 1,121 superconducting qubits and can perform computations beyond the reach of traditional computers. IBM also released Heron, a chip with 133 qubits that boasts a lower error rate.

    Along with these hardware releases, IBM also unveiled its development roadmap for quantum computing, which pegs 2024 for the launch of its code assistant and platform.
Image courtesy of IBM

What to expect in 2024?

Let me be clear that next year won’t be the year that financial services organizations experience widespread adoption of quantum computing. The industry has a long road ahead when it comes to leveraging the new technology and will face challenges with hardware stability, algorithm development, and security.

Despite these challenges, we will see a small handful of larger firms dabble in quantum computing in 2024. Many already are. Earlier this year, Truist Financial joined IBM’s Quantum accelerator program and MUFG purchased an 18% stake in a quantum computing startup called Groovenauts. And just today, HSBC announced it has implemented quantum protection for AI-powered foreign exchange trading, using quantum cryptography to safeguard trading data against cyber threats and quantum attacks.

These firms’ developments in quantum computing will spark conversation and development plans among mid-market firms. It is the conversation– rather than the implementation– around quantum computing that will burgeon in 2024.

Use cases in financial services

So how will firms end up using quantum computing? Specifically, the new technology will enable organizations to develop better algorithms around risk assessment, portfolio optimization, encryption, and security.

In the coming years, as quantum computing chips become more accessible, we’ll see use cases including faster transaction processing for high-frequency trading and settlement systems, customer behavior analysis and personalized financial services, and financial modeling that can more accurately predict market behavior and economic scenarios.

Photo by Dynamic Wang on Unsplash

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What ChatGPT Got Wrong about Top 5 Fintech Trends of 2024

What ChatGPT Got Wrong about Top 5 Fintech Trends of 2024
By Julie Muhn (@julieschicktanz) Posted on
Categories: Julie's Column, Thought Leadership

I’ve received dozens of 2024 fintech trends prediction pitches in my email inbox over the past month. And while many of them are insightful, I wanted to see what our AI overlord ChatGPT had to say about the matter.

My prompt read, “What are your predictions for the top five newest and hottest trends in fintech for 2024?” Here is how the AI responded:

Predicting the exact trends for 2024 is speculative, but here are potential emerging trends in fintech:

  1. Embedded Finance: Further integration of financial services into non-financial platforms like e-commerce, SaaS, and marketplaces. This trend will offer users seamless access to financial products within their daily activities.
  2. Metaverse Finance: With the growing popularity of the metaverse, fintech might explore virtual currencies, digital assets, and decentralized finance (DeFi) solutions tailored for this space.
  3. AI-Powered Personalization: Enhanced AI-driven tools for hyper-personalized financial recommendations, wealth management, and banking services. AI will further analyze vast datasets to offer tailored financial advice.
  4. Climate and Sustainable Finance: Continued growth in green finance, impact investing, and ESG-driven financial products as consumers and investors prioritize sustainability.
  5. Regulatory Evolution: Fintechs navigating evolving regulations, especially around data privacy, digital currencies, and open banking. Compliance and adapting to regulatory changes will remain crucial.

As usual, ChatGPT not only did a pretty good job, but it also sounds pretty convincing. And while there are truly no blatant errors in the prediction, it could be better. Here’s what’s wrong or what’s missing in each of the five predictions.

Embedded finance

ChatGPT was spot on. It is quite obvious that this will be a big trend in 2024. Why? Because it’s a big trend right now. However, this is more of a continuation of a current trend rather than a new trend in 2024. Also, ChatGPT failed to mention the role that regulation will likely play in embedded finance next year, especially in the U.S. That’s because partner banks have become more wary to partner with fintechs after the FDIC issued a consent order to Cross River Bank, saying that it was involved in unsound banking practices. Where there is opportunity, there is liability.

Metaverse finance

ChatGPT was wrong. This is one trend that can be thrown away with all of those 2023 desk planners out there. The metaverse offered a fun distraction during the pandemic, when the industry was obsessed with moving all of a bank’s operations to digital channels. However, most consumers lack interest in moving their lives to the metaverse, and banks have realized that their investments in more traditional channels are more likely to pay off.

AI-powered personalization

This is another win for ChatGPT. However, personalization is not the only AI-powered aspect of banking and fintech that will surge in 2024. Many organizations are now turning toward generative AI, which has the potential to produce creative outputs for generating investment strategies, designing financial products, building marketing campaigns, simulating data to predict market movements, simulating economic scenarios, or stress-testing financial systems.

Climate and Sustainable Finance

While I want to believe ChatGPT on this prediction, I wouldn’t list it among the top five trends for 2024. There are two major reasons why sustainable finance will take a backseat (though not disappear) next year. First, the high cost of capital has both banks and fintechs searching for new revenue opportunities. Given this high interest rate environment, firms are more focused on direct cost-saving and revenue growth initiatives such as AI. Second, in many geographies, regulation has not caught up with sustainability initiatives. This lack of regulation and industry standards makes it difficult for organizations to pose definitive claims about what they are doing for the environment.

Regulatory evolution

This is absolutely among the top trends I have my eye on for 2024. Again, this is a continuation of a current trend and not a new development, but it will remain at the forefront in fintech next year. ChatGPT cited regulatory changes across data privacy, digital currencies, and open banking. In regards to open banking, the CFPB released its notice of proposed rulemaking to implement Section 1033 of Dodd-Frank earlier this year and made clear that it will issue the final regulation in the fall of 2024.

One piece that ChatGPT left off its list of anticipated regulatory changes is the formalization of rules around buy now, pay later (BNPL) companies. As consumers rely on BNPL payment technologies as an alternative to traditional credit models, regulators in both the U.S. and the U.K. have announced their intent to formalize regulation in the space.

Photo by Matheus Bertelli

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An Overview of the Native American Fintech Scene

An Overview of the Native American Fintech Scene
By Julie Muhn (@julieschicktanz) Posted on
Categories: Thought Leadership

To celebrate the start of Native American Heritage month, we wanted to highlight the current landscape of the Native American fintech scene. There’s one problem– while the culture of Native Americans in the U.S. is vibrant and alive at the moment, tools to serve this group’s unique financial needs are not.

There are, however, a handful of organizations to highlight in this space.

Totem

Totem is currently the only fintech aimed at specifically serving indigenous people. The startup was founded in 2022 as a digital bank to serve Native Americans. The app not only offers direct deposit and a debit card, but also serves as a place where users can search information on tribal benefits and programs.

Native American Venture Fund

The Native American Venture Fund is a platform that offers impact investment opportunities to investors looking to support indigenous communities. The firm’s goal is “to leverage a tribe’s economic and legal advantages to develop and operate successful business enterprises and provide job opportunities for tribal members and the local community workforce.”

KeyBank’s Tribal-Specific Banking

KeyBank is very intentional in the way it serves its Native American clients. The Ohio-headquartered bank has a specific team to offer credit, treasury management, capital markets, investment management and public finance products to tribal nations.

First Nations Financial Management Board

While not in the U.S., Canada-based First Nations Financial Management Board allows indigenous people to be eligible to borrow at similar rates and terms as other governments in Canada. It also allows tribes to use different revenue streams like taxation, government transfers, and economic development as security for borrowing under the FMA.

Banks and Credit Unions

In addition to these financial services organizations, there are a small handful of banks and credit unions serving First Nations communities. Earlier this year, NerdWallet published a blog post listing 30 U.S.-based financial institutions.

Why the lack of tools and services?

This list needs some work. There are currently 574 Native American tribes and Native Alaskan villages that are spread out across cities and the 326 federally recognized Indian reservations. Most Native Americans have severely limited access to traditional financial services and rely on clunky websites and paper-based processes to receive and maintain benefits. As an example, I own a home that I rent out to a Native American family. Eight family members live in the home, and they pay their rent each month using four separate U.S. Postal Service money orders.

There are two main drivers behind the lack of credit opportunities, resources, and education for Native Americans. First, most Native Americans and tribal units are not wealthy. If a fintech wanted to serve this group’s particular needs, it may be difficult to monetize and scale. Second, each tribe has its own unique culture and many tribes also have their own constitution. What’s more, different tribal members receive unique sets of financial benefits and resources, which can be difficult to track and manage without the proper tools. Building one solution to fit all tribes’ needs would be a challenge. Can fintech do better?

Photo by RDNE Stock project

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7 Things to Know about the U.S. Federal Reserve’s Novel Activities Supervision Program

7 Things to Know about the U.S. Federal Reserve’s Novel Activities Supervision Program
By Julie Muhn (@julieschicktanz) Posted on
Categories: List series, Thought Leadership

Earlier this month, the Federal Reserve (Fed) rather quietly released a letter that addresses what it is calling the “creation of novel activities.” Signed by Michael S. Gibson, the Board’s Director of the Division of Supervision and Regulation, the letter is titled, Creation of Novel Activities Supervision Program.

If you’re a fintech or a bank, the contents of the letter will likely apply to you. Here are 7 highlights of the newly created program.

Who is impacted

The letter applies to all banking organizations supervised by the Fed, including those with $10 billion or less in consolidated assets. Organizations will receive a written notice from the Fed if their activities will be subject to examination. Those who are still in the exploration phase will be “routinely monitored” for active engagement.

What is it for

The program will focus on activities related to crypto-assets, distributed ledger technology (DLT), and what the Fed is calling “complex, technology-driven partnerships with nonbanks” that deliver financial services to end customers.

The target

The letter explains that the Fed will “enhance supervision” over the following categories:

  • Partnerships where a non-bank provides banking products and services to end customers via APIs that provide automated access to the bank’s infrastructure.
  • Activities such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and stablecoin issuance and distribution.
  • The exploration or use of DLT for issuing tokens or tokenizing securities or other assets.
  • Organizations that provide traditional banking services to crypto-related companies.

How will it supervise?

The program will leverage existing supervisory processes and will use the Fed’s existing supervisory teams instead of creating a new portfolio to monitor activity. The supervision will be risk-based, meaning that the intensity of the scrutiny will vary based on each firm’s engagement in novel activities mentioned above.

Why

The Fed is seeking to strengthen its existing oversight of banks’ third party fintech partnerships. In the letter, Gibson reasons that innovation can lead to rapid change in banks and in the financial system in general, and that it has the potential to generate risks that can impact banks’ safety and soundness. “Given the novelty of these activities,” he states, “they may create unique questions around their permissibility, may not be sufficiently addressed by existing supervisory approaches, and may raise concerns for the broader financial system.”

Future plans

The Fed explained that it will continue to “build upon and enhance” its technical expertise to stay abreast of fintech trends, the risk associated with the trends, and appropriate controls to manage risk. In addition to increased supervision, the letter explains that the program will help shape supervisory approaches and create guidance for banking organizations engaging in the use of these “novel” technologies.

So what?

The Fed is making it clear that the lack of regulation for fintechs and the Wild West environment of the crypto realm is a thing of the past. This means that fintechs– especially those engaged in crypto– will need to be ready to answer not only to banks, but also to the Federal Reserve. On the flip side, banks will need to be ready to ask a lot more questions before engaging with fintechs, formalize partnership processes, and document all that they can regarding potential risk.

Questions about the letter can be sent via the Federal Reserve’s website..

Photo by Jewel Tolentino

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Citizens Bank of Edmond Goes National

Citizens Bank of Edmond Goes National
By Julie Muhn (@julieschicktanz) Posted on
Categories: Julie's Column, Thought Leadership

Citizens Bank of Edmond has a single branch located in Oklahoma– what many people consider a “fly over state.” The town of Edmond, where the building is located, boasts a population of just under 100,000 people. That’s not stopping President and CEO Jill Castilla from pursuing growth, however.

Castilla announced today that her bank– with $400 million under management and just 55 employees– is taking Citizens Bank of Edmond national. Now, U.S. citizens across the country can sign up for a retail bank account at Citizens Bank of Edmond. The move broadens the bank’s reach to around 300 million people.

“In an unprecedented 72 day timeline to implementation, Citizens proves that small banks can be nimble, fast, thorough, sophisticated and still deliver a George Bailey-like experience,” said Castilla in an announcement on LinkedIn. “We love leading the way for other community banks to stay relevant for decades to come!”

Powering the launch is digital banking technology company Narmi. Founded in 2016 by former bankers Nikhil Lakhanpal and Chris Griffin, Narmi has a mission to offer financial institutions the best digital banking platform in the industry. The New York-based company offers both retail and commercial accounts, as well as a digital account opening solution that takes only two minutes and 13 seconds to complete.

Narmi, which has amassed $55 million in funding, counts Radius Bank (now Lending Club), Greater Alliance Federal Credit Union, Berkshire Bank, Freedom Credit Union, and more among its clients.

By opening its digital doors to everyone in the U.S., Citizens Bank of Edmond is breaking down geographical barriers. This shift toward “affinity banking” or “identity-based banking” will enable Citizens Bank of Edmond to take advantage of the brand identity and recognition it has spent the past few years building.

During the pandemic, the bank leaned hard into its focus on community and the small businesses that make up the community. For example, Castilla frequently shared her phone number on public channels as a resource for those in need. She also contacted all of the bank’s business customers to determine their main areas of stress. And when the bank had to close its lobby, its employees met customers at the curb to schedule time slots to serve its customers and maintain a personal touch.

It will be interesting to see how Citizens Bank of Edmond plans to maintain that level of personal touch while scaling up its accounts. Given Castilla’s fastidious determination, however, I do not envision the bank will have an issue maintaining its reputation of offering a top-notch customer experience. To hear Castilla talk about customer experience in person, come to FinovateFall next month and check out her panel.

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Four Reasons Why Goldman Sachs and Apple Are Breaking Up

Four Reasons Why Goldman Sachs and Apple Are Breaking Up
By David Penn Posted on
Categories: Apple, List series, Thought Leadership

Rumors have circulated that the partnership between one of the biggest names in finance – Goldman Sachs – and one of the biggest names in tech – Apple – is coming to an end.

Specifically, the reports suggest that Goldman Sachs is looking to exit its financial relationship with Apple. Goldman Sachs is Apple’s partner for its Apple Card – and has been since 2019. Goldman Sachs is also Apple’s partner for its Buy Now Pay Later service, currently in beta. Reports from the Wall Street Journal indicate that Goldman Sachs is looking to off-load its Apple credit card business to American Express.

So why has the relationship soured? Here are four possible factors:

Know Your Customer

One of the big headline issues hinting at friction between Goldman Sachs and Apple occurred when Apple CEO Tim Cook was testing the Apple Card and was unable to get approved. The issue had to do with fraud protection protocols on Goldman Sachs’ side. The company’s underwriters rejected the application because, as a well-known, high-profile individual, Tim Cook is often impersonated by fraudsters. This appeared to be a one-off problem at first. But an investigation by the U.S. Consumer Financial Protection Bureau led to additional concerns about disputed transactions and, ultimately, reports of gender bias in the granting of credit limit increases. Goldman Sachs was cleared of any wrongdoing, but the drama helped stoke tensions between the company and Apple.

Culture Clash

It’s not surprising that there were issues between the East Coast Wall Street culture of Goldman Sachs and the West Coast Silicon Valley culture of Apple. But there were very real challenges in the working relationship between the two firms. As is often the case when “move fast and break things” technologists team up with the rules-based world of finance, there was a tension between what one person called a focus on “the sleek technology and product pizazz” on the one hand and “regulatory compliance and profitability” on the other. Even at a more mundane level, basic issues such as the timing of billing statements and card design became grist for conflict and development delays.

The Bank Behind the Curtain

Writing at 9to5 Mac, Chance Miller noted that in addition to losing a ton of money with Apple Card – more than $1 billion by January 2022 – there are other ways that Goldman Sachs was losing out on the Apple partnership. Miller points out that not only was Apple developing its own in-house financial service project (called “Project Breakout”), but also there were other aspects of the relationship that ill-served Goldman Sachs. “One thing to keep in mind is that most Apple Card users likely don’t even know Apple Card is backed by Goldman Sachs,” Miller wrote. “Goldman Sachs exists in the backend, and everything else is managed directly through the Apple Wallet app.”

While this relationship is common in fintech and financial services, it seems like a poor approach for Goldman Sachs, which is newer to the consumer business than Chase or American Express and was likely seeking to build its consumer brand via its association with Apple. Couple that issue with the financial losses, and the potential of Apple “breaking out” on its own, and Goldman Sachs may have one more reason to start second-guessing its Apple Card gambit.

Whose Idea Was This Anyway?

When Goldman Sachs first announced its partnership with Apple, there were many who questioned the financial institution’s deepening foray into consumer banking. Goldman Sachs earned its lofty reputation in the world of finance as a leading investment bank and investment management firm. To say that consumer banking was not a core Goldman Sachs competency would be an understatement. But in the wake of the financial crisis, with Wall Street banks desperate for new revenue sources, consumer banking and the rise of fintech were alluring opportunities to an institution like Goldman Sachs. Goldman Sachs had room to grow – and money to burn. The firm also had a brand name and reputation that would help it gain the attention it would need in an increasingly competitive market.

But projects like Marcus rose and plateaued, with an initial rush of deposits leading to overly optimistic profit forecasts and, ultimately, significant losses. Efforts to expand into areas such as investing via Marcus revealed that Goldman Sachs was not as innovative as smaller upstarts like Robinhood. An attempt to leverage opportunities in consumer lending with the acquisition of Buy Now Pay Later startup GreenSky proved costly.

Seen through this lens, Goldman Sachs’s issues with Apple Card may have more to do with Goldman Sach’s issues with consumer banking.

Photo by cottonbro studio

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Disability Empowerment: How Fintechs Help Us Overcome Physical, Cognitive Challenges

Disability Empowerment: How Fintechs Help Us Overcome Physical, Cognitive Challenges
By David Penn Posted on
Categories: Daily news, Diversity in Fintech, Thought Leadership

Disability Pride Month is coming to a close. The annual July commemoration is an opportunity to honor the experience and achievement of those in the disability community. The month of July is special because President George H.W. Bush signed the Americans with Disabilities Act into law on July 26, 1990. The landmark legislation was the first comprehensive law enshrining the civil rights of people with disabilities.

Today we take a look at just a handful of ways financial technology and the financial services community is helping support people with disabilities, whether those challenges are physical or cognitive, transitive or enduring.

There are some who bristle at the euphemism “differently abled.” But the idea of leveraging one ability to make up for another is at the heart of inclusion when it comes to people with disabilities. This is true when we are talking about technologies that enhance the power of hearing or touch for those with visual challenges. It is also true when we talk about a digital banking world that ultimately makes banking services more accessible to all – including those who cannot easily travel.

At the same time, greater awareness of the challenges faced by those with physical and cognitive challenges also means understanding the limits of technology. A pilot project in 2010 that explored disability inclusion in microfinancing institutions in Africa produced what one observer called “several clear conclusions from this pilot worth repeating because they are likely to have near universal application for MFIs entering this market.” The recommendations?

Don’t develop special credit products. Don’t give special conditions. Don’t get disappointed too soon. Identity existing clients with disabilities. Learn from them and use them in promotional efforts and in reaching out to new clients. Join efforts with local disability organization. Improve the physical accessibility of the premises.

A sizable number of government organizations and non-profit entities exist to help support people with disabilities secure employment, housing opportunities, as well as economic and health benefits. In many instances, non-profits have benefited from partnerships with financial institutions. This includes the partnership between JP Morgan Chase and the National Disability Institute. The bank, for example, is backing the NDI’s effort to inform and educate low- and moderate-income individuals with disabilities about the resources available to them under the Community Reinvestment Act (CRA).

The partnership between NDI and JP Morgan has produced some interesting insights into the challenges of small business owners with disabilities, as well. The report, Small Business Ownership by People with Disabilities: Challenges and Opportunities, makes a number of important points – foremost among them that entrepreneurialism is often a major employment choice for people with disabilities. The reasons for this vary from preferring a more flexible work schedule to previous experiences with discrimination or a hostile work environment to a lack of advancement opportunities. Importantly for people in financial services and fintech, the report noted that smaller, disability-owned businesses often avoid traditional financial channels and struggle to secure financing.

The causes for this aversion include concerns about using personal assets as collateral, a lack of assets, or benefit-related issues – such as a fear of losing social security benefits if their countable assets climb too high. Helpfully, the report provides a number of recommendations to help banks and fintechs better serve disability-owned businesses. These suggestions include greater investment in CRA funds for small businesses to more support of policies that would boost business opportunities, access to capital, and better coordinate of public resources.

Check out the full study.

Sometimes helping people with disabilities means helping people who help those with disabilities. According to data from co-parenting solution provider SupportPay, 38 million people are taking care of loved ones in 2023. To this end we share news that SupportPay has unveiled a new app designed to make it easier for caretakers to share, manage, and track expenses. The solution also enables caretakers to coordinate schedules and streamline communication. It is expected to be available in the fall of 2023.

Sheri Atwood, SupportPay founder and CEO, highlighted the fintech component of the new offering compared to other solutions on the market. “While several caregiver solutions are entering the market, none are focused on reducing the stress of managing expenses between multiple caregivers,” Atwood explained. “Our solution is built to solve this pain point by simplifying and streamlining this process.”

More than 65,000 parents are using SupportPay to manage more than $450 million in expenses and payments. In addition to helping caregivers share, organize, and track expenses and schedules, the new offering also helps caregivers review and resolve disputes as well as maintain certified records of expenses and payment histories. These can be especially helpful for tax purposes or addressing legal issues that arise.

“We knew our platform could be of assistance to all family members, including the staggering number of caregivers,” Atwood said. “From our co-parenting solution, we know that when people share financial responsibilities – whether it’s with an ex, a sibling, or another family member – the process can be much more time-consuming, conflict-ridden, and stressful.”

Founded in 2018, SupportPay is headquartered in Charlotte, North Carolina. The company has raised $6.8 million in funding. SupportPay’s investors include LAUNCH and The Syndicate.

Photo by ELEVATE

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