Debra’s 2 Cents

CustomersCompliance Competition

What Scares You Most?

You are facing one of the scariest times in banking history.

Banks have always had to keep multiple balls in the air to ensure that every emergency gets the necessary attention. But, have we ever seen a time when so many groups seem to be out to destroy the banking industry?

That probably sounds dramatic, but it seems true to me.

The most obvious evidence of that is made apparent by the data. Every quarter, the FDIC releases its “State Tables,” which allows you to compare data between one state during specific quarters, one state against another state or a state against national data. (VISIT: state-tables.fdic.gov)

The most recent State Table data is for the quarter ending June 30, 2022. The “State” data is for banks headquartered in a particular state. The data shows that Kentucky has lost 31 Kentucky bank charters in the last five years and 38 in the five years before that, for a total of 69 lost bank charters in the last ten years. Kentucky isn’t an anomaly. You can run the same comparison for any other state and see the same trend—in the last ten years the country has lost 2474 bank charters.

When we look at this trend, it could be caused by any number of things; or, more likely, a combination of things. Certain fintechs are entering the world of financial services without the same level of oversight that banks have to deal with. Similarly, other providers of financial services, like credit unions and the Farm Credit System, don’t have the same tax burden. And, even when competitors are regulated, it is not at the same level of scrutiny that bank feel. The SBA is considering allowing fintechs to lend under that program. This unfair competition allows them to compete primarily through speed. A recent survey I saw reported that while most small businesses still want to go to a bank, those numbers are changing.

That brings up customers. They want speed, free frills and no responsibility. The savvier customers want complete digital/phone access and fraud protection. The less savvy still wants low or no fees and ability to make mistakes without penalty; and, the CFPB seems to support them—at least for now. The one thing that banks have covered so much better than the competition is access to bank personnel, whether in person or by phone. The good news for the smallest banks is that they are still perceived as a strong pillar of the communities they serve.

But regardless of your reputation, customers have also become so accustomed to Reg E (and other regulations) and incorporated protections that they don’t even try to protect themselves. And, certain folks in DC are standing with them. As a result, customers and regulators do not want late fees, overdraft fees or any other fees (so called “JUNK” fees) that would make sense to a responsible consumer.

Regardless of which regulator is your primary regulator, you see each one following the same lead—often that lead is the CFPB. We have constantly predicted that the CFPB would be difficult regulator to deal with, but that has really shown to be true most recently. Sometimes even with formal regulation, regulators approve guidelines and use laws in ways they were never intended (and look only to NSF guidelines to see regulators implementing changes in ways that seem retroactive). All of this without any concern as to whether the consumer needs, wants or understands the service offered. Regulators move too fast and Congress moves too slow. For example, banks need to be able to legally bank cannabis business for states where it is legal. Cannabis is legalized in many states and confused by local law enforcement with legal hemp businesses. Banks are told that their regulators won’t enforce the federal prohibition on banking cannabis, but is that true and when will it not be true again? We can’t know.

The Fed recently finalized a rule that requires debit card providers until July 2023 to ensure that ALL transactions must be able to be processed by at least two unaffiliated networks. This is a significant change from the previous rule and posses a potentially significant burden (and cost) on issuers. The Fed assumes that this will result in cost savings that will be passed on to the consumer—do you recall the Durbin Amendment?

Regarding fintech, we see “stablecoins” being discussed in Washington. Stablecoins can change the entire banking system dramatically, by allowing users to totally eliminate the need for a traditional bank for the purpose of making or receiving payments…all with the backing of the Government, if adopted by Congress. The bottom line…

The public and others view new digital sources as unique and interesting. And, banks as utilities (safer and more trustworthy), but without the need for profit and that is where the problem occurs.

Happy Halloween—Maybe the New Year will be better.