At the outset of the COVID pandemic, the digital transformation of services was not a top priority for many financial institutions. The post-pandemic world has now ushered in a new sense of urgency. Staying competitive in this new business and economic environment demands a focus on employing technology to provide better solutions. The latest episode of the “Fintech Beat Podcast” brings together, Dr. Chris Brummer, Nicole Elam, CEO of the National Bankers Association, and Larry Parks, co-founder of Forethought Advisors, to discuss what digital transformation looks like for minority-owned and rural banks.
The Fintech Beat podcast is a weekly series, hosted by Dr. Chris Brummer. Dr. Brummer is a professor at Georgetown Law, and has had a wide array of experiences advising a number of agencies as a member of the Commodity Futures Trading Commission’s subcommittee on Virtual Currencies, and as a member of the Consultative Working Group for European Securities and Markets Authority’s Financial Innovation Standing Committee. He is also the founder and host of the D.C. Fintech Week, a platform that brings together the brightest minds of finance to hold fascinating discussions on the fintech ecosystem. The 5th Annual Fintech Week took place last year from October 18-21 and brought to stage many diplomats, regulators, and academics. Notable participants included Kristalina Georgieva (The current Managing Director of the International Monetary Fund), Augustin Carstens (General Manager of the Bank of International Settlements), Reza Baqir (Governor, State Bank of Pakistan), and Nellie Liang (President Joe Biden’s Under Secretary of the Treasury for Domestic Finance).
Minority and Community Banks are critical to the success of America’s diverse communities. Often classified as MDIs, (Minority Depository Institutions) they provide essential funding for people looking to purchase first homes, provide start-up capital for smart businesses where family networks and wealth may be limited and offer a source of emergency support for people facing unexpected challenges.
The episode provided a holistic understanding of the infrastructure of MDIs and the challenges they face due to their unique customer base. Nicole Elam is one of the most important voices for the nation’s minority financial institutions. In her expertise, the pandemic has radically reshaped the banking landscape. By accelerating digital transformation, it has pushed institutions to rethink the need for physical branches. It has also ushered in a new competitive landscape with the emergence of new fintech and payment companies. MDI’s have lagged in adopting this digital transformation. This lack of flexibility has combined with a customer base strongly affected by the pandemic and has exacerbated the need for technological upgrades.
Dr. Brummer was quick to get the ball rolling when he questioned both experts on the most pressing technology needs of MDIs. Larry Parks had an interesting view on the adoption of technology. According to him, there is a tendency to overuse and overplay the importance of technology. There are areas of banking in which technology is an imperative part of functioning, such as making mortgages, creating loans, and basic mechanics. However, for MDIs, the unique selling point is their focus on interpersonal relationships. Although technology can assist those relationships, there is no substitute for being able to connect with a human.
For Nicole Elam, the most pressing technology need of MDI’s is upgrading an outdated IT infrastructure. Fintech solutions cannot be adopted without an efficient and updated infrastructure. Existing MDIs do not have IT teams, and not a single Chief Technology Officer is present in a minority institution. Most MDIs have simple mobile applications and lack online lending platforms, onboarding platforms, and P2P solutions.
Historically, there have been three technology providers that provide the core banking system for financial services. These providers rely on outdated legacy systems which they then use to provide outdated solutions to banks. As long as these technology providers do not provide updated services, the minority banking sector will remain underequipped. It is possible that with an increasingly competitive atmosphere, these providers will upgrade their services to also remain competitive.
Dr. Brummer was also eager to know what steps the government was taking or should be taking to assist in the issue of digital transformation. Larry Parks referred to Congresswoman Maxine Waters and her efforts to secure a $9 billion Emergency Capital Investment Program to provide low-cost, long term capital investments to Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs) that are depository institutions, and $3 billion to the CDFI Fund for financial and technical assistance grants to CDFIs. These efforts have led to the overcapitalization of MDIs due to having a surplus of capital but not enough loan volume. Larry and Nicole both agreed that the government should now work towards utilizing MDIs in a way that the government does business and thus creates loan loss reserve funds through CDBG.
Additionally, Nicole discussed the possibility of funding flexibility. Currently, the dollars invested from Congresswoman Water’s USD 12 Billion are focused on lending facilities. Allocating a certain number of these funds towards digital transformation can allow more flexibility and better use of funding.
Dr. Brummer took the initiative during DC Fintech Week to ask top technology companies in the country to pitch solutions for minority and community banks which were then published in a report entitled “Future Proofing Inclusion.” The episode concluded with a discussion on some of the themes behind these proposals. One interesting theme was the expansion of financial inclusion for credit invisible individuals. There are currently 45 million people who are denied credit due to a lack of scorable credit scores. A majority of these individuals are from the Black or Hispanic community. The report contained several brilliant proposals to help bring these people into the credit score bracket, by using alternative data (such as utility-rent-cellphone payments) to underwrite loans that institutions wouldn’t otherwise be underwriting.
However, the use of alternative data presents a challenge for banks. Due to their privacy concerns, banks find it difficult to share consumer privacy data with fintech companies. This data is vital for fintechs to be able to provide novel solutions for the issues faced by credit invisible individuals.
Another theme was that of financial literacy. It is reported that consumers with financial literacy skills tend to perform better in terms of managing debt and also have more non-retirement savings. Nicole Elam believes that the adoption of financial literacy needs to be incentivized. Simply educating individuals on financial topics will be unable to change their behavior. Typical incentives can look like discounted rates for mortgages or business loans upon completion of a financial literacy module.
The episode concluded with a thought-provoking statement by Dr. Brummer. He believes that although MDI’s are small and have a limited consumer base, they hold valuable data. Part of the value of the data MDI’s have is that they may help de-bias existing data with their more inclusive inputs and stakeholders.