The Banking Dive Outlook on 2021

In many ways, the trends Banking Dive is following in 2021 laid their roots in 2020. The trick is how to keep the momentum going.

Over 10 months, the value of crypto's flagship currency grew tenfold. Is that for real? How will that stick? 2021 may provide an answer. Banks' environmental, social and governance (ESG) efforts shifted from climate to racial equality. How will banks be held accountable for their follow-through? The new year may hold an answer. And COVID-19 — oh, COVID-19 — forced banks to back up their digital-first visions with real-world rollout. Where do they go from here? 

A make-or-break year for crypto

It would have been easy to dismiss cryptocurrency as a fad after the price of Bitcoin shrunk back from its previous 2017 high value of $19,783. But its charge from an early-pandemic low of $4,107 to more than 10 times that early this month makes it hard to ignore.

2020 provided an about-face on crypto from a major player in the banking space: JPMorgan Chase last spring began extending banking services to Bitcoin exchanges Coinbase and Gemini. Three years earlier, the bank's CEO, Jamie Dimon, called the currency "a fraud" and said he would fire "in a second" anyone at JPMorgan found to be trading in it. "You can't have a business where people can invent a currency out of thin air and think that people who are buying it are really smart," he told The Guardian.

A similar turnabout appears to be brewing in 2021. Goldman Sachs last year dismissed Bitcoin over its volatility, saying in a May report, "We believe that a security whose appreciation is primarily dependent on whether someone is willing to pay a higher price for it is not a suitable investment for our clients." However, the bank issued a request for information to explore digital asset custody, a source inside the bank told CoinDesk on Friday.

Perhaps a bigger tell is the attention regulators have focused on the space. The Office of the Comptroller of the Currency (OCC) last week gave cryptocurrency platform Anchorage conditional approval for a national trust bank charter. Fellow crypto firms BitPay and Paxos have charter applications pending. "The Anchorage approval demonstrates that the national bank charters provided under the National Bank Act are broad and flexible enough to accommodate evolving approaches to financial services in the 21st century," the OCC wrote in a release.

Looking only at that and other recent actions from the OCC — clarifying this month that banks can use stablecoins and blockchains to facilitate payments, and, in July, that banks can provide crypto custody service — skeptics could credit such progress to one regulator led, until last week, by a crypto enthusiast. (Former Acting Comptroller Brian Brooks previously served as chief legal officer of Coinbase.)

But other regulators, for better or worse, are weighing in on crypto. The Securities and Exchange Commission (SEC) sued blockchain payments company Ripple last month for allegedly violating investor-protection laws through the sale of the XRP coin.

The Biden administration's choice to lead that regulator, former Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler, has advocated for greater regulation of crypto exchanges. And greater oversight could trigger greater mainstream adoption, he said. "You want traffic lights and speed limits because then the public is confident to drive on the roads," Gensler told Bloomberg in 2018.

2021 could turn into a make-or-break year for crypto simply for the volume and variety of opinions on the matter. While crypto-focused businesses such as Coinbase and Bakkt charge toward initial public offerings, regulators such as the U.K.'s Financial Conduct Authority are warning crypto investors they "should be prepared to lose all their money." Swiss bank UBS similarly cautioned clients that the price of crypto coins could go to zero. "Netscape and Myspace are examples of network applications that enjoyed widespread popularity but eventually disappeared," strategists for the bank wrote Thursday, according to Bloomberg.

Niche-shopping M&As

Two distinct strategies emerged toward the end of 2020 regarding mergers and acquisitions: the splashy "we'll-take-it-all" growth method exemplified by the December tie-up between Huntington Bank and TCF, and the niche-shopping acquisitions and sell-offs that have begun to permeate 2021.

Perhaps the highest-profile purveyor in niche shopping is Wells Fargo. The bank laid out a plan Friday to cut its gross expenses by $8 billion in the coming years — 35% of that from streamlining organizational structure, according to American Banker. At one level, that means de-cluttering the management ranks. At another, that has meant analyzing which segments of the bank's business perform best, and which are less crucial to the bank's forward path.

Since October, the bank has dangled several units to gauge interest from potential buyers. The bank knows, for example, its asset-management unit, which holds north of $600 billion, isn't truly competing with arms of JPMorgan or Morgan Stanley that hold twice as much. And with Morgan Stanley's acquisition of Eaton Vance pushing it over the $1 trillion mark, a competitor that suddenly finds itself behind may want to catch up quickly. Six hundred billion dollars under management would do that. Plus, Wells Fargo's asset-management unit could fetch as much as $3 billion on the market, according to Bloomberg. That's a lot of cost savings for the nation's fourth-largest bank.

Wells reportedly put its corporate-trust and student-loan businesses on the market in October and found a buyer for the latter in December. It is also considering selling a unit that provides store-branded credit cards and point-of-sale financing, according to Bloomberg.

Selling units individually is also a way for a bank whose strategy is otherwise on point to maintain an abundance of caution as it exits the crisis mode portion of the coronavirus pandemic.

U.S. Bank last month agreed to buy MUFG Union Bank's debt servicing and securities custody portfolio, boosting its assets under management by $320 billion and giving it a greater West Coast footprint.

Silicon Valley Bank, looking to expand its wealth-management business, bought a niche player this month in Boston Private Financial Holdings.

Still other banks have reportedly been looking to exit particular markets. News that HSBC is allegedly shopping its U.S. retail banking operations came a mere two weeks after another international lender, BBVA, sold its U.S. presence — save for its New York branch — to PNC for $11.6 billion.

Last year, the banking space may have been on the lookout for a splashy, all-in Truist-type tie-up or, on a smaller scale, for credit unions gobbling up community banks. (There were seven such deals in 2020, according to American Banker, compared with 16 in 2019.) In 2021, banks will be tweaking their business models piece by piece.

Race will be ESG's true test

A year ago, it seemed climate might be the cornerstone of banks' environmental, social and governance efforts. Goldman Sachs in December 2019 rolled out an ambitious policy to commit $750 billion over 10 years toward projects focused on renewable energy, sustainable transportation and affordable education. Activists pushed banks to align themselves with the 2015 Paris agreement and, one by one, institutions from Barclays to JPMorgan Chase, pledged to aim for net-zero carbon emissions by 2050.

In the meantime, Morgan Stanley, Citi and Bank of America joined a group aiming to standardize the way banks measure and reduce their climate impact. And regulators, from New York's Department of Financial Services to a CFTC panel laid out suggestions for banks to level up their climate risk reduction.

But the focus of ESG shifted to the S — social — in May after the police killing of George Floyd, a Black man, was met with worldwide protest. A reexamination of the wealth gap along racial lines ensued, and banks from PNC to Bank of America made billion-dollar commitments toward rebalancing the scales through housing, investment in minority depository institutions and more.

Wells Fargo led an effort to tie executives' year-end compensation packages to their efforts to diversify the ranks of bank leadership (despite blowback over language the bank's CEO used to introduce the initiative). And banks from Santander to Truist pledged to give employees time off to commemorate Juneteenth.

The key in 2021 will be follow-up. Banks have said they're pledging the money, but what happens as time wears on. Will some banks fail to commemorate Juneteenth when the spotlight isn't so bright?

State Street is one institution insisting on progress at the corporate board level. The bank's investment arm said last January it would "take appropriate voting action" against board members at big U.S., U.K., French, German, Japanese and Australian companies that fall short on ESG standards if they "cannot articulate how they plan to improve" their score on State Street's metric of responsibility.

This year, it vowed to go further — voting against board members of S&P 500 and FTSE 100-listed companies if those firms fail to disclose the racial and ethnic makeup of their boards. And next year, it said it would begin voting against the chair of the nominating and governance committees of companies that don't have at least one board member who is a minority.

Not to be outdone, Nasdaq proposed requiring companies to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or lesbian, gay, bisexual or transgender.

Digital acceleration to continue

The coronavirus pandemic brought unprecedented digital acceleration to the financial services industry in 2020. Industry experts say the increased interest in digital technologies and fintech products is expected to continue its momentum this year, even once the pandemic subsides. 

"The amount of bank digitization that I've seen over the last 10 months is equivalent to what I saw over the last five years, in terms of the speed of acceleration," said John Pitts, head of Policy for data aggregator Plaid.

As social distancing forced consumers to rely on digital products for their banking needs, banks took stock of their tech investments and digital offerings to accommodate the changes.

"We found out a lot of banks had 'fake' digital offerings," said Aubrey Hawes, senior director of Oracle's financial services global business unit. "If something was broken, we could always go into the branch and fix it. When the branches are closed because of COVID, now behaviors are changing because places weren't open. It just kind of changes everything."

Banks will also be eyeing the gains made by fintechs in the digital-first environment, and will be looking to invest in more digital offerings and technology to remain competitive.

"The amount of consumer adoption of fintech that we saw over the pandemic was dramatically higher than anything we had seen during the previous five years," Pitts said. "Fintech at the consumer level went from being something that was a very nice thing to have to a need. ... We see that as likely to continue accelerating even coming out of the pandemic."

During JPMorgan Chase's most recent fourth-quarter earnings call, Dimon gave a blunt assessment of what banks are up against when it comes to the growth of fintech. 

"We should be scared s---less," said Dimon, adding banks are facing a whole generation of "newer, tougher, faster competitors."

"I expect to see very tough, brutal competition in the next 10 years. I expect to win, so help me God," he said. 

In its earnings presentation, JPMorgan Chase said it plans to add an extra $900 million to its $11 billion technology budget in 2021, with an emphasis on data analytics, cybersecurity and artificial intelligence. 

Participation in the Paycheck Protection Program (PPP) has also increased banks' demand for fintech services amid the demand for the forgivable Small Business Administration (SBA) loans. 

"In many ways, this is like so many things in COVID, just pushing banks into the future," Dan O'Malley, CEO of digital lending platform Numerated said ahead of the SBA's relaunch of the program last week. "If you don't have a high-quality self-service experience, the work is so much greater."

Challenger banks have been on a tear in the past few years. The digital banking institutions, many of which say their aim is to disrupt the traditional banking space, have brought increased attention to the growing fintech sector, with massive funding rounds and reports of steady growth in user numbers. 

There were 256 neobanks worldwide as of December, according to data compiled by Exton Consulting, and many have reported steady account growth over the past 12 months. 

Chime, which closed a funding round in September that valued the startup at $14.5 billion, told Bloomberg last February it had amassed 8 million users, up from the 1 million customers it claimed in 2018.

Varo, which in July became the first U.S. challenger bank to obtain a national banking charter, said it doubled its customers in 2020, and now has nearly 2 million accounts, according to Reuters. 

Challenger bank Current's user numbers rose from 1 million in June to more than 2 million in November. The company raised $131 million in a Series C funding round in November, and values itself at around $750 million.

As the challenger bank market continues to attract venture capital, new users and even celebrity endorsements, how will the momentum and hype surrounding this new way to bank continue into 2021?

Filling the expectation gap

Challenger banks have been able to grow user numbers because of their ability to offer financial services missing at some of the major incumbents. 

"These challenger banks have emerged because they're able to deliver upon an expectation gap between what actually exists within banking and what should exist," said Lane Martin, a partner in the banking practice at the consulting firm Capco. "Challenger banks make their case around fulfilling unmet needs. And they do so quickly for things that are very logical."

Challengers such as Chime and Current boast features such as fee-free accounts and overdraft protection in their bid for a market that lives paycheck to paycheck, a market that arguably isn't getting tailored service from traditional institutions. 

A 2018 study by the Federal Reserve, released in 2019, found that 40% of Americans would struggle to come up with $400 to cover an unexpected expense. 

That financial vulnerability is something megabanks such as JPMorgan Chase and Bank of America are not adequately addressing with their products and services, challengers say. 

"We have a fundamentally different business," Adam Hadi, vice president of marketing for Current, told Banking Dive last year. "We aren't making money based on the amount of deposits we have, like a traditional bank. ... Banks are always there when you have a lot of money. What banks are there for you when you don't?"

Interchange is how the vast majority of challenger banks make money. Banks collect interchange fees from merchants when customers spend their money using a bank's debit card. 

The percentage challengers can collect on interchange is small, but larger than what their megabank competitors are allowed.

Under the Durbin Amendment, part of the Dodd-Frank Act, banks with less than $10 billion in assets are able to charge merchants up to 1.5% on debit card swipes. That's seven times more than what incumbents like Wells Fargo or Citi can charge, an analysis by Fortune found. 

While the interchange business model has allowed startups to establish themselves in a saturated market and take advantage of a benefit not available to some of the industry's most powerful players, not everyone thinks challengers can sustain their momentum in 2021. 

Digital banks Azlo and Simple, as well as Latino-focused alternative lender Aura, have shuttered so far in 2021. 

"I think what we're seeing is a lot of these neobanks — Chime is a great example — have massive valuations, but they've really built their business on interchange and that requires significant scale," said Nathaniel Harley, co-founder and CEO of MANTL, an online account-opening platform.

"[Interchange] has worked, historically, because we've been in a bull market where there has been a ton of venture dollars that have been going into these companies, and really propping them up," he said.

Chime generated more than $600 million in revenue in 2020 thanks to interchange fees, according to The Information. 

Much of the venture funds going into challengers have been put toward marketing and advertising, as neobanks look to take market share from traditional institutions, Harley said.

"But what happens in an environment where those venture dollars dry out or when the market isn't doing really well?" he said. "I do think that there is going to be a reckoning for some of these challenger banks in 2021 and we're going to see some of these inflated valuations come down again, and their business models are really going to be pressed hard."

Investors are chasing returns, Aubrey Hawes, senior director of Oracle's financial services global business unit, said of the amount of venture capital pouring into challengers. 

"You wonder how many of these guys can make it. These VC firms place a lot of bets in a lot of places, and I think they won't expect them all to hit," he said. 

A report Thursday from Axios found challengers may also be generating a significant portion of income from out-of-network ATMs. 

Chime derives 21% of its revenue from fees its customers pay for using out-of-network ATMs, according to data obtained by the news outlet.

"A small percentage [of our revenue] comes from fees derived from out-of-network ATMs," the company told Axios, adding its customers have access to more than 38,000 fee-free ATMs."

Challengers will need to diversify

Expect to see more challenger banks introduce expanded product offerings in 2021, Martin said. 

"The challenger banks that start getting momentum in the marketplace, they'll start acting more like a traditional bank, in terms of fulfilling more of that wallet share," Martin said. "It's interesting that the fintechs start out being different, and then they somewhat have an aspiration to then offer everything that a traditional bank is offering right now."

Fintech Upgrade this month launched a mobile banking platform to complement its existing personal loan and credit card offerings. 

Co-founder and CEO Renaud Laplanche said the new digital banking platform won't be a revenue driver but rather an offering that will bring new customers to Upgrade's personal loan and credit products. 

"[The mobile bank account] is a way for us to deliver more value to existing customers, and also to acquire new customers," Laplanche said. 

Step, a challenger bank aimed at the Gen Z market, plans to offer lending and possibly investment and financial literacy products, CEO CJ MacDonald said.

"A big part of our mission is financial literacy, so I think there's some educational tools that we can build in," said MacDonald, whose San Francisco-based startup raised $50 million in a Series B funding round in December. 

Subscription banking

While interchange remains a steady revenue driver for most challengers, some niche-focused fintechs require monthly subscriptions for their services or offer premium versions in addition to their free offerings.

U.K.-based gohenry, which recently closed a $40 million financing round which it plans to use for its U.S. expansion, charges a monthly subscription fee of $3.99 per account in the U.S. 

The challenger bank offers a prepaid debit card and bank account with parental controls for 6- to 18-year-olds.

Subscriptions are the company's main source of revenue, said CEO Alex Zivoder.

"Interchange is, of course, an element on top of that, but, suffice to say, the number of transactions that a teenager or a child does is not comparable to the number of transactions that adults do," he told Banking Dive in December. "It's difficult to think that a free model based on interchange alone in our segment has any chance of making it."

Azlo, an entrepreneur-focused neobank that BBVA USA said this month it would shut down, tested the subscription model last summer.

In addition to offering a fee-free account, Azlo launched a $10-per-month subscription service that bundled the bank's existing features, such as invoicing, with new tools that included automated budgeting for payroll and taxes. 

The model was supposed to be another way for the bank to generate revenue outside of debit card interchange fees, CEO Cameron Peake told Banking Dive in September. However, BBVA has since announced its decision to shutter the platform ahead of PNC's acquisition of the Spanish lender's U.S. arm. 

Other challengers that use either subscription or premium offerings as an additional revenue stream include Houston-based Majority, which targets the immigrant market; NorthOne, which caters to small businesses; and U.K.-based Revolut, which launched a premium account in 2017.

As more challengers eye subscriptions or premium offerings to supplement income made through interchange, they should be aware that it's not always easy to make the move, said Andrew Beatty, senior vice president and general manager of next-generation banking at FIS. 

"You can only give a premium offering if you're providing a premium service set of products," he said. "It's very difficult to move from a lite version of an offering into something and charge for it when the competitive landscape is filled with other things that people pay for today." 

More niche banking

Many neobanks focus their attention on specific segments of the population as a way to differentiate from incumbents. 

Daylight, which launched in December, specializes in serving gay and transgender customers through offering access to LGBT-focused financial planning coaches, as well as an inclusive feature that allows a transgender person's preferred name to appear on cards, rather than their "dead name," the name they were given at birth.

Majority targets the immigrant community by bundling digital banking with long-distance calling and money transfers. Remitly, which already targeted the segment with its money-transfer services, launched Passbook last year to offer banking services to that same demographic. 

Other challengers, such as MoCaFi and Greenwood, aim to provide banking services to Black and Brown communities.

"The banks are great, but they are not in a position to really address some of these fundamental issues, because it runs counter to their business model," MoCaFi founder and CEO Wole Coaxum said, of his goal to decrease the number of unbanked Black and Hispanic households in the U.S.

"I think we'll see more and more of these challengers solving customer problems because that's what it's all about," Beatty said. "I don't think there's a saturation point yet. The fintech space has really come up with some really great ideas. If you think about the challenges around [the Paycheck Protection Program], people rallied around that and created business opportunities. Certainly, it showed that innovation can occur quite rapidly."

After President Joe Biden’s inauguration Wednesday, and a Georgia runoff election that gave Democrats control of the Senate, the financial regulation and policy agenda looks to be in Democrats' hands for at least the next two years. 

Banking industry stakeholders said some of the issues earning the new administration's focus are alternative credit data, big-bank oversight and fair lending.

"Alternative data is going to become incredibly important, and the Biden administration has signaled some real openness to that," said John Pitts, head of policy at data aggregator Plaid.

Coming off a year where student loans and mortgage payments have been paused amid the coronavirus pandemic, consumers are facing big gaps in credit history.

Among his first actions as president, Biden signed an executive order Wednesday directing the Department of Education to extend the pause on student loan payments through Sept. 30.

"This is the longest period of significant regulatory dampening of normal financial services information that we've ever seen," Pitts said. "We're going to have a year's worth of irrelevant information on people’s credit reports, and we've never really had an environment like that."

As a result, Pitts said he thinks cash flow underwriting will become an important practice during the Biden administration. 

"This is an area where fintechs really have been the leaders in for the last five years, and large financial institutions have always done with small businesses but not done as frequently with consumers," he said. "I think having leadership at the [Office of the Comptroller of the Currency] and the [Consumer Financial Protection Bureau] who are leaning into those types of innovations and making sure that consumers are protected when they do them will be incredibly important."

With Democrats heading the financial services and banking committees in the Senate and House, major bank CEOs should expect an increase in bank oversight hearings.

Sen. Sherrod Brown, D-OH, who will replace Sen. Mike Crapo, R-ID, as Senate Banking Committee chair, is expected to ramp up oversight of the sector and has expressed a desire to hear from the CEOs of the nation’s largest banks more often.

"[T]hey have a lot of power and we need to know more about how they do their business," he told reporters last week. "The more we hear from them, the better."

Bank CEOs may benefit from some extra time to prepare for future congressional hearings, as Democrats may want to postpone some of the "blockbuster" ones until after the pandemic subsides, said Aaron Cutler, a partner in Hogan Lovells's government affairs unit. 

"It's not as dramatic to have people raise their hands and swear in over Zoom as opposed to in the committee room," he said. 

In the meantime, Cutler said banks should be preparing testimony and managing responses to topics that Democrats will likely be focused on, such as diversity and inclusion, fair lending and climate change.

"Fair lending is one of the areas that moves back and forth with the party affiliation of the administration, more than really other kinds of financial services regulation," said Christopher Willis, co-leader of Ballard Spahr's consumer financial services group. "We're expecting an increase in fair lending attention under this administration. It’s a particular area of law that banks have to be concerned about."

The Obama administration actively enforced anti-discrimination laws, such as the Equal Credit Opportunity Act and the Fair Housing Act, while the Trump administration took the opposite approach, Willis said.

"That's an area where, historically, you see a lot more in a Democratic administration, and so we're expecting that to occur again," Willis said. 

Despite Democratic control of the House and Senate, the margins are still too tight for lawmakers to pass any significant bills that could impact banking, Cutler said. But, he added, leadership changes at regulatory agencies will have a greater impact on the sector. 

Biden appointed nine-year CFPB veteran Dave Uejio, who last served as the bureau's chief strategy officer, as the agency's acting chief after CFPB Director Kathy Kraninger resigned, the White House announced Thursday, according to Reuters. 

Rohit Chopra, a member of the Federal Trade Commission, has been floated as a likely pick to head the CFPB on a permanent basis.

The president is also expected to nominate former Ripple adviser and Treasury Department official Michael Barr as head of the OCC, The Wall Street Journal reported Wednesday.