JPMorgan Chase is bolstering the unit of the bank that serves startup clients as it looks to fill a void left by several regional lenders that collapsed in March and May.

The New York City-based bank this year added close to 200 bankers to its innovation economy division, an area of the firm that caters to technology startups and venture capital backed-businesses, the bank said. The hiring spree comes as JPMorgan claims the unit’s U.S. client portfolio nearly doubled in 2023.

But as the firm invests in the division’s growth, Ashraf Hebela, head of startup banking at JPMorgan’s commercial banking division, emphasized that the bank has always had a mission to serve startups, even before this year’s banking turmoil. 

"This is not a new phenomenon,” said Hebela, who joined JPMorgan from Silicon Valley Bank, which collapsed in March. “JPMorgan has always been in the innovation economy business and not just domestically, but globally. I think the March event put it in more of a focus." 

When Silicon Valley Bank collapsed, the startup community lost their favorite bank. The 40-year-old Santa Clara, California-based lender fostered close relationships with the emerging tech sector and was known as the go-to bank for venture capital-backed firms. 

But SVB’s implosion, and the subsequent demise of two other startup-friendly regional lenders, meant entrepreneurs were on the hunt for a new bank, and many saw JPMorgan as a safe place to park their funds.

"We have seen an influx of companies come to us in the last two months that are looking for a more stable environment," Melissa Smith, JPMorgan’s co-head of innovation economy and head of specialized industries, told Reuters in May.

During JPMorgan’s investor day in May, Doug Petno, the bank’s CEO of commercial banking, said the market disruption and the “shift in our competitive landscape” substantially heightened the firm’s new client acquisition. 

“[T]o accommodate this growth and rebalance the business and to accelerate our innovation economy banking efforts, we're adding incrementally higher front and middle office support than we have in prior years,” he said.

To help it serve a clientele that was the bread and butter of SVB, JPMorgan has brought on some of the firm’s former executives, including John China, who spent 27 years at the regional bank, most recently as president of SVB Capital. 

JPMorgan installed China as co-head of innovation economy for commercial banking in July, where he serves alongside Smith.

‘Fintech 1.0’ 

As JPMorgan looks to capitalize on a gap left over from a string of bank failures, the firm will need to convince startups it has the culture and customer service that endeared so many entrepreneurs to SVB.

Beta Boom Capital Managing Partner Kimmy Paluch, whose firm became a JPMorgan customer after the bank took over failed First Republic Bank in May, said the transition has so far been positive. 

“Ultimately, the test as to whether JPMorgan can step in to serve this space will be measured by their actions. As of today, it appears the answer is unequivocally, ‘yes,’” she said. “The legacy First Republic Bank platform has been able to leverage these expanded resources to continue to serve its VC partners, and we've been able to take advantage of these as a firm.”

Hebela said startups and VCs can look at JPMorgan’s 224-year history for examples of the bank’s early commitment to emerging tech.

"You could almost argue JPMorgan has been in the business of banking the innovation economy from what I would consider fintech 1.0, which was Alexander Hamilton,” he said, referencing the treasury secretary who co-founded The Manhattan Company, JPMorgan Chase's earliest predecessor.

The Manhattan Company was chartered by the New York state legislature in 1799 to provide drinking water to the city's population. A provision in the charter allowed the company to use its excess capital for banking operations. 

“We've been banking entrepreneurs for the last two centuries,” Hebela said. “I think it's a little bit of an interesting narrative that's out there, that after March, we're all in. When you peel the onion back, you can see the history of what JPMorgan has been doing in the innovation economy. The story starts way before March.”

Strategic advantage

While JPMorgan Chase CEO Jamie Dimon has touted the bank’s investments in serving the venture ecosystem, he has also acknowledged the $3.87 trillion-asset firm has room for improvement.

“We always were there, we always did OK, but I always wanted to do better,” Dimon told Bloomberg TV this month. “We have unbelievable products and services to bring to them — digital, consumer, subscription lines, financing, globality, research — you name it. But we have to deliver it to them in a way they actually like it and they want it, which is what Silicon Valley Bank did.”

JPMorgan faces competition from incumbents and fintechs that are looking to court the startup sector in the wake of this year's banking crisis.

Fintechs Mercury and Brex, which cater to startups, each reported deposit windfalls as SVB clients moved funds out of the troubled bank.

Meanwhile, Raleigh, North Carolina-based First Citizens Bank, which acquired $110 billion of SVB’s assets at the end of March, is rallying in an effort to fill the lender’s shoes. 

“[SVB] was the number-one bank in tech and life sciences for over 30 years and suddenly that went away, so we’ve spent a lot of time trying to give people confidence that we’re in the bank and plan to continue to run the model they were running,” First Citizens President Peter Bristow told the Financial Times in April.

But a key advantage for JPMorgan, Hebela says, is the bank's ability to serve startups throughout their life cycle. 

“It's really dangerous to think about a company as just an archetype of a segment. The job for us is to be active listeners and solution-oriented professionals that are providing what they need at the right time, in the way that they need it. That's what we're building,” he said. "When I look at what we have, it is the full gamut, end-to-end of what an entrepreneur would ever need, from idea generation all the way to post IPO.”

JPMorgan’s capital position also puts it at a strategic advantage, especially in light of federal regulators’ proposals for more stringent capital requirements for banks, said Don Butler, a managing director at Thomvest Ventures, which is not a JPMorgan Chase client. 

“I believe that if these [proposals] move forward, then you’ll see an increase in the regulatory capital needed for banks that invest in and, to a lesser extent, lend money to startups,” he said. “I believe the outcome of this will be that banks’ commitment to the sector will be tested and that those with both a larger deposit base and a strategic focus on the venture sector will emerge as the larger players here. JPMorgan Chase has both, and so I think in that regard it is well-positioned in the sector."

For some banks, the decision to operate an expensive and compliance-heavy cannabis banking program has been rewarded with access to cheap deposits. 

With many banks still wary of the risks and compliance burdens associated with serving the sector, firms that choose to bank the industry have been able to justify the high cost and labor by implementing risk-based pricing and non-interest-bearing accounts.

But as more banks and financial institutions are getting into the game, some banks are feeling the pressure to rethink their strategies.

“Risk-based pricing doesn't always work when you’re trying to compete with the bank down the road,” said Chris Call, CEO of Santa Rosa, California-based North Bay Credit Union.

Faced with growing competition, the credit union decided to launch interest-bearing cannabis accounts to differentiate itself from competitors, Call said at the PBC Conference in Washington in September.

“Our credit union is probably one of the few institutions that actually pays interest on cannabis deposits,” Call said. “We sort of have a competitive situation where we need to have that extra edge to offer to our customers out in California.”

North Bay, an early entrant into the cannabis banking space, has been offering accounts for marijuana-related firms since 2017, shortly after the drug was legalized for recreational use in the state in 2016.

The credit union has been offering interest on cannabis accounts for over a year now, Call told Banking Dive. North Bay has about 300 cannabis accounts and pays 2.75% interest on those accounts, Call said.

The credit union’s portfolio of cannabis accounts has grown steadily over the past couple of years, with interest on accounts being one of several factors contributing to the growth, Call said.

“It is certainly much appreciated by our customers and contributes to their loyalty in staying with us in the face of growing competition,” he said.  

In some cases, the interest earnings on the accounts offsets the credit union’s monthly account fee, Call said.

“Our philosophy has always been to treat our [marijuana-related business] accounts as much like any other business account as possible,” he said. “Greenbax Marketplace is our cannabis banking subsidiary, and I think our range of services and the level of customer support we provide are also significant factors in our growth.”

More competition

With the majority of banks’ unwillingness to serve the cannabis sector, the industry’s financial services options have historically been limited. 

But a growing public acceptance of marijuana and lawmakers’ increasing support for legislation that aims to make it easier for banks to serve the sector, have made the space more palatable for institutions looking for new ways to grow deposits. 

According to the latest data from the Financial Crimes Enforcement Network, 812 banks and credit unions are actively serving cannabis business clients, based on cannabis business-related suspicious activity reports filed in the second quarter of 2023.

The latest FinCEN report reflects an increase from 807 firms in the first quarter and 773 in the fourth quarter of 2022.

Meanwhile, legislation that would make it easier for banks to serve state-legal cannabis firms is set for a historic vote in front of the Senate Banking Committee. Proponents say the Secure And Fair Enforcement Regulation Banking Act is the solution to the largely cash-based nature of the cannabis industry, as it would encourage more banks to serve the sector.

As more banks become comfortable banking cannabis clients, firms will need to find ways to differentiate their cannabis programs to stay competitive, whether it be offering interest on cannabis accounts, or lowering monthly fees, said Tony Repanich, president and chief operating officer of Shield Compliance.

“We're already seeing that banks are doing a trade-off between service charges and getting deposit accounts. We're seeing softening of fees as the bankers are willing to do that trade-off,” said Repanich, whose Seattle-based firm provides financial institutions with cannabis banking compliance software. 

Repanich said he’s also seeing banks use account analysis on marijuana-related accounts. 

Instead of paying interest, firms are giving their cannabis clients credit toward their service charges, and encouraging them to keep higher balances at the bank to cover monthly fees.

“Bankers have to look at their total deposit strategy,” Repanich said. “If I'm running CD specials at 5% for nine months, but I could instead get that next cannabis company and additional balances, and I only have to pay them 2% – that 3% is a lot.”

As more banks choose to serve cannabis clients, lenders will have to consider strategies for high-balance cannabis accounts if they want to retain those deposits, he said.

“If I'm the owner of a [cannabis] business and I have hundreds of thousands of dollars sitting in the bank, at some point, my board is gonna say, ‘Why aren't we at least earning some interest?’”

Differentiated services

But not all bankers are on board with paying interest on cannabis deposits, arguing the cost of operating a cannabis banking program makes the prospect unfeasible.  

Bank Michigan Senior Vice President Brenda Brandom said she doesn’t foresee her bank offering interest on cannabis deposits unless the entire market adopts the strategy.

“There is too much work involved,” said Brandom, who heads the Brooklyn, Michigan-based bank’s cannabis banking and treasury management programs. “It’s too time consuming and takes too many people doing manual work to get these customers onboarded.” 

Nicole Perry, vice president and senior treasury management officer at Mason, Michigan-based Dart Bank said her institution also does not offer interest on cannabis accounts, a decision the firm made when it first launched the program in 2018.

The bank’s cannabis customers, however, ask for it all the time, she said.

“They want to be treated like a traditional business, but it’s not traditional,” said Perry.

As competition increases in their market, Brandom and Perry said they are leaning on old-fashioned customer service to both attract and retain cannabis clients.

When a prospective client noted that a competitor was offering interest-bearing cannabis deposits and asked if Bank Michigan could do the same, Brandom said she persuaded the client to join her firm after making the argument her bank could provide a better service. 

Perry said her bank is facing competition from new entrants who are undercutting Dart Bank’s cannabis account fees. 

“There are tons of banks coming in the state of Michigan that are direct competitors, and they'll try and charge $50 a month. There's no way that you can manage a [cannabis] account for $50 a month,” she said. “You're not covering your costs. You're losing money in that aspect.”

Despite Dart’s higher fees, Perry said she has had several cannabis clients return to her firm after trying to save money at a competing institution that ultimately didn’t meet their expectations. 

“It's not only based on fees. It's based on the experience that you give your customer and your reputation,” she said. “While fees are an issue, it’s about selling yourself and being confident in your program.”

Sponsored content

By inbenta

“How do I open an account?”

“How do I transfer funds?”

“How do I change my password?”

Banks everywhere are inundated with questions like these each day. Contact centers are scrambling to keep up as customer service agents spend up to 40% of their time responding to these types of repetitive questions.¹

In response, financial institutions are ramping up their customer service capabilities to improve their NPS and reduce wait times. More and more are recognizing that they need to offer their customers better, faster ways to connect.

It's the reason many banks are looking to AI self-service tools, such as chatbots and interactive FAQs. These tools are available 24 hours a day, 7 days a week. And they’re fast being adopted to solve banking’s customer service problem.

Rise of the Bots

According to the CFPB, an estimated 37% of U.S. consumers interacted with a bank’s chatbot in 2022.² With more banks seeking digital solutions to service customers, these numbers are expected to grow. 

The chatbots that banks deploy today vary in their sophistication and underlying AI technologies. For example, many of the chatbots that banks use to interact with customers are rules-based, designed to guide users through a pre-programmed dialogue tree. These bots can only resolve customer issues within their limited purview. So, any query that isn’t explicitly programmed is beyond the bot’s ability.

Other banks deploy bots that feature Conversational AI, which uses Natural Language Processing (NLP) and can engage in more complex conversations. Conversational AI bots can deconstruct the semantic relationships between words, which lets them recognize the underlying intent of long-tail inquiries and give more accurate responses.

Generative AI, made popular by the Large Language Model (LLM) ChatGPT, is also being explored for its ability to instantly generate responses from simple prompts. While LLM-powered chatbots have the amazing ability to develop original content, there are also concerns around inaccurate responses and hallucination rates.

Banks that want to benefit from the customer service lift that chatbots provide will need to weigh the pros and cons of each underlying AI system, as well as any potential compliance risk. This calculation should center around which AI capability can provide real resolutions and can most benefit customers.

Unlocking New Efficiencies

Imagine answering your top 20 service questions without a live agent intervening. This is one of the key areas where AI self-service technology can unlock new customer service efficiencies.

A well-built chatbot can handle 85% (or more) of routine customer questions. Not only can AI automate customer service responses via a chatbot, but it can also be used to complete tasks, surface FAQs, escalate critical issues and reduce repetitive tasks that consume the time and effort of frontline staff.

In addition to improving their customer service, banks also stand to improve their bottom line.

Take, for instance, the cost of processing a check deposit. Processing a paper check at a bank can cost as much as $13, if you include the time and labor. Compare that to the cost of processing a digital check deposit: just 3 cents. Similar responsibilities and efficiencies can be transferred to chatbots, such as account opening, replacing a card or reporting a transaction dispute.

What is more, implementing AI self-service tools doesn’t have to be difficult or time-consuming. Many banks can have a Conversational AI chatbot ready to deploy in as little as four to six weeks. And because they’re powered by machine learning, Conversational AI chatbots get better with each interaction.

Addressing Compliance

As a regulated industry, banks that roll out chatbots will also need to consider the compliance implications of automating customer conversations. For example, the chatbots that banks deploy will need to comply with all federal consumer financial laws that protect consumers from harm.

Transparency will be vital. Banks should consider disclosing clearly that a chatbot is powered by AI. Banks also need to fully understand the response logic of their chatbot and be prepared to address consumer complaints. 

As banks familiarize themselves with the benefits of AI automation and the efficiencies it can bring to their customer service operations, they will be better positioned to solve their most persistent customer service problem: how to help customers help themselves.

---

Citations:

¹ PR Newswire, “Exasperated Customer Service Leaders Report That 40% of All Customer Tickets Are Mind-Numbing and Repetitive,” September 11, 2018. URL Reference: https://www.prnewswire.com/news-releases/exasperated-customer-service-leaders-report-that-40-of-all-customer-tickets-are-mind-numbing-and-repetitive-300709891.html.

² Consumer Financial Protection Bureau, “CFPB Issue Spotlight Analyzes “Artificial Intelligence” Chatbots in Banking,” June 6, 2023. URL Reference: https://www.consumerfinance.gov/about-us/newsroom/cfpb-issue-spotlight-analyzes-artificial-intelligence-chatbots-in-banking/.

Citizens Bank of Edmond CEO Jill Castilla’s latest venture combines two key elements of her professional life: financial services and the military.

For the past several years, the bank executive and military veteran has been building a national digital bank that aims to address some of the banking pain points that Castilla herself encountered when she enlisted in the Army at 19. 

“There's still this deficiency in the market where there's not a focus on that new servicemember coming in,” Castilla said. “They're very targeted from a predatory lending standpoint.”

Through Roger, a digital bank which officially launched on Tuesday, Castilla is hoping to reach entry-level recruits who all too often start basic training without bank accounts.

“They are coming to basic training, 50% or more across every service, without having a banking relationship,” she said. 

The lack of early access to a bank account can delay a new recruit’s first paycheck, or even push back their training start date, Castilla said.

Castilla said Roger aims to work with military recruiters to provide new servicemembers with an instantly available direct deposit form that is compliant with the Department of Defense regulations. The form populates all of the prospective service member’s information, as well as a signature by Castilla as the bank’s CEO.

“All they have to do is either text that, email, or print it out and provide it to either the recruiter or to reception at basic training,” she said.

Roger also allows 17-year-olds that have signed enlistment papers to be able to open an account without a cosigner.

“That’s another big hurdle that we're excited to be able to remove for young people that are serving but may not be 18,” Castilla said.

‘Cracks in the system’

According to the Consumer Financial Protection Bureau, U.S. servicemembers are increasingly becoming targets of predatory lending and falling victim to payments app scams. 

The Department of Defense has identified predatory lending and poor financial literacy as serious threats to military readiness, Castilla said.

“It’s recognized, from a mental health standpoint, as well as deployment readiness by the Department of Defense, that financial stability and financial literacy is critical to ensure both the servicemembers and their families are well educated and protected when it comes to their finances,” she said. “We have laws in place to protect service members from exposure to potentially predatory lenders, unfortunately, cracks still exist in the system, that don't fully allow that barrier from someone taking advantage of a service member being deployed.”

One of Roger’s fraud protection features includes “deployment mode” where a servicemember can lock down some of the access to their debit card or enable increased fraud monitoring during a tour.

A common cause

Castilla said a couple hundred users, made up of both military veterans and National Guard members, have been testing the platform ahead of its official launch.

Existing staff at Edmond, Oklahoma-based Citizens Bank of Edmond have been tapped to work on Roger, Castilla said. The firm also added retired Brigadier General Andy Preston as Roger’s director of military banking.

Castilla said “several $100,000 of hard expenses” as well as the equivalent of $1 million in staff time has gone into the launch of Roger.

Roger has a standalone core powered by banking technology firm Nymbus.

Castilla said Nymbus has offered to work with Citizens to make its technology more accessible “all for this common cause to help the servicemembers that typically have been underserved.”

November marks a year since OpenAI released ChatGPT into the market, and several large banks are charging ahead to take primacy in harnessing the burgeoning technology.

JPMorgan Chase is walking U.S. regulators through the bank’s first set of generative AI pilot projects to let them see the controls in process, Lori Beer, JPMorgan’s global chief information officer, told Bloomberg.

"It's about helping regulators understand how we build the generative AI models, how we control them, what are the new vectors of risk," she told the wire service. "It's not only what we need to think about, but what they should think about.”

The AI applications JPMorgan is testing include ones that can generate earnings summaries for companies the bank follows, Beer said. The bank is also working on a help-desk service that arms users with problem-solving steps rather than links to related articles, Beer added.

Meanwhile, JPMorgan’s rival, Goldman Sachs, is working on a dozen projects meant to incorporate generative AI into its business practices, George Lee, co-head of the bank's Office of Applied Innovation, told Reuters.

The projects include writing code in English-language commands, and the ability to generate documentation, Lee said, adding that none of the projects are client-facing, out of regulatory concerns.

"We're moving very deliberately, very carefully, very thoughtfully," Lee told Reuters.

Not to be outdone, Morgan Stanley has spent months testing a generative AI bot meant to serve as a virtual assistant for financial advisers who must quickly navigate troves of data. 

While Morgan Stanley chose to develop its tool with OpenAI, JPMorgan Chase went its own way — applying in May to trademark technology it calls IndexGPT, which would use artificial intelligence to select investments for customers.

JPMorgan’s Beer was cautious to note that IndexGPT was just in the application stage and not a product in development. 

"It's not a tomorrow thing, it's one of the spaces in which we've been working, and we want to protect our [intellectual property],” she told Bloomberg.

Beer added she expects it will be at least the first half of 2024 “before we're ready to say anything is in production.”

Goldman’s Lee, meanwhile, said generative AI’s ability to offer responses to financial questions means human financial advisers will need to up their game to earn the fees they charge customers.

"It's a fascinating forcing function for businesses to recognize they need to raise the bar for the services they deliver to clients," Lee told Reuters.

Foteini Agrafioti, chief science officer at the Royal Bank of Canada, told American Banker the technology’s possibilities are “endless in servicing and potentially in advice,” but added it’s “not ready for prime time as much as it would be potentially in other sectors because of the sensitivity of the domain.”

RBC is developing applications with large language models to enable bankers to advise clients while sifting through mountains of policies and procedures. While a proof of concept at this point, the bank plans to deploy the technology later this year, Agrafioti told American Banker, calling it a “good, solid first step toward client servicing because it allows us to have human oversight.”

Regardless of what stage of development various banks label their AI-related projects, one aspect that appears to remain constant is enthusiasm.

In his annual letter to shareholders, JPMorgan CEO Jamie Dimon said AI could be integrated into "every single process" of the bank's operations, calling the technology "extraordinary and groundbreaking.”

McKinsey projects that generative AI could deliver up to $340 billion in annual value in the banking industry, including through increased productivity.

But Beer again warned that though it may be easy to “build things quickly” with the technology, “the harder part is the validation and the controls.”

"On this one, you have to see guardrails from regulators to drive the right outcomes," she told Bloomberg.

The year was 2020. Paul Kesserwani’s then-girlfriend (now wife) left their home in San Francisco to be near her family in San Diego. Kesserwani wanted to help her furnish her apartment, but was strapped for cash — he was saving for a ring — so he, for the first time, turned to buy now, pay later.

He financed a mattress through Klarna, a Ring doorbell through Affirm, and a slew of household items through other BNPL providers.

“After three purchases, I was like, ‘I have a computer engineering degree and I have a team of Ph.D.s and I can't for the life of me stay on top of these freaking payments,’” he said. “This is so confusing.”

At the time, Kesserwani was running Cushion, a fintech that had offered automated overdraft fee negotiation since 2016. The venture was successful, refunding millions in overdraft fees up until that point.

Following his first foray into BNPL customership, Kesserwani and his team dove into Cushion’s customer data and found out that customers were leaning heavily on BNPL, not just for large one-time purchases but to finance DoorDash meals, Uber rides and grocery lists.

“[We] realized this was about to get so urgent, and no one was paying attention,” he said of customers’ short-sighted BNPL habits. “So we dropped our thriving first business ... and decided to go all-in on bill pay for the BNPL era.”

The average BNPL customer has four concurrent BNPL loans, according to Bankrate. And, according to data released by the Federal Reserve Bank of New York in September, many BNPL customers are “financially fragile” — meaning if they had to come up with $2,000 in the next month, they couldn’t do it.

BNPL is a tool used across financial profiles, at least to a point: 14.6% of those surveyed by the Fed with an annual income above $150,000 used BNPL; and 11.6% of people with a credit score above 760 used it.

BNPL take-up rates, however, are notably higher with those whose credit scores are 620 or lower, for those who have been 30 or more days delinquent on a loan in the past year, and for those who have been recently rejected for a credit card. BNPL use goes down, too, when looking at higher income brackets; and when looking at higher levels of education, Fed data shows.

According to Bankrate, more than half of BNPL customers surveyed report having fallen behind on payments.

Switching focus

When Kesserwani and his team had their revelation about BNPL, what Cushion had been focusing on was fighting with banks, rather than addressing the root cause of why their customers were overdrafting in the first place.

By digging through “hundreds of millions of customer transactions,” it became clear what the root cause was: cash flow, or lack thereof. And it became clear that, in the last 20 years, the landscape of consumer bill pay had completely changed.

“Twenty years ago, you had your car payment, your rent, your credit card, and your phone bill, and it was straightforward. Then in the 2010s, subscriptions became a big thing, so now you had to factor in your Netflix, Hulu, Tinder … and that's another five to eight payments you need to make each month,” Kesserwani said.

And in the last three to four years, he noted, the shift was in BNPL: adoptions of the tool completely exploded.

“BNPL is unique in the sense that it's not just a payment you make. It’s a loan with a bunch of characteristics: paying four versus paying six versus paying 12 [installments]; this one has interest, that one doesn't; this is due weekly, that's due monthly. Stacking just two or three BNPL loans by themselves is unmanageable, let alone putting that on top of the tower of subscriptions and other bills,” he said.

“As [bill pay] is getting more complicated, consumers are making more mistakes,” he said. “[We decided to] focus on consumer bill pay — and in that, let’s really focus on a solution for this BNPL era.”

Shifting focus when Cushion was in its prime may have seemed counterintuitive. Kesserwani said it wasn’t easy to let it die and start from scratch, but creating a tool that would help customers get on top of their BNPL loans, along with other monthly account draws, was “urgent,” he thought.

To aggregate a consumer’s bill and subscription payments into Cushion’s feed was easy with Plaid, a popular fintech that gets real-time consumer financial data through contracts with banks and the use of screen scraping.

But aggregating BNPL payments into a feed required engineering on Cushion’s own part.

“These BNPL operators have no [application programming interfaces], and they're very hard to scrape because they don't use username and passwords. They use phone-based authentication,” Kesserwani said. “All of us became BNPL customers to better understand the landscape, and we learned that they email you — they email you, ‘Hey, your order’s confirmed;’ they send you another email, ‘Here's your loan ID;’ then they send you another email and another email. ... So we hired a team of Ph.D.s in machine learning. They figured out a way to reconstruct all of your loans based on just looking at your email inbox.”

Challenges there included a rigorous multi-month audit by Google, to gain access to customer Gmail inboxes; and further, navigating the “sloppiness” of some smaller BNPL operators who might not even send a loan ID via email.

“It turned into a full-time job for a whole team for two years to finally build out the system the way we needed to,” he said.

A revamped Cushion was launched earlier this year.

Credit assistance

Kesserwani explained, with emphasis, that he’s “not anti-BNPL by any means.”

“I use it all the time,” he said. “But consumers do not have enough guardrails around it.”

Most BNPL providers don’t report to the credit bureaus. That means when BNPL providers lend to a consumer, they’re doing so without a complete credit profile.

“Say I get a loan from Affirm for $800. If Affirm doesn't tell the credit bureaus about that, then Klarna goes to underwrite me, and I appear creditworthy to them, but they don't know about my $800 Affirm loan. Then Klarna gives me a $500 loan, [which] they also don’t report to the credit bureaus; and before I know it, I’ve now signed up with seven different BNPL companies, all of which have a limit to how much they’re willing to lend [me] … and all of which underwrote me incorrectly,” he noted.

In addition to its BNPL and bill aggregator, Cushion offers a credit-building virtual payment card. For between $4.99 and $12.99, customers get a virtual payment card number that they can provide to billers and BNPL providers. Cushion reports their payments to the credit bureaus monthly, thus helping customers build credit.

Customers simply must change their preferred payment card within a biller’s system. On the back end, the Cushion card pulls directly from a customer’s bank account or debit card.

When consumers find out their BNPL payments aren’t being reported to the credit bureaus, they think, so-says Kesserwani, “’Well wait a second, I'm taking a loan, and I'm paying it back on time. Why am I not getting credit for doing my end of the bargain here, which is to pay back my loan?’”

“We have a system now set up where we're able to report those payments to Experian, and we're in talks right now with TransUnion and Equifax,” he said.

Regions Bank customers can now have their rent, cell phone and utility payments reported to the three major credit bureaus through a new partnership with credit-building platform Self Financial, the lender announced in November.

The partnership is meant to give consumers a more comprehensive view of their financial health, and allows them to build credit without having to take on new debt, the Birmingham, Alabama-based bank said.

“We were drawn to work with Regions because of our shared commitment to working toward financial inclusion,” Chris LaConte, chief strategy officer at Self Financial, said in a statement. “Working with Regions enables us to support more consumers who either are new to establishing credit, or they’re in need of solutions that reflect how they’re already responsibly managing bills and other payments.”

The fintech’s rent and utility payment reporting service is available to Region’s customers for $6.95 a month.

While millions of Americans rent homes, many are not recognized by the credit bureaus for successfully making those payments, LaConte said.

“Self addresses this problem by enabling consumers to have their payment histories taken into account so they can get the credit they deserve,” he said.

More than 45 million consumers in the U.S. lack sufficient credit history to either generate a credit report or a credit score, according to the Federal Reserve Bank of Kansas City. 

This demographic is more likely to face limited employment options and rely more heavily on high-cost alternative financial products, the Kansas City Fed found.

Acknowledging the gap, bank regulators have encouraged lenders to consider using alternative data to determine creditworthiness.

In a joint statement in 2019, the Consumer Financial Protection Bureau, Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the National Credit Union Administration noted that using alternative data could help consumers obtain additional products and more favorable pricing and terms.

“The agencies recognize that use of alternative data in a manner consistent with applicable consumer protection laws may improve the speed and accuracy of credit decisions and may help firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system,” the regulators said. 

Meanwhile, lawmakers are pushing legislation that would expand the type of data credit bureaus use in factoring consumers’ credit scores. 

The Credit Access and Inclusion Act, introduced by Sens. Joe Manchin, D-WV, and Tim Scott, R-SC, would permit property owners and utility and telecom providers to report payments data to credit reporting agencies.

Charlie, a neobank for the 62-plus demographic, is looking to solve pain points facing retirees and soon-to-be-retirees.

The fintech, which launched in May, allows account holders to withdraw their Social Security benefits up to four weeks early. The free service is available to account holders who link their Social Security direct deposit to their Charlie deposit account, said Kevin Nazemi, the fintech’s co-founder and CEO.

Many neobanks offer customers early access to their paychecks, a feature that has become popular with those who live paycheck to paycheck. Offering retirees advanced access to their Social Security checks is simply a streamlined version of what many other fintechs are doing with earned wages, Nazemi said.

“It's a nice instrument for a company like ours. We can provide early access to a payment that's made by the United States government,” he said.

“We're not dealing with 50 payroll systems and thousands of employers. We're dealing with the Social Security Administration as the entity that needs to meet their obligation of providing that money.”

With Charlie, Nazemi’s goal is to build a platform that addresses the unique financial needs of retirees.

“The posture of existing financial services companies are all tilted toward income generators and accumulators,” said Nazemi, who has worked in the technology and healthcare sectors for over 15 years.

The average retiree has about $50,000 in liquid savings and receives $1,800 in Social Security each month, said Nazemi.

“Most financial services offerings aren’t built for them, unless they have a ton of money,” he said. “The industry could do a lot better.”

While some may argue the particular demographic Charlie is targeting may favor traditional institutions over neobanks, Nazemi said the fintech refuses to paint the segment with a broad brush, especially in light of the COVID-19 pandemic, which accelerated digital adoption.

“A growing number of people in this population are either becoming, or will soon become, tech-comfortable enough to want a solution that comes to them, that meets their needs, and is available to them 24/7 versus defaulting to going and standing in line in a box,” he said.

He said his idea for Charlie came about after a family health issue involving his father, a senior, opened his eyes to the unique healthcare, finance and housing needs facing the 62-plus demographic.

Charlie account holders receive a 3% annual percentage yield on average balances, and have access to a network of 55,000 ATMs, including retailers CVS and Walgreens, the company said. Attica, Ohio-based Sutton Bank provides the underlying banking services for the fintech.

The company worked with a group of 20 seniors who provided input on the app’s design, including font size, color contrast and interface, Nazemi said.

“If you go on our site, you'll see a tile-based interface. The idea there is that we can contextualize what we want to draw your attention to without just adding more menu items,” he said. “Contrast that to the typical bank website. For me, it kind of feels like walking into Times Square.”

Nazemi said Charlie also plans to launch a set of optional fraud tools that would notify account holders’ loved ones of any unusual patterns or charges on an account.

Additional revenue streams

Charlie’s business model is similar to most neobanks, generating revenue from interchange fees. But Nazemi said the company plans to parallel the revenue models of a typical bank over time.

Charlie plans to launch a home pension product in the future, giving customers the ability to turn a percentage of their home’s value into an annuity and a source of income, he said.

“Most of the 80% of seniors who own their homes, 100% of their home's value is set to go to their legacy, and yet they're living in an environment where over half of them live Social Security check to Social Security check. And over half of them don't feel prepared for their retirement,” he said.

The product, for example, would allow a customer to designate 90% of their home to their legacy, and sell 10% of it today, Nazemi said, adding Charlie would charge a fee to facilitate the transaction.

“It’s not as if the broader ecosystem is blind to the needs of this audience,” Nazemi said. “What you see with the bigger banks is, the way they try to serve their needs is by adding feature after feature, but it's really hard to make these features accessible amidst the 15 hundred other offerings for the 15 constituencies that the bank is serving. When you get down to the community banks, I do think that they bring the service ethos to this audience that's needed, but they're not resourced to utilize the latest technologies to bring a simple transparent solution to the table.”

Charlie has raised $7.5 million from investors, including Better Tomorrow Ventures and Expa.

Bank of America in May launched an accelerator program for early-stage fintech startups, the Charlotte, North Carolina-based lender announced.

The six-month program provides mentorship, networking opportunities and access to potential investors to Black, Hispanic-Latino, Native American and other entrepreneurs from underrepresented communities, the bank said. 

The bank is offering the program, called Breakthrough Lab, at no cost. Participants are not expected or required to exchange equity with the bank, the firm said.

The launch comes after Bank of America tested smaller versions of Breakthrough Lab in 2021 and 2022.

Bank of America launched a pilot program with five startups from the New York City area in 2021. The bank said it expanded the pilot in 2022 with 17 companies from the U.S., Mexico, U.K. and France.

“The bank’s long-standing commitment to supporting economic opportunity for people and communities we serve is at the core of Bank of America Breakthrough Lab,” Rina Arline, Breakthrough Lab program director in global transaction services at Bank of America, said in a statement. “We’re excited to play a role in giving emerging entrepreneurs from a range of backgrounds access to the bank’s vast resources and industry networks.”

Bank of America said it plans to host a new cohort each year, and is looking for pre-seed stage fintech companies or firms with tech-enabled ideas promoting inclusion such as healthtech, wealthtech, edtech and housing. 

“While the aspirational goal of the program is to increase access for underrepresented groups, all eligible entrepreneurs regardless of background are encouraged to apply,” the company said in a statement.

The six-month part-time program runs from September to March, and includes 94 hours of live instruction. 

Each cohort will be assigned mentors at Bank of America’s managing director or executive level, the firm said. Participants will receive technology support, a branding package covering website and logo design and guidance on partnering or selling to a large company.

At the end of the program, each cohort will be able to pitch to potential investors, the bank said.

Atlanta-based Greenlight is making its kid-focused banking services available to traditional financial institutions, the fintech announced in March.

The new partnership program, called Greenlight for Banks, allows banks and credit unions to offer the fintech’s suite of banking and education products to their customers through a co-branded landing page and app.

Over half a dozen firms, including Morgan Stanley, WaFd Bank and Community Financial Credit Union have partnered with Greenlight to offer the fintech’s services to their customers, said Matt Wolf, Greenlight’s senior vice president of business development.

Greenlight is actively involved in discussions with more than 100 financial institutions, he added.

“In those conversations with financial institutions, we found that many don't have the expertise or resources to create a compelling digital banking experience for the next generation,” Wolf said. “We've designed something that really helps financial institutions, seamlessly integrate family banking into their own ecosystems.”

Greenlight, which was co-founded by Tim Sheehan and Johnson Cook, launched a debit card for kids in 2017.

The fintech has since expanded its offerings to include savings and investing for children, while allowing parents to automate allowances and supervise their dependents’ money management.  

In January, Greenlight launched a financial literacy game called Level Up, which banks and credit unions will also be able to make available to their own customers through Greenlight for Banks.

Lenders who partner with Greenlight have the option to hold the deposits gathered by the fintech, or allow them to be held by Greenlight’s partner bank, Community Federal Savings Bank, which issues the Greenlight debit card.

While banks are eager to launch products that reach the next generation of customers, bank accounts geared toward children typically don’t have high balances, meaning they won’t be large deposit generators for banks, Wolf said.

“A couple transactions a month is probably not going to really rise to the top of their technology roadmap and prioritization,” Wolf said.

But offering services targeted toward kids and their parents allows a bank or credit union to create deep and potentially long-lasting relationships, Wolf added.

“As it pertains to the child, they're getting exposed to the financial institution’s brand very early on. And for the parent, they're recognizing that this is a great service they're getting for free because they have that banking relationship with their credit union or bank,” he said.

The service is free for customers, Wolf said. Institutions that partner with Greenlight pay the fintech a monthly fee, based on the size of the firm, he added.

“Neobanks are coming after Gen Z really aggressively. This gives banks and credit unions of all sizes the ability to have relationships with that next generation before they start getting bombarded by neobanks and others that have a young adult banking relationship,” he said.

Greenlight’s effort to offer its youth and family tailored services to traditional firms follows a tie-up it launched with JPMorgan Chase in 2020. 

The New York City-based bank partnered with the fintech in October 2020 to offer an account designed for kids called Chase First Banking.

The account reached 1 million users by April 2022, the bank said during its May 2022 investor day.

Amid Greenlight’s new business-to-business focus, it still plans to grow its direct-to-consumer model, where users pay the fintech a monthly subscription to use its services directly.

But the fintech recognizes the reach traditional banks have to offer, Wolf said. 

“We think that can really help us reach the most families,” said Wolf, on partnering with traditional institutions. “It's too big an opportunity to ignore.”

Greenlight, which is not yet profitable, has raised over $556 million in funding, according to Crunchbase. The fintech’s most recent investors include venture capital firms Andreessen Horowitz and Canapi Ventures.

The fintech said Greenlight for Banks is expected aid its efforts to reach profitability. 

“Our multiple paths to market, across our direct-to-consumer and partner programs, represent a distinct advantage and allow us to meet the evolving needs of our families where they are through a combination of new products and diverse distribution channels,” Greenlight said in a statement.

When bank customers request forbearance or miss payments, there can be some underlying financial hardship reasons that are often ignored.

SpringFour, a fintech, said it has identified the root causes of some of these problems and has come up with a tool aimed at helping those in need of financial assistance.

Using cloud-based tools, the Chicago-based firm said it strives to provide borrowers with a list of reputable nonprofit and government assistance programs in over 30 categories, including employment, health insurance and financial services that can help people regain financial footing.  

“We are a social impact fintech organization, really trying to say that part of somebody's financial health is not just product related; if we can connect them to resources that help with their cash flow, remove issues that they are having around household expenses, there is going to come a time where they can access a product in your product suite or move up that ladder to a better finding,” SpringFour CEO Rochelle Gorey said. “When more clients believe that providing access to financial health information and referrals is a good thing that results in a better financial health picture for their client.”

SpringFour offers call center and digital tools that help financial institutions search the cloud-based platform by zip code and categories to find local assistance programs for their customers, she said. Banks pay to use the fintech’s technology and have access to unlimited referrals — a key feature of SpringFour, according to Gorey.

Institutions can also provide SpringFour’s digital self-serve portal for customers to seek help privately.

SpringFour was founded in 2005 as MortgageKeeper to help address the underlying difficulties homeowners faced that led some to default on their mortgage payments. During that time, SpringFour helped many consumers avoid foreclosures by offering counseling and other resources. The name was changed to SpringFour in 2015.

With over 23,000 curated financial health resources and 17 financial health guides, the woman-led fintech can be accessed in over 665 cities across the country, the company said.

Destigmatizing seeking assistance

Financial institutions choose the categories they would like to offer their customers. On the digital portal, these categories are tailored to the bank’s needs and displayed on the screen for customers to use. Bank of Montreal, Capital One, KeyBank and M&T Bank are some of the banks that SpringFour works with.

“We work with each of our bank partners to message the availability of SpringFour resources in whatever way that they would like, but we have a wide range of best practices and marketing messages that we feel worked really well for a customer,” Gorey said. “We are really trying to work with our bank partners to destigmatize the need for assistance.”

The need to destigmatize is important since over 60% of Americans struggle to pay their bills, according to Gorey.

Along with referrals, the fintech offers financial guides to raise the comfort of first-time aid seekers since educational content demystifies the process, she said. But those in immediate need should be referred to quick assistance, she noted.

Customers feel assured when they see their banks guiding them on ways to save and improve financial health, Gorey said.

Some customers grapple with financial hardships year-round, so financial institutions understand the value of long-term partnerships with fintechs to provide solutions promoting overall financial well-being, she said.

“We are increasingly seeing that more and more things are happening in a very macro-environment that have a very dire impact on your customer or consumer who is living paycheck to paycheck,” Gorey noted. 

SpringFour saw a surge in demand for its resources during the pandemic and the last government shutdown, Gorey said.

This year, SpringFour is on track to deliver more than 5 million financial health resources, according to the firm. Last year, the fintech delivered 4.4 million financial health resources to households in need in partnership with banks, credit unions and fintech lenders.

As of August, the most requested financial health categories were food savings, heating and utility costs, employment services, rental resources and financial counseling.

“At SpringFour we are really trying to change that dynamic and say it's okay to seek help when you need it and also help the industry understand that when they operate from a place of empathy and providing assistance, it's going to come back to them as well in increased customer engagement, repayment performance [and] increased trust with their borrowers,” Gorey said.