The banking industry is no stranger to upheaval, be it economic, regulatory, technological or political. But the upcoming year could nevertheless prove to be especially turbulent. The regulatory environment is poised on the precipice of change. Digital banking is maturing. And the uncertain economic landscape, from interest rates to asset prices to the ever-undulating credit cycle, will leave bankers questioning whether their institutions are positioned to profit from the changes bearing down on the industry.
In this environment, a handful of people and organizations appear especially likely to shape banking in the coming year. The list is far from comprehensive, as there are obviously many people and organizations shaping banking, but it includes at least a few people who will be incredibly interesting to watch. It includes the newest member of the Board of Governors of the Federal Reserve System, a fintech company that is inching further into banking and a consumer bank diving headlong into digital banking..
RANDAL QUARLES | REGULATION
On October 5, 2017, the Senate confirmed Randal Quarles to be vice chairman for supervision at the Federal Reserve, the most influential financial regulator in the country. He will be the first person to officially hold the position, which is vested with the duty to oversee the supervision and regulation of entities within the Fed’s jurisdiction. There is irony in the appointment, some might say poetic justice, as the vice chairmanship was created by the Dodd-Frank Act of 2010 but is now occupied by a skeptic of the legislation who is expected to ease its impact on the financial industry. Even though Jerome Powell is arguably powerful as the newly appointed Fed chairman, he is seen as someone likely to continue the current path of monetary policy. Quarles, on the other hand, might have the wherewithal to really change the course of banking regulation.
“He has a daunting task,” says veteran bank analyst Richard Bove. “He is expected to ease up on banks, but if he eases up too much, he will be attacked by the press and people like Elizabeth Warren.”
At Quarles’s confirmation hearing in July, the 60-year-old lawyer and former partner at The Carlyle Group, a private equity firm based in Washington, D.C., adopted a measured tone. “[R]egulatory policies enacted since the financial crisis have improved the safety and soundness of the financial system,” said Quarles in opening remarks to the Senate Banking Committee. “But as with any complex undertaking, after the first wave of reform, and with the benefit of experience and reflection, some refinements will undoubtedly be in order.” More pointedly, two years earlier, he said in an interview: “There are a lot of provisions in Dodd-Frank that are not well designed and were included for political as opposed to financial reasons. I think it was a failure of ambition and in other ways a concession to inappropriate pressures.”
Quarles has argued more generally in the past that the government plays too big of a role in the markets and financial services industry. “The government should not be a player, it should be a referee,” he said in the same 2015 interview. “And both the practice and the policy and the legislation from the crisis tended to make the government a player.” He then identified three parts of Dodd-Frank that should be revisited: the Volcker Rule, which prohibits banks from proprietary trading; capital requirements; and the annual stress tests, which Quarles believes should be made more transparent—presumably by publishing the models used by the Fed in assessing bank performance on the test.
This preference for a more modest role in government also informs Quarles’ view on monetary policy, which he helps set as a member of the Federal Open Market Committee. “When governments have discretion, markets and citizens cannot be sure how the government will act, and that uncertainty results in inefficiency, delay and politicization,” wrote Quarles in a 2010 paper. “Governments can limit both moral hazard and uncertainty by refraining from intervention when possible, and when action of some sort is inherent in the government’s mandate (as in issuing debt or executing monetary policy), by developing and sticking to clear, predictable rules for action.”
SQUARE | FINTECH
Jacqueline Reses is spearheading an effort that could have meaningful ramifications for banks. Reses is the head of lending at Square, a payments and financial technology company headquartered in San Francisco, California, which grew its loan volume in the second quarter of 2017 by 68 percent, to $318 million. Square does not actually make the loans, it just facilitates them—$1.8 billion since the inception of Square Capital in May 2014 to September of 2017. The underwriter is Celtic Bank, a privately owned $620 million asset bank based in Salt Lake City, Utah. Square’s goal now, however, is to handle both underwriting and loan origination.
To turbocharge these efforts, Square applied in September to open an industrial loan company, which Reses will chair. An ILC charter bestows many of the same privileges of a traditional bank, but can be owned by a nonbank parent company. In Square’s case, it would free the company to lend on an interstate basis and export the interest rates from its home state rather than having to comply with the laws in 50 different states, explains V. Gerard Comizio, a partner and head of the law firm Fried Frank’s banking practice. It would also empower the chartered subsidiary of Square to offer federally insured deposits.
Regulators have signaled that they are open to new bank charters, but it remains to be seen if they will be as receptive to ILC applications. The issue attracted attention a dozen years ago when Wal-Mart Stores applied for an ILC charter in 2005. Walmart eventually withdraw the application in the face of stiff opposition from Congress. An effort by San Francisco-based fintech SoFi to get an industrial loan charter ended after the firm withdrew its application in October.
If Square is approved for an ILC charter, it would mark a watershed moment, encouraging other fintech companies to follow suit. “There are advantages in this context to being ‘first in line to be second’ to obtain the ILC charter, since some of the bugs will have been worked out for the fintech companies that apply after them,” says Comizio.
CITIZENS FINANCIAL | BANKING
The digital transformation of banking is being waged on multiple fronts. Fighting on many of them is Citizens Financial Group, a $151 billion asset bank based in Providence, Rhode Island. But it isn’t doing it alone. “We’ve taken an approach as it relates to innovation and digital and embraced partnerships with fintech,” says Brad Conner, vice chairman of consumer banking. “You see some fintech companies that are really good at building frictionless experiences and thinking forward in terms of how customer interactions can work. Instead of being intimidated by that, we’ve embraced it and partnered with these companies.” Citizens is worth watching, in turn, not only because of what the performance of these initiatives will mean for it, but also because of what it could mean for the fintech companies with which it partners.
Conner cites two examples of products that Citizens launched recently in collaboration with fintech companies. The first is a robo-advisor released in 2017 in partnership with SigFig, a tech-based wealth advisor that uses algorithms instead of advisors to manage client money. The second is a small business lending platform, launched with Fundation Group.
“It allows a customer to get a small business loan in a streamlined and simplified manner,” says Conner. “Funding in minutes. Digital signing of documents. Just greatly simplifying the small business lending experience which traditionally has not been a painless process.”
Citizens has partnered with Apple as well, providing the financing behind the Apple iPhone upgrade program. “We’ve worked with Apple to create a beautifully simple experience for customers,” says Conner. “You might imagine the expectations of Apple for us being their partners. The loan process had to be just as simple and elegant as buying and turning on a new iPhone.” In short, Citizens’ experience with these partnerships confirms to Conner the prescience of its strategy of leveraging partners’ strengths as opposed to going it alone.
In sum, while it’s impossible to predict the future, it seems fair to say that 2018 will present a variety of challenges and opportunities for banks, fintech companies, and the people that run them. Few banks and bankers won’t be caught up in the undercurrents impacting these newsmakers.