Banks still matter
Since these P2P platforms are not a bank and are not regulated like a bank, the users are taking on a systemic risk."
If we can take one lesson away from the current turbulence within this uncertain economy, it is that the basic principles of banking — liquidity, capital adequacy, profitability and asset quality — still apply. That may sound odd and even beg the question as to whether they were ever in doubt, but community banks are dealing with competitors that do not necessarily share those basic principles.
P2P platforms
The Harris Poll found that 87% of Generation Z, 94% of millennials, 88% of Generation X and 65% of baby boomers use peer-to-peer (P2P) companies like CashApp, Google Pay, PayPal, Remitly and Venmo. These platforms make transactions quick and easy and can be a positive thing for moving money from one person or business to another, but they are not regulated like a bank. And because they are not regulated, they are able to make the customer experience better than a bank. It’s easy to open an account because these companies operate without any oversight.
Since these P2P platforms are not a bank and are not regulated like a bank, the users are taking on a systemic risk. Many users keep their money with these platforms instead of transferring it to their FDIC-insured bank account and are using them as their bank.
Lack of accountability
It is troubling to see the lack of response from regulators against the fintechs, crypto platforms and other non-banks that are marketing themselves as banks or as safe places for consumers to hold their assets. It is for that reason that I say these basic sound bank principals still do matter, and I am worried about the safety of these deposits.
Neobanks failing
These non-banks are aggressively moving themselves into the financial services space without any accountability and with a seemingly unstoppable momentum. However, news reports now say Varo Bank may run out of money by the end of the year due to costs outweighing income, which includes bloated salaries and a $38 million Q1 marketing spend. Chime also recently reported delaying its IPO in light of the decline in fintech stock valuations. While this may not be the end of neobanks, it is most certainly the end of what it once was.
Recently, the Wall Street Journal published an article about a cryptocurrency platform, Celsius Network, having to freeze its customers’ accounts because of liquidity issues. The article also talked about Babel Finance, a crypto lending platform that also had to freeze its customers’ accounts and is contemplating bankruptcy. It went on to talk about how billions of dollars are tied up in these unregulated institutions.
Getting the message out
My time as chairman of the Texas Bankers Association will be spent raising this issue to regulators and anyone else who will listen about this consumer threat. We as bankers — serving in a prudent and conservative industry — need to make sure the public is aware that bank chartered financial institutions with FDIC insured deposits should matter to them as well.
I’ve been sharing this message with my fellow bankers across the state through TBA’s Texas Tour that highlights our legislative priorities at the local, state and federal levels. We also use this time to engage with other bankers throughout the state to hear their issues and figure out how TBA can better serve them as well.
This is your time as TBA members to help yourselves — and our industry — through this great organization that started over 135 years ago by community bankers for community bankers.
To date, I have been really pleased with the response from my fellow bankers. I think we are all tired of hearing about the threats to the community bank business model. But as I mentioned earlier, the economy has proven these threats aren’t as sure-footed when they face pressure. New evidence to this point shows up on a daily basis.
A safe and sound financial industry needs to be maintained and if there are those who want to provide deposit services, they should be regulated and held to the same standards as FDIC-insured chartered banks.
Banks have always been and always will be the backbone of the communities they serve. Banks have value.
I encourage you to read University of Houston Professor Berger’s feature in this issue on how community banks positively impact a local economy. We’ve always known this, but now there is empirical data to back it up.
We shared this message at the Central States Bankers Association meeting in Nebraska this summer and received a similar encouraging response from the entire delegation.
Folks we are not alone.
It’s time we start pushing this message out in force and marching to the same drumbeat. Please join me in this effort by raising these issues and risks with your customers, regulators and elected officials.