10 developments that defined banking in 2021

December 19, 2021 9:00 PM

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The year in banking was defined by business disruption accelerated by the ongoing pandemic, clashes over regulation under a new president and the rise of new technologies.

Merger activity heated up in 2021, but a number of deals announced early in the year are still awaiting regulatory approval, and all indications are that Biden-appointed regulators will be applying more scrutiny to big-bank mergers than previous regulators have. On the legislative front, the industry suffered some setbacks — particularly on its longstanding efforts to get a pot banking bill passed — but flexed its muscles in defeating a proposal that would have required financial institutions to report customers’ account information to the IRS in an effort to catch tax cheats.

It was a year of major disruption as well. Well-funded fintechs like Klarna, Affirm and Afterpay upended the world of consumer lending, and “stablecoins” — a term few of us had even heard of last year — became a household word, and caught the attention of regulators and lawmakers. It may also be seen as the beginning of the end of bank overdraft fees and the beginning of climate-change stress tests.

Here’s a look back at the year's biggest storylines in banking.

Bloomberg

The beginning of the end of overdraft fees

This was the year when it became clear that banks won’t be able to live on overdraft fees like they once did.

The fees are unlikely to disappear entirely — at least, not anytime soon — but they are in steep decline due to a convergence of economic, market and regulatory forces.

One factor is the pandemic, the sudden onset of which led many banks to waive certain consumer charges. In 2020, total fees that larger banks collected from customers who overdrew or had insufficient funds in their accounts plunged by 26% from the previous year.

A second cause is the rise of competition from neobanks that sell overdraft-fee-free accounts to customers of traditional banks.

But perhaps the most important factor is the arrival of new federal banking regulators with the Biden administration.

Acting Comptroller of the Currency Michael Hsu, who has said that excessive overdraft fees should be prohibited, recently

identified eight overdraft-related practices

that he described as pro-consumer. They include providing a grace period to customers and refraining from charging multiple overdraft fees in a single day.

Meanwhile, Consumer Financial Protection Bureau Director Rohit Chopra has

promised

a crackdown on large banks that rely heavily on the fees and vowed to scrutinize not only the banks, but also individual executives who oversee illegal overdraft practices.

Two large banks — Ally Financial and Capital One Financial — announced plans this year to eliminate overdraft fees altogether. Most financial institutions likely won’t go that far.

But as

a growing number of large and midsize banks

make smaller, but still significant changes, even

smaller competitors

will feel pressure to follow suit. — Kevin Wack

Big tech flexes its muscles

It was the combination punch against the financial establishment heard around the world.

Angry over payment fees, Amazon threatened to

cut off Visa

credit card payments in the U.K. at nearly the same time the e-commerce giant

entered deals

with the buy now/pay later lender Affirm to broaden access to credit and Venmo to add a nonbank option for payments.

Amazon was not alone in challenging traditional financial services companies. Other large technology companies like Apple and Facebook added financial products in 2021. The companies are all attempting to develop "

superapps

," which refers to a bundle of financial products that are accessible through the technology firms' payment services. Their goal is to gain more control over the consumer relationship and strengthen negotiating power with banks and otherpartners over fees and other matters.

Facebook, now called Meta after a rebrand, debuted its

Novi wallet

late in the year. Novi offers peer-to-peer payments and is expected to be a central part of the pending Diem stablecoin. And Apple in 2021 built off of its Apple Card partnership with Goldman Sachs to debut

point-of-sale credit

. By offering point-of-sale credit, Apple can compete with buy now/pay later fintechs such as Klarna, Affirm and Afterpay.

Scale is the name of the game for these technology firms. Amazon Prime has 175 million users in the U.S., while Apple Pay has nearly

400 million users

and Facebook reaches 3 billion people.

"If you can reach pre-authenticated users at the point of sale, there's an opportunity to grow," said Richard Crone, a payments consultant. "Financial services are a key component to increasing “monetizable” daily active users." — John Adams

M&A roars back — but for how long?

Bank merger-and-acquisition activity roared back in 2021.

Through the end of November, 201 deals had been announced this year — nearly twice as many as in 2020, according to S&P Global.

The drivers? Banks

urgently need to invest in technology

. A growing number of small lenders lack the resources to keep up with deep-pocketed megabanks and a growing field of financial technology companies. At the same time, many community banks have aging management teams and are struggling to develop future leaders in a

highly competitive job market

.

Many community banks have concluded that joining forces with another financial institution — especially larger ones — is the only way to overcome these obstacles.

“A lot of small banks are taking a hard look at their futures, and a lot of them are deciding it’s time to throw in the towel,” said Tom Thiel, president of the investment bank and broker-dealer JWTT.

To be sure, hurdles may emerge, particularly for large-bank M&A.

For example, House Financial Services Committee Chair Maxine Waters, D-Calif., in December

called on leaders

at the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to impose a moratorium on approving any deal that would create a bank with more than $100 billion of assets.

Earlier in the year, President Biden issued an

executive order calling for closer examination of mergers

, specifically including bank combinations. Investment bankers say the call for scrutiny has resulted in longer regulatory review periods of large deals and created trepidation that has

stalled some deal talks among smaller lenders late in 2021

.

Roadblocks aside, the reasons for community banks to sell persist.

The good news for small sellers is that there are plenty of hungry buyers out there. Larger banks are on the

prowl for more assets

over which to spread out their own rising technology costs, and credit unions are increasingly buying banks to diversify product offerings so they can compete with larger rivals.

“This consolidation wave keeps building,” said Mike Matousek, head trader at U.S. Global Investors.

Dealmaking volume may return to pre-pandemic levels next year, Thiel said.

“We expect a strong year of activity,” he said. “There’s a lot of conversations going on that should lead to deals in 2022.” — Jim Dobbs

Banks rise up to defeat IRS reporting proposal

The legislative agenda looked surprisingly bright for banks entering 2021.

At the beginning of the year,

Congress passed anti-money-laundering reforms

cheered by the industry. Despite concerns that the Democrats’ election sweep could prompt tougher regulation, bankers were also hopeful the new majority would deliver long-cherished marijuana banking reforms.

But enthusiasm dimmed after

Democrats abandoned the pot banking bill.

The financial sector was later put on the defensive when the biggest legislative fight of the year emerged: a

Biden administration plan

for banks and credit unions to

report account information to the IRS

.The industry leapt into action to defeat the plan.

The IRS reporting proposal was intended to boost tax revenue — exposing underreported income earned by the wealthy — and help pay for President Biden’s Build Back Better agenda. Banks would have to report total inflows and outflows in accounts where such activity exceed a certain threshold, exempting wages and federal benefits.

Banks led a grassroots lobbying effort — even

getting customers involved

— to oppose including the proposal in Biden’s social policy package moving through Congress. They argued that expanded reporting on customers’ accounts was an invasion of privacy and a compliance nightmare. Their campaign worked after centrist Democrats disapproved of the plan, hurting its chances to get Senate passage. However, critics claimed some in the industry and Congress had spread misinformation about the overall impact of the provision, and backers of the IRS reporting plan

are trying to resurrect it

as part of the final Build Back Better package. — Joe Adler

Industry gets serious about climate change

Efforts to address climate change accelerated across the banking industry and bank regulatory agencies this year.

Stress testing for climate risk emerged as a practice

just a few years ago

, when a handful of European banks began reviewing their investment and loan portfolios to understand their vulnerabilities under several warming scenarios. But efforts to tackle the issue in the U.S. lagged by comparison — at least until this year.

The Biden administration signaled early on that addressing climate-related risks in the financial system would be a major priority. Regulators have taken some initial steps, like

developing their own scenario analysis

for climate change and

updating the National Flood Insurance Program

.

Climate risk disclosures are not yet required of U.S. banks, but the very largest Wall Street banks have published their own assessments following guidelines established by the Financial Stability Board’s Task Force for Climate-Related Financial Disclosures. This year, the $156 billion-asset Regions Financial in Birmingham, Alabama,

issued its own

TCFD report, making it the first regional bank to do so.

But the issue goes beyond stress testing and risk disclosures. Bankers have also woken up to the business case for going green. Banks are

beefing up

their capabilities to finance renewable energy projects. They’re launching

specialized deposit products

for corporate clients with

climate mandates of their own

. And they’re

creating new units

to head up environmental, social and governance issues across their organizations.

Beyond the

opportunities

in financing the transition to a low-carbon economy, bankers say that taking a stand on environmental issues

increasingly resonates with customers

and employees.

“We're investing a lot of effort in our ESG initiatives,” Jennifer Piepszak, co-CEO of consumer banking at JPMorgan Chase, said in April, “not only because they have a positive impact on society and communities, but because they're also important to our clients, customers and our shareholders.” — Laura Alix

Buy now/pay later upends consumer finance

Buy now/pay later loans soared above $100 billion worldwide in 2021.

Fintechs such as Klarna, Affirm, Afterpay and PayPal are providing a formidable alternative to credit cards: short-term, interest-free installment loans granted instantly at the point of sale using minimal customer data.

This hassle-free iteration of installment lending appeals to younger consumers with little or no credit history and others fed up with

the complexities of traditional credit cards

. Almost half of U.S. consumers have tried a buy now/pay later loan, which is usually repaid in four equal segments over four weeks. The repayment period typically is extended for purchases over $200.

Merchants pay buy now/pay later providers about 3% to 5% for each sale, and many of those providers pick up additional revenue from interest and fees if consumers miss payments. As many as 30% of consumers have

fallen behind

on a buy now/pay later loan, leading

lawmakers to begin scrutinizing

what has been a largely unregulated sector.

Although buy now/pay later is more costly for merchants than credit card interchange, they say the on-the-spot loans accelerate sales and help them reach audiences that have

eschewed credit cards

.

The buy now/pay later trend has created

a dealmaking frenzy

. Block (formerly Square) agreed to buy

Afterpay

this year for $29 billion.

Private-label credit card issuers

are fighting back with their own buy now/pay later options, major

card issuers

are devising them, too, and some

banks are partnering with the upstarts

. The game-changer could be

buy now/pay later products

that credit card networks are readying for banks to offer beginning in 2022

via apps

. — Kate Fitzgerald

Stablecoins step out

Stablecoins became a household name in 2021.

The digital assets, which are designed to always equal the value of a greenback and are used to fund the trading of other digital assets nearly instantly, skyrocketed in value.

The largest and most controversial, Hong Kong-based Tether, began the year with a market capitalization of $21 billion. By mid-December, that figure had risen to $76 billion. USD Coin from Boston-based Circle went from $4 billion to $37.6 billion. Binance USD rose from $1 billion to $13 billion.

That rapid growth drew the attention of regulators in Washington,

who published a report in November

recommending that only banks should be permitted to issue stablecoins.

“Stablecoins are like money market funds, they’re like bank deposits, but they’re to some extent outside the regulatory perimeter and it’s appropriate that they be regulated: same activity, same regulation,” Federal Reserve Chair Jerome Powell

said in late October

.

New regulations and laws covering stablecoin will likely take years to come to fruition, as these wheels typically turn slowly. Meanwhile,

stablecoin issuers like Circle are applying for bank charters

.

In a way, stablecoins circumvent the banking system — trades settle without the underlying funds having to go through the automated clearinghouse or banks’ wire systems. But in another way, banks are heavily involved. Stablecoin reserves are held at banks, and in many cases banks are involved in the minting of these digital dollars.

Silvergate Capital

in La Jolla, California, provides an alternative payment rail to facilitate transactions between institutional investors and crypto exchanges and is working with Meta (formerly Facebook) and the Diem Association to develop the Diem dollar. Signature Bank in New York and BankProv in Providence, Rhode Island, are building similar businesses.

Customers Bank

in West Reading, Pennsylvania, recently signaled its intent to do the same. In late November,

New York Community Bank

began minting a new stablecoin called USDF on Figure’s Provenance blockchain.

The SBA's rising profile

For the Small Business Administration, it would be hard to conceive of a more eventful year than 2020, when the agency was thrust into a front-line role in the battle against the pandemic recession.

The year that followed came close.

Things started where 2020 left off — dominated by having to manage the massive Paycheck Protection Program. Congress provided $284 billion to restart PPP, whose lending authority had expired in August 2020. Meanwhile, the new Biden administration unveiled a

revised funding formula

to direct more dollars to the smallest entrepreneurs.

While the funding formula and a

direct-borrower forgiveness portal

unveiled in July both proved effective, banking advocates accused the SBA of threatening to audit lenders that didn’t use its portal. Officials assured critics adoption was optional, though not before

enduring a tongue-lashing

from some lawmakers.

The performance of the SBA’s two biggest regular programs, 7(a) and 504, provided a bright spot throughout 2021, as each generated record lending volume. Indeed, 504 was so successful it reached its funding threshold six weeks before the end of fiscal 2021, forcing it to

shut down

until the 2022 fiscal year started on Oct. 1.

Still, the agency ended 2021 mired in controversy over a

plan

that gives it $2 billion to lend directly to borrowers seeking loans of $150,000 or less. Administrator Isabel Casillas, pictured above, promoted the scheme as a means to funnel money to minority and underserved entrepreneurs. SBA lenders, including banks and credit unions, vocally opposed the proposal, arguing it puts the government in competition with its private-sector partners. — John Reosti

The explosion of niche neobanks

Challenger banks have multiplied in recent years, promising low fees and a business model open to all. A bumper crop of neobanks emerged this year that target very specific audiences in hopes that specialization will be their ticket to success in a highly competitive market.

Some

niches

, such as

families

, are saturated with neobanks that offer digital allowance and kid-friendly savings products.

Copper

Till Financial

Verizon Family Money

and more debuted in 2021, while incumbents such as Greenlight and gohenry beefed up their offerings with more sophisticated features like investing and financial education.

Other neobanks stand out for solving problems in a way that traditional banks — and even other neobanks — have not yet attempted.

Purple

is a standard no-fee digital bank today but is working to incorporate tax-advantaged ABLE savings accounts where people with disabilities can store up to $100,000 without jeopardizing their eligibility for Supplemental Security Income.

Daylight

, a digital bank for the LGBTQ community, offered a wider array of products in 2021, including a debit card to replace its prepaid card, and recruited 600 beta testers.

Other startups are trying to carve out niches within niches. The small-business category has splintered into neobanks that serve types of workers, such as

freelancer

s, or professions, such as the musician-oriented Nerve. A number of apps, including

Majorit

y and Simba, target broad

immigran

t communities, while others launched in 2021 want to cater to certain nationalities, such as

Chees

e for Asian Americans and Tend for

those with connections to Mexic

o.

“We see both markets" — the U.S. and Mexico — "equally as our core constituency," said Tend CEO James Dunavant, pictured above. — Miriam Cross

Regulators get tougher

Trump administration regulators treated banks more leniently than their predecessors had in the years immediately after the 2008 financial crisis. In 2021, with the election of President Biden, the

pendulum began to swing back

in the direction of strictness.

Change has been slow in the first year of the Biden administration as the

roster of financial policy appointees

is still a work in progress and the deadlocked Congress stands in the way of drastic reforms. But there could be more noticeable changes in 2022.

More progressive regulators such as Consumer Financial Protection Bureau Director

Rohit Chopra

and acting Comptroller of the Currency

Michael Hsu

arrived on the scene this year.

The CFPB has signaled its intent to reinstate Obama-era

payday lending restrictions

that were eliminated under Trump. The bureau is also reviving a tougher approach to

penalizing rule breakers

.

Under Hsu, the Office of the Comptroller of the Currency issued guidelines for how big banks should

combat climate risk

and has been

more cautious

in granting national bank charters to fintech firms.

While the new environment is likely to make bankers nervous, the industry has applauded some reversals of Trump policies.

The OCC halted a rule — opposed by the industry — that would punish banks for risk management processes

that bar service to disfavored

sectors such as firearms manufacturers and sellers. Bankers applauded Hsu’s decision to

repeal the OCC’s unilateral reforms

of the Community Reinvestment Act and revive interagency talks on a joint CRA rule. Financial institutions also praised the Federal Housing Finance Agency for

rescinding certain Trump-era restrictions

on loans bought by Fannie Mae and Freddie Mac.

Still, regulators clearly are more focused on reining in certain industry practices. The clearest example came just recently when Democratic members of the Federal Deposit Insurance Corp. board — including Chopra and Hsu — tried

to launch a review

of the agency’s bank merger policy, creating a

rift

with Trump-appointed Chair Jelena McWilliams. — Joe Adler