Identifying Revenue Opportunities in 2022

It will be difficult for financial institutions to boost revenue in 2022 – many will need to be more innovative than ever to add customers, book loans, and bring in fees.

Interest rates should remain low next year, and competition will intensify as loan demand returns. Customers’ shifting preference for digital channels will require tech investments that will further pinch bottom lines.

Financial institutions are looking at niche businesses, acquiring loan portfolios, and creative revenue strategies to offset those pressures. Here’s a look at some tactics being employed.

Lending Strategies Vary

Opportunities exist to increase net interest income.

Many lenders first interacted with the Small Business Administration (SBA) through the Paycheck Protection Program. They will look at 7(a) and 504 loans to sell the guaranteed portions.

Expect more loan participation, though FIs must trust the originating lender to avoid bad loans. Other banks are pursuing verticals such as health care, law firms, home improvement projects, and aviation.

Banks have also been acquiring lenders to add loans that the target would typically sell.

Fifth Third Bancorp bought Provide, a fintech focused on lending to the health care industry. Regions Financial acquired EnerBank, and Truist Financial is buying Service Finance to book more home improvement loans.

Loan-purchase agreements are another trend to watch.

First Internet Bancorp agreed to buy $100 million of loans to franchisees under a deal with ApplePie Capital, while Wintrust Financial will buy $570 million of loans to Allstate agents.

Working with Fintech

More banks are offering Banking-as-a-Service (BaaS), where fintechs connect to a bank’s core to create accounts and process payments on top of a regulated infrastructure. Many of these efforts are redefining the definition of community.

MetaBank supports Daylight, a neobank focused on the LGBTQ+ community, and Piermont Bank backs Nerve, which serves musicians. The Bancorp assists Purple, which focuses on disabled consumers with government assistance.

Piermont is taking its BaaS platform to a new level, creating BancFi, a division that offers loans to fintechs. MainStreet Bancshares recently formed Avenu, a national BaaS platform.

Expect more FIs to forge relationships with fintechs in the form of cross-referrals, investments and acquisitions, and outsourcing in areas such as underwriting and data collection.

Cryptocurrency and Decentralized Finance (DeFi) are other growth opportunities. My colleague, Larry Pruss, has written extensively on how crypto, DeFi, and Central Bank Digital Currencies(CBDCs) will reshape lending and other critical financial services.

Buy Now Pay Later Grows in Popularity

FIs are revisiting the premise of letting consumers pay for goods through interest-free installments. Nonbanks such as PayPal, Affirm, Afterpay, and Klarna have driven the By Now Pay Later (BNPL) trend.

Apple Pay Later, backed by Goldman Sachs, may shake up the business even more.

Several FIs are buying, or investing in, BNPL and point-of-sale lenders, including Truist with Service Finance and Goldman buying GreenSky. Discover has invested $30 million in Sezzle, and Square (with its recently obtained bank charter) is buying Afterpay.

The underlying risk resides in Washington, as more legislators express concern that BNPL encourages consumers to overspend. There is also chatter about potential intervention by the Consumer Financial Protection Bureau.

Cannabis Breakthrough?

Another intriguing growth opportunity involves banking companies involved in cannabis, ranging from farmers to retail shops.

In Illinois, West Town Bank & Trust built a national platform around hemp, working with a cannabis consultant and forming a merchant services division to work with CBD shops. West Town emphasizes the need to build scale – “trying” will not cut it.

There are challenges to entering the business, as rifts between federal and state laws persist. Interested lenders should assess and review policies for engagement and risk tolerance. West Town said its regulators have been comfortable with its effort.

Monitoring is critical, going beyond BSA and anti-money laundering checks. Lenders should require farmers to test THC levels and have remediation plans if levels exceed legal thresholds.

Outside legal expertise is needed to understand state-by-state laws. Lending challenges exist given the industry’s newness and many applicants’ lack of extensive financial records.

The Bottom Line

Successful banks and credit unions will be those willing to explore new avenues for growth, balanced by an awareness of the credit and reputational risks that exist for each path taken.

A careful analysis of customer needs and vendor relationships will be critical to any initiative. To learn more about how SRM helps clients assess the bottom line and the big picture, including opportunities to partner with fintechs and other emerging revenue generators, contact Ben Mrva, EVP at SRM.