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Fifth Third Bancorp's Greg Carmichael Discusses the Relationship Between FinTechs and Banks

Greg Carmichael, CEO of Fifth Third Bancorp, discusses the effect of regulations on the industry, the relationship between FinTechs and banks, and his thoughts about the future with Jim Aramanda, President and CEO of The Clearing House.

By James D. Aramanda

Jim Aramanda, TCH: You have a deep background in technology, including as a CIO. And you have made technology an important part of Fifth Third’s growth strategy. Could you provide us with your perspective, particularly as someone with a technology background, on how you are using technology to grow revenue, manage expenses, and provide new products and services to your customers? Also, I’d welcome your views on how technological innovation and regulation intersect – for instance, is it challenging for banks to effectively innovate due to their regulated nature?

Greg Carmichael, Fifth Third Bancorp: First, let me share a couple of general comments on innovation and Project NorthStar, an initiative we launched last year. The overall strategic approach is really about putting the customer at the center of everything we do. It focuses on taking care of the customer, as well as growing revenue and managing expenses, as you mentioned.

Cutting costs just to cut costs, which could hurt our ability to serve our customers, is not acceptable. Project NorthStar puts the emphasis on being customer-centered in all things.

With respect to the question of whether regulation has the effect of holding back banks from creating new products or offerings, here’s what I would tell you. First, there’s never just the right amount of regulation. In any amount, regulation will prevent some positive innovations that would help customers. Likewise, even the most stringent regulation will fail to catch some innovations that don’t create value and that weaken the stability of our financial systems. Ultimately, it’s about balance, and that balance has to be found in each area, each business and each regulation. Understandably, we are not pleased about regulations that prevent us from pursuing innovation that would enable better outcomes for customers. We strongly believe that some regulations should be changed to enable better outcomes for our customers, without risking safety or soundness.  At the same time, we recognize and appreciate the very important role that regulations play in protecting customers and ensuring the safety and soundness of the financial system. We appreciate the ongoing dialogue we have with regulators on how best to achieve this balance.

When we put new products or services into the market, we should have an opportunity to learn from the customer experience and the ability to modify that product appropriately. Currently, we are operating in a zero-tolerance regulatory environment.

This environment presents challenges to introducing technologies, products, or services. If we have an issue, we can’t advance the products or services. A zero-tolerance regulatory environment puts constraints on products and services that we may like to get into the marketplace. For instance, small dollar lending has been problematic. As you know, Jim, small-dollar lending is a very important product for our customers. Many customers are regularly going out to payday lenders, title loans, and pawn shops to get short-term access to dollars.

We also know that a significant amount of the American population lives paycheck-to-paycheck, and nearly half of the population can’t cover an unexpected $400 expense. So, there’s a real need for temporary emergency funds to cover situations such as a car breaking down, a refrigerator going out, a roof leaking, or something of that nature.

It’s important we get a banking product out to serve this need, and we appreciate that regulators are rightly focused on protecting consumers from potentially unscrupulous lenders. But the guidelines issued to date will prohibit banks from offering a suitable product.

Much of the regulation that came out of Dodd-Frank made for a stronger financial services sector. The need and the requirement to stress-test our portfolios make a lot of sense.... But Dodd-Frank has also created some unnecessary complexities, especially around lending.

With a limited amount of resources that a bank has to apply to new products, and the limited amount of value that a product of that nature creates for the bank itself – but a huge value for the customer – we can’t implement a product that needs to meet significant hurdles to satisfy regulators. The solutions should be simple, efficient, inexpensive and effective for the customers. With overly restrictive rules, it takes as long and as much effort and cost to originate a $500 loan as it does a $1 million loan. Those types of constraints just impede our ability to introduce the right types of products and services to our customers. Instead, these limitations end up leaving the marketplace in the hands of the payday lenders or emerging FinTech start-ups.

Another example is small business loans. We know that small businesses are the primary source of job formation in the economy. They create two out of every three new jobs. Small business loans are thus extremely important. But under Dodd-Frank and under CCAR analysis, because of the nature of a small business loan, typically most of those are leveraged loans and we get penalized. We have to hold more capital for a small business loan than you do for a consumer loan.

When you look at the amount of capital you have to hold, and the underwriting requirements for a small business loan versus a larger loan, the cost is the same. It makes it more difficult to serve small businesses, and you see small business lending by banks being significantly reduced over what you saw pre-crisis.

Once again, a lot of regulation that came out of Dodd-Frank made for a stronger financial services sector. The requirement to stress-test our portfolios makes a lot of sense. We should continue to do that.

But Dodd-Frank has also created some complexities around lending. Likewise, the cost associated with compliance, such as DFAST and CCAR, forces resources to be pulled away from new product introduction.

Aramanda: Yes. I think the other TCH member bank CEOs would agree with you and the way you characterize it. While a lot of it makes sense, Dodd-Frank needs to be recalibrated. Its impact on the industry and on the economy also needs to be considered as well.

Carmichael: Agreed.

Aramanda: You are one of the select few CIOs who have gone on to become a CEO of a financial company. How do you think your background gives you an advantage when it comes to running a bank?

Carmichael: Jim, I’ve spent my entire career using technology in a way to solve business problems or to make a company more efficient. When you think about the skills associated with putting in new technology, the preparation, the testing, the disaster planning you have to go through to make sure you can recover from a situation, all of those skills are very helpful when you sit as a CEO of any company.

In our sector right now, what’s really interesting is the pace of change we’re experiencing, driven by digital capabilities. The digital capabilities have been enabled by some of the legislation that’s been passed in the past few decades. Check 21 enabled banks to transact with a digital image of a check versus the physical check. The new legislation plus the emergence of broadband internet, smartphone technology, and web-based applications all came together to change how we serve our customers, the products we offer, and the channels in which we can offer those products.

A technology background is very helpful with the digital transformation that’s occurring now. My approach to problem solving and using technology adds to how I look at my job as CEO.

Our fintech strategy allows us to accelerate the pace at which we bring new and better products, services, and experiences to our customers.

My technology experience is very helpful in my current role as we work to assess the right type of technology or the right type of partnerships.

We have a clear strategy at Fifth Third when it comes to technology: buy, partner, then build. That mentality of looking out and finding the best partners and the best solutions to solve our problems and implement them quicker, in this day and age, gives a bank an advantage. This strategy is driven by the way our customers want to bank, which is anywhere, anytime. They want simple, easy and fast banking services for day-to-day transactions, and they want a relationship with a trusted advisor.

And to finish answering your question, I’d like to also discuss FinTechs. You know, Jim, I look at FinTechs as a great opportunity. We embrace FinTechs as partners who can help make us better. We have FinTech in our DNA plus more than 150 years of financial services experience. In fact, Fifth Third has a long heritage in the FinTech space. We’ve been doing FinTech integration and partnerships for the last decade at Fifth Third to introduce new products and services. Examples include bill pay, mobile banking, payment solutions, etc.

Fifth Third was the first bank to introduce a network ATM infrastructure back in the late ’70s. We’ve been innovative for a long time. We built Vantiv Corporation, which is now a very large FinTech company. All in all, I look at FinTech as an opportunity to better serve our customers and to differentiate ourselves. FinTech is not something that I view as a threat.

Aramanda: Yes, I think FinTechs are a threat if you don’t understand what they can do to help drive solutions to the market. While we’re on that topic, can you talk about Fifth Third’s partnership with private equity?

Carmichael: Absolutely. We are extremely excited and proud of our partnership with QED Investors. QED is a small boutique private equity firm focused on the FinTech space. It’s a great company with tremendous leadership. QED takes a hands-on approach to its investments premised on deep operational experience in financial services. They work with over 50 different FinTech entities in startup phase. Our partnership with QED enables Fifth Third to get the first look at those businesses and determine if there’s an opportunity for us to invest directly, partner, or, in some cases, acquire those entities at an early stage.

This partnership has already helped us form relationships with companies like GreenSky, ApplePie Capital, Transactis, and AvidXchange. This has enabled Fifth Third to accelerate our innovation in those different areas, whether it is unsecured lending, small business franchise lending, or accounts payable automation.

Working with QED accelerates our ability to evaluate FinTech companies, and then, where appropriate, make an investment that creates a strategic relationship. And, most important, our FinTech strategy, of which QED is an critical part, allows us to accelerate the pace at which we bring new and better products, services and experiences to our customers.

Aramanda: Do you have any concerns about the FinTech industry and products and services they offer? For instance, do you have concerns over potential liabilities it may create for Fifth Third or your customers? Also, what kind of touch do you think the regulators should have on the FinTech market?

Carmichael: Yes, I think the regulators should be involved. Banks are held accountable to protect our customers and make sure that there’s safety and soundness in what the banks are doing. The regulators need to balance the need for customer protection and systemic safety and soundness on the one hand with innovation and customer value on the other. They need to create an environment that provides the same safeguards in the FinTech space that banks have to adhere to when introducing new products and services to customers.

A technology background is very helpful with the digital transformation that’s occuring now. My approach to problem solving and using technology adds to how I look at my job as a CEO.

I am concerned about emerging entities that do a lot of screen-scraping, which puts pressure on our networks and our systems to support their business.

And, of course, there is the customer service aspect. When customers have an issue or a problem, they don’t contact the FinTech company, they go to the bank. I’m aware and concerned about this, and my hope is that the regulators will evaluate these FinTech companies in the same manner in which they evaluate and regulate Fifth Third Bank.

We know how to compete in this environment, and we desire what I’ll call a level regulatory playing field for all participants.

Aramanda: As you mentioned earlier, it’s important to partner with a FinTech to make sure safety and soundness is addressed. If banks don’t do that, these newer companies will go out and build products that tend to disintermediate banks from their customers, and the banks may risk becoming a utility.

Carmichael: Well, the interesting thing with FinTechs is that most of them need a bank as a partner to be successful.

GreenSky doesn’t exist, Lending Club doesn’t exist, OnDeck doesn’t exist without liquidity and the safe harbor banks provide for the asset. Partnerships between a bank and a FinTechs are a potential strong win for our customers and a win for our banking shareholders because we’re more efficient in how we deliver innovative products and services.

Aramanda: Well said. Moving on to the next topic, the banking industry, as we all know, over the last eight or nine years has undergone more regulatory change than any time in the history of banking. With a new administration in the White House, there’s plenty of talk of regulatory reform. What areas of the bank regulatory framework do you think need to be recalibrated?

Carmichael: I think it’s appropriate to revisit certain aspects of Dodd-Frank, especially when you think about the traditional regional banks like Fifth Third. There’s an opportunity to more appropriately tailor prudential standards by tying the type of business that a traditional regional bank has to the systemic risk it poses to the financial services sector, rather than the single measurement of asset size.

Fifth Third and most of its regional peers are not Wall Street banks. We’re Main Street banks. We’re more similar to large community banks with a bigger balance sheet, but we do not do a lot of the types of high-risk transactions or have the international exposure that many trillionaire banks have.

There’s an opportunity to tailor Dodd-Frank more appropriately to the risk that banks create for the financial services sector. That will allow us to do a better job of serving our customers, quite frankly, and deploying our capital more strategically, while reducing our cost to serve customers.

Regulation should be tailored based on business factors, such as interconnectivity, global activity, and complexity. All those things should be considered when you think about the risk a bank or a financial services entity creates for the financial services sector. There is certainly an opportunity to right-size some aspects of regulation.

Aramanda: Yes. And I think there’s the appetite in Washington to do that.

Carmichael: There is a need to revisit some of the regulations and how restrictive they are, and assess the applicability of those regulations to where we’re at today. Generally speaking, banks are well capitalized. We are holding significantly more capital than we had going into the Great Recession. We need to maintain a significant capital position to absorb losses in the event of an economic downturn. But we also need to be able to deploy some of that capital differently than we have in the past for strategic opportunities.

Aramanda: Switching gears, you’ve been expanding in wealth management and insurance. Can you talk about the opportunities you see in those areas and why Fifth Third is investing in those segments?

Carmichael: Wealth management and insurance are businesses that create a lot of stickiness to the relationship that we have with our customers. Once you become their wealth partner, and they’re part of our Private Bank, it creates a very different relationship because we’re focused on long-term financial wealth creation, retirement planning services, and how to protect their wealth over time.

We become their strategic wealth partner, and that creates a different bond with those customers. In addition to that, Jim, as you know, the population is aging and unprecedented numbers are approaching retirement. People are very concerned about having enough financial resources to be financially successful through retirement. We want to be there to help them do that.

That’s why we acquired a company called Retirement Corporation of America and we’re investing heavily into our insurance capabilities. Our wealth planning platform, called Life 360, is a secure and convenient web-based platform that specifically meets the complex needs of our Private Bank customers. It provides a digitally integrated view of all a customer’s assets across all of their financial relationships, whether they are at Fifth Third or at another financial institution. Life 360 includes an electronic “vault” storage feature that is an outstanding platform to save and share important documents with family members or financial managers. It also allows customers to create projections and offers other tools to enable our Private Bank customers to plan better for their future.

Wealth management and insurance have been strong growth areas over the last five years because of the investments that we made. They are very important services to our customers.

Aramanda: What concerns you about what you are seeing in the different markets that Fifth Third services? What sectors are still lagging? Are there some that are overheating? And, maybe, what geographic regions would you hope should have better growth prospects than they’ve been experiencing?

Carmichael: As you know, Jim, we’re in the third-longest economic expansion in the history of the U.S. Broadly speaking, one of the concerns I have is that the length of the recovery suggests that we’re in the latter innings, potentially, of the cycle. That’s something we’re very mindful of going forward.

GDP growth remains slow. I think the latest reading was around 1.2% annualized. There’s also a lot of concern and lack of clarity around the timing and magnitude of reforms, which creates headwinds for our business. Are we going to get corporate tax reform? Are we going to see a different healthcare structure put in place and the repeal of Obamacare? Are we going to get fiscal stimulus in the form of infrastructure investments, defense investments, which would bode well for a lot of our customers? Are we going to see that materialize this year? We don’t know that, and nor do our customers.

That creates some challenges from a growth perspective and for companies to make decisions. If you’re going to sell your company or acquire a company, you may be more attracted to a 20% tax structure than a 35% tax structure. So it may impact your decision making. That’s just reality.

On the positive side, I would tell you credit losses are at an all-time low for most banks right now. For Fifth Third, our credit losses are below pre-crisis levels. Our forward metrics are very positive and strong. Credit continues to be a positive in the current cycle, but once again, we’re in the latter end of the cycle.

To answer your question about areas/sectors that are lagging, I would tell you we’re seeing the same thing that you are seeing. From a sector perspective, we see broader weakness in the brick-and-mortar retail space for traditional clothing and the electronic retailers. That should be no surprise as they’re getting pressure from companies like Amazon or eBay, and they really have to rethink their business model.

In addition, the energy sector has rebounded a little off its lows in February 2016, but not where it was nor is it in a healthy state. We don’t have a large exposure there, but it’s one we watch carefully.

From a geographical perspective, we have seen fairly balanced growth within our footprint. We believe that our footprint, which extends from the Midwest down to the Southeast, has a very diverse mix of businesses in both manufacturing, technology, and the service industry. We’re very similar to the rest of the United States with respect to the type of companies that we bank across our footprint. We’re not heavily concentrated in any one area.

Aramanda: Looking ahead, do you see any fundamental shifts taking place that will affect the overall economy in the years to come?

Carmichael: I think there’s a lot. It’s difficult to say five years from now what the economy is going to look like, to be honest with you.

There are concerns around the administration’s ability to introduce their policies and get them into production, so to speak, whether tax reform, fiscal stimulus, or healthcare reform. I don’t know how they’re going to play out.

I think those will have far-reaching consequences. If we don’t get corporate tax reform, I think that’s going to be a setback. If we don’t see some type of regulatory relief for corporations, especially financial services, I think we’re going to continue to be challenged to grow. While there are concerns, we are focused on the things we can control and what we can do to better serve our customers.

Aramanda: Finally, can you speak about Fifth Third’s community commitment?

Carmichael: With pleasure, Jim. Fifth Third has always been a strong contributor to all the communities in which we serve. I am a firm believer that you can’t build a strong bank without having strong communities. We’re very, very focused on serving our communities, and are making that commitment more visible with respect to how much we are doing to help them be successful.

In November 2016, we announced a $30 billion, five-year community development plan over 10 states where we have a retail banking presence. This is the largest community development plan made by a single regional bank in recent history. We partnered with the National Community Reinvestment Coalition (NCRC), to make sure that we’re doing the right things to create the greatest value in each community we serve. The NCRC is working with over 145 member organizations, and has been a tremendous partner to Fifth Third Bank.

Our $30 billion community commitment focuses on supporting low- to moderate-income borrowers. $11 billion of our five-year commitment is dedicated to mortgage lending; $10 billion is for small business lending; and $9 billion is for community development lending and investments.

We also are committing almost $155 million over five years in philanthropic investments, housing-related investments, small business-related investments, branch and staffing commitments in low- to moderate-income areas, inclusion and diversity and financial literacy.

 The NCRC’s President and CEO John Taylor has been a great partner to Fifth Third. In our joint press conference, he declared that “Banks are our neighborhoods’ best hope” and I could not agree more. Our commitment has been well received, and I think it’s really helping the communities see that banks are, indeed, their best hope. We have to stand behind those words by the actions that we’re taking and the investments that we’re making. We’re now in year two of this commitment. In year one, we delivered $7.8 billion. This includes $3.2 billion in mortgage lending, $1.6 billion in small business lending, $2.6 billion in community development lending, and $19 million in philanthropic donations. This represents 26% of the total commitment. I believe that we’ll exceed our overall commitment over the next years, and I could not be more proud of the contribution we are making to our communities. It feels just right and it feels good.

Aramanda: Greg, thank you for your time.