Some see fintech partnerships helping banks with Community Reinvestment Act

The recent proliferation of bank-backed venture capital funds is helping spark curiosity about whether depositories can earn Community Reinvestment Act credit by investing in financial technology companies.

At least six venture capital funds that target fintech investments have been launched since 2021 by veteran investors who have looked to add community banks as limited partners, according to data compiled by S&P Global Market Intelligence. The fund investments often include partnerships that incorporate offerings from the fintechs into the banks' operations, and some of the fintech companies develop products to enhance practices of fair lending and financial inclusion.

Venture capital professionals who connect banks with fintechs now see an opportunity to get more regulatory clarity in qualifying banks' investments in fintechs for Community Reinvestment Act, or CRA, credit, as regulators look to expand the scope of CRA assessment and take digital banking efforts into consideration.

"We are absolutely paying attention to it and will certainly consider that as a part of the future," said Carey Ransom, managing director at BankTech Ventures. The firm closed its first fund of $115 million in August, backed by over 100 banks and other investors as limited partners to invest in fintechs.

Community Reinvestment Act interest

Although BankTech Ventures has seen banks' interest, it opted not to take the mandate of earning CRA credit for banks in this first fund. It requires dedication to set up a fund with an explicit focus on community development, and since regulators' reevaluation of CRA rules is still in process, it did not want to anchor the whole fund's strategy on something uncertain right now, Ransom explained.

"I'm very confident that some of the investments that we have and are making in the first fund could qualify for CRA," Ransom said in an interview. But now, it remains a question how a bank can claim the credit by such an investment in a pooled fund, rather than in a fund dedicated to community development purposes, Ransom added.

What will help is a clearer process for banks to recognize qualified activities for CRA credit, and regulators appear headed toward that direction. In May, the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency issued a joint Notice of Proposed Rulemaking to revisit regulations that implement the CRA and collected comments from the public until August.

"One of the good things they do in this proposal is that they will start listing what are eligible activities for community development consideration," said Corey Carlisle, Varo Bank's head of public policy. Regulators proposed to create a new process to give banks some surety about CRA qualification before they make an investment, Carlisle said.

Concerns in practices

The current CRA framework was established in 1977 and has not been substantially revised since 1995. The fintech community has advocated for expanding the scope of the law to address nonbanks, including fintechs, as well as banks' engagement with fintechs.

One concern in linking fintech venture investments to CRA credit is the viability of the fintech startups, said Adam Rust, senior policy advisor at National Community Reinvestment Coalition.

"It is possible that a fintech could reach an underserved audience, but that's a pretty uncertain statement to make," Rust said in an interview. A lot of fintech startups may not have established a customer base when they raise capital and could fail over time, Rust said.

Measuring the impact of fintech solutions on financial equity and inclusion can be a time-consuming and complex endeavor. Between 2017 and 2019, it took the Consumer Financial Protection Bureau 22 months to conclude a study on lending marketplace Upstart Holdings Inc., and the watchdog validated that Upstart extended credit access to a broader consumer base at a lower cost compared to traditional models.

Fintech innovation to continue

While the dialogue about CRA modernization will continue, there is no shortage of banks' interest in investing in fintechs built on a mission. For instance, Atlanta-based neobank Greenwood Inc. said it aims to design a digital mobile banking app that caters to Black and Latino customers. The fintech secured $40 million in equity financing in March 2021 from investors including Truist Ventures, the corporate venture arm of Truist Financial Corp.; Bank of America Corp.; PNC Financial Services Group Inc.; JPMorgan Chase & Co.; and Wells Fargo & Co.

Fintech funds are gaining traction from those in and near the banking industry. In addition to investments from community banks, Castle Creek Launchpad Fund I LP also drew investors of banking executives and professionals, and JAM Fintop Blockchain LP is also backed by nonbank investors as well, including blockchain technology company Figure Technologies Inc.

CMFG Ventures, the corporate venture arm of CUNA Mutual Holding Co., also sees healthy innovation from fintechs with a goal to alleviate some of the inherent biases in loan decisioning, and it has invested in such companies as Home Lending Pal, said Sam Das, managing director at CMFG Ventures. Home Lending Pal uses artificial intelligence and blockchain technology to connect borrowers with mortgage lenders.

"It's a great combination of new revenue opportunities and being ahead of the curve of financial inclusion while also embracing new forms of technology to make it happen," Das said.