Neighborhood Networks
Happy Friday, Fintech Takers!
It’s snowing in Montana, which is … honestly a bit late in the year for us.
I’m more accustomed to snow in September or the first week of October, but alas. We all must adapt to a changing world. It will still likely be snowy on Halloween, which is very important. Halloween costumes without coats over the top are weird and unnatural.
Today’s essay was fun to research and write, and it will be a delight to read. I promise.
- Alex
P.S. - I'm going to be hosting a digital event on November 6th with speakers from TruStage and the Financial Health Network talking about what lenders can and should be doing now to prepare for an uncertain (and potentially risky) next couple of years. Join us!
Neighborhood NetworksCopy anchor linkCopied
The Independent Community Bankers of America (ICBA) is a trade association founded in 1930 to represent the interests of community banks. As all good trade associations do, the ICBA describes those interests as being deeply aligned with the interests of U.S. consumers and the U.S. economy overall:
As local and trusted sources of credit, America’s community banks leverage their relationship-based business model and innovative offerings to channel deposits into the neighborhoods they serve, creating jobs, fostering economic prosperity, and fueling their customers’ financial goals and dreams.
With nearly 45,000 locations nationwide, community banks employ nearly 700,000 Americans and are the only physical banking presence in one in three U.S. counties.
Holding $6 trillion in assets, $4.9 trillion in deposits, and $4 trillion in loans to consumers, small businesses and the agricultural community, community banks channel local deposits into the Main Streets and neighborhoods they serve, spurring job creation, fostering innovation and fueling their customers' dreams in communities throughout America.
Also, as all good trade associations do, the ICBA aggressively pushes back on any market development that threatens to disrupt those interests.
Judging by the volume and tone of recent press releases from the ICBA, community bankers see existential threats everywhere.
In its new rulemaking, the CFPB should preserve an ICBA-advocated provision from the previous rule exempting small community banks from the requirement to create and maintain a third-party developer interface, allow banks to charge reasonable fees for third parties to access bank customers’ data, and enhance bureau oversight of third-party data privacy protections. The nation’s community banks should not be required to bear the costs of establishing and maintaining developer portals to allow third-party companies to access consumer data.
ICBA and the nation’s community bankers support the Main Street Depositor Protection Act to improve our nation’s successful deposit insurance system while minimizing costs for community banks. Expanding deposit insurance coverage for noninterest-bearing transaction accounts while mitigating higher costs on locally based community banks will further strengthen our banking system.
Industrial loan companies (and deposit insurance):
ICBA and the nation’s community banks call on the FDIC to reject deposit insurance applications from industrial loan companies, which present excessive risks to the nation’s financial stability and U.S. taxpayers
National trust bank charters for crypto companies:
If the Applicants are successfully able to establish themselves as national trust banks that do not primarily provide fiduciary services, but instead provide traditional banking services like payments, then … other companies will follow, presenting material risk to the U.S. banking and financial system.
Community banks make 60% of U.S. small-business loans under $1 million and provide nearly 80% of the banking industry’s agricultural lending to power Main Street America, so preserving needed credit for local communities must be the top priority as the Senate considers digital assets market structure legislation. Prohibiting crypto exchanges and affiliates from offering interest, yield, or rewards on payment stablecoins — as the GENIUS Act does for payment stablecoin issuers under its purview — will maintain the intended purpose of stablecoins for payments and help avoid a flight of FDIC-insured domestic deposits to global crypto conglomerates that do not have the same regulatory oversight or local commitment as community banks.
This frantic, multi-pronged request for protection from disruption strikes me as interesting for two reasons.
First, many of these requests are likely to be successful (at least in part) because policymakers are generally very supportive of community banks and the need for them to continue to exist.
Here’s Michelle Bowman, the newly installed Vice Chair for Supervision at the Federal Reserve, speaking at the Fed’s annual community bank conference:
Community banks drive local and regional economic growth, and they play a central role
in the financial health of the customers and communities they serve. These banks often pursue unique business models—ones that are not easily replicated by larger banks, including the relationship banking model that is a central tenet of community banking.
As she went on to make clear, this support is not merely symbolic:
Our support for community banks cannot just be lip service; it must translate into specific actions that right-size regulation and apply appropriate supervisory standards, specifically in identifying the appropriate definition of a community bank, in establishing appropriately tailored regulatory thresholds, and in approaching supervision focused on material financial risk.
Second, while I know the ICBA doesn’t speak for all community banks on all issues, I find it a bit alarming how few examples I see of community banks publicly pushing back on the idea that they need protection.
The examples you do see stand out because of how rare they are:
The reason this alarms me is that A.) I actually agree that community banks play a uniquely important role in their communities, and B.) I don’t want the continued existence of community banks to depend solely on the goodwill of legislators and regulators.
I don’t want community banks to survive. I want them to thrive. And for that to happen, I think the way they serve their communities needs to evolve.
How Do Community Banks Serve Their Communities?Copy anchor linkCopied
I asked this question on LinkedIn and Twitter this week:
I took small business lending out of scope for the purposes of this essay because it’s too easy. If the ICBA’s stats — community banks make 60% of U.S. small-business loans under $1 million and provide nearly 80% of the banking industry’s agricultural lending — are even close to accurate, that’s a role that should be protected or preserved, in some fashion, by policymakers.
So let’s set it aside.
What else do community banks do to support their communities and connect their customers to their communities?
Here’s a non-exhaustive list, sourced from the replies I got on LinkedIn and Twitter:
- Sponsoring youth sports teams/leagues (tee-ball seems especially popular).
- Supporting (and helping fund) community and civic groups, such as Rotary and Lions clubs.
- Entrepreneurship programs for students and providing coaching and financial advice for small business owners.
- Providing co-working and community spaces (one bank even has a podcast studio for local podcasters to use!)
- Buying holiday presents, school supplies, or even school lunches for families in need.
- Providing free financial literacy resources and classes for children and adults.
- Scholarship programs for local students.
- Providing free pictures with Santa Claus at Christmas (this is a good one … why should malls have a monopoly on crying children?)
- Volunteering, participating in fundraisers, and connecting non-profits with potential donors and board members.
- Assisting with local emergencies or natural disasters.
- Supporting local artists and arts organizations.
All of these are great and important.
They are compelling reasons for us to want community banks to continue to exist because, among other reasons, it’s difficult to envision new banks like Erebor and new trust banks like Coinbase sponsoring the local 4th of July parade or tee-ball league, as Jason Mikula wryly observed.
However, what’s interesting to me is that none of the community contributions listed above have anything to do with the products offered by community banks.
Productizing Community Banking Copy anchor linkCopied
Before the internet, companies that served specific geographic communities didn’t have to worry too much about how their products addressed the unique needs of those communities. The companies didn’t succeed because of their products. They succeeded thanks to the local monopoly or oligopoly they had over distribution.
As we know, the internet wiped out those distribution moats and leveled the playing field for customer acquisition.
But here’s the thing — geography didn’t stop mattering when we all got online.
Apart from a brief moment of insanity in 2021, when some folks (Mark Zuckerberg, most famously) talked themselves into the idea that we were going to transcend our physical bodies and live in the metaverse, geography has always mattered. Where consumers physically live, work, shop, and spend their leisure time matters. It has an enormous influence over our preferences, behaviors, and values.
However, what many companies — including community banks — have failed to grasp is that the best way to harness the importance of geography in the lives of their customers is no longer through investments in distribution (i.e., branches), but rather through investments in product.
Bilt, Block, & the Building of Neighborhood Networks Copy anchor linkCopied
Bilt started out as a co-brand credit card that allowed renters to earn rewards for paying their rent. That product wasn’t sustainable (Bilt’s issuer, Wells Fargo, was reportedly losing $10 million a month on the card), but it didn’t have to be. It just needed to attract enough consumers onto the Bilt platform so that the company could build towards the bigger prize: a neighborhood ecosystem.
Here’s the vision for how Bilt’s neighborhood ecosystem will work, once it’s fully scaled up:
- A consumer moves into a new apartment and signs up to make rent payments and earn rewards on those payments through Bilt. They have the option of getting a Bilt co-brand card (Bilt is transitioning from Wells Fargo to Cardless to launch a set of new cards early next year) or they can link their existing debit cards and credit cards in the Bilt digital wallet (Bilt tracks attribution using technology it acquired when it bought Banyan).
- When the consumer uses a Bilt card or a Bilt-linked card at a local merchant within the Bilt neighborhood benefits network, they earn rewards on those purchases as well. The Bilt app includes a map showing in-network merchants, and those merchants can also present special offers or rewards to Bilt users.
- Rewards earned in the Bilt ecosystem can be redeemed as discounts or free products or services from local merchants, or put directly towards their rent or a down payment on a house.
- If the renter is interested in buying a home, Bilt accelerates the journey, furnishing rent payment data to the three credit bureaus (boosting the consumer’s credit score), redeeming rewards as credits towards a down payment, helping to facilitate the home discovery and purchase process, and offering rewards for on-time mortgage payments. These benefits for homebuyers and homeowners are initially being enabled through a partnership with United Wholesale Mortgage.
While the homebuying/homeownership portion of the ecosystem is still under development (the partnership with UWM will begin to be operationalized early next year), much of the rest of it is already up and running, and at a massive scale. Bilt claims to have partnerships with 70% of the nation's top 100 property managers and with more than 40,000 merchants. Through those relationships, Bilt expects to process over $100 billion annually in housing spend and drive over $10 billion annually to neighborhood merchants by the end of 2025.
And, notably, it frames the purpose of what it’s trying to do in strikingly similar terms to how community banks describe their purpose:
This isn't just about transactions—it's about building vibrant communities where people truly love where they live.
Block — the parent company of Square and Cash App — is pursuing the same vision.
The roots of its neighborhood network ambitions actually stretch back quite a ways. In 2011, the company launched Card Case, a mobile payments tool that enabled consumers to discover and shop with local Square merchants. Here’s how it worked:
Once you’ve downloaded your mobile Card Case, you can fill your case with ‘cards’ of all the merchants you visit and buy from who accept Square. When you click on an individual merchant’s card, you’ll be able to see a map of where the merchant is located, contact information, your own order and purchase history, and receipts with the merchant and a daily live menu of items or services from the merchant. You’ll also be able to see what other customers are buying at the store, and merchants can serve customized offers to specific customers based on their purchase history.
So here’s where things get interesting. In a merchant’s card within the case, you can press a “use tab” button which allows the frequent customer to essentially put a purchase on their virtual tab with Square at the merchant. So once you press that button within two blocks of the merchant, you’ll be able to tell the cashier your name and your card will be charged on the merchant’s backend Square register. Because you are a repeat customer, Square already has your payment information. The purchaser will then receive a push notification when the merchant processes the payment.
Another feature of the newly designed Square is the ability for the payments company to show other merchants nearby who also accept Square payments. As [Keith] Rabois [COO of Square at the time] puts it, “it’s like a curated app store for local businesses.”
Huh, that sounds familiar, doesn’t it?
Card Case didn’t end up sticking around (much to my dismay), but Block has recently revived the idea with the launch of Neighborhoods, a network that brings together Cash App and Square to create branded storefronts, embedded in Cash App and available via the open web, for merchants to directly market to, sell to, and reward customers in their communities.
Cash App’s sheer scale (Block claims that Cash App has seen $300 billion in inflows over the last year) makes this a compelling solution for merchants. However, Block is further sweetening the deal by also offering merchants:
- Low costs. A 1% payment processing rate for all in-app orders, regardless of the payment method, with no extra marketplace commissions or monthly fees.
- Network-wide rewards. Rewards can be earned and redeemed with any merchant in the network, keeping money local and helping every business benefit as the network grows.
- Direct customer relationships. Once a customer follows a local merchant’s online ordering profile, the merchant can reach them directly and offer customizable rewards.
- Marketing and discovery tools. Merchants can engage with customers through in-app messages and marketing campaigns.
And, just like Bilt and community banks, Block describes the purpose of its Neighborhoods product using very aspirational language:
This is more than a product launch. It’s a commitment to the communities and businesses that shape our cities and towns. At Block, we believe that economic empowerment isn’t just about giving businesses the ability to start and run — it’s about ensuring they have what they need to grow, and to continue defining the neighborhoods we all call home.
Where We Go From HereCopy anchor linkCopied
One of the advantages of focusing on geography as a product differentiator rather than a distribution differentiator is that you never run out of opportunities to add value.
At a certain point, building more branches starts to produce diminishing marginal returns. By contrast, digital products can be endlessly tinkered with and expanded.
When I look at the neighborhood networks that Bilt and Block are building, I see plenty of room to run. Hyper-local social networking for event discovery, double opt-in neighbor introductions, and meetup organization. Communal saving and lending programs for community improvement projects. Personalized property insurance and neighborhood safety tools. The possibilities are endless.
And there’s no reason that community banks can’t get in the game.
In fact, I think community banks have a window, right now, to aggressively copy this neighborhood networks product strategy and adapt it to the geographies they serve.
Bilt is a national company, but its neighborhood benefits coverage is concentrated in big cities like New York, Boston, Chicago, Dallas, Atlanta, Miami, and Los Angeles. Block will eventually roll out its neighborhood network nationally, but for now, it’s only available in Portland and Charlotte. The fly-over states and small towns that community banks specialize in serving won’t see these products anytime soon.
And even when they do, Bilt and Block, for all their aspirational messaging, are still large companies with demanding investors. At the end of the day, they will always prioritize commerce over community.
Consumers and small businesses deserve something better.
Imagine a neighborhood network that enables a local office supply store to offer a 40% discount in July to local school teachers to help them buy supplies. Or a neighborhood network that gives customers the option to round up their purchases to donate to the local food bank or to scholarships for underprivileged students
In short, imagine a neighborhood network built by a community bank.
MORE QUESTIONS TO PONDER TOGETHER
Big news for the endlessly curious (yes, you): I’m collecting your fintech questions on a rolling basis.
What’s keeping you up at night? What great mysteries in financial services beg to be unraveled? Think of it this way, if a stranger is a friend you just haven't met yet, your question is a Fintech Takes conversation waiting to happen.
One that could headline a Friday newsletter or be answered in an upcoming Fintech Office Hours event.
Drop your question here, whenever inspiration strikes!
MONEY20/20 SPOTLIGHT
It’s officially Money 20/20 season, which means I’ll be highlighting a handful of sessions, meetups, and happenings in every newsletter.
💰 Deepfakes, Real Risk: Fighting Fraud in an Age of Synthetic Identity | 10/26 | 3:00pm–3:30pm PT
I’m thrilled to be moderating this discussion at Money20/20, featuring the head of fraud at Varo and the co-founders and CEOs of SentiLink and Oscilar.
☕ Nova Credit Coffee + Conversation | 10/27 | 8:15am–10:30am PT
Start the AM with lending leaders unpacking the real-world journey of cash flow analytics (where to begin, how to apply it, and what it takes to make it work). Breakfast, networking, and discussion included! RSVP here.
🍸 MX Happy Hour Panel: Data into Action | 10/27 | 3:30pm–6pm PT
Small panel conversation featuring Jane Barratt (Chief Advocacy Officer, MX) and yours truly (among others!), followed by drinks and hors d’oeuvres at The Grand Lux Cafe, Venetian. RSVP here.
🍸 Fundbox After Hours | 10/27 | 7:30pm–9:30pm PT
Come for the conversation on the future of embedded finance and small business lending. Stay for the one-on-one conversations (over drinks and appetizers, of course!)
🥯 Astrada Breakfast Discussion | 10/28 | 8–10am PT
Join Salman Syed (CEO of Astrada) and yours truly for a lively AM conversation on data, AI and open banking. Who will win as the battle lines are redrawn? Bring your hunger and curiosity to Bouchon at The Venetian. RSVP here.
FINTECH TAKES: BUILDERS SUMMIT
As you may know, Fintech Takes is hosting our first-ever in-person event on November 12th and 13th in the mountains outside Bozeman, Montana.
The Fintech Takes: Builders Summit is the industry event that I’ve always wanted, but have never quite been able to find. We are bringing together experienced founders and operators from banking and fintech — the folks who are actually building products in our industry — and giving them the content and networking opportunities they need to find (and understand) the next big problem they are going to tackle.
If that sounds like something you’d be interested in participating in, apply to attend or hit reply to this email to get more information on sponsorship opportunities. We still have room, but it is going fast!
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
