Since our prior launch of COVID-19: Its Impression on Banking, Fintech, and Funds: FAQs final month, we now have really seen the pandemic’s impression on banking, fintech, and funds. Our crew is carefully monitoring current developments and impacts associated to COVID-19, and to your insights we’re sharing a brand new compilation of FAQs. This new useful resource displays questions we’re receiving from our purchasers, contacts, and colleagues on subjects associated to the pandemic. We hope you discover this info useful in navigating these quickly evolving points and considerations.
1. Q. LEGISLATION FOLLOWING THE CARES ACT IMPLEMENTED THE DISBURSEMENT OF $1,200 PAYMENTS OF COVID-19 STIMULUS FUNDS TO MILLIONS OF AMERICANS. ON MAY 15TH, THE HOUSE OF REPRESENTATIVES PASSED THE HEROES ACT, WHICH WOULD PROVIDE A SECOND STIMULUS CHECK IF IT IS ULTIMATELY PASSED IN THE SENATE AND SIGNED INTO LAW. IN DISTRIBUTING THE FIRST ROUND OF STIMULUS CHECKS, HOW DID THE FEDERAL GOVERNMENT DISTRIBUTE SO MANY PAYMENTS AND MIGHT THOSE METHODS CHANGE FOR ANY SECOND ROUND?
A. In mid-April, the IRS started delivering stimulus funds by direct deposit to those that had acquired tax refund funds by that technique in both 2018 or 2019. Checking account info was additionally obtained by the IRS from the Social Safety Administration and the Veterans Administration and used to ship stimulus monies by direct deposit. The IRS additionally started getting ready and sending checks for the rest, nevertheless it solely has the capability to concern 5-7 million checks every week. For direct deposits which are rejected resulting from closed accounts, the funds are then despatched by test by mail. To stop fraud, the IRS doesn’t permit individuals to alter their bank account info on-line. So long as all circumstances are met, individuals who haven’t filed a tax return in 2018 or 2019 and who don’t obtain Social Safety, Railroad Retirement, or VA advantages may enter bank account info on-line and procure their funds by direct deposit.
Corporations comparable to Intuit® TurboTax® and H&R Block® have needed to deal with individuals who acquired 2018 or 2019 tax refunds on one in all their pay as you go or debit playing cards however who’ve misplaced the playing cards or closed the accounts. Their web sites present good element on how their prospects will obtain their funds, both by a paper test from the federal government if the account was closed, or from Intuit or H&R Block in the event that they acquired the funds.
Thus far, the IRS and Treasury have issued greater than 140 million funds worth $239 billion. Nonetheless, there was vital criticism that the disbursements are continuing too slowly. In response, Treasury and the IRS introduced on Might 18 that they may start sending roughly Four million disbursements although pay as you go playing cards that function on Visa’s community. With the cardboard, the recipient should buy items and providers, make withdrawals from ATMs, and switch their funds to a bank account, all with out incurring charges. Metabank will mail the playing cards to eligible recipients and embrace directions on activation and use.
We perceive Treasury and the IRS are utilizing pay as you go playing cards so as to ship stimulus funds to recipients extra rapidly and in a extra handy, efficient kind. This shift in technique may portend a rising position for revolutionary funds merchandise within the disbursement of federal funds to customers, which in flip may assist the federal authorities assist the unbanked extra successfully. Roughly Eight million Individuals are fully unbanked, so pay as you go playing cards may be viable options to paper checks. Different cost companions comparable to PayPal, Sq., and Venmo may additionally play an vital position as options to the normal banking system for future emergency funds, given their adoption charges by the unbanked and their technological options. Thus, there’s a enormous position for cost and monetary providers corporations to play in such cost applications, so direct advocacy to Congress and the Administration to grow to be a part of this infrastructure is vital.
2. Q. HOW IS THE COVID-19 PANDEMIC AFFECTING FINTECHS?
A. The COVID-19 pandemic is inflicting many fintech corporations monetary misery. As this continues, we anticipate it’ll grow to be tougher for fintechs to boost wanted financing. Banks which have partnered with fintechs have an curiosity in seeing that their fintech companions survive this disaster. On the identical time, we’re more and more listening to from fintech corporations about their curiosity in acquiring financing from their bank companions. We additionally anticipate to see a surge of distressed companies developing on the market within the months forward, and that the fintech business, with its many startups which have benefited from huge enterprise capital funding over the previous a number of years, will probably be hit particularly laborious. Robust fintechs, their traders, and monetary establishments will seemingly have alternatives sooner or later to amass financially distressed fintech corporations and their belongings.
3. Q. HAS COVID-19 ALSO IMPACTED FINTECHS DUE TO BROKERED DEPOSIT ISSUES?
A. On April 3, 2020, the FDIC prolonged the remark interval for the proposed rule to modernize the brokered deposit restrictions resulting from “the challenges associated with COVID-19.” The tip of the remark interval was prolonged from April 10 to June 9, 2020. That seemingly implies that any optimistic adjustments to the laws will probably be delayed by not less than two months. This delay, coupled with the monetary impacts of COVID-19, has the potential of resulting in the failure of some fintechs and different corporations which are deemed to be performing as deposit brokers underneath current FDIC laws.
Underneath the Federal Deposit Insurance coverage Act, an undercapitalized insured depository establishment may not settle for or renew brokered deposits. Though the FDIC may, on a case-by-case foundation, grant a waiver for an establishment that’s not less than adequately capitalized (however not effectively capitalized), there isn’t a assure that they may accomplish that. Given the extreme hit to the U.S. financial system from COVID-19 and the probability of excessive charges of borrower defaults, many monetary establishments may wrestle with sustaining their well-capitalized standing. Those who lose this standing could possibly be required to stop accepting brokered deposits, together with these supplied by fintech and program supervisor companions. We will probably be monitoring this case carefully.
4. Q. WHAT FINANCIAL DISTRESS TO BANKS HAS BEEN CAUSED BY COVID-19? WILL COVID-19 LEAD TO BANK FAILURES?
A. Through the preliminary part of the pandemic, banks suffered no severe financial fallout. Banks had been targeted on assuaging its impression on prospects by offering liquidity assist, loan extensions and forbearances, and by collaborating within the Paycheck Safety Program. Solely two small banks failed. However the subsequent part of the pandemic is prone to be a lot much less benign in its impression on banks because the nation shifts from a well being disaster to a possible financial disaster.
The present protected harbor bank regulators have prolonged to banks by permitting them to keep away from classification of loan modifications and forbearances as troubled debt restructurings will expire quickly. Underneath the Interagency Assertion on loan Modifications issued on April 7, 2020, the regulatory forbearance for modifications ends on the sooner of the President’s termination of the nationwide emergency or December 31, 2020. By fourth quarter 2020, longer-term opposed impacts of the pandemic rippling by the financial system are prone to be obvious. The cost forbearances many debtors acquired in second quarter 2020 will by then have expired. The day of reckoning could have arrived — enterprise tenants with out earnings unable to pay hire, landlords with out means to pay their mortgages, and banks with the ensuing sharp enhance in non-performing business loans. Allowances for loan and lease losses will see dramatic will increase. Business actual property values will probably be hit laborious. How may this not occur with the catastrophic, pandemic-caused declines anticipated in second quarter GDP?
The monetary well being of the banking system in the US will probably be underneath severe stress by 12 months finish. Delinquencies will rise. Whereas at present banks are higher capitalized and have extra liquidity than through the Nice Recession of 2008, the banking business is prone to see a major shake out and extra consolidation. Regulators may want to change not less than quickly the accounting guidelines by which they evaluated banks for capital adequacy. They merely can not put hundreds of banks in the US underneath consent orders. Present GAAP accounting guidelines for troubled debt restructurings and short-term loan impairments could possibly be modified for regulatory reporting functions.
The pandemic has put the financial system right into a sudden and unanticipated recession. A big enhance in bank failures inevitably follows any recession. The banking business at present is best capitalized, has extra liquidity, and has significantly improved threat administration practices over the previous 15 years. Whereas this implies banks ought to be capable to climate the approaching storm, the enterprise of banking is not going to be getting any simpler.
5. Q. HOW WILL COVID-19 IMPACT CONSUMER BANKING? DOES COVID-19 FINALLY USHER IN THE DEMISE OF PAPER CHECKS IN THE U.S.?
A. The pandemic has brought about vital changes in client habits. The complete extent of these changes may have profound impacts on the deposit aspect of the banking enterprise. Individuals have been reluctant to go to bank places of work. Will that proceed? Maybe not, however there has lengthy been a development amongst youthful bank prospects to eschew branches and depend on cellular banking. Even earlier than the COVID-19 disaster, many banking establishments have inspired their prospects to maneuver to digital banking options, and this effort has accelerated in the previous few months since COVID-19. A current American Bankers Affiliation report (which is up to date recurrently) lists digital and digital banking providers supplied by over 200 small and huge banking establishments as choices and options which are accessible for his or her prospects. Certainly, at occasions like this, many purchasers are attempting digital banking for the primary time.
The identical change is going on in client funds. For instance, a current Paysafe Report exhibits 54 p.c of U.S. consumers are utilizing on-line sellers as a result of they will’t attain the shops, and of these consumers, 25 p.c of U.S. consumers are logging on for the primary time. We’re additionally seeing vital enhance in contactless funds, as a result of each customers and retailers want to keep away from exchanging plastic or cash. A current MasterCard report indicated a 40 p.c enhance in contactless transactions. Whereas the US has lagged behind most different industrialized nations within the implementation of contactless and cellular funds, the impression of the pandemic is now rising requires such cost strategies.
Regardless of the alternatives accessible for digital banking through the pandemic, such adjustments in client and service provider habits may not bode effectively for monetary establishments with out the resilience or expertise assets to accommodate anticipated adjustments in client choice. Regardless of the case, many predict that the enterprise of banking is not going to be getting simpler.
6. Q. WHAT OTHER DISRUPTIONS TO THE BANKING SYSTEM ARE ANTICIPATED AS A RESULT OF THE COVID-19 SITUATION?
A. There are quite a lot of disruptions to the banking system already because of COVID-19. For instance, there are vital quantities of cash generated by sellers of stock, nearly all of which is being held within the largest banks. This focus of funds is detrimental to the smaller banks that might use the funds to lend to small companies as a part of the PPP program and for different lending applications. It’s detrimental to the system as a result of it additional exacerbates the “too big to fail” downside.
As one other instance, monetary establishments are bracing for a wave of monetary covenant defaults by their company debtors, as debtors’ cash move and skill to service debt deteriorates. This can start in earnest when debtors are required to report second quarter covenant compliance to their lenders. Monetary establishments must assume strategically and virtually about the best way to strategy company loan modifications, loan pricing, and exercises within the present setting. Up to now, regulators have inspired monetary establishments to be supportive of their debtors by the disaster.
7. Q. CAN FORCE MAJEURE CLAUSES BE USED TO AVOID CONTRACT OBLIGATIONS DURING COVID-19?
A. Generally, however this significantly depends upon the language and details. Such clauses could be used to excuse efficiency underneath a contract, and courts may view this as merely an excuse. There could be a distinction, for instance, between a enterprise that might not stay open resulting from a governmental rule and a enterprise that’s already struggling and sees COVID-19 as a chance to flee a contract. Generally, the precise language of the drive majeure clause may make all of the distinction.
As mentioned in our final FAQ, a drive majeure clause is a provision of a contract that excuses a celebration from efficiency if a unprecedented occasion prevents one or each events from performing their obligations. Along with “force majeure” provisions that exist in lots of contracts, there are different “contract-avoidance” doctrines that will also be asserted, comparable to “impossibility” or “frustration of purpose.” Whether or not any of those doctrines apply requires a case-by-case willpower that’s extremely depending on the contract language and the details related to the precise occasion. When you are assessing your obligations underneath a contract, you may additionally must assess a counterparty’s assertion that their threatened or precise non-performance is excused.
8. Q: WILL THE COVID-19 CRISIS IMPACT THE ACCEPTANCE OF CASH? WHAT ARE THE POLICY CONSIDERATIONS INVOLVED IN MOVING TO A CASH-FREE MARKETPLACE? WHAT IS THE PERSPECTIVE OF RETAILERS?
A: Shoppers’ restricted means to buy in-person because of the social distancing measures and considerations concerning the transmissibility of COVID-19 by way of bodily notes have made digital funds much more fashionable through the COVID-19 disaster. In reality, some retailers have instituted “no cash” insurance policies on the level of sale, because of these considerations. Whether or not a better, longer-term shift to digital funds for in-person funds happens after the pandemic is over will depend upon client and service provider choice, but additionally coverage issues.
In 2019 and previous to the outbreak of COVID-19 in 2020, a number of states and quite a few main cities launched or enacted insurance policies prohibiting retailers from refusing to just accept cash for cost (with varied exceptions), or from discouraging or discriminating in opposition to using cash. Main cities like New York Metropolis, San Francisco, and Philadelphia enacted such legal guidelines, as did New Jersey and Rhode Island. Proponents for these legal guidelines argued that cashless cost insurance policies deprived low-income customers as they’re much less prone to have non-cash types of cost. Even Congress is now contemplating laws that may prohibit retailers from implementing cashless cost insurance policies. (See the “Payments Choice Act of 2019”)
Whether or not different states and cities, or Congress, enact such legal guidelines may learn by COVID-19. Proponents of non-cash funds have argued that such non-cash funds promote public well being higher than cash as they will decrease bodily contact along with different advantages comparable to lowering cash laundering, permitting for higher monitoring of spending, and minimizing the danger of theft. Those that oppose non-cash insurance policies, nonetheless, argue that such non-cash insurance policies harm the customers most affected by the pandemic: the unbanked and underbanked.
Thus far, retailers who need to prohibit cash funds should test their state and native legal guidelines. Such legal guidelines may mandate that they settle for cash as much as sure denominations (comparable to $20 and fewer), and chorus from charging customers who pay with cash greater than those that don’t, or chorus from posting indicators discouraging cost in cash. Some legal guidelines permit retailers to implement non-cash insurance policies if the service provider accepts cost with pay as you go playing cards which are supplied to customers on the premises — as long as such pay as you go playing cards are supplied freed from cost. Different legal guidelines permit retailers to refuse to just accept cash if fraud in all fairness suspected, or for sure purchases (comparable to membership fashions that require cellular funds, or telephone-based transactions, as an illustration). COVID-19 may result in new adjustments to those legal guidelines or complete new legal guidelines, of which retailers ought to be cognizant.
We’ve heard from retailers which have been considerably impacted by COVID-19; they might simply assume keep away from cash, not less than on the present time. They see cash as a well being threat to their workers.
9. Q: HOW HAS COVID-19 IMPACTED CRYPTOCURRENCIES AND STABLECOINS?
A: Like many monetary markets, the market cap for digital belongings has been unstable for the previous few months, declining by roughly 43 p.c from March 1 to March 16 (its trough) in accordance with CoinMarketCap. But, the market exceeded its March 1 value, as of Might 20. Over the primary quarter of 2020, the buying and selling quantity of stablecoins elevated by Eight p.c over the earlier quarter to over $90 billion. The resiliency (and volatility) of those markets are a product of many components, however the contactless nature of those belongings has performed some position in renewed enchantment. World financial volatility has additionally made stablecoins extra enticing monetary devices given their steady values.
The COVID-19 pandemic can also be affecting the event of central bank digital currencies (“CBDCs”). The Bank of Worldwide Settlements has mentioned that the COVID-19 pandemic may speed up the event of CBDCs partly by altering client views on cash. Lately, China, a frontrunner in CBDC analysis, introduced that it’s going to proceed to press ahead with its growth of a digital renminbi. The Agricultural Bank of China is reportedly conducting assessments on a consumer interface by which customers may use the digital renminbi (often known as DE/CP) and 19 companies have been testing transactions with the digital forex. South Korea has additionally introduced plans to speed up its CBDC pilot, beginning a 22-month pilot program. The Bank of England is contemplating the position personal corporations may play in issuance and distribution of a pound sterling CBDC, in addition to the power of personal digital belongings to enhance digital nationwide forex.
Varied Members of Congress have additionally proposed laws establishing pass-through digital wallets to be maintained by the Federal Reserve to scale back the delay between authorities disbursements and customers receiving them, notably in occasions of disaster. For now, these proposals haven’t gained a lot traction, however the clear want for quick and safe disbursement may speed up the event, use, and regulation of stablecoins and CBDCs. The fabric structural adjustments the Libra Affiliation has made to its proposed Libra coin to mollify regulators, who raised fierce opposition previous to the disaster, may have already demonstrated rising regulatory scrutiny within the sector. Issuers of stablecoins, due to this fact, ought to hold regulation and coverage developments on the forefront of their enterprise fashions.
10. Q: HOW DOES THE INCREASED FOCUS ON “CONTACT TRACING” IMPACT INDIVIDUAL PRIVACY RIGHTS? HAS THERE BEEN ANY PROPOSED LEGISLATION?
A: Though Apple and Google introduced that they collectively developed contact tracing software program that may permit governments and medical professionals to know who has been in shut contact with a COVID-19 affected person, cities and states thus far have been reluctant to go down this path. As a substitute, state and native governments are nonetheless relying totally on handbook tracing strategies.
In fact, any such “contact tracing” functions would increase vital privateness considerations. As soon as these apps are in play, stopping their misuse by regulation enforcement, governments, and numerous different third events (together with criminals), could possibly be troublesome if not unattainable. The Chair and Subcommittee Chairs of the Senate Commerce Committee have launched the “COVID-19 Consumer Data Protection Act” (S. 3663) to limit using private information by such apps. Amongst different issues, the invoice would require any enterprise topic to the Federal Commerce Fee’s jurisdiction to acquire a client’s affirmative specific consent to gather, course of, or switch the patron’s private well being, geolocation, or proximity information for the needs of monitoring the unfold of COVID-19, and to reveal on the level of assortment how the enterprise will safe, retain, and switch the info. As soon as the enterprise stops utilizing the info for the aim of monitoring COVID-19, the enterprise can be required to delete or de-identify the info. Nonetheless, some privateness advocates see it as doing extra to decontrol privateness than to guard customers. It stays to be seen whether or not this laws will achieve traction.
 One widespread false impression is that cash, as “legal tender,” have to be accepted by retailers. However truly, that rule applies solely to sure collectors. Except in any other case restricted by relevant legal guidelines, personal retailers can refuse to just accept cash. See https://www.federalreserve.gov/faqs/currency_12772.htm