April/May 2017 Banking Exchange by Banking Exchange

April/May 2017 bankingexchange.com

How well do your people fit? Hiring, training, pay, skills... All in flux as banks change

A LOOK INSIDE Two DIGITAL STANDOUTS Tales (and a lesson) from the dark web

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/Contents April/May 2017

14 Skills Gap The work in banking is changing. The skills, training, and pay of the workforce not always so much. How some banks are adjusting By Melanie Scarborough, contributing editor Cover image: Shutterstock

20 Digital Decisions The digital revolution hits banks in all places. Two facets are covered: a digital platform and data put to good use By Steve Cocheo, executive editor

April/May 2017 BANKING EXCHANGE

/ contents / 4 On the Web

April/May 2017, Vol. 3, No. 2 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: bankingexchange@sbpub.com Web: www.bankingexchange.com Twitter: @BankingExchange LinkedIn: www.linkedin.com/company/ banking-exchange

Don’t blow up your Sub S; Watch those reg swings; Try out Weekend Think

6 Like it or Not Some blunt talk and food for action

8 Threads Getting out of the bank helps; Banks vs. credit unions on OD fees; Three things to help factor rising rates into deposit pricing

8 12 Seven Questions

Chairman & President Arthur J. McGinnis, Jr. Editor & Publisher William Streeter bstreeter@sbpub.com

How Leslie Andersen keeps her $112 million bank in step with evolving future

Executive Editor & Digital Content Manager Steve Cocheo scocheo@sbpub.com

25 Bank Tech

Creative Director Wendy Williams

Why banks need to stop the IT Band-Aids and properly fix the plumbing

Art Director Nicole Cassano

28 Compliance Watch

Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: bankingexchange@halldata.com

How safe is the SAR “safe harbor”? and other BSA/AML info sharing issues

Graphic Designer Aleza Leinwand Editorial & Sales Associate Andrea Rovira arovira@sbpub.com

Contributing Editors John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Lucy Griffin, Mike Moebs, Ed O’Leary, Melanie Scarborough, Lisa Joyce CMY

30 Risk Adjusted Tales from the “Dark Web” and tips to avoid getting caught up in it

32 Idea Exchange Details of an unbanked account winner

34 Industry Resources

Director, National Sales Robert Vitriol bvitriol@sbpub.com Production Director Mary Conyers mconyers@sbpub.com

White papers, eBooks, Roundtables

Circulation Director Maureen Cooney mcooney@sbpub.com

36 Counterintuitive

Marketing Manager Erica Hayes ehayes@sbpub.com

Better rethink your security questions

Banking Exchange (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published February/March, April/May, June/July, August/September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single Copies are $35 each. Subscriptions must be paid for in U.S. funds. Copyright © Simmons-Boardman Publishing Corporation 2017. All rights reserved. Content may not be reproduced without permission. Reprints For reprint information Contact: Mary Conyers, (212) 620-7250, mconyers@sbpub.com For Subscriptions & Address Changes Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: bankingexchange@omeda.com Write to: Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 Postmaster Send address changes to Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 2

BANKING EXCHANGE

April/May 2017

Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co, Mark Erhardt, Fifth Third Bank, Joshua Guttau, TS Bank Jane Haskin, First Bethany Bank Brian Higgins, First Financial Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan O’Malley, Eastern Bank Dan Soto, Ally Bank Dominic Venturo, U.S. Bank McCall Wilson, Bank of Fayette County

/ ON THE WEB / Now Showing at

bankingexchange.com

Don’t let carelessness blow up your Sub S

Following “The Prairie Economist” yet?

Regulatory pendulums swing two ways

A single shareholder’s careless act can destroy your bank’s Sub S designation. In his blog bank attorney and consultant Jeff Gerrish says careful planning and administration can protect the deal. Read more at tinyurl.com/SubSBomb

Blogger Mike Moebs questions assumptions of what works in pricing, product design, and more. You’ll always find something to challenge you in “The Prairie Economist.” Read more at tinyurl.com/ prairieeconomist2

With a President who wants to slash regulation, bankers are busy thinking about which regulations they would like to see removed. Compliance expert Lucy Griffin suggests an alternative approach. Read more at tinyurl.com/compliancependulum

Weekend Think: Matters that call for reflection What issues lie ahead that you should be considering? Each weekend we pick one or two articles of special longterm significance and highlight them on Saturday and Sunday in “Weekend Think” on the BankingExchange.com home page. Try out “Partner or vendor? Why it matters in fintech world,” a recent choice. Read it at tinyurl. com/partnerorvendor

@BankingExchange

www.linkedin.com/company/ banking-exchange

BANKING EXCHANGE

April/May 2017

Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, scocheo@sbpub.com, 212-620-7219

C T D t B H m a P D G t c E s

BANKINGEXCHANGE.COM: SMART NEWS FOR SMARTER BANKS

Can America grow new banks again? Cybersecurity is everybody’s iss The next thing: Agile banking? 5 AML technologies you must understa Due diligence—checking out a bank 4 internal frauds and how to spot them Quick lessons in loan swaps Making “Three Lines of Defense” w Blockchain: What you need to know NOLs in acquisitions … simplified! Hang on—Big Tech is remaking banking 4 techniques for better financ management. Have the right conversation with customers. Get real about strategic planning in 11 steps Fintech and banks shaking hands Panama Papers: Hot—but issues aren’t new Getting ready for more HM NEWS AND BEYOND Digital strategy: Does your bank have one? - Bank tries out Pokémon ANALYSIS. Go “Flying money” may land inINSIGHT. U.S. What’s new with SOLUTIONS. neobanks? Day i the life of Compliance 10 reasons fintech startups fail. When blockchai cryptocurrencies, and AML meet Brexit Blues: “We Don’t Need No Education” CFPB means it as you read it. How community banks can survive Banking on artificial intelligence How are marketplace lenders

/ like it or not /

Some food for action

here is much about community banking that is in sync with current trends of local sourcing. One bank vendor we spoke with recently raised this point and expanded on it. Dwayne Spradlin, CEO of digital marketing company Buzz Points, said “local” was community banks’ great differentiator. It’s something the big banks can’t match. He also said, however, that there is a fundamental rethinking of customer expectations going on that bankers of all sizes must grasp, a point we’re hearing from others as well, including some quoted in this issue. Spradlin said that consumers have come to view the kind of experience that Uber, Hotels.com, Amazon, and the like offer as a baseline. He’s right, we all do. These digital-powered services have in several cases completely upended the respective industries of which they are a part. Spradlin feels that this disruption is inevitable in financial services, and has only lagged because the industry is highly regulated. Agreement w ith that point comes from a community banker we interviewed for “Bank Tech” (p. 25). Suresh Ramamurthi, chairman and chief technology officer of CBW Bank, Weir, Kan., observes bluntly that the Bank Holding Company Act is what has kept traditional banks in business. That law, he says, requires owners of a bank that owns other types of companies to put everything under federal financial regulatory scrutiny. Absent that, he continues, the likes of A ma zon a nd G oogle wou ld have become banks already. “And they have better technology than any bank in the world,” says Ramamurthi, who is a former Google engineer. A lt houg h he li ke s hav i ng a ba n k charter, what he doesn’t like is all the “old plumbing” that is associated with banking, particularly in regards to technology and payments. We think Ramamurthi is right that laws have sheltered banks to a degree. But it’s also true those laws and the regulations they spawn—when in excess, as

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April/May 2017

now—stif le change and innovation. The fintech crowd is only beginning to comprehend this as they partner more often with banks and contemplate the merits of an OCC fintech charter. Community banker Leslie Andersen, the subject of our Seven Questions interview (p. 12), represents an intersecting view between the traditional and the emerging. As the fourth-generation head of a small Nebraska bank, she understands the traditions of banking. But at the same time, Andersen, CEO of Bank of Bennington, fully grasps the need to grow and change. She has changed a great many things already. Right now, for example, she is in the process of ripping out most teller stations in her main office. She also has partnered for some time with online marketplace lenders through a cooperative, and is currently assisting a local tech startup to perfect its real estate settlement platform. The $112 million-assets bank is situated in a suburb of Omaha, which, Andersen says, greatly impacts what her bank can do. CBW Bank, being a very small bank in a town of 663, by contrast, did not have many options for growth when Ramamurthi and his wife bought the bank eight years ago as a means to implement their unconventional ideas about banking. As these two examples illustrate, it is diff icult, and often inaccurate, to generalize about trends in banking. Nevertheless, we’ll venture three takeaways from the above: First is the importance of looking up from what you’re doing to gauge what is happening around you. Not just once a year at the board retreat, but every day. Second, in doing that, think about whether some of the insights offered by, for example, the two bankers cited above, suggest some changes in thinking and ultimately direction at your institution. Frame it in the context of your own situation and your own experience. Third, insights, if they seem right, should not just be food for thought. They should be food for action.

BILL STREETER, Editor & Publisher bstreeter@sbpub.com

Laws have sheltered banks to a degree, it’s true. But it’s also true those laws and the regulations they spawn—when in excess, as now—stifle change and innovation

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/ THREADS BEYOND BANKING

Execs gain new perspectives by joining nonbanking peer groups By Lisa Joyce, contributing editor

sk Jo shu a G ut t a u , t he 4 0 year-old CEO for $900 million-assets TS Banking Group, if he’s a banker and he’ll reply without hesitation, “No.” Guttau may hold the CEO title at a community bank headquartered in rural Treynor, Iowa (population: 919), but he considers himself a business owner and investor, who happens to operate within the banking industry. That distinction encouraged Guttau to look for ideas and strategies outside traditional banking peer groups. He joined Vistage, an organization that runs advisory groups for CEOs worldwide, four years ago. Explains Guttau: “I believed that other industries were ahead of banking, and although these industries aren’t an apples-to-apples comparison, I knew I could learn from them.” Trey Maust, cofounder and copresident/CEO of Lew is & Clark Bank in Oregon City, Ore., also was looking to gain perspective from outside the banking industry. Maust and cofounder Jeff

Sumpter started the bank in December 2006, and they were eager to get input from a diverse group of entrepreneurs and CEOs. Maust, like Guttau, is a member of Vistage. Maust also is a member of Strategic Coach and of the Entrepreneurs’ Organization (EO). The latter group, says Maust, was especially helpful during the bank’s early stages. “EO helped me think strategically about how to effect change,” he says. At this point in the bank’s growth trajectory ($180 million in assets), Maust finds Vistage the most helpful. “The peer group is like having a board of advisors to bounce ideas off and to get insights on how to approach a challenge from a business perspective. I can then layer on what we need to do to meet our safety and soundness requirements,” he explains.

Strategic thinking, off-site Each Vistage peer group includes a chair and 15 members from a wide variety of industries. The group’s personality varies depending on the chair and the members.

RAISE OR LOWER OD FEES? Overdraft service pricing may be at a crossroads, writes Mike Moebs in his Prairie Economist blog on BankingExchange. com. For all financial institutions, the median OD price has exceeded the inflation rate since 2000, with differences between banks and credit unions. He analyzes price hike vs. decrease impacts. Read the blog at tinyurl.com/ODratedecision

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April/May 2017

Guttau’s group includes one life insurance business and a financial planner, but the rest of the members are in services and manufacturing businesses. Peer groups meet monthly. In the morning, members hear from an outside speaker. After a lunch break, group members share the progress they’ve

Median OD prices for all FIs

$18

$30

2000

2017

Inflation-adj. price $25

monthly, one-on-one coaching sessions, during which chairs hold group members accountable for meeting individual goals.

“Focus-group” feedback

made on professional and personal issues as well as challenges they are currently facing and other topics they want to discuss. The chair facilitates the afternoon roundtable discussion. Since being off-site pulls him away from daily distractions, Maust credits the meetings with giving him time to

Median OD prices for banks

think strategically. Prior to a monthly meeting, Guttau often frets if he can really afford to spend a day away from the bank. Laughing, he says: “But within 30 to 60 minutes of the start of the meeting, I realize that this is exactly what I need. It allows me to reset my clock.” Vistage membership also includes

Median OD prices for CUs

$20

$30

$15

$29

2000

2017

2000

2017

Inflation-adj. price $27.82

Inflation-adj. price $20.86

Guttau and Maust both note that membership in groups such as Vistage are not inexpensive, but they say the benefits outweigh the costs. For Maust, his participation in the Vistage peer group helped define Lewis & Clark Bank’s approach to its market. One example of this is its website. Even though the content on the website is in line with content found on other bank websites, the presentation is decidedly hip and nonbank-like. Conversations with group members also have helped Maust define what his bank’s customers and potential customers want from a financial institution. Lewis & Clark Bank is exploring digital platforms and a shift in its deposit strategy—something the bank was reticent to do without input. “The group acts as a sounding board and as a focus group,” points out Maust. “They help ensure that our perspective is grounded.” However, to get the most out of the investment, you must be open to new ideas. “A cross-industry peer group is great if you are willing to think of your institution as a business, rather than just as a bank,” says Guttau.

Percent at or below inflation-adj. price

26.4% 7.7%

BANKS CREDIT UNIONS

Source: Moebs Services Overdraft Study, January 2017

April/May 2017

BANKING EXCHANGE

/ THREADS /

NOW WHO’S SITTING PRETTY?

Innovation is cool, but customer base counts By Steve Cocheo, executive editor

isruptive innovators tend to be the “cool kids” of financial services. But Ron Shevlin pops that bubble with this: “It’s easy to be innovative when you don’t have to take care of any customers.” Shevlin, director of research at Cornerstone Advisors, continued in this vein during a presentation at the recent American Bankers Association National Conference for Community Bankers. He said so much emphasis has been placed on invention that many forget that delivering products to customers is more important. Banks connect innovation to a user base. “You may not be the first movers on these new things,” said Shevlin, “but you get them. You can do these things.” Shevlin was asked what banks should be paying most attention to now. His answer: Artificial intelligence in general, and, more specifically, chat bots, the AI powered voice and text communication tools. But he said banks and fintech partners would have to think longer about applying this technology. If the best they can come up with is an app to tell someone they’re spending too much on Starbucks, they’ve missed the wave, he said. Shevlin suggested community bankers will find a natural connection to blockchain technology, in time, as the smart

contracts application comes into its own. For now, he sees fintechs and comm u n i t y b a n k s w o r k i n g t o g e t h e r. Partnerships can help banks expand by broadening their credit footprint without creating larger physical office networks. One risk: alienating fintechs. Shevlin

noted a common experience: “Banks’ procurement departments treat us like mini IBMs and harass us with requests.” Ultimately, banks must decide on fintech’s role: vendor or true partner? Read related story at tinyurl.com/ vendor-partnerBE

From high fives to partnerships

ouring the exhibit hall at the recent Lendit USA 2017 conference in New York City gave one a good overview of the marketplace lending ecosystem. Although individual bankers were hard to spot among the crowd, five banks exhibited—WSFS, Bankers Trust, Capital One, Wilmington Trust, and BNY/Mellon—mostly in regard to custody and related services. Otherwise, the 152 exhibitors included all major credit bureaus and companies touting authentication, risk mitigation, digital signatures, lending platforms, legal services, and consulting. Forty companies were in a “start-up zone.” The f ive year- old show included

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attendees from 48 countries. China had a particularly large presence. Several returning attendees noted the conference’s vastly increased size and scope. Said one: “Four years ago in New York, it was in a ‘closet.’” Peter Renton, one of the Lendit founders, pegged total registration at 5,683. This broke down as follows: 35% private equity investors, 32% fintech reps, 16% investors/advisors, 10% bankers, and 7% “other,” including 150 media members. Of the fintech companies present, 52% were marketplace lenders. Ten percent of the 540 banks present were described by Renton as community banks. The lending software company

Akouba sponsored a community banking lounge in the exhibit hall. Bankers were tapped as panelists in several sessions, reflecting the ongoing shift within marketplace lending and the fintech universe overall toward “hooking up” with banks—a term one speaker used. Reflecting on this, Julie Kimmerling, head of Chase Business Quick Capital, observed, “There was a lot of rhetoric about banks versus fintechs, but also a lot of learning that pushed beyond the disruption. Five years ago, it was all ‘rainbows and high fives’ [among fintech lenders] with banks on the sidelines. Now, they’ve woken a sleeping giant.” — Bill Streeter

RISING RATES ARE HERE AGAIN!

This time around will be different. A look at deposit pricing issues

ow that we’ve had three consecutive Fed rate hikes, bankers may feel like singing “Happy Days Are Here Again.” This rising-rate environment, however, cannot be viewed in the same light as the last one in 2006. Too much has changed. One topic that should be at the forefront of asset-liability committee discussions is deposit pricing and stability. Deposit management is very bankspecific. Where trouble usually arises is when banks use the competition as a means to determine products and pricing, rather than looking deeper into their customer base to be more proactive. There are three factors to focus on: • Segmentation. The best way to determine the stability of your depositors is to look deeper into each customer relationship. Knowing who is more rate-sensitive and who is more locked into your products and services—direct deposit users, for example—will be vital. It will help you decide when and how much to raise rates—or if it makes sense to offer new premium products to a certain customer segment to retain the relationship. • Marginal cost of f unds. A s banks look to offer premium products or specials in an effort to either maintain or grow deposit balances, it is important to understand the true cost to the bank.

Analyzing the impact of migration from other accounts and how much that changes the real cost can help determine the overall success of a deposit campaign. Also, when considering whether to raise rates on your existing deposit base, having an indication of the “at risk” balances is extremely helpful in your pricing conversations as to whether to increase an entire account or to focus on the balances most likely to migrate out. • Large depositor behavior. Your largest customers can provide great benefits to the bank. Yet such valuable relationships can also be cause for great stress when they leave for another institution. Utilizing segmentation analyses as discussed above makes it easier to identify those accounts that are more stable. For those that are at greater risk to move, it becomes vitally important to monitor behavior more closely. With these larger accounts, there are usually several consecutive periods of balance declines before the account closes. Armed with this information, it becomes easier to get in front of these relationships. A longer version of this article—by Mark Haberland, Darling Consulting Group—covers liquidity management, contingency planning, and strategic risk. Go to tinyurl.com/ risingratehappiness

At home between “standoff” and “beer on demand”

“

rior to arriving at Radius Bank, I worked for a large insurance co m p a ny, w h e re t h e re w a s a noticeable divide between ‘old guard’ and ‘new guard.’ I also worked at a small start-up, where the oldest person was 40—and the fridge was stocked with beer.” S o w r i t e s Tr i c i a D u n n i n t h e opening to her Nex t Voices blog on BankingExchange.com, where the younger generation of bankers speaks out. Here are edited excerpts of her experience at Boston-based Radius Bank ($947 million in assets), where she is marketing officer. “When I started at Radius, I had an introductory meeting with Mike B u t l e r, p r e s i d e n t a n d C E O. H e encouraged me to feel comfortable challenging the status quo and to push the boundaries in this new role. He said that he and his leadership team wanted new ideas and would offer guidance as needed. ‘My job,’ he said, ‘is to give you enough rope to run, but to pull you back if you’re about to hang yourself.’ “I’m reminded of this quote each time I bring a question or new idea to the table, because it’s met with genuine consideration. There’s mutual respect between more experienced team members and newcomers. I think this is unusual and an important factor in our bank’s ability to innovate. This open culture also is appealing to younger workers and can help banks build a pipeline of talent. “One of the oft-repeated points about millennials is that we are eager to make an impact—we aren’t content to just do a job; we want to know our contribution matters. While some may think this is a stereotype, I think there’s truth to this, and it can be used to an employer’s benefit. Encouraging younger workers to be part of shaping the company’s future creates buy-in and long-term loyalty.” Read the full blog at tinyurl.com/ NextVoicesRadius

April/May 2017

BANKING EXCHANGE

/ Seven Questions /

4TH GENeration BELIEVER

The future will be different, but for community banker Leslie Andersen, it is still promising . . . if you adapt By Bill Streeter, editor & publisher Donald Trump at the White House in March. She talks about that meeting, along with other issues, in the dialogue below, edited from an interview.

eslie Andersen’s great-grandfather and grandfather, founders of the bank she now runs, in their day may have puzzled over Uber and Amazon—both of which she uses. On the other hand, her forebears, including her father, still on the board of directors, would appreciate how she has kept Bank of Bennington growing and succeeding. Founded in 1928, the $112 millionasset bank, based in Bennington, Neb., is no longer 100% family owned, but comes close. Andersen, president and CEO, is the fourth generation of her family to head the 12

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bank and is the single-largest shareholder. For most of its history, Bank of Bennington was an agricultural bank. About 25 yea rs ago—when A ndersen f irst began working there—the bank began to “morph,” as she says, into a suburban bank as nearby Omaha expanded to encompass formerly rural Bennington. Now, the bank is primarily involved in residential construction lending, oneto-four-family mortgage lending, small business lending, and consumer lending. Andersen was among the nine community bankers who met with President

It is unusual. The construction loans are for one- to four-family homes, primarily to the individual homeowner. We do some builder lending, but the majority finance custom homes for individuals. We do a lot of mortgage lending, and we service our mortgages. We’ve got about a $120-million servicing portfolio. When we went into the mor tgage business, we looked at areas that were pain points for people. If you’re selling into the secondary market to Fannie Mae and Freddie Mac, it is very much a one-size-fits-all approach. So the wellqualified borrower gets treated the same as the first-time homeowner who puts 3% down. Instead, we sell 100% of our 30-year mortgages to the Federal Home Loan Bank under its MPF [Mortgage Partnership Finance] program. The rules are more tailored so we can meet our customers’ needs. Still unresolved is the Dodd-Frank issue of QM [qualified mortgage] rules. We see the biggest impact on loans that we hold in-house. For example: a loan to a small business owner who doesn’t have large W2 wages, but is taking draws. It’s very difficult to get him qualified for a secondary market loan. We still make those loans and we will hold them, but we’re assuming liability when we do that. If the rules would get changed so that anything you held in-house automatically was Q M, that would take the liability away from banks, and they would be more willing to make those loans. Q2. You may have heard the phrase, “Too small to survive.” What’s your view? I definitely think the smaller you are, the more difficult it is to comply with all the regulations—they’re truly crushing people, which is why many small banks

Photo courtesy Bank of Bennington

Q1. Residential construction lending and a large mortgage business is unusual for a bank your size. Can you give details?

are selling. I don’t think you can put a size on it, however, because markets are so different, and business models are so different. We’re in a metropolitan area where it’s easy for me to find quality people to come to work here. In a more rural setting, it becomes much more difficult to hire somebody who’s a compliance expert. Also, we have a lot of mortgagerelated income— something other banks our size don’t have. But again, in a metropolitan market, we have the ability to go out and get those loans. Small, rural banks could absolutely survive if they didn’t have the cost of compliance. Q3. Is unnecessary regulation your biggest challenge? Is relief in sight? It is our biggest challenge. The sheer volume of everything we have to comply with now is all-consuming. We have a compliance committee, and every one of our officers is in charge of one or more regulations on which they are expected to be an expert. We are trying to do everything we can to not have a whole lot of folks on our team who don’t generate income. Regulatory relief will always be an uphill battle. But I do believe that the new administration clearly understands that one size does not fit all from a regulatory perspective. The president will have the opportunity to appoint new senior regulators who may have a different attitude and approach. That will make a huge difference because the regulators have a lot of latitude, and we’re just not seeing that latitude exercised right now. Over the last eight years, for example, all the major regulators have centralized supervisory decision-making in D.C. So one thing that would help a lot is to push that back out into the regions or districts. Somebody in Washington doesn’t have any real concept of what’s actually happening on the ground in rural Nebraska. Q4. You were among nine community bankers who visited President Trump in March. How was the meeting? I thought it went well. The president asked many questions and was very engaged. You

know we [bankers] live in banking land, with all its acronyms, and for him to come into that world with—maybe a 15-minute briefing?—I thought he did really well. He wants to try to do something to unleash small business again. That piece really hit home. He understands that community banks are the ones lending to small business, which has become a real challenge for us [due to regulations]. We ta lked about the fac t that we need to get some tailored, commonsense regulation for community banks. We also talked about the need to put some accountability in place for the CFPB [Consumer Financial Protection Bureau]. I think that was well received. Q5. Women CEOs outnumbered men at that meeting. Does that say something about how the industry has changed? Yes, I really do. At the national meetings of senior bankers I go to, there are more and more women. That has changed dramatically over the last ten years. In our own bank, we have a number of women officers and one other woman besides me in the senior leadership team. I’ve always taken the approach of putting the best person in the job. I don’t focus on whether they are male or female. Still, I think there are more and more women being recognized for their abilities now and their roles in the banking industry. Q6. How do you view technology? I’ ll answer that in t wo par ts. First, technology is challenging for most community banks in dealing with their core providers. We’re really down to just a handful of core providers whose technology is built on 1970 platforms. They have really no economic reason to change, and that puts community banks at a disadvantage with bigger banks. Their bells and whistles are better; their mobile sites are much more user friendly. There’s nothing to keep a community bank from innovating until you actually have to integrate that innovation with your core system. Then the core providers make it expensive and difficult.

I do believe that market is ripe for disruption. With fintechs, we have chosen to partner with them. There are certain things they can do to enhance the customer experience. Through our partnership with Bank Alliance, we are working with both Lending Club [consumer loans] and Fundation [small business loans]. It’s a way our customers can get an online, quickresponse experience. There is no way a small bank can do all the vendor management and due diligence necessary to partner with one of those guys on their own. It’s too expensive. In addition, we are working with a local fintech start-up called ATS Secured— helping them with their proof-of-concept right now for a real estate settlement platfor m. I just think there’s a real opportunity for community banks who are willing to do that to get in early on some new technology. The one advantage we have is that we can put that high-touch customer service piece with the technology. Long term, I’m not so sure that’s going to keep us in the game, which is why I think forming partnerships is a way to adapt. Q7. How do you see facilities changing? Well, here’s one example: In our main bank in Bennington, we had a six-station teller line. I say “had” because it was just ripped out. We are totally remodeling our whole lobby area, cutting it down to about half the size, using two teller stations, and expanding our operations area and putting in some more office space, because we just don’t need those big lobbies anymore. Now, there’s still a fair amount of people coming in because they can’t balance their checkbook or they’re having trouble with an electronic payment they set up. Also, we do still spend a lot of time consulting with mortgage, construction, small business customers—both in the branch and in their offices or wherever. On the residential side, folks can do the whole experience with us over the phone and online using e-signatures if that’s what they want to do until we get to closing. April/May 2017

BANKING EXCHANGE

Skills gap

By Melanie Scarborough, contributing editor

As banks transform, employee skills don’t always keep up. How to overcome the shortfall

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WANTED: RAINMAKERS

The void is most acute among employees who can bring in revenue, according to Alan Kaplan, founder and CEO of Philadelphia-based Kaplan Partners. “If you’re in any market—small town or major city—you’re having trouble finding good lenders, business bankers,” he says. In a recent meeting with 35 bank CEOs, Kaplan says they reported that their biggest struggle was finding lenders to help grow their loan portfolios. “We have a big hole in the training of commercial lenders and commercial bankers that is probably a 15-year gap,” he says. “Supply and demand are way out of whack.” One reason is regulatory hurdles. “After the crisis ten years ago, bank hires became more concentrated in nonrevenue staff jobs—particularly those related to risk and technology, as a result of transformation of the industry,” Kaplan explains. “If you’re constrained on expenses and regulators are scrutinizing you, you have to placate them with extra hires before they allow you to grow.” The result: Many banks don’t have enough employees in jobs that bring in revenue, and those they do have may be inexperienced or out of practice. The president of one of the nation’s largest banks, speaking on background, says that nearly two-thirds of his employees were hired in the moribund years since 2008, so they have almost no experience in selling investment

Shutterstock/ Maksim Kabakou

a n k s of a l l s t r ip e s a re cha ng i ng. Branches that aren’t closed are remaking their looks and functioning faster. Because many transactions can be performed online, customers who come into the bank often bring complex questions that frontline employees need the knowledge to address. Then, too, after a decade of sluggish economic growth, and post-crisis focus on compliance and risk management, bank employees may be out of practice in sales. Digital technology is transforming the industry, making it a good fit for tech-savvy millennials, who bring novel career expectations that banks must manage. Banks know that upgrading skills is critical, but the industry faces specific challenges. Employee training is often regulation-driven, leaving little time and resources—especially for community banks—to teach skills that drive profit. Further, a career in banking no longer holds much allure for young people. Finding skilled workers can be particularly difficult in small towns where the hiring pool is limited. The problem is not merely geographic or unique to small banks. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said in a speech earlier this year: “Something I’ve heard over and over again from businesses of all sizes is that they have the jobs; they just can’t find the people. There seems to be a skills void that can’t be filled by the existing workforce.”

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products. Now that the economy is recovering and customers are interested in annuities and bonds, employees must be trained in skills they may have never used. Mary Beth Sullivan, managing partner at Capital Performance Group, Washington, D.C., says, “The investments issue is just a part of the bigger challenge: transforming frontline staff into true customer relationship managers capable of calling on subject-matter experts—an investment advisor, a small business specialist—when that is what the client needs.”

frontline mvps

The need for frontline employees to be jacks-of-all-trades requires another set of skills. Brian Higgins, first vice-president, digital, payments and innovation for $8.4 billion-assets First Financial Bank, Cincinnati, says: “The challenge is not that there is a lack of people willing to do the work. The challenge is, as an industry, what we’re asking from them at physical locations. They need to be— maybe not experts—but have enough 16

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knowledge around all the solutions the bank offers as customers bring them more complex questions.” That requires the skill to decipher what the customer needs, even when the customer can’t clearly articulate it. “As basic transactions are moving to other channels, branch representatives are being asked to focus on higher-valued sales and more complex financial solutions, both consumer and commercial,” Higgins says. “They need to be able to tap into all the solutions we offer right that minute. That’s really hard.” He suspects most banks don’t provide enough tools. One that tries to do so is Fifth Third Ba n k , t he $142 bi l lion-a sset super regional, also based in Cincinnati. Christine Nester, senior vice-president and chief learning officer, says the bank recognizes that as branch functions change, employee skills must adjust. “The digital world is transforming how we build talent the same way it’s transforming the way we work with customers,” she says. Like Higgins, Nester says frontline

employees need to be knowledgeable beyond defined roles. “That nimble skill set, that agility, is critical,” she says. “That’s what we look for in talent.” To foster agility, Fifth Third emphasizes the importance of continual learning, rather than waiting for annual training. Fifth Third also looks for the willingness to learn among candidates for its college leadership program, which recruits individuals for internships and two-year rotations at the bank. An encouraging sign is that young workers want to know how to improve. “They’re not waiting for an annual performance review to see how they’re doing and what they can do to advance,” Nester says. “They’re very interested in instructional feedback— much more so than previous generations.” Working with colleges also helps the bank find skill sets across various business lines. “As the environment changes and we stay connected to universities— following what are the popular majors like cybersecurity—we try to recruit new talent in those areas,” Nester says.

Shutterstock/ Maksim Kabakou

/ SKILLS GAP /

HIRE WHAT YOU NEED

The Bank of New Jersey, headquartered in Fort Lee, with $872 million in assets, takes a unique approach to finding skilled employees: It hires only tellers who have been tellers elsewhere. “We don’t bring them in from the ground up,” says President and CEO Nancy Graves. “That’s a benefit because they’re already very knowledgeable.” The bank cross-trains employees so they can fill many roles. Because of its proximity to New York City, the bank needs employees skilled in the discernment that comes with experience. “The standard of knowing who you’re dealing with and the source of their funds, that rests on tellers and platform people to have that knowledge and pay close attention,” Graves says. “If a customer comes here and passed 20 banks to get to us, the first question is, ‘Why us?’ They may think we’re inexperienced and don’t know how to spot high-risk business.” After hiring people who already have skills, the Bank of New Jersey works to keep them. “We’re a little different from other banks,” Graves says. “We pay better, and we have a bonus program that’s not based on selling. If we have a good year and people are working hard, they get rewarded for that.” One of the first things Graves did after becoming president and CEO a year ago was to ask the board of directors to offer stock options to all employees after they vested over three years. “They need to know they’re sharers in this bank,” she says. The bank also has done a tremendous amount of internal promotion. “They don’t

“So much training is tactical and defensive—for compliance. But are we really training people to develop new skills for today’s jobs?” — Alan Kaplan, Kaplan Partners have to leave to get a better job,” Graves says. “That job is going to be here. We put people in accounting who started out in a branch, and they’re invaluable because they understand how everything works.” State Bank of Countr yside, Countryside, Ill., did a total remake of all its branches about three years ago. “We went from traditional to modern or ‘millennial’ as some people call it,” says Thomas Boyle, vice-chairman of the $565 million-assets bank. The branches have two cash exchanges manned by fairly young employees. “We are looking for not only analy tical ability, but for some sales skills as well,” Boyle says. Young employees with sales skills are more difficult to find. “Actually, our best results have been stealing them from other institutions,” he points out.

“Be salary competitive, but change the ‘Come work for the bank’ proposition to ‘Come work for a company that’s helping people’” Mary Beth Sullivan, — Capital Performance Group

MINING FOR NEW SKILLS

Hiring employees who bring new skills to the bank is one solution. Another is f inding untapped skills in current employees. Nester says it’s a myth that older employees struggle with new banking technology because that’s not the way they learned originally. “Think how we live personally,” she says. “All of us baby boomers use our cell phones and apps constantly.” The transition for these bankers has been no more difficult in their professional lives. Yet no matter how adept 50 year-old employees become in banking technology, most will not have the proficiency in social media that is second nature to younger workers—and important to learn as banks increasingly market there. Cross-training can prove helpful. “Young folks are used to a rapidly changing digital env ironment; what they’re less familiar with is banking,” Capital Performance Group’s Sullivan says. “Some banks have reverse-mentoring programs, where executives are paired with young people to learn how to interact with their peers in a digital way. It can be powerful.” One hindrance to skill development that banks should watch out for is that “regulation drove banking to become an industry of specialists,” says Kaplan of Kaplan Associates. Too many employees stay in one area far too long, becoming experts in a particular slice of the bank, but never developing the skills they need to take responsibility across lines. Some banks sabotage themselves with hierarchical structures that keep skilled April/May 2017

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not the highest-paying job, but one where they can give back to their community. Generation Z, those just entering the workforce, are all about instant gratification. How do you manage a workforce where values are so vastly different?” While most attention is given to managing younger employees, O’Connor says it’s just as important to develop skills in your bank’s leaders. “The number one reason people leave jobs is because of their managers,” she says. “You’d hate to lose a really great employee because they don’t like their manager.”

TRAIN FOR VALUE First Financial reinstituted its management training program two years ago, partly because of the challenge of finding the employee skills it needed. An enhancement of the previous program, this one is built around helping participants understand all facets and features of how the bank delivers value. “We use a sevenweek program where they’re challenged with coming up with all the decisions to help them understand the implications of business results,” Higgins explains. “How did clients respond to that? What does that do to our bottom line? They have to make the decisions to really run a business and have the feedback to see how their decisions can serve clients.” More banks could benefit from such instruction and likely would if they didn’t have to spend so much time training for compliance. “So much of it is tactical and defensive,” Kaplan says. “But are we

really training people for new jobs to the extent that we could help people develop new skills? Some banks do a good job; others have room for improvement.” Sullivan says when Capital Performance Group helps clients train teams, they teach them to remind employees that although they’re in a regulated environment with significant responsibility, they can still function in innovative, customercentric ways. “Regulations are inherently designed to address safety and soundness because we’re in the business of managing risks,” she says. “But that doesn’t preclude us from building very strong value propositions that essentially help businesses and families to operate and become more financially strong and optimize their cash f low. It’s not about products; it’s about what you’re going to do for the client.”

MILLENNIAL APPEAL W h i l e t he s k i l l s b a n k s ne e d h av e changed, recruitment hasn’t always kept pace. “We’re still running ads in the newspaper saying, ‘Must be good at adding and subtracting,’ instead of saying, ‘If you want to work for a technology-driven business that gives back to its community, then come talk to us,’” Kaplan says. “Millennials’ key drivers are technology, community, and customer. There’s no industry that is more committed to communities than banking—none.” To attract skilled workers, banks also need to promote f lexibility in career paths. Silos in banking often keep them from developing talent, and that hurts

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workers on the shelf. “We baby boomers started our careers when there were fairly exacting expectations for how long you might be in a role and when you could move up,” Sullivan says. “For younger folks, career paths have to be f lexible.” Today’s skilled workers will move on if banks are too rigid about advancement opportunities. “The mindset [of] ‘I’ve been here five years and he’s been here two years; I should be given that chance.’ We need to rethink that,” Sullivan points out. Kaplan sees the problem particularly in veteran managers, aged 50 and older, supervising employees in their 30s who want to be constantly challenged with more responsibility. “You have the upand-comer working for someone who says, ‘It took me 20 years to be a manager; why does she want to do it in five?’” But if an employee has skills, it is a mistake to make her wait. “Millennials get a knock for moving around a lot,” Kaplan adds, “but employers are just as much at fault for not managing a different kind of employee than they’ve ever had to manage before.” Malysa O’Connor, senior director of financial services at Kronos Inc., says managing and cultivating employees is difficult because so many generations— each with different experiences, cultural milieus, and economic histories—are now coexisting in the workforce. “Baby boomers have more of a live-to-work mentality,” she says. “Gen Xers want more of a work-life balance. Millennials want to do things they feel have purpose—maybe

the recruiting process, Sullivan says. “A lot of kids are finance majors, but they think, ‘I don’t want to be a bank teller.’ There’s a lot that can be done, even in universities, to change that perspective.” Like Kaplan, Sullivan says recruitment should focus on what banks do for their communities. “You have to be competitive with salaries, but the key is you have to change the proposition from ‘Come work for the bank’ to ‘Come work for a company that’s helping people.’ You don’t have to match Wall Street salaries because you’re offering something different.” Fif th Third ma kes that a cor nerstone of its approach to college students. Recruiters explain that not only does the bank allow time for community service, such service is expected of employees—a value that Nester says resonates. Malysa O’Connor says rebranding may be needed. “Jobs that were attractive 20 years ago because they had high salaries are not attractive to millennials,” she says. “They’re looking more for purpose.”

MONEY AND REPUTATION Clearly, to recruit young, tech-sav v y, purpose-driven workers, banks must compete with nonbank entities, online companies, and start-ups. But Nester finds that prospective hires are looking at a broad range of opportunities in a broad range of industries. “We’re still able to find those people, but they’re a highly sought-after group,” she says. State Bank of Countr yside’s Boyle agrees that “it’s an employees’ market at the moment.” One of the challenges, he says, is that hiring today is not only about

“The challenge is not that there is a lack of people willing to do the work. It’s what we, as an industry, are asking from them” — Brian Higgins, First Financial whether prospective employees can meet the bank’s requirements, but whether the bank can meet theirs. “They want to know about shorter hours, how quickly they can advance. It’s a little unusual to be asked that of a person right out of school,” he says. O’Connor says some of the banks she has talked to are finding talent by hiring more part-time workers or having pools of different workers. That can bring in employees, such as mothers and college students, who may have good skills but can’t commit to full-time work. Broadening the workforce also can address a common complaint she hears: It’s hard to find people willing to work the new “ bankers’ hours” because one of the changes many branches have made is to stay open evenings and weekends.

“We pay better, and we have a bonus program—not based on selling— and stock options. Employees are sharers in this bank” Nancy Graves, — The Bank of New Jersey

Sullivan says if she were running a bank, she would make clear to potential employees that the job is about much more than time and position. It’s about how much they can accomplish within the company, and the ample opportunities for advancement. “We are an industry going through a substantial change,” she says. “We want the people coming in on frontline positions to have people skills, but we have to make sure we’re giving them the opportunity to use those skills in new and exciting ways. Banks haven’t done the best job conveying that a career in our industry can be an incredibly rewarding one.” For new hires in First Financial banking centers, Higgins generally relies on employee referrals. To f ill backoff ice roles, he taps into contacts he made during his career in financial services before being recruited by the bank four years ago. “I’ve had the opportunity to build a large network in financial services and help influence and educate,” he says. Nonetheless, finding and developing the right skill sets remains a significant and universal challenge. “Almost every bank I talk to says transactions are declining as people move to digital channels,” Higgins says. “If that’s the case, you need to be looking at your talent a lot differently. Recruiting, teaching, managing—it’s all different than ten years ago when branches were more transaction-based.” “At our bank, we’ve recognized and addressed this,” Higgins adds. “We make sure our employees are successful for us and successful for our customers.” April/May 2017

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April/May 2017

How two banks constructively disrupt By Steve Cocheo, executive editor & digital content manager

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here is the digital revolution in banking taking place? All over. It shows in a long string from a bank’s core system to the iPhone or Android in a customer’s hand. It shows in the inter weaving of digital services with human ser vices, whether they be live chat, a data-empowered call center, or a branch’s resident problem solver. It shows in how banks can sharpen their marketing so they throw the best seeds on the best ground. What’s especially interesting is there’s a bit less talk these days about millennials driving the digital trend. Sure, they love the gadgets, but so do older generations for whom any fear of computers has pretty much gone away. When grandma is bingeing on Netflix on her iPad, awaiting Amazon Prime goods, and munching a meal assembled from an online food app, clearly she’s decided the kids shouldn’t have all the fun. In this report, we look at different facets of digital disruption in two quite different banks. A third case appears on BankingExchange.com. April/May 2017

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/ DIGITAL /

EQ Bank: Partnership, perseverance, AND perspiration How a branchless bank up north went digital, busting projections Popularity on rate and convenience

Dan Dickinson, EQ Bank

Q Bank opened its virtual doors in January 2016 after a careful, step-by-step, soft launch. Employees opened the f irst accounts—Dan Dickinson, vice-president and chief digital officer, opened account No. 1 six months before public launch. As processes were honed and bugs squashed, friends and family had been added to the rolls. Finally, launch day arrived, and EQ Bank went live. Trickle? Steady f low? No, the digital bank’s small staff faced an electronic tsunami. More than 1,000 people attempted to open accounts online that first day, and “we didn’t have the backshop capacity to have everyone onboarded as fast as they were coming in,” says Dickinson. “My team and I were sleeping under our desks to keep up with the demand coming in 24/7,” Dickinson continues. At one point, EQ Bank had to freeze new account openings temporarily. The waiting list reached 15,000 at one point. The ex per ience wa s preferable to deafening silence, certainly, but Dickinson and his team didn’t have time to cheer. They had to find some workf low “shovels”—solutions to address the much-higher-than-expected volume.

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Today, EQ Bank has onboarded over 30,000 customers and brought in over $1 billion in deposits, blowing through the initial goals for the digital effort ($500 million in the first year). Before getting into how EQ dug out, more about the bank and what made its offer so attractive. EQ Bank is the digital platform for Ca na da’s $22 billion-a sset Equit able Bank, the country’s ninth-largest domestic bank, based in Toronto. Since its beginning in 1970, parent Equitable has been a branchless bank. It funds its residential mortgage and commercial lending concentrations through a combination of securitizations and the sales of guaranteed investment certificates—considered a type of insured deposit in Canada—and high-yield savings accounts opened through a network of investment advisors. The parent bank doesn’t offer ATM access, handle cash, or issue checks for customer use. The efficiency produced by the branchless approach is considered a major advantage over the “big five” Canadian banks that have branch networks and an omnichannel approach. As described in Equitable Bank’s annual report, funding was a key reason behind the formation of a digital bank: “The ability to now access consumer deposits directly through the EQ Bank platform enhances and diversifies our funding capacity.” Management felt EQ Bank, built as a mobile-first approach from the ground up, “gives us the flexibility to accommodate the launch of new Equitable banking services over the long run.” EQ Bank’s debut product was EQ Bank Savings Plus, a hybrid, insured transaction/savings account earning a high rate of interest—3% when the digital platform went public. While the initial account was fairly simple, EQ has been

adding features. In time, the account, currently considered a secondary one, could become primary for many users. In just its f irst year, EQ Bank has proven attractive enough to savers that it accounts for over 10% of Equitable Bank’s total deposits. “I sleep much better at night since knowing that we can always go to that tap,” Andrew Moor, Equitable president and CEO, said recently. Dickinson says a surprise about the EQ Plus account—which can be accessed via computer and smart devices—is it appeals to more than just younger people. “We get quite a few seniors—more than we expected to get,” he says. Although the rate has been lowered to 2%, in stages, from the initial 3% rate— partially to throttle back growth—the account still pays a strong return, made possible through lack of overhead. The account requires no monthly balance, and no monthly fee is charged. Enrollment is made by depositing a signed check from another institution via remote capture.

Help from a partner

When Dickinson began the process of building EQ in 2013, he says he knew the project would hinge on forging relationships with outside expertise. Unless invention made sense, his attitude was “buy, don’t make.” Take, for example, the platform’s core system, provided by Temenos. Dickinson knew he didn’t want to get into customization of the core, so he found the system he deemed best in the Temenos Connect core. He chose Hewlett Packard Enterprise to host the digital bank, believing the firm could do a better job on security, being in the business full-time, than his small staff. (Originally this comprised around 25 employees, and is a bit smaller now that some marketers have joined the main bank’s staff.) Where customization counts, says Dickinson, is where the result will differentiate the offering from the pack. A mong compa nies chosen for more than off-the-shelf offerings were Konrad Group, a noted digital design firm, and Deloitte Digital, to help the fledgling bank with its customer-facing front end. In a LinkedIn blog series about his experiences launching EQ, Dickinson shares his finding that vendors prefer to be called “partners.” But he says there truly is a difference. He’s been pleased with the companies that got and keep EQ

running, he says, but the off-the-shelf providers he considers to be vendors. What, then, is a partner? He illustrates this by telling what happened when EQ’s embattled staffers were running on pizza and coffee. Deloitte Digital had already been more than a vendor, Dickinson allows, because its experts and the bank had been building the front end from the ground up. “That is more the two-way relationship of a partnership,” he says. EQ Bank launched on a Thursday, and sometime over the weekend, Dickinson says, he and the team came to realize how much trouble they were in. Everyone battled on, but by the next Thursday, he called Deloitte for help. “So they pulled a Level 6 Six Sigma black belt from a higher-paying client’s assignment,” says Dickinson. (Level 6 is the top of the business-process troubleshooting system’s scale.) This woman and two associates arrived on Saturday, piloted a revamped process on Sunday, and brought it up live on Monday. The backlog began to recede. When that kind of thing happens, “you know you have a partner,” says Dickinson. “We’re not that big a bank.”

Moving ahead EQ Savings Plus allows account holders to make deposits in various electronic forms; pay bills manually and automatically; and transfer funds to and from other banks’ accounts. Customers can set up linkages between EQ and their accounts at other banks to facilitate routine transfers. And they can make instant transfers to friends and family who have EQ accounts. One element of the user interface is the ability to maintain sub-accounts for budgeting. Dickinson’s staff is in Toronto. “I do a lot of my work virtually, but it is very handy, especially for problem solving, to be able to walk down the hall,” he says. Interestingly, EQ customer contacts tend to be online, via human chat. “Our chats outnumber our calls,” he says. “We picture ourselves as a challenger bank, and we need to leverage technology,” says Dickinson. His advice to others starting digital platforms: A good user experience is critical, but don’t get fancy. “You can lose sight of what the customer wants. Remember,” he says, “the customer doesn’t need a savings account, they need to save money.”

Seacoast Bank: Using digital science to apply the human element Small can be beautiful when data drives growth

sk Seacoast Bank’s Jeff Lee about the digital revolution in community banking and he’ll give you two examples. First, when a question arose about what the maximum next-day availability should be on the bank’s mobile check deposit service, staffers did not survey other Florida banks’ practices, a typical bank response. Instead, they combed through the bank’s database for data to indicate what customers were actually doing with their transactions and then looked at the relative risks of differing maximum levels. They concluded they could raise the level to a higher point at no appreciable additional risk. Says Lee, chief marketing officer and head of external relations: The bank tailored its decision to its risk profile and its customers’ needs, using data in hand. The second example from Lee concerns another aspect of remote capture, “classical” business remote capture, performed with bulk check scanners in customer offices. From time to time, the bank identifies a business customer who still sends someone with a package of checks for an over-the-counter deposit, and targets them for a sales outreach. What do these two examples share? If you said “remote capture,” you went for the obvious choice. More significant: A combination of data and observation helped identify situations where $4.7 billion-asset Seacoast National Bank, Stuart, Fla., could bring digital services to bear on a customer pain point. Lee is a big believer that digital serv ices have grow n in impor tance to customers. But when he spea k s of them, he doesn’t treat them so much as game-changing innovations, but more as essential, ongoing additions. “It’s become pretty clear that the expectations customers have of other industries are creeping into everything,” says Lee. “Today, customers expect your bank to

be available on demand. They expect you to be able to get them whatever they want, at any time they want. And those expectations will continue to ratchet up. This works out to be not so much a digital story, but a customer story.”

Digital smorgasbord Lee leads the bank’s marketing, customer experience, business analytics, and investor relations areas. He came to the bank four years ago after a ten-year stint at American Express and experience directing digital marketing and analytics at other companies. Two observations hit him as he settled in at Seacoast. First, he had access to a wealth of customer data, both current and seasoned, from the bank’s files. As a smaller bank with a single core provider, Seacoast offered clean data that someone with his background could dig into. Second, the cost of the digital tools available to do that digging, and for acting and promoting on the basis of what was learned, had fallen drastically. “I s aw t h a t m a ny c ont r a c t s for

Jeff Lee, Seacoast Bank April/May 2017

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/ DIGITAL /

You can build a digital bank around your existing capabilities without reinventing the entire organization. PwC calls this “wrap & digitize.” Read more at tinyurl.com/wrapanddigitize top-f light software are priced by number of accounts, which meant that I wouldn’t have to ask for millions to obtain it,” says Lee. He says the bank spends about $28,000 a year for cross-selling software and $15,000 a year for analytics software. This represented a lining up of digital planets for Seacoast. As the bank added more sophisticated digital services, it could compete with the larger players coming to dominate Florida banking. And it could revise its approach to marketing those services and the remainder of the bank’s menu using digital tools for analysis and outreach. Perhaps one of the biggest challenges is to approach this veritable data feast with the attitude of a selective gourmet. “You can have all of the data in the world, and it can be clean,” says Lee. “But you have to know what you are solving for.” And there is one more critical factor. Amid all the hard tech and hard data, there is a critical soft center: bank culture. If a bank does not make a cultural transition along with a technological one, Lee says, “it won’t work.” Seacoast has been fortunate because with an employee base of approximately 800, “you can spend time communicating the ‘why’” of changing tactics and approaches.

no seasonal campaign With the ability to dig deep into the bank’s data to analyze the status quo, and to spot and predict customer needs, Lee says the day of the regularly scheduled promo has passed. “What we are not about anymore is, ‘It’s April, so it’s time to do our HELOC promotion’,” he explains. Now, analytics will surface a need that can drive an automated campaign that manifests itself in different ways through 24

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each channel. Outreach may take place through cued reactions to inbound calls; via outbound calls targeted to that customer; through in-branch suggestions; through selective email marketing and direct mail; and tailored messages on ATM screens, in online banking, and on mobile devices. Thus, an owner of a company with a line of credit that lies untapped may be reached along any of those paths. Lee says software enables the bank to automate about 40 campaigns at a time. Data drives the message. And urgency lies behind the effort. “We want to be reaching out before another bank gets them,” says Lee. He gives this example: It may be noticed that veterinarians appear to have a particular need. An offering can be tailored for vets and delivered through the most appropriate channels. For Lee, the sell is all about the intel. No bank has infinite resources, so part of the increased use of analytics concerns prioritization. Lee says the bank tries to use data to see where it is applying too many resources to serving a segment or customers who represent low potential. Conversely, the bank may find that it has been devoting inadequate attention to a segment that currently provides little return, but could become more significant to the bottom line. For Seacoast, CLTV—Customer LifeTime Value—is a critical method for estimating what potential a customer has and how much it can afford to devote to reaching and serving that customer.

Remember the people When Lee arrives at work, he reviews the bank’s customer portfolios to see how things are progressing. And he spends

time on the administrative side of the bank’s website. He likes to keep up with the number of leads, leads converted to enrollments, and other metrics . But he maintains that a key part of the bank’s growing success with its digital efforts comes back to people. As digital services increasingly take up the burden of routine transactions, that frees up human staff for a different day of work. In place of rote work, more of a front-line banker’s time is taken up by troubleshooting, problem-solving, and consultation. “You have to find the folks out there who have a passion for people and a passion for helping,” says Lee. Understanding what’s going on up front, firsthand helps. Lee says the bank’s head of retail has served as a teller several times to get a personal perspective. “It was eyeopening,” he says. But it wasn’t like an Undercover Boss episode. With 800 staffers, everybody pretty much knows what the head of retail looks like.

Featured online on BankingExchange.com . . . U.S. Bank: Digital as part of the omnichannel strategy Gareth Gaston, a veteran of travel industry web services, doesn’t believe that “a digital-only bank will scale.” Instead, U.S. Bank considers digital channels part of the overall omnichannel approach. Gaston, EVP and head of omnichannel, discusses the U.S. Bank philosophy online. Read more at tinyurl.com/USBankDigital

“Everyone can be a travel agent these days; it’s become so simple to book online. But travel apps and bank apps are ‘chalk and cheese’” —Gareth Gaston, U.S. Bank

/ BANK TECH /

Time to fix the plumbing

Banking must stop adding Band-Aids, says banker-fintech exec Suresh Ramamurthi By Steve Cocheo, executive editor

Shutterstock/ Sergey Nivens

hen the subject of innovation comes up, Suresh Ramamurthi recalls how a few years ago, one of the major U.S. automakers ran a commercial showing two truck owners comparing their vehicles. “Well, my truck has WiFi. Does yours?” one owner declares. “My question was, ‘Have you not heard of having a WiFi hot spot on your phone? Everybody has one!’” says Ramamurthi. Meanwhile, Ramamurthi says in 2015, electric car manufacturer Tesla introduced, with considerably less fanfare, an update of its app that included the first version of its “Summon” feature. This feature allowed the user, on private property, to have a Tesla vehicle open the garage, park itself, and shut off—all remotely and automatically. And the app allowed Summon to have the car pick up the owner as well, like a Labrador Retriever. “Which do you think is the better example of innovation?” asks Ramamurthi. “ The tra d itiona l aut oma kers ha d a

lega c y cha ssis t hat t heir de sig ner s couldn’t touch, so they came up with the idea of plugging in a third-party, WiFi hot spot in the roof of a truck and called it innovation. Meanwhile, Tesla rethought the entire vehicle, including the chassis. Completely new electronics and software enable control of the car in so many ways. Software that can now tell the car which way to turn the wheel, which way to go, and how fast.” Too often, Ramamurthi believes, in banking, institutions are “slapping a mobile app on top of some bank account and they claim they’ve done innovation.” They do that, he explains, because in so many ways, they can’t fix the industry’s “plumbing,” the legacy internal systems and the legacy payment systems that underlie so much of what is flowing through banking institutions. Banking suffers, says Ramamurthi, from what he calls “the third BandAid problem.” A problem begins with a cut, figuratively. The bank applies a

temporary solution, as a “Band-Aid.” And then another. And another. “By the third one, you don’t know where the wound is anymore and what is going on with it. You just cover it up. Big banks have a guy who is a ‘vice-president in charge of the third Band-Aid,’ and he comes to believe that that third Band-Aid is integral to the survival of the bank.” By now, you’ve likely gathered that Suresh Ramamurthi is not one to pull punches or to be diplomatic when he’s confronted with an assumption quoted as fact that needs challenging.

Where are things really at? Ramamur thi, a former Google engineer, is chairman and chief technology officer of CBW Bank, Weir, Kans., and founder a nd CEO of Ya ntra Fina ncial Technologies, which specializes in bank-oriented software and apps. The $31-million assets bank is the platform underpinning the Moven app in the U.S. and is expanding the scope of April/May 2017

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/ BANK TECH /

services it offers to other banks. Unlike so many f intech names, the word yantra is a real word in Sanskrit. It literally translates as “machine” or “contraption,” but also refers to diagrams used in meditation and worship. Ramamurthi and his wife, Suchitra Padmanabhan, the bank’s president, acquired the troubled one-branch, family-owned CBW Bank in 2009. The bank continues to serve the small Weir community (population 663), although it does little lending now. Yantra was launched when Ramamur thi found that the bank’s or ig inal technology vendor would not even discuss APIs (application program interfaces). Even after switching core system vendors, Ramamurthi wasn’t getting the tools he believes banks need, so Yantra came into being. Too many bankers—and too many traditional bank technolog y companies’ executives, in his v iew—lack a good understanding of how banking has evolved. “Many can’t really talk technology,” says Ramamurthi, “and banking is now a technology business.” Does he think other bankers know that? “I don’t know,” R amamur thi says. “Some do, some don’t, and some don’t care. That’s because most bankers I’ve met think banking is about lending money. But even that is fast-becoming technology based. The industry has always been data driven. For a long time, the data was in bankers’ heads. 26

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Now, it’s done with computers.” One way or another, lending hinges on knowing the gap between a customer’s receiving and spending—the difference is the need for credit, he suggests. In Ramamurthi’s view, community bankers who don’t have in mind to sell out and leave the battle to others have a limited amount of time to change their approach to innovation and technology. “At some point, somebody is going to bring a gun to the bow-and-arrow fight,” Ramamurthi says. “And when that happens, you are done. So once the gun becomes available, why would you keep on making bows and arrows?” W h i le ma instrea m c ore proc e ssing vendors would surely dispute this, Ramamurthi believes they are in much the same place as traditional automakers who add WiFi because they can’t do much about vehicle basics. “The competencies acquired to run the core vendors may not be the same ones necessary to transform them, especially if the core vendors are depending on their bank customers to give them feedback on how to transform the core systems and to transform the banks,” says Ramamurthi. “The kind of people you need to hire to build the next iteration of bank technology are different from those at the core vendors now,” he continues. “Those companies operate in a very industrialized way for building things. They will say, ‘We are heavy duty, and we have all this blah, blah, blah.’ But in reality, two

Banking life after Google Thus far, R amamur thi is not overly attracted by the idea of the national fintech charter. He says that there are unanswered questions, even after the OCC released its char tering manual draft in March. “I prefer to be a real bank,” he adds, because that gives CBW the full range of powers available to a chartered institution with deposit insurance. Still, he recognizes the limitations there. For many years, banks spoke of the payments system as theirs—something they operated and something they

Photo courtesy CBW Bank

Banking’s future belongs to those who can evolve and improvise, says Suresh Ramamurthi of CBW Bank and Yantra.

guys and a dog in Silicon Valley can build something better.” Ramamurthi holds up Twitter as an example of something that originated with a minimal team, but today handles over 600 million tweets daily. So where does Ramamurthi find all his people? “Ah, that’s a closely guarded secret,” he jokes. “But we try to have people who are not in banking, who have advanced degrees in other areas, and very good critical thinking.” The future will not necessarily belong to the innovator or to the smart incumbent player, but to players who can evolve and improvise, in Ramamurthi’s view. Amazon began as an online bookseller and quickly overtook the internet operations of Barnes & Noble and Borders. The first still survives, while the second went out of business long ago. But Ramamurthi finds what happened next much more instructive. “Amazon thought, ‘A book is just a SKU number, right? So anything with a SKU is something we can sell,’ and that is how Amazon became a multi hundred-billion dollar sales machine,” says Ramamurthi. As soon as any industry’s “Amazon” can scale up to drive its costs way down, it “pretty much puts the next guy who’s got a higher cost base out of business.” In fact, Ramamurthi believes it is the Bank Holding Company Act that has kept traditional banks in business. That law requires owners of a bank that own other types of companies to put everything under federal, financial regulatory scrutiny. Absent that factor, he says, the likes of Amazon and Google would have become banks already. “And they have better technology than any bank in the world,” he says.

controlled. Ramamurthi scoffs. “They don’t have the rails,” he says. “Access to the rails was given to them by the government or by third parties like Mastercard and Visa. What rails do individual banks have? They have a charter.” Founding Yantra in parallel with CBW has ushered in a steady stream of innovation shared with the bank and other client banks. CBW was named Celent Model Bank of the year for corporate payments in 2016. One example of innovation is the OneCard, a Mastercard giving the user the option to use it to send funds anywhere from instantly to a few days, depending on the option selected and the fee the user is willing to pay. (The funds can be transferred from one OneCard member to another at no charge.) Along the way, CBW and Yantra have created solutions, such as cards designed to work in only certain locations—like corporate gas cards usable only where a company enjoys fleet pricing, and online account opening that can perform knowyour-customer functions and everything else in less than a minute. Of the latter, Ramamurthi resists the label “regtech.” “Regtech assumes a separate thing that you can plug into,” he explains. “I don’t think that that will work anymore. You have to build everything into a single, holistic platform.” Once he discovered how much of the fabric of banking compliance is, he trained and became certified in the “art.” Beyond compliance, he believes, anti-fraud and risk management features must be baked in, too.

Old rails and old plumbing OneCard and other innovations developed by Ramamurthi’s organizations ride on the existing payment rails, which frustrates him. “I have to use the existing rails, and I’m using them to their full potential,” he says, but they are a mishmash of stitched-together systems, protocols, and linkages that don’t function especially efficiently. “The entire set of payments channels are very old—some of them 20 years old, some 40 years old, some even 100 years old. They all settle differently, and they all use different ways to address the same bank account.” He acknowledges that efforts to bring about fast payments are underway. The Federal Reserve promises a paper full of recommendations in mid-2017. But, no pun intended, Ramamurthi doesn’t feel

these have come along fast enough. One author, John Waupsh in 2016’s Bankruption, said of Ramamurthi that “he breaks things to fix them his way.” “I don’t k now i f I br e a k t h i ng s ,” explains the banker-fintech executive, in reaction, “so much as I deconstruct things so I can reconstruct them back. I mean, if you took over a dilapidated old building, you really couldn’t fix it until you fixed the plumbing.” Interestingly, an affiliated Yantra website, Y Labs Marketplace, uses a plumbing motif and invites visitors to “Say hello to our plumbing.” Among other features, nearly two dozen Yantra APIs are listed.

Blockchain overhyped At some point, the U.S. financial system will f ind that circumstances demand ripping out the old plumbing and renovating things, Ramamurthi believes. As extreme as that may seem, he says, a shift on a significant scale has begun in his native India. It’s called “Cashless India,” a subset of the massive “Digital

“Too often in banking, institutions are slapping a mobile app on top of some account, and they claim they’ve done innovation” India” program, which launched in 2015. The parent program included creation of digital identities for all Indians based on fingerprints and retina scans. One aspect that’s already been implemented is the ability to send money to anyone else in India at no charge, electronically and instantaneously. “They did it for 500 million accounts,” says Ramamurthi. “And once they built out the framework, it took a start-up only three weeks to build the app and a month to roll it out.” As exciting as such change is, something that doesn’t get R a ma mur thi excited is all the talk of the potential of blockchain technology. For one thing, he is very skeptical of many who speak of it. There is more of “cool” here, he thinks, than “real.” “It’s like listening to two kindergartners who are talking about something they

don’t know about, but they love the sound of the word,” maintains Ramamurthi. In t er m s of ba n k i ng f u nc t ion a lity, Ramamurthi doesn’t see it. While he would like to see today’s aged rails replaced, blockchain won’t do it. “ This was designed for a specialty pu r p o s e — de c e nt r a l i z e d b a n k i ng ,” Ramamurthi explains. “And I don’t see decentralized banking happening any time soon.” That said, there are elements of the technolog y that do appeal to Ramamurthi, and he says he and his developers have deconstructed blockchain technology to extract those useful functions for their own suite of products.

Where he wants to go Ultimately, Ramamurthi says what he is after is the creation of a smart banking account that offers, in a painless, frictionless way, a central role for one’s bank in one’s life. “In time, as a consumer, I will expect that my bank will know that my AT&T bill is higher or lower than normal, and that it will then ask me for a ‘yes or no’ regarding paying it,” says Ramamurthi. Asked if he thought Americans are truly ready for such a gear shift in how they interact with their banks, Ramamurthi bridled at the question. “No, it is not a gear shift,” he insists. “This is what a person’s bank used to do. It used to help citizens of a given village or town or city to conduct commerce. I call this kind of service ‘commerce enablement’.” What would need to change is bank thinking, he admits. Cross selling? That would disappear as traditionally thought about. Any selling of additional services would occur in the moment as a need suggests a way that the bank can fulfill it—all in real time, adds Ramamurthi. A mazon’s Echo digital hub and its Dash buttons, permitting easy, timely ordering of commonly used goods, are already introducing this concept. “Banks haven’t done the same thing yet,” says Ramamurthi. “We are working towards that.” At times, the bank service would be in the position of telling the customers to rein in their spending. Would that be counseling or advice? “No,” says Ramamurthi. “The bank is providing you with data, information in real time. You decide what you want to do with it.” April/May 2017

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/ compliance watch /

Info sharing needs upgrade Roadblocks to pooling BSA/AML intelligence hinder enforcement and cooperation By Daniel Stipano, Buckley Sandler LLP

How safe is “safe harbor”? Financial institutions that disclose possible violations of law to the government enjoy a safe harbor from civil liability for doing so. T he S u s pi c io u s A c t i v i t y R e p or t (SAR) safe harbor, codified at 31 U.S.C. 5318(g)(3), is actually three safe harbors that cover voluntary disclosures; disclosures pursuant to Section 5318(g) (i.e., SARs); and disclosures pursuant to any other authority. As long as an institution is operating within the bounds of the safe harbor, it cannot be held civilly liable—under the laws of the United States, or any state, or under contract or other legally enforceable agreement—for mak ing the disclosure or for failing to provide notice to the person who is the subject of the disclosure. The theory underlying the SAR safe harbor is: If institutions cannot be held liable for filing SARs, they will be less 28

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reluctant to file them on their customers or third parties. In addition, the institutions also will file more complete and accurate SARs. However, that’s not how things work in practice. The reality is that the SAR safe harbor does not prevent customers or anyone else from suing institutions that file SARs. But the safe harbor can be asserted by banks to support a motion to dismiss such a lawsuit and avert a long, costly legal proceeding. Unfortunately, the SAR safe harbor is not as ironclad as it appears. Some courts, including at least one federal court of appeals, have held that in order for an institution to avail itself of the SAR safe harbor, it must be acting in good faith. (The relevant cases in that appellate decision are Lopez v. First Union National Bank of Florida and Coronado v. BankAtlantic Bancorp, Inc., 129 F.3d 1186 [11th Circuit 1997].) However, it is clear from the face of the statute and its legislative history that Congress did not intend for there to be any “good faith exception” to the SAR safe harbor. Courts that have read such a requirement into the statute have effectively undermined the purpose of the

safe harbor by making it more difficult for institutions to dismiss lawsuits based on their filing of SARs, and, therefore, less willing to report suspicious activity and potential crimes. Absent a split in the circuit courts of appeal and review by the Supreme Court, the only remedy is for Congress to amend Section 5318(g)(3) to clarify, once and for all, that there is no good faith exception to the SAR safe harbor.

Incomplete sharing Another area where information sharing could be improved is from the government to financial institutions. Section 314(a) of the USA Patriot Act was originally conceived as a mechanism for downstreaming government information about bad actors and criminal schemes to institutions for use in designing and implementing their anti-money laundering (AML) programs. As implemented, however, information sharing through Section 314(a) has been largely a one-way street, from institutions to the government. The way the Section 314(a) process works is that, on a regular basis, the Financial Crimes Enforcement Network

Shutterstock/ tomertu

he Bank Secrecy Act (BSA) regulatory regime depends heavily on the sharing of information— from f inancial institutions to the government, from the government to institutions, and from institutions to each other. Robust information sharing better positions institutions to conduct customer due diligence; identify suspicious transactions; and file suspicious activity reports. This, in turn, enables law enforcement to obtain the information that it needs to conduct effective criminal investigations and prosecute money laundering and other financial crimes. Notwithstanding this, key barriers inhibit information sharing. Some, such as grand jury secrecy rules and classified information, are unavoidable. But other obstacles can and should be removed. Law enforcement would receive more complete, accurate, and timely information. Financial institutions would be better able to deter illicit activity as well as lower compliance costs.

(FinCEN) transmits the names of individuals and entities obtained from law enforcement to institutions through a secure website. The institutions are required to check the names against their systems to identify accounts and transactions, and report hits back to law enforcement through the website. Law enforcement can then decide whether or not to issue a subpoena to the institution to obtain detailed account or transaction information. While this system is doubtless of great value to law enforcement, it provides little value to the institutions for use in implementing their AML systems. Without diminishing the current use of the 314(a) mechanism, the government could greatly expand its utility by using it more frequently to transmit relevant information to institutions in the manner in which it was originally conceived. Institutions could then take that information and build it into their customer due diligence systems as well as monitoring software, resulting in more accurate and timely SARs.

Expand interbank provision A third area where information sharing could be improved is from financial institutions to each other. Section 314(b) of the USA Patriot Act provides another statutor y safe harbor from civil liability for institutions that engage in such sharing. However, the scope of the safe harbor is limited to information about individuals, entities, organizations, and countries suspected of engaging in possible terrorist or money laundering activities. This is a helpful provision as far as it goes. However, Section 314(b) offers no pr ot e c t ion t o i n s t it ut ion s t h a t share information about other financial crimes. Thus its effectiveness as a means of promoting information sharing is limited. To optimize its impact, Section 314(b) should be expanded to cover the full range of financial crimes. Once again, legislative action is needed to accomplish this.

Info sharing under your roof

The limitations on information sharing even extend to disclosure of SARs within banking organizations. In 2010, FinCEN, which administers the BSA, amended the confidentiality section of its SAR rule (31 CFR 1020.320[e]). The amended rule provides that a SAR, and any information that would reveal the existence of a SAR, is confidential and may be only disclosed as authorized in the rule. The rule goes on to say that it does not preclude the sharing of a SAR, or any information that would reveal the existence of a SAR, within the bank’s cor porate orga nizationa l str uc t ure for purposes consistent with Title II of the BSA. On the same day that the amended rule was issued, FinCEN also issued a

establishing enterprise-wide AML systems, especially in large, internationally active banks; and the availability of technology to better ensure the security of SAR information than what was available in 2010. The amended rule provided a legal standard and lays the groundwork for doing so, which is a finding by FinCEN that such broader sharing is consistent with the purposes of Title II of BSA.

Looking ahead While obstacles to more robust information shar ing exist , they are not insurmountable and can be overcome with the mutual support and cooperation of the government and the financial serv ic e s i ndu s t r y. The BS A ser ve s a n important purpose in helping prevent

It is clear from the face of the statute that Congress did not intend there to be any ‘good faith exception’ to the SAR safe harbor

guidance document that provided that the sharing of a SAR, or any information that would reveal the existence of a SAR, with an affiliate that is itself subject to a SAR requirement is consistent with the purposes of Title II of the BSA and therefore permissible (Sharing Suspicious Activity Reports by Depository Institutions with Certain U.S. Affiliates, FIN-2010-G006, Nov. 23, 2010). While the amended rule and guidance are helpful in promoting information sharing within a banking organization, they don’t go far enough. The limitation of SA R shar ing to af f iliates that are subject to a SA R requirement is outdated. This should be expanded, given the benefits of broader i n for m at ion sh a r i ng w it h i n ba n king organizations; the importance of

and deter money laundering and other illicit activity. However, as presently implemented, its effectiveness is diminished by unnecessary restrictions on information sharing.

Daniel P. Stipano, a partner with Buckley Sandler LLP and former deputy chief counsel for the Office of the Comptroller of the Currency, provides assistance in establishing, maintaining, and monitoring BSA/AML compliance programs. He has been a key participant in numerous BSA/AML milestones, notably the USA Patriot Act; regulations addressing SAR confidentiality; and customer due diligence and beneficial ownership. April/May 2017

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/ Risk Adjusted /

TALES FROM THE DARK WEB

Are you meticulous about logging out of web functions that require a log-in? No? Better read this story By Bill Streeter, editor & publisher

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its electronic crimes task force. Now at Computer Forensic Services, where he is chief technology officer, he and his colleagues work with banks and corporations on cyber responses and giving expert testimony. Lanterman said that like any other forprofit operation, the Carbanak Gang has a business model. He described it as like that of a farmer: “Farmers plant crops. Hackers plant malware,” a form of computer virus. The hackers’ crop grows as it begins to collect data—primarily stolen credit card data in the case of this gang. The harvest is passed on to Rescator, who has created “the Amazon.com for stolen card data,” as Lanterman described it. He said the U.S. Department of Justice estimates that Rescator represents over 85% of the dark-web sales of stolen credit card numbers. (More about the dark web in a moment.) “Hackers send card numbers to him,

and he sells the data for them,” Lanterman explained. “He takes a 40% cut.” Rescator also sells hackers the malware to do this, Lanterman pointed out, and everything is done in Bitcoin. He can do this, said Lanterman, because he owns the market, and he is in Russia, beyond the reach of U.S. law enforcement.

A live visit to the dark web The dark web, or dark net, is a part of the internet not indexed by Google, according to Lanterman, so you won’t just stumble onto it. However, it is not difficult to find instructions on how to get to it. Lanterman conf irmed that it is based on technology created by the U.S. Navy in the early years of the internet that somehow ended up in the hands of the public—and criminals. The dark web does have legitimate uses, he noted. One example is the means by which citizens of an abusive regime can communicate

Shutterstock/ hamburg_berlin

his particular tale has a peculiar cast of characters: Zeus, Rescator, and the Carbanak Gang. You may have heard of some of them because they have been behind the Target breach and many others over the past few years, according to cybersecurity expert Mark Lanterman. All the high-profile cases, Lanterman said, were accomplished using malware written by one hacker based in Russia, who goes by the name Rescator. He is not some kid, Lanterman added, but a “for-prof it professional.” Rescator’s accomplices are known collectively as the Carbanak Gang. Lanterman spoke at Deluxe Corporation’s Exchange 2017 conference earlier this year on the subject of the “dark web.” This article is based on his presentation and a follow-up interview. Lanterman came out of law enforcement and was a supervisor in the U.S. Secret Service for

with the outside world. But mainly it is a “criminal f lea market,” as Lanterman called it, where you buy anything—drugs, guns, information, cards, identities, people. (Lanterman advised against casually looking for the dark web—“Bad idea!”) In his presentation, Lanterman took the audience to Rescator’s storefront on the dark web—live. “This is where criminals come to spend their Bitcoin,” he said. “You get to choose which countries you’re interested in. Drop-down menus allow you to choose region, issuer, and type of card—a gold Visa, a corporate Mastercard, a platinum American Express card; stolen debit or credit cards,” Lanterman told a rapt audience. “And you get to choose cards based on the bank.” There are more than 14,000 banks and credit unions listed, he said, ranging from Bank of America to very small community banks and credit unions. Criminals can select stolen credit cards based on city and state and billing address. This is not just a big-city problem, according to Lanterman. He described how in one northern Minnesota town of 7,000 people, he found almost 2,000 stolen cards on the Rescator site. “It’s an every-town problem,” said Lanterman.

Unusual case, with lessons The means for all this sophisticated criminal activity depends on two things primarily: malware and the phishing and spoofing tricks that get people to download malware. In his presentation, Lanterman related a case of a nonprofit in Minnesota where two years ago, a bogus $1 million wire transfer was made to Romania. The nonprofit’s bookkeeper, who was responsible for wire transfers, was Romanian and was immediately suspected. But she said she didn’t steal the money. His firm investigated the case. In brief, Lanterman related how the bookkeeper had logged in to the organization’s bank using an RSA security token, had checked the bank balances using a secure connection, and then took a break. When she came back, she admitted she was looking

at wedding dresses online for a time. “I checked the woman’s computer, and the traffic was consistent with her version of what happened,” said Lanterman. “And then I found Zeus [a type of malware]. Zeus is like a hacker’s Swiss Army Knife,” he said. “It does many things and has the attitude of a soldier: You tell it what to do, and it does not stop until it’s done. In this case, Zeus was a keystroke logger and took screenshots every 30 minutes.” It also did a third thing, said Lanterman, which he had never seen before. When the bookkeeper went to take a break, she closed the browser, but did not log off from the secure line from the bank. “Zeus detected an open, SSL-encrypted data connection,” he says, “and it kept that open without the user’s knowledge, notif ied the hacker [that installed it], and then the hacker took control of that data connection.” “That’s supposed to be impossible,” Lanterman thought at the time. He called the feds right away. Ultimately, he said, U.S. law enforcement contacted its counterpart in Romania. The fraud turned out to be engineered by a Ukrainian Army general, who was arrested.

What to do in a risky world There are risks in almost everything in life and always have been, Lanterman said. What people and organizations have to do is try to mitigate and manage the risks. With cybersecurity in particular, “It’s important we all take responsibility for it,” Lanterman stressed. No software can prevent all fraud. He is not a big believer in antivirus software, which, at best, detects known viruses, but won’t detect a virus that is “polymorphic”—that is, constantly changing. Zeus is polymorphic, he says, which is why it is still state of the art, though it’s been around for years. “Zeus changes about every 48 hours,” said Lanterman. It’s a dangerous world. In the accompa ny ing sideba r, L a nter ma n of fers suggestions for both individuals and institutions to help manage cyber risk.

A few simple steps to avoid cyber fraud • Most malware is disseminated by email. In the nonprof it case cited in the main article, cybersecurity expert Mark Lanterman said the bookkeeper had received a bogus email from what was purported to be the FDIC. The email’s message was clever: “Be on the lookout for fraudulent cashiers’ checks being cashed in your area. Other organizations like yours have been victimized. These are ver y difficult to identify. If you want to see what they look like, click here.” The bookkeeper clicked, and Zeus malware was downloaded. Even though it’s been said over and over, the lesson here is clear: Be very careful about clicking on a link in an email. Typos are one clue that a message is bogus. • Don’t be so “honest.” On a personal level, Lanterman suggested that whenever you’re asked for personal information by a vendor or even a doctor online, consider using fake answers that only you know. (See Counterintuitive, p. 36.) • Always log out of any secure link, such as an online banking session. Don’t just close the browser. • If possible, use an Apple computer. “I used to make fun of Apple computers,” said Lanterman. “Then I a na l y ze d o n e, a n d o u r e n t i re office is now on Apples because 99% of the malware out there will not run on them.” • Read the book. Whenever starting to use new technology—whether a new smart router in your home or, for a bank, issuing chip and PIN cards—understand the technology. “Read the manual.”

April/May 2017

BANKING EXCHANGE

/ idea Exchange /

LOW-Cost Winner

Fifth Third has a big hit with its Express Banking program for unbanked and underbanked segments By Bill Streeter, editor and publisher

Certainty has broad appeal Going back several years, Fifth Third had been gradually expanding its customer base by introducing fee-based check ca shing (in conjunction w ith check guarantee firm Certegy), Western Union funds transfers, and prepaid cards, in addition to the cashiers’ checks and money orders most banks offer. As it developed expertise in these areas, says Erhardt, “We thought, ‘Let’s take this to the next level.’” The resulting Express Banking program is essentially a branch-ba sed, check cashing ser v ice w ith a mobile component added that allows full and immediate availability of mobile-deposited checks, if approved, along with the ability to get cash or make purchases using the debit card. “The whole premise,” says Erhardt, 32

BANKING EXCHANGE

April/May 2017

“was to develop an alternative product that exists in parallel with our traditional products.” Fifth Third has three traditional checking accounts: Essential, Enhanced, and Preferred. Each carries a monthly service fee that can be waived by meeting certain balance requirements. The Express Banking account—and that’s what it is, an account running on the bank’s core deposit system—has no monthly service charge and no minimum balance requirement. In fact, no deposit at all is required to open an Express Banking account. (One exception is if a customer wants to add a savings account, which requires a $50 initial deposit.) Erhardt says Express Banking was designed to address the needs of the unbanked and the so- called underbanked (people using a mix of bank and nonbank services). There is another target segment, he says: people dissatisfied with traditional banking (usually because of a bad overdraft experience). Express Banking does not allow overdrafts. If insufficient funds are in the account for a debit transaction, it is declined. There is no fee for insufficient funds and, of course, no overdraft fee. Express Banking is not positioned as a starter account, and Erhardt says the bank doesn’t view its other checking

accounts as upgrades. Choice of account is very much based on customer preference, he says. A sked about the demographics of Express Banking customers, Erhardt responds that by age, they skew younger: “slightly over-represented in the working years (35-54), slightly less represented in the preretirement years, and less represented in the retirement years.” “We do very little traditional marketing” for Express Banking, Erhardt adds. The bank relies extensively on working with community organizations that focus on financial literacy to get the word out.

Front line buy-in The ba n k conduc ted focus g roup research prior to final development of the new account both as a way “to get into the mind-set of the consumer,” and to validate features of a “straw man” product it had put together. The researchers didn’t indicate that it was a bank conducting the focus group, Erhardt notes. One of the findings was that banks were seen as likely to provide better service for this type of program, particularly in contrast to a clerk at a retail store offering check cashing. Erhardt says the bank also spoke about the new accounts w ith its front-line

Shutterstock/ Tuthelens

wo things surprised the folks of Fifth Third’s product group since the rollout of the low-cost Express Banking account. One was how many people have said “yes” to the debit card option, pairing it with the account’s mobile app. The group expected about half of the roughly 200,000 people who have opened the account since November 2015 to ask for the card. In fact, the “vast majority” have done so, according to Mark Erhardt, senior vice-president, retail product management, for the $140 billion-assets, Cincinnati-based bank. The other surprise was that use of direct deposit of payroll into the account has exceeded the bank’s expectations. Erhardt says only that it is a “pretty high number.” By using direct deposit, customers who don’t need to write checks have a “completely self-service, no-fee account,” he says. Express Banking is a low-cost account option built around check cashing, but with a number of other features, including loyalty pricing. The box on the facing page shows some features of the Express Banking account, which does not allow check writing or overdrafts.

bankers from among its approximately 1,200 branches. Management wanted them to understand and see the value of Express Banking, so they would be comfortable standing behind it. According to Erhardt, several front-line employees made comments along the lines of: “I know who to offer this to.” He points out that they would see the same customers come in week after week with a payroll check drawn on Fifth Third, cash it, and then make no deposit.

Discounts reward usage The fact that Express Banking is an account, not a product, “allows us to create a customer record on our core system,” says Erhardt, including the usual know-your-customer and other data. This integration into the mainstream of the bank enables a key feature of the account: progressive discounts for usage. Whether or not a person runs a balance in his Express Banking account is irrelevant. Every qualifying transaction—including branch and mobile check cashing, direct deposit, debit card purchase, and purchase of a Western Union money transfer or a cashier’s check—is tracked by the system and counts toward three tiers of pricing for the fee-based services. These are: Tier 1 (four transactions or fewer), standard pricing; Tier 2 (five to 15 transactions), 25% discount; Tier 3 (16 or more transactions), 50% discount. Here’s what makes this arrangement unusual: those transaction levels are cumulative and exist for the life of the account. “Customers don’t have to re- ear n the discount every month,” points out Erhardt. “We didn’t want people getting to Tier 3 and then dropping back to Tier 1. Once they qualify for the higher discount, they keep it, so they don’t have to worry where they are.” Customers can view each transaction and the fee associated with it online or on the mobile app. Erhardt says the bank does have an overall usage requirement. If an account has remained inactive for 13 months,

the bank will close the account. He indicates that a few of the roughly 200,000 Express Banking accounts opened to date are beginning to reach that point.

Regulators like it In addition to marketplace success, Erhardt notes that Express Banking has garnered positive feedback from both consumer groups and regulators—the Consumer Financial Protection Bureau, in particular. One reason why, he explains, is because the bank puts the account “right out there”—that is, it’s not a “keep-it-inthe-drawer” kind of option, he says. “We have a sales tool we call a ‘place mat,’” Erhardt notes. It’s an 11 inch x 17 inch laminated sheet on which various products are listed for the bank’s retail officers to review with customers. The three core checking accounts are shown, and Express Banking is right next to them in a “ box” of a dif ferent color, according to Erhardt. He adds that Express Banking has been incorporated into Fifth Third’s points-based incentive compensation plan. The pr icing str uc t ure of E x press Banking’s check cashing service is “very competitive with nonbank check cashing services,” says Erhardt. With personal checks, the bank’s fees are usually considerably lower, he says. Erhardt acknowledges there are some “deep discounters” in the check cashing business, notably Walmart. Often, however, such discounters will not accept personal checks, he notes. “They want you to cash your payroll check and spend it in the store,” he observes.

Sustainable program Other banks naturally will be curious to know if Express Banking adds to Fifth Third’s bottom line. Erhardt gives a few clues, without being too specific. In regard to average balances, Erhardt notes that because some of the accounts carry no balances, the overall average is low. Looking only at active users, the average balances are “not much different from a low-balance, starter checking

account,” he says. As to whether or not the accounts are profitable, Erhardt offers this assessment: “It is a sustainable, long-term product. It is not subsidized by revenue from other products. It pays its own way with some return for our shareholders.” For competitive reasons, he declines to say more. Overall, though, Erhardt says Express Banking has been “a great success for us.” It resonates with customers, regulators like its inclusiveness, and it allows the bank to expand its reach beyond its traditional product base. “Employees are proud to of fer it,” Erhardt says. “It’s a good differentiator.”

Fifth Third’s Express Banking account features

he following come from the account description on the bank’s website (www.53.com) and from a press release. Items marked with asterisks indicate fees. • No minimum deposit required • No monthly balance requirement • No monthly service charge • No overdrafts, thus no OD fees • No non-sufficient funds fees • C heck cashing and deposits at Fifth Third branches* • M obile check deposit with immediate availability* • Optional debit card* • F ree cash withdrawals at all the bank’s ATMs in addition to any Allpoint ATM • N o check writing and no check deposits at ATMs • M obile and online banking (but not online bill pay) • Identity protection* • Discounts of up to 50% on feebased services, including money orders, cashiers’ checks, and Western Union money transfers based on three tiers of account activity

April/May 2017

BANKING EXCHANGE

Industry Resources Banking Exchange partners with companies that work with banks to provide useful information, data, and analysis in the form of webinars, white papers, and roundtables. The webinars are conducted live, but are available for viewing on-demand for six months on bankingexchange.com. The white papers and roundtables run for up to six months on the website as well. Below are descriptions of the sponsored content currently on bankingexchange.com. You can learn more by using the shortened web address below each item. Or, on the site, click on the “Industry Resources” tab at the top of the home page.

White Papers, eBooks & Roundtables Five Critical Aspects of Profitability Analysis—A Guide for FIs In this eBook, five profitability analysis factors are explored. Two of these are Funds Transfer Pricing and Factors for Setting Loss Provisions. Sponsored by Kaufman Hall tinyurl.com/ProfitabilityGuideWP

FIVE CRITICAL ASPECTS OF PROFITABILITY ANALYSIS

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How different types of counters authenticate, denominate, and sort coins varies greatly. The differences, explained in this white paper, can impact accuracy and downtime. Sponsored by Cummins Allison tinyurl.com/CoinCounterWP

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It’s What’s Inside Your Coin Machine That Counts

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2 3 5 79 Market Drivers

Banking and the Distributed Enterprise

Considerations The Right Network Service Provider

RounDtable How banks can use data to maximize touch points throughout the customer lifecycle

When it comes to self-service coin machines, it’s what’s inside that counts – literally. While machines fundamentally serve the same purpose of authenticating, denominating and sorting, the way that coins are processed can vary greatly.

rotating wheel rail

Accuracy and reliability are very important considerations when purchasing self-service coin machines. To understand what drives these critical characteristics, it’s important to understand how the technology itself can make your organization more or less susceptible to issues such as inaccuracy, machine downtime and staff productivity.

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There are three most common coin processing technologies available today. Understanding technology choices is essential to providing a positive customer experience and productivity enhancements for your branch.

Pros • Affordable • Easy to maintain Cons • Susceptible to inaccuracies • Limited coin capacity • Must be cleaned often • Slow

Rail Sorting Technology Overview: In any piece of coin sorting equipment, coins enter the machine and must first be aligned into a single row, single layer for processing. In the case of a rail sorter—the most prevalent technology used in self-service coin machines today—the coins are aligned with the aid of a rotating wheel and sent along a narrow track – or rail – on their circumference via gravity. Each coin then passes a detector where it is counted and sorted according to denomination. Rail sorters typically process coins at speeds between 600-900 coins per minute.

Pros: The simple design makes these machines affordable to own and easy to maintain. Employees can easily clean the machine or clear jams. Some machines feature dedicated cleaning mechanisms to remove sand, dust and particles which can impact jamming and accuracy. Sensors are used to help identify and reject foreign coins. Authentic coins feed directly into bags or bins, and non-coin debris is deposited into a small trash receptacle inside the machine for easy disposal.

Cons: Coins in rail sorting equipment are especially susceptible to bouncing, potentially leading to mis-sorts, miscounts, or falling from the rail and causing a jam. Bouncing most commonly occurs with coins that have nicks or imperfections on their outer edges. The rail itself must be extremely clean and coins must be stable when passing by the authentication sensors in order to properly authenticate and sort. Debris getting lodged in the track can lead to a jam and if too much dirt or dust collects on the rail, coins can mis-sort and possibly miscount. Rail sorters need to be cleaned frequently or risk poor performance. Because rail sorters depend on gravity to feed coins down the rail, speed is limited and relatively slow. Coins need to be fed into the machine in small batches, increasing the amount of time needed to process a transaction.

Omnichannel Banking in a Seamless Society

The Compliance Journey Boosting the Value of Compliance in a Changing Regulatory Climate