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Competitive intelligence for bankers


BRANCH ANGST Defining issue in retail banking enters a new phase

“An unmitigated string of disasters” INNOVATE AND MANAGE THE RISK

THE FUTURE OF BANKING ISN’T BANKING. IT’S CONNECTING. Today, banks aren’t just undergoing a facelift. They’re digitally transforming – with data-fueled, security-driven shifts at every location and touchpoint. With Comcast Business, you have a network that delivers consistent performance and speed across your bank’s footprint. To power game-changing innovations – like biometric security measures and remote financial advisors – from flagship to your farthest branch. That’s how you seize today’s opportunities and leave yesterday’s pens-on-chains behind. That’s how you outmaneuver.

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/Contents August/September 2017

16 Branch angst Today banking has to be everywhere. But what’s the right balance of digital and physical presence? By Melanie Scarborough, contributing editor. Cover image/ Shutterstock:

26 Controlling innovation risk Update your bank without betting the bank. By John Epperson & Jason Henrichs

August/September 2017



/ contents / 4 On the Web

August/September 2017, Vol. 3, No. 4 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: Web: Twitter: @BankingExchange LinkedIn: banking-exchange

Farmer Jones wants mobile banking (Why wouldn’t she?) • Google + fintechs = global banking powerhouse? • Chop up Kabbage, flatten OnDeck • APIs remake retail banking

6 Like it or Not Straight talk, rants ... and trash

8 Threads Varo: Meet the new bank • Faster payments by 2020? • Housing reform, now • What ALCO should be thinking about


8 13 Seven Questions “An almost unmitigated string of disasters” is how Guy Williams depicts Washington’s impact on community banks.

22 Compliance Watch Keeping banking’s sales culture clean in the wake of the Wells Fargo scandal.

24 Bank Tech Think fintech is cool, millennials? U.S. Bank’s Doug Biever is rewiring the joint.

26 Risk Adjusted Four strategies for innovating—without betting the bank


30 Industry Resources Free white papers, eBooks, webinars

32 Counterintuitive Identity crisis: Who the heck are you?

Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: Chairman & President Arthur J. McGinnis, Jr. Editor & Publisher William Streeter Executive Editor & Digital Content Manager Steve Cocheo Creative Director Wendy Williams Art Director Nicole Cassano Graphic Designer Aleza Leinwand Editorial & Sales Associate Andrea Rovira Contributing Editors John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Lucy Griffin, Mike Moebs, Ed O’Leary, Melanie Scarborough, Lisa Joyce Director, National Sales Robert Vitriol Production Director Mary Conyers Circulation Director Maureen Cooney Marketing Manager Erica Hayes

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, For Subscriptions & Address Changes Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: 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


August/September 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 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 Soto, Ally Bank Dominic Venturo, U.S. Bank McCall Wilson, Bank of Fayette County

sponsored statement automate the credit decision process. Automation provides cost savings and allows banks to offer customers the credit products they need, while supporting scalability as application volume increases. Automated decision engines can help banks address five core areas of the credit application process: ID data, fraud data, credit risk data, servicing capacity data, and asset value data. Real-time credit decisions will hinge on immediate access to these data points. A single, API-connected platform is the most efficient way for banks to fast-track the digital application process. Using Zoot’s data-agnostic decision engine, banks can immediately and seamlessly integrate all the relevant data attributes into an automated credit application. By provid-

Win New Customers with Real-Time Credit Decisions

Getting to Yes

when it matters most By: Eric Hathaway, Vice President Marketing at Zoot Enterprises


ing millisecond access to hundreds of data provider products, Zoot enables banks to easily and efficiently decision the application, improving both operational efficiency and customer experience. Incorporate alternative data Banks that have access to alternative data sources can take advantage of a tremendous market opportunity

onsumers are visiting banks through many differ-

for underbanked/unbanked consumers. According to the

ent channels, including websites, online apps, and

2015 FDIC National Survey of Unbanked and Underbanked

branches. They have less time available — and

Households, there are more than 60 million of these indi-

higher expectations. Successful banks today, and in the fu-

viduals in the United States, representing $380 billion in un-

ture, will have the agility and flexibility to make digitally en-

tapped banking deposits (deposit data from Accenture’s

abled, real-time credit decisions to offer the right products

2015 report “Within Reach”).

to the right consumer.

Bankers can use a decision engine with access to alterna-

A recent McKinsey & Company impact story titled “Digitiz-

tive data to serve the very real needs of these consumers.

ing credit risk trims costs and delights customers” shows the

Again, single-platform API-enabled access will be critical

positive impacts of automating the credit decision process.

for alternative data sources, especially as banks move to

In this case study, the bank implemented an automated en-

offer products to this market segment in real-time.

gine and digital workflow to handle credit applications.

The future of credit decisions is digital, real-time engage-

After implementation, the bank processed approximately

ment. Banks that embrace digitization and automation will

40 percent of the credit applications automatically. The re-

reap the rewards of new customers, process improvement,

sults were dramatic: the bank saw a reduction of process-

cost savings and improved efficiencies. Partnering with the

ing times from 2 days to 4 minutes, a 10x reduction in the

right decision platform provider will be the key for banks

number of screens in the loan application interface, and a

making this transformation.

30-40% reduction in cost per origination.

Bankers should demand that their partner provide robust

Additional benefits included more time for employees to

data integrations, compatibility with legacy systems, and

focus on the most challenging applications. The automat-

rapid time-to-market. Leveraging automated decision ca-

ed workflow also routed unapproved applications back to

pabilities as a competitive differentiator will position banks

manual review — instead of rejecting them outright — giving

as leaders, and give them the tools to give customers the

the bank more opportunities to say “yes” to customers.

answers they need in real-time.

Platform covers 5 core credit areas Solutions like the decision engine from Zoot Enterprises are specifically engineered to enable banks to digitize and August/September 2017



/ ON THE WEB / Now Showing at

Farmer Jones wants mobile banking

Globalizing finance via fintech-only partners

How banks can chop up Kabbage, flatten OnDeck

“Next Voices” blogger Kelsey Neisen, from a farm family, heard a country banker dismiss interest by customers in better banking technology. Why wouldn’t a farmer with the latest ag tech want the latest bank tech? Read more at

If a dozen fintech startups partnered with Google, could banks match them as global competitors? Might not be so easy, suggests analyst Chris Skinner. After the crisis megabanks gave up on the universal banking model. Read more at

Partnering with fintech lenders works for some banks. But Tompkins Financial wanted the small businesses it serves to enjoy the best of innovative online lending plus the benefits of borrowing from a community bank. Read more at

How APIs will change retail banking Fintech companies come off as the cool kids on the block. That’s not the end of the story, says the 2017 World Retail Banking Report from CapGemini and Efma. The future looks less like a race, and more like a journey built on collaboration. Read one of the most frequently read stories of the summer at tinyurl. com/apisandretail

@BankingExchange banking-exchange



August/September 2017

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

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/ like it or not /

Straight talk, rants … and trash


amie Dimon got plenty of attention for the pointed remarks he made about our dysfunctional government during JPMorgan Chase’s second quarter earnings call. You probably read about it—The Wall St. Journal wrote an editorial on it. We think Guy Williams, a CEO of a slightly smaller bank—$1.6 billion-assets Gulf Coast Bank & Trust, New Orleans— and the subject of our “Seven Questions” interview in this issue, deserves attention for his candid remarks. Both CEOs focused on Washington, always a ripe target, but Williams also singled out the lobbying efforts of banking trade groups as being ineffective in regard to community banks. What he said will rankle some people. Straight talk usually does. We don’t think that will bother him. We’ve known Williams for some time and he’s one of those people who speak their mind and let the chips fall where they may. Banking needs people like that. Discretion is a wonderful quality and tact has its place. But there is too little straight talking in this world. If done right, it can help get people, as a group or individually, moving in the right direction. You may be thinking, “Don’t we have too much straight talk already? The web and airwaves are full of name calling and ranting, and worse. On the latter, we agree. But the terms are not all the same. Straight talk is constructive. It is the polar opposite of “spin” and hypocrisy. It bores in to the crux of an argument or issue without a lot of “prettying up” or evasion. It must be honest, and it is—or should be—rational, f lowing from cold reason and common sense, and be based on facts and direct experience. Ranting, invective, and the rest of what too often passes for “communicating” these days are emotional, often hurtful, outbursts—like a boxer f lailing wildly at an elusive opponent. Sometimes the points may be valid, but when presented emotionally the power is diminished because the vitriol or sarcasm are what people focus on. L et’s ack nowledge one thing: the



August/September 2017

people who agree with Guy Williams’ points will say he’s candid, forthright, courageous. Those whose ox he gored will likely call his comments intemperate, biased, damaging. That’s the point, though. You can’t please everyone, so don’t try. Sure, there can be questionable motives for being outspoken. Self-aggrandizement and arrogance being two. Only someone who can discern another person’s motives can say for certain why they say or do something, and that capability does not exist among mortals. So we make our judgments based on our own perceptions, experience, biases. But when the motive is right—e.g. to stand up and say what needs to be said—the person who has the guts to say it forthrightly, and respectfully, knowing it will likely bring condemnation, deser ves applause. Some people—and Williams may be one of them—just naturally seem do this, perhaps out of practice. There c a n be a not her mot ive for straight talking: Sometimes you just need to shake things up—get people’s attention; make ’em a little uncomfortable. That’s getting more into the art of dealing with people, but policy issues after all begin and end with people. Clearly, though, straight talk isn’t a license to say anything in any manner you choose. Which brings us to “trash.” That defines a great deal of the crude, mean, and degrading words spread over the web, social media, airwaves, and in much of what we call “entertainment.” A better example of what this trend br i ng s c ou ld n’t b e fou nd t h a n t he abhorrent words used in July by the br iefe st-ser v ing- ever W hit e House Director of Communications to describe colleagues to a reporter. What does all this have to do with ba n k i ng? Ju st t h i s: W hen you feel compelled to speak out on an issue of importance to you or your institution, seize the opportunity and be straight, be accurate, and don’t take the low road. You will stand out if you do because right now the low road is crowded.

BILL STREETER, Editor & Publisher

The person who has the guts to say forthrightly, and respectfully, what needs saying, knowing it will bring condemnation, deserves applause

sponsored statement

As Branches Evolve,

so will the workforce By Jenni Palocsik, Senior Director, Solutions Marketing, Verint Systems


ank branches have gradually evolved over the last decade. In lieu of the traditional brick-and-mortar design with designated teller lines, sales and lobby areas, many banks are transitioning their branches into newer formats to modernize and meet market demand. Today, there are six main categories of branch formats: flagship, advisory, digital self-service, pop-ups, lounges and traditional. When introducing new branch formats, staffing considerations become increasingly important to help ensure the right talent and skills are in place to meet customer needs. Because each branch type requires a different mix of resources, banks need the right talent to fill evolving employee roles, along with the ability to effectively manage staff and act on customer feedback to deliver efficient, quality experiences. Let’s explore three ways banks can better manage their changing branch workforces. 1. Adopt Role-Based Staffing Most branches do not have the demand to warrant a full-time mortgage specialist or investment banker, but still need to offer these advisory services. As a result, banks often share specialists across a group of branches, or offer online appointment setting for branch visits or in-branch video-conferencing with specialists in other locations. This presents a planning and scheduling challenge. Banks will need to plan for additional roles in their branch employee profiles (beyond teller, universal staff or sales associates) and be able to identify the specific skill set of each specialist and the branches to which they are assigned, so they can effectively schedule these employees. 2 . I m plement E m ployee, B ranch and Role- B ased Performance Dashboards Traditional performance scorecards have captured rolespecific KPIs for each employee. With newer branch formats, employees may be asked to switch roles (from teller, to universal staff and back again) or work in different branches to cover demand/absences. And banks will need to be able to analyze performance data not only by employee, but by role, branch, branch type and market. Additionally, traditional branches have struggled with

evaluating the effectiveness of more complex, face-to-face interactions. Advisory branches, in particular, will need new ways of automatically capturing face-to-face interactions to help ensure quality and regulatory compliance, while avoiding costly fines and protecting the bank’s reputation. Branch audio recording is a relatively new technology that enables banks to record, retrieve and analyze face-to-face interactions with customers in branch locations. 3. Collect and Act on Branch Experience Feedback Monitoring customer feedback can help banks ensure they are applying the right mix of branch types for each market. Capturing customer feedback from post-branch visit surveys sent within 24 hours of the visit, for example, can help banks analyze and act on feedback related to the effectiveness of new and existing branch types, customer experiences, employee performance and proficiencies, and more. Today’s technologies are driving changes in customer expectations from their branch experiences. And banks are responding by modernizing branch designs to meet specific market needs and to help ensure they have the right talent in place to optimize the performance of each branch. Using solutions to match skilled resources to branch formats, collect performance data and customer feedback, and analyze branch interactions for quality and compliance will be key to helping banks reach these goals. August/September 2017




MEET THE NEW BANK Varo Money isn’t exactly a bank, yet, but should be on all retail banks’ radar By Bill Streeter, editor & publisher


Colin Walsh, co-founder and CEO of Varo Money

FASTER PAYMENTS . . . WHAT ABOUT CASH? The recent report of the Faster Payments Task Force (see p. 10) doesn’t say much about that old standby, greenbacks. Cash may no longer be king, but it still hangs in there for some things. Here’s how it stacks up among 1,000+ consumers polled for the 2016 U.S. Consumer Payment Study from TYSYS.



August/September 2017

not her f int ech, app -ba sed “ bank.” We’ve seen Simple, Moven, Mint, and others. Does another entry really matter? One reason why Varo Money may matter more is that the venture was formed by people w ith banking experience. Another is the fact that late in July the company announced it had applied to the OCC for a national bank charter, and to the FDIC for deposit insurance to form Varo Bank, N.A. It’s significant, too, that Varo Money isn’t waiting to see how the “fintech charter” concept, f loated by the OCC last year, plays out. Its principles embrace regulation as you will read further on. The compa ny wa s st a r ted in late 2015, led by Colin Walsh—late of American Express, Lloyds Banking Group, and Wells Fargo—and a core group of


Credit card

Debit card





lenders, technicians, and designers. The plan impressed Warburg Pincus enough to lead a Series A funding round, which pulled in $28 million. There are dozens of apps for money management, payment, and lending. Varo rolls these different functions into one “holistic” mobile app targeted, at least initially, to “hands-off, creditworthy millennials,” as Walsh put it in an interview with Banking Exchange. “This is a classic retail banking model delivered through more modern technology,” Walsh says. Walsh agrees that the concept of an alldigital bank is not new. The difference now, he says, is that mobile, cloud, and artificial intelligence technology make many more things possible—and easier. The national bank charter may take a while, but Varo Money is already functioning as a bank through an agreement with the Bancorp Bank, Wilmington, Del., which provides FDIC-insured checking and savings accounts. A Visa debit card is part of the Varo package. The Varo Money app launched June 14 and had picked up 3,000 customers as of July 5. Since that date, a company spokesperson would say only that the total is “signif icantly more than the 3,000.” Currently, the app operates only on Apple mobile devices, but Walsh says an Android version will be introduced next year.

Varo Money is a state-licensed, nonbank lender in 11 states. It currently offers two loan products: an unsecured credit line ranging from $1,000 to $5,000, which is available to prime borrowers with a credit score of 660 or above; and installment loans with terms of three or five years. Walsh says the credit line is an alternative to overdrafts, late fees, and cash advances. The rate varies from 12% to 24%. The installment loans, he says, have no up-front fees and are intended primarily for debt consolidation. Secondary uses could be for education, moving or marriage expenses, or a car purchase, according to Walsh. The rates for installment loans range from 8.9% to 24%.

The secret sauce The above-referenced holistic approach used by Varo Money refers to the underlying principle around which the bank was formed: assisting people, who don’t tend to pay much attention to their finances, to avoid costly missteps—paying overdraft fees, being one example. The t ea m spent 18 mont hs doing research with the hands-off millennials described earlier. Walsh explains what they learned: “These are people that just check their bank balance every few days, and they have in their mind what their incomings and outgoings are going to be. Unfortunately, that mental model is not




Credit card: 57%

Credit card: 34%

Debit card: 26%

Debit card: 35%

Cash: 5%

Cash: 17%

always correct.” The variables could be a trip to Mexico for a friend’s wedding, a sudden medical expense, or an auto repair, for instance. “As a result of that expense volatility,” Walsh continues, “and the fact that these people are not actively managing their money, they run into what we call ‘cash traps.’ They don’t have enough in their checking account to pay their bills. So they either have to borrow money or draw down savings. They’re in this constant cycle of not building up savings, and it’s frustrating for them.” “ The essence of our desig n,” says Walsh, “is to give people the tools they need to see their whole financial picture, to be able to track expenses, and understand where their money is going in a very simplistic way.” The primary tool for this is what Walsh calls the “Cash Board.” At the time of the interview, it was not operational. In late July, it was being tested internally, and according to a company spokesperson, “If all goes well, it will be in the hands of customers shortly.” Walsh maintains that Cash Board is not something that’s seen in any financial apps today. In addition to presenting a combined checking account balance (for now, Varo is using account aggregation to obtain this), the app uses machine learning algorithms to detect all upcoming Continued on page 12


Discount store


Fast-food restaurant


August/September 2017

Payments to individuals






Goals are set, frameworks still needed By John Ginovsky, senior contributing editor The report also said laws and regulations affecting payments and payment service providers should be evaluated to make sure they are suited to the unique characteristics of real-time payments. • Infrastruc ture. Needed here are: developing a design for faster payments solutions to interoperate v ia directory services; asking the Fed to develop a 24x7x365 settlement ser v ice; and requesting that the Fed explore and assess other operational roles it may need to play to support ubiquity, competition, and equitable access to faster payments. • Sustainability and evolution. In general, a U.S. faster payments system should be future-focused and able to address evolving security threats; meet changing end-user needs; and foster continuous innovation through new technologies.




August/September 2017

banking industry and for payments in general,” said Jim Reuter, CEO, FirstBa n k , w it h lo c at ion s i n C olor a do, Arizona, and California. “We will get to do what people expect. They will click on a button, money will get there, the receiver will have it right away. That’s pretty simple, but it’s been really complex up until now.” Tom Rea, executive vice-president, U.S. Bank, suggested that f inancial institutions have an opportunity to rationalize their business strategy around the faster payments environments outlined in the report. One key recommendation of the task force: ensure interoperability between multiple payment service providers.

Key areas for resolution The task force’s written report focuses on three key areas that need to be resolved: • Governance and regulation. Specific activities include establishing a formal governance framework as well as rules, standards, and a baseline set of requirements for the faster payments system that would enable payments to cross solutions securely and reliably while ensuring that end users have predictability and transparency associated with timing, fees, error resolution, and liability.

The report spells out specific challenges to achieving these goals: • Many players must get with the program. The overa l l fa st er pay ment s system env isioned by the task force requires broad adoption by service providers and end users. • Success demands collaboration. Because the United States is taking a market-driven approach—as opposed to centralized government mandate— multiple solution operators and other stakeholders must voluntarily collaborate with each other. • Security is of paramount concern. The task force noted that when multiple solution operators pass payments and share information, a security weakness in any one solution makes the system as a whole more vulnerable. “By design, the task force did not pick a winner or a best solution,” Rodriguez said. “We’re going to leave that for the marketplace to decide.” The task force’s work is now complete. On the matters of governance, standards, and infrastructure, clearly the task force pointed directly, or indirectly, toward the Fed, which indicated in a press release concurrent with the release of the task force report, that it will be communicating its next steps “in the coming weeks.”


Challenges to faster pay

f all goes well, by 2020 every person and business in the United States will have access to a faster payments system that is ubiquitous, secure, continuously available, and nimble enough to adapt to new technologies as they develop. That’s the vision behind the “Call to Action” issued July 21 by the national Faster Payments Task Force, created and led by the Federal Reserve. Since the task force’s formation in 2015, 323 representatives of financial institutions, consumer groups, payment service providers, fintechs, merchants, government agencies, and other interested parties have discussed the elements needed by such a market-driven system. “Our goal is to ensure that anyone, any where is able to pay and be paid quickly and securely,” said Sean Rodriguez, the Fed’s faster payments strategy leader and chair of the task force. A key concept of the task force is “ubiquitous receipt,” defined as: “where all payment service providers are capable of receiving faster payments and making those funds available to customers in real time.” In a webcast announcing the task force report, several members of the group emphasized the revolutionary nature of what’s being proposed. “ This is tra nsfor mationa l for the


Resolve temporary conservatorship before a crisis By Steve Cocheo, executive editor


he infrastructure of U.S. housing finance is “the great unfinished business of post financial-crisis reform,” Federal Reserve Board Governor Jerome Powell said in a July speech. That unfinished business should be completed while housing continues to enjoy its regained health, he urged. Powell noted that the conservatorship of Fannie Mae and Freddie Mac was characterized as a “time out” by Bush administration Treasury Secretary Hank Paulson. The idea was to stabilize the two mortgage giants to allow evaluation of their future role. “Almost nine years into this time out,” said Powell, “the federal government’s domination of the housing sector has grown and is actually greater than it was before the crisis.” Powell said the government accounts for 80% of the purchase mortgage market today. This includes the participation of Fannie, Freddie, the Federal Housing Administration, and the Department of Veterans Affairs. The remaining 20% is held by private financial institutions. “A f ter reaching nearly 30% of the market before the crisis, private-label

securitization has dwindled to almost nothing today,” Powell added. Pulling more private capital into housing finance would be “the most obvious and direct step forward,” he said. A s the system stands now, Fannie and Freddie resemble the equivalent of a banking system dominated by two large, insured banks, said Powell. That “insurance” represents a huge potential taxpayer burden should housing hit trouble again. “ The economic s of secur itization do not require a duopoly,” said Powell. “Greater competition would help to reduce the systemic importance of the GSEs, and spur more innovation. “We know that housing reform is diff icult ,” the Fed gover nor obser ved. “Completely redrawing the system may not be necessary and could complicate the search for a solution. At this late stage,” he added, “we should not be holding out for the perfect answer.” There is support for reform in the Senate Banking Committee. The week before Powell spoke, at a hearing on housing reform, the committee Chairman, Sen. Mike Crapo (R-Idaho), identif ied the issue as one of his key priorities for the

current Congress. “We need multiple levels of taxpayer protection standing in front of any government guarantee,” said Crapo, “including down payments, loanlevel private insurance, and substantial, robust, loss-absorbing private capital at guarantors comparable to the amount of capital maintained by global, systemically important banks.” The House Financial Services Committee has not held hearings on housing reform in this Congress. The Financial Choice Act, passed by the House in June, does not deal with these issues.

Go out to lunch (or you’re out to lunch)



es, it is hard to change—particularly when you may not fully understand or are uncomfortable with a new concept, because it counters what you have relied upon for so long. I’m not Dr. Phil, but I will say change is not going to wait for you. But there is hope. Of course, you are probably thinking that this is where I suggest yoga and finger painting. Nope. But you do need to take a step to change your circumstances, because innovation comes by changing our behaviors. So select an environment that places you slightly out of balance. My suggestion: Take lunch outside, literally, with your key staff. Make it a brown bag lunch at a park close by the office. Okay, you’ve found a convenient

spot. Now what? First, have everyone but one designated person turn off their cell phones. And have someone take notes. Here’s a proposed agenda: First Topic (The ice breaker). Talk generally about the internet and how each of you and your friends and family (including children and grandchildren) use it in your daily lives. Give this warmup about 15 minutes. Discuss the interesting items that came up and then divide into teams of three. Second Topic (Let your mind go!). The question: Name as many things as you can that you use the internet for. For 15 minutes, just blurt out the suggestions and write them down. Third Topic (Wow, can we do that?). The question: Name as many things as

you can that you could use the internet for at your bank that you are not using it for now. Give this about ten minutes. Wrap it (Now that is cool!). Get the teams together and compare notes, and then talk about the ideas that came up. Pick the top ten and open up the ideas to a broader audience in your banking organization. Remember, the first two letters of innovation are “I” and “N.” So ask yourself: “Are you IN?” If you’re not, you’ll soon be OUT—as in “out of business”! Excerpted from a blog by Dan Fisher, CEO of the Copper River Group, a consulting firm. For more, read the full post on innovations and changing your bank’s behaviors at atlunchwithDan

August/September 2017




No “bad” revenue The bank’s revenue model is pretty traditional, minus what Walsh calls the “bad revenues”—fees and charges that benefit the bank, but not the customer. Thus, Varo Money does not charge overdraft fees, minimum balance fees, or foreign transaction fees. It uses the Allpoint Network. Customers using one of the approximately 55,000 ATMs in that network pay no fee. According to Walsh, the bank derives its income primarily from interchange and loan interest. Given t he ba n k ’s m ission, Wa lsh believes the OCC will be comfortable with the idea of a chartered Varo Bank, and he does not think full bank regulation will impede the company’s ability to innovate. He points out that he and several of his colleagues have spent many years working in regulated f inancial services businesses. That experience, he believes, will be “invaluable in terms of our ability to anticipate what regulators are going to be looking for.” Read an edited presentation of the full interview with Colin Walsh on, where he covers data privacy, the coming disruption in banking, the broken bank revenue model, and more. Go to VaroMoneyBE 12



Changing times demand revisiting strategies By Keith Reagan, Darling Consulting Group


August/September 2017

hat are bank ALCO managers talking about? Darling Consulting Group recently held it s a nnua l Ba la nce Sheet Management Conference. The overall economy and likelihood for yield cur ve changes were hot topics again this year. The general consensus for the interest rate environment was for the yield curve to continue to f latten for the remainder of 2017 and into 2018. With inf lation not on the horizon and substantial roadblocks in Washington impacting much hoped-for reform and action on regulation, taxes, and the economy, the Fed’s balance sheet reduction will impact longer-term rates. But this is expected to be done at a glacial pace. Strategically, the yield curve shape has major implications for all financial institutions. If you are not running a rising-rate scenario with a f lat yield curve through your asset-liability model, it is well past time. The results may change your strategic initiatives.

Funding strategy The financial industry is wrestling with the need and desire to grow core deposits, while at the same time trying to lag rates on existing balances—not an easy task. If the liquidity profile of your institution is strong, lagging deposit rates and relying more on wholesale funds for growth may be the appropriate strategy.

If liquidity is tighter, retail strategies may be necessary to reach your goals. Regardless of liquidity profiles, most banks want to grow core deposit relationships. You likely have the data necessary w ithin your organization to analyze your current customers and to be able to devise strategies to expand these relationships. The buzz at the conference was that utilizing the data to be a strategic tool needs to be a priority going forward.

Loan, investment strategies The current yield curve and potential for further flattening has impacted loan strategy. For most attendees, spreads appear to be flat to down. This, combined with more deposit “specials” available in the marketplace and the financial industry, is creating its own flat yield curve. Many strategies can be employed to help increase the profitability of each loan. Interest rate swaps, prepayment penalties, expanded fees, and increased compensating balances were discussed. The current yield curve is also causing investment challenges. Most sectors are well below historical average spreads to Treasury. Unattractive spreads result in banks stealing loan business away from competition, reducing spread—and around we go. To read the full article, which also covers non-ALCO strategies and issues, go to


VARO MONEY Continued from page 9 bills as well as when the next paycheck is coming. “So it shows people what their expenses are going to be and whether or not they will have a positive or negative balance” after paying the expenses, according to Walsh. What Wa lsh descr ibes a s the “A I bot” will make recommendations. “If someone’s situation is positive, it will encourage them to put more into savings. If they’re in a negative situation, it will give them other recommendations.” The in-app message may be, “Bill, it looks like you’re heading for a bit of a cash crunch. We suggest that you slow down spending, or you might want to move some money from a savings account just to make sure you cover your bills that are coming up.” Would the bot recommend that a customer pay down a Varo loan? “Whether it’s a loan from Varo or from somewhere else, if the person has the disposable cash to pay it down and that’s the best situation for them, then it would definitely recommend that,” Walsh says.

/ Seven Questions /

tell us what you really think Whether he’s talking to a senator, the head of a trade group, or bankers, Guy Williams tells it like it is By Bill Streeter, editor & publisher


ommunity banker Guy Willia ms ha s not yet met Sen. Elizabeth Warren in person. We’d like to be there when it happens, though. During a recent interview with Williams, the president and CEO of Gulf Coast Bank & Trust—a $1.6 billion-assets bank that’s based in New Orleans—had this to say about the Democratic senator from Massachusetts: “Elizabeth Warren thinks she’s in favor of community banks, but just does horrible things for them. The simplest example is her premier achievement: the Consumer Financial Protection Bureau, which was not supposed to affect community banks but does, and has raised our costs significantly. “The thing that Sen. Warren doesn’t understand is that complexity favors the large. Citigroup has more attorneys than we have total employees. It’s not a big deal for them to digest an 800-page document. It’s a big deal for us. Any time you pass a very complex bill you have favored the biggest banks.”

Shutterstock /flysnowfly

It’s been an almost unmitigated string of disasters in Washington for community banks

Something tells us Sen. Warren would have a comeback if the two faced off. It would be fun to watch. The “History” page of Gulf Coast Bank’s website reads, in part: “We make banking easy and secure for our customers by providing straight talk instead of the old runaround.” As the previous paragraphs demonstrate, the man who has led the bank for the past 27 years embodies the concept of straight talk. While everything has its place, the ability to ruff le feathers can be useful. Williams is on his third go-round of industry leadership. He was president of the Louisiana Bankers Association for the 2004-2005 year and served on the board of the American Bankers Association for three years beginning in 2006. He currently is on the executive board of Friends of Traditional Banking, a group that seeks to elect individuals who support traditional community banking. Williams also manages to run a good bank. Gulf Coast Bank has not had an unprofitable year since Williams and a business partner acquired the failed

Williams has led New Orleans-based Gulf Coast through 27 profitable years. American Savings Bank in 1990 and renamed it. That record stands despite the cha llenges posed by Hur r ic a ne Katrina and the BP oil spill. The bank avoids significant concentrations and doesn’t make big loans, says Williams. Roughly one-third of its lending is in commercial real estate (it is a big SBA lender), one-third in commercial and industrial lending, and one-third in mortgage lending. It also has a large trust and investment group, and a specialty unit that buys bad loans from other banks. The bank has 19 branches plus a mortgage origination office in Florida. Williams does not consider himself a “political junkie.” His interest in government is out of necessity, he says, because it has such an impact on banking—especially community banks. The follow ing dialogue, edited for length and clarity, is based on an hourlong interview with Williams. Q1. Not all bankers are interested in Washington, but you are and have always been. Why is that? We are a highly regulated industry, and if you don’t pay attention to Washington, August/September 2017



/ Seven Questions / the Federal Reserve for highway funds—I mean, come on. But Dodd-Frank was a significant loss. The credit union expansion continues to be a significant loss. The Affordable Care Act was a big loss for banks and small businesses. So it’s hard to see any wins for us. I think it’s been almost an unmitigated string of disasters in Washington for community banks. At least there is some awareness of the issue. But the interesting thing is everybody in Washington loves community banks, but nobody loves them enough to do anything that would be helpful.

It’s not hard to find Williams in the C-SPAN archives. He’s testified numerous times on subjects ranging from Hurricane Katrina to the lack of de novo banks. you can end up in deep trouble. So you have to play the political game. You don’t have to like it, but it’s important to be involved—to know the candidates and talk to their staff. And, unfortunately, you have to suppor t political campaigns financially. Friends of Traditional Banking looks for people who support the normal community bank model and pay attention to them. Legislators have a lot of things going on and will do things that are just really dumb without intending to. I will never forget at the beginning of the Obama administration, a very nice person from the White House came over and said, “Look, the president loves you guys; it’s the big banks he hates.” Well, nine years later if I could replay that moment I’d say, “Could he hate us and love them?” The four biggest banks now have almost 50% market share among them. They’ve become financially bulletproof. At a certain point, companies become so big in scale that it’s almost impossible to compete with them. You see this with Amazon and Google, and we’re rushing toward that with the biggest banks. When you tell people like Elizabeth Warren and [former Congressman] Barney Frank that what they’re doing is hurting community banks, they don’t believe it. They always say, “That’s an anecdote; that’s not really true.” 14


August/September 2017

It’s not just members of Congress. I said to the head of one of the regulatory agencies, “You know, we treat the consumer worse today than the first day I walked into a bank 40 years ago.” He replied, “Oh, I hope that’s not true.” I said, “It’s absolutely true, and it’s your fault.” He said, “Well, that wasn’t our intention.” Unintended and unforeseeable are dif ferent. When an entirely foreseeable consequence occurs that you were warned about by the industry, it’s not believable to say it’s an unintended consequence. You’re either completely ignorant, or you’re just so pigheaded and stubborn that you won’t listen to people that are actually doing the business. All these consequences we’re experiencing now were entirely foreseeable. As community banks, we warned Congress what would happen with Dodd-Frank. They ignored us. They told us we weren’t going to be affected. They were wrong. Q2. Have there been some good things that have happened as a result of banking industry involvement in government relations? Unfortunately, we’ve been on a long losing streak. I feel like our lobbying efforts have been largely ineffective. We’ve lost every major issue we’ve fought. And we’ve lost some that are just evil. One in particular being allowing Congress to tap

Q3. Some community banks are aligned with the ABA, some with the Independent Community Bankers of America, and some with both. Is that a good thing for the industry? It’s bad. Any time you have two lobbying groups, it allows legislators to say, “When you all get together, come back”— which allows them to do whatever they want to do. It would be far better for banking to be represented by one lobbying group. And it really almost doesn’t matter which one it is: ABA or ICBA. Having both is terrible, though, because Congress can say, “Because of the dissension in the industry, we really can’t do anything.” Our bank belongs to both. I hope to be a part of merging the two associations. I would say to my ICBA friends: If they had objected to Dodd-Frank, we would not have that law. They believed it wouldn’t af fect community banks. But, in fact, it has accelerated consolidation, raised complexity and costs, and pushed a lot of people out of the business. They [ICBA] wanted to say they were doing something against the big banks. Well, it’s one industry. I’m not an apologist for the big banks, but when you start trying to say, “Well, only this half,” this is what happens. Let me tell you why we joined Friends of Traditional Banking. I got so tired of only playing defense and never playing offense. It seemed like we’d always go up to Capitol Hill and there would be some horrible bill we’re trying to stop. Friends of Traditional Banking actually identifies people who are not friendly to community banks and supports their opponents. It’s been great fun to say, “You know what, I’ve had it w ith you. I and my f r ie nd s a r e g oi ng t o s upp or t y ou r

opponent, and we very much hope to give you a retirement and a gold watch and send you home.” And we’ve been successful in doing that in a number of races. Every year, we pick two or three races where we think we can make a difference. And that’s something neither of the traditional lobbying groups have been willing to do. I think it’s a mistake. If you never seriously oppose an elected official, there’s no downside to that person voting against you. Q4. Which proposal—the Financial Choice Act, passed earlier this year by the House, or the Treasury’s regulatory reform recommendations—offers the better choice for change? I think both are fine, but neither one of them is doing what the simplest change would do. The biggest win for community banks and for banking as a whole would be a reduced corporate tax rate. Think about it. Banks haven’t had any wins, compared to the Farm Credit System and credit union system, for 40 years. A reduced federal tax rate reduces their subsidy. If the corporate tax rate were 20%, the credit union tax subsidy becomes not so serious. So that is, by far, the best thing that Congress could do for banks. The piddling around with regulatory reform at the edges is a nice thing, but none of the reforms really root things out. However, the part of the Financial Choice Act making CFPB a real agency with a regular board and regular appropriations makes perfect sense. CFPB is a total disaster. One of the problems with CFPB is that it hurts consumers and you cannot explain that in Washington and have them understand. We’re one of the biggest mor tgage lenders in Louisiana. Every one of our mortgage service providers has raised their cost and closings now take longer. If the industry had hurt consumers like that, they would throw us under the jail. CFPB can do it and say, “Well, that was an unintended consequence.” But it’s a logical outcome of what they’ve done. The real solution is to eliminate CFPB. Let the Fed, OCC, and FDIC do consumer protection just like they always did. Q5. What is your perspective of the Trump administration, so far? One-third of what the president has done

I absolutely love. The deregulatory push is wonderful—the “get rid of two rules for one new one” is a great idea. Some of his appointments have been absolutely wonderful. I sat in the audience during the Neil Gorsuch hearings. He is a great judge; he actually reads the law and applies the law, not his personal feelings. I thought he was an inspired choice [for the Supreme Court]. The border wall is idiotic. I can’t believe he wants to do that. More Mexicans are leaving the United States than are coming in. And why do you want to keep the Mexicans out anyway? They’re perfectly fine, hardworking people. Foreign trade makes the whole country better. It is reasonable to want trade to be fair, but it’s not that unfair right now. So

The technical arms race is a real challenge and will be one more thing that pushes more consolidation. At some point, smaller community banks are going to realize they just can’t play

trying to stop foreign trade, I think, is an awful thing. So one-third of the stuff I love, onethird of the stuff I hate, and the rest is somewhere in the middle. Very mixed. Q6. What are the biggest challenges your bank faces as an organization? Our regulators are pushing customers away from banks and so now you have many people borrowing from f intech companies. The problem is the fintechs are getting pretty darn good at what they do, and they’re not going to stop with just the marginal borrowers. They want the core business, and they essentially have no regulation. It is signif icantly more difficult to compete with somebody

that just has an internet presence. So I think the competition for consumers is going to get really brutal. The same thing will happen in the small business realm, too. The disruption is real. Look at what Amazon is doing to department stores. To t hin k t hat money—t he u lt imat e commodity that can be transferred electronically—is not going to follow that path is shor tsighted. Unfor tunately, much of it is going to be outside of the bank regulatory system because that system makes doing business so difficult. So I think the technical arms race is going to be a real challenge and will be one more thing that pushes more consolidation. At some point, smaller community banks are going to realize they just can’t play. One part of the technology challenge is that core systems are obstacles to progress. They’re always a generation or two behind. If somebody came along and did a Windows-based core with an open API system where you can just plug in apps, they would grab the market. But it would have to work. Switching cores is like jumping out of an airplane—that parachute better work. Q7. Your bank has 19 branches and you emphasize personal service, yet a lot of technology takes away from the face-toface. How are you dealing with that? Well, our objective is to provide high tech and high touch. We spend a ton of money updating technology, and we have all the customer-facing technology the big banks have. The difference with us is when you want to actually talk to somebody, you still can. Many people are happy just getting online reports, and we’ve got those. But if you want to deal with a person, that option is always available here. [When you call the bank’s main number, a person answers —Ed.] Our branches a lmost a lways have mortgage people, investment people, and commercial lenders in them. Because we have relatively few branches, we can afford to have each one be a little bigger and have more folks. That strategy has worked for us. However, while we w ill f inish our branch remodeling effort this year, we don’t have any plans for new branches. We expect to grow $100 million to $200 million next year without adding a branch.

August/September 2017





By Melanie Scarborough, contributing editor



August/September 2017

With a nod to Paul Simon, the question of branches is “Still Crazy After All These Years.” For every point of agreement, two others polarize



epor ts of branch closings by Bank of A mer ica , JPMorgan Chase, Wells Fargo, et al don’t generate all that much attention anymore. A hundred shuttered here, 200 there, and even 300 and up—what’s the surprise? Because of acquisitions and spurts of organic, pre-crisis branch binging, these giants were, and probably still are, over-branched. Even more recent branch-reduction moves by big regionals are pretty much along the same line. But when Umpqua Ba nk—a longtime and vocal proponent of branches as a strategic weapon—changes direction, that’s a signal that the long-running branch debate has entered a new phase. The $25 billion-assets West Coast regional, headquartered in Roseburg, Ore., still has more than 300 locations in five states after recently closing about 35 branches. But the mojo has shifted. Ray Davis, the bank’s former CEO who is now chairman of Umpqua Holdings, says the decision to close branches wasn’t about money; the branches were profitable. “With us, it’s predominantly about customer preferences—they’re moving to online and digital banking—so that the branch lost its importance in some communities,” Davis says. In area s where Umpqua had several branches and lobby traf f ic had decreased, it made sense to concentrate the bank’s presence into fewer locations. “We try not to close branches; we try to consolidate them,” Davis says. “We haven’t left markets.” The present challenge for banks is dealing with customer preferences while also differentiating themselves, Davis says. Twenty years ago, Umpqua differentiated itself by turning branches into “bank stores” that provide a computer café, Umpqua’s custom-blend coffee,

August/September 2017



/ Branch angst / and meeting space for groups, such as book clubs and yoga cla sses—a long with banking services. Davis drove the change, which was highly successful and spawned many imitators. “Now, we have to figure out how to differentiate ourselves with technology coming at us so fast,” Davis says. Umpqua Bank plans to do that primarily through Pivotus Ventures, a subsidiary of Umpqua Holdings charged with creating new technologies and digital models to transform banking. “We’re taking digital platforms to a level that does not yet exist,” he says. For the branch crowd, that’s a bummer. It’s like Mario Andretti driving a Toyota Prius. But hold on. The change of view of one banker—admittedly a creative genius when it comes to branches—does not tell the whole story.

Non-Community Banks reduced offices while community banks Maintained office numbers Number of offices


32,297 32,230

59,554 60,972

June 2011



1-Year percent change



5-Year CAGR



Complicating the issue is that consumers operate w ith a fundamental contradiction: While they may visit a branch only a few times a year, they want one available when they need it. Ed Barry, CEO of $960 million-assets Capital Bank, Rockville, Md., likens the phenomenon to condominium shoppers who want a building that has a pool and a gym although they may rarely use either. “That’s what’s happening with branches,” he says. “Customers want to know it’s there even though they may not go in but two or three times a year.” Everyone seems to agree that today’s branches will continue to be replaced by smaller facilities that are more thinly staffed and highly automated. How to make that transition while keeping the facilities relevant and profitable, however, remains a matter of debate.

Without question, overall branch numbers are shrinking. According to the FDIC, there were 80,227 bank branches at year-end 2016, down from 94,725 in 2014. Yet while large banks prune their branches, community banks sprout new ones. Rober t Meara , senior analyst, banking group, at Boston-based Celent, says that distinction reflects the separate dilemmas large and small banks face. Banks that built branches on every corner before online and mobile banking became prevalent now have to shed real estate, while smaller banks that want to expand have few options but to add more. “If you have only three branches and want to move into the town next door, what else do you do?” Meara asks.


Number of offices

June 2016 June 2015

Source: FDIC Summary of Deposits Data adjusted for mergers.


Back in the day

Non-Community Banks

community banks

SELECTIVE EXPANSION First Financial Bank, an $8.5 billionassets institution based in Cincinnati, has both opened and closed branches in the past few years, from a peak of 150

in 2009 to 103 present locations. Several factors weigh into those decisions, says President and Chief Banking Officer Tony Stollings. “For existing locations, we’re always monitoring transaction volumes and customer preferences—and profitability comes into play,” he says. The bank has added about ten branches since 2014 as new markets emerged allowing “a strategic fill-in of our existing footprint.” In 2015, First Financial announced it was going to close three branches in the Dayton market and open about three others there. “Those [moves] are primarily about getting into better growth areas,” Stollings explains. “Sometimes, it’s because of simple things like moving from a location that can be hard to get in and out of. Sometimes, it’s merely a consolidation in a better location around an existing presence that we have. Typically, we’re moving into some place that gives us more opportunity to create the brand presence we’ve invested in.” A s Meara noted, adding branches remains the main vehicle for expansion for smaller banks. Capital Bank recently

DRIVE-THROUGH Popular for decades in certain areas, drive through facilities are down from 2,772 in June 2011 to 2,348 in June 2016

August/September 2017

atms—50 years on

opened a branch in nearby Columbia, Md., to establish physical presence in an area where it already had a sales team. “It used to be, ‘If you build it, they will come,’” Barry says. “Now, it’s ‘Show me the money.’ Our view is that the role of the branch has been changing and has been in somewhat of a decline in the past decade, but there’s still a relevancy to customers. So we put branches in high-traffic and visibility areas to announce that we’re there.” Capital Bank’s strategy is to expand its footprint, not to become denser in its

The role of the branch has been changing and in decline in the past decade, but there’s still relevancy. We put branches in high-traffic areas to announce we’re there —Ed Barry, Capital Bank

transactions pushed out

...but will they still come?

ATMs’ arrival en masse in the ’70s began the shift of routine transactions out of the branch, a trend accelerated by debit cards, and online and mobile banking

As you can read in the accompanying article, opinions of branches’ future role are as sharply divided as ever. Clearly, however, they are no longer a place people come to as often as they once did. That chapter is closed. THE look has changed... August/September 2017



/ Branch angst / present markets. “I definitely need more locations just to have a physical presence in the marketplace,” Barry says. “But we’re more likely to open a branch in Northern Virginia than in Montgomery County [where the bank is based].”

split over FACE-TO-FACE Indeed, as customers visit branches less often, proximity becomes less of an issue. Dave Martin, founder of bankmechanics and a former retail bank executive, explains it in terms of shopping circles. People generally shop in a grocery store close to home because they buy groceries several times a week; they will drive farther to buy clothes because those purchases are less frequent. “So as the need for visits to a bank branch is reduced, the willingness to shop a bigger circle grows,” he says. “Historically, the more branches you had, the more convenient of a bank you were. But if you need a bank branch only four or five times a year, spending ten minutes to get to it is not a big deal.” Martin says even people who rarely come into the bank want to know they can speak face-to-face with someone if they have a problem. “People don’t visit a branch; they want to visit a banker,” he says. “So if you argue that branches will go away, you’re arguing that people will never value face-to-face contact.” It’s primal, Martin adds, to want to know the person to whom you’ve entrusted your assets. Most a na ly st s ag ree, but not a l l.



Margaret Kane, CEO and founder of Kane Bank Services in Sacramento, predicts that branches of the future will target specialized markets, such as commercial real estate and, in the short term, financial advisement, but she doesn’t see the advice-led model as viable for the long term. “If you look at the investment space, bankers have been saying that customers will still need to come in and see someone for advice,” Kane says. “That’s proving to be less true because there are a lot of platforms that allow you to do that online.” She says her 23-year-old daughter manages her finances online and “is never going to go into a branch for advice. The idea that people will still need branches for advice is going to fundamentally change.” Umpqua Holdings’ Davis points to another challenge. “Most people say they see banks evolving into advice-driven facilities,” he says, “but if that happens, the big problem is you still have to get people to go in.” It used to be people had to come in to cash a check or make a deposit. Now, bankers will have to be more creative to bring people in, he says. How do you draw in tech-savvy millennials? Kevin Tynan, senior vice-president for marketing at Chicago-based Liberty Bank for Savings, with assets of $820 million, says that some young people who now bank online will always bank online. “But to look at millennials now and say that’s the way they’re going to be when

August/September 2017

they’re 55 is erroneous,” he says. “After 50, they may be interested in where they can get the highest interest rate and the best service, and want to have someone down the street they can talk to. Experience colors preferences, and there will be an evolvement of the customer.”

NEXT STEPS Tynan may be correct, but Ken Olan, CEO and founder of CAKE Performance Group, Houston, offers a different take. Any smart bank, he says, is looking at demographics and psychographics to determine if and where to build branches. Olan says the placement and design of future bank branches will depend on the bank’s priority. “Banks that have a heavier commercial business will probably continue to use branches. In the long term, more consumer banking—if not the vast majority—will be electronic.” He foresees branches no larger than 700 square feet, equipped with interactive video and staffed by one or two people. “We w ill continue to see branches because they help dominate market share, but we’ll most likely see them develop into smaller locations manned by universal bankers who can do a lot more,” Olan says. His firm developed online training to help branch employees broaden their skill set. Capital Bank’s new branches are “not the typical branch of 20 years ago,” says Barry. They have smaller square footage and are more thinly staffed, “but more tightly integrated with our sales team. The branch becomes that first level of help desk in customer support.” Celent’s Meara says plans for future branches have common technological elements, but broad variations in design. “Where everyone seems to be in agreement is that branches are going to be smaller, more highly automated, with more assisted self-service options—like the self-checkout at the grocery store,” Meara says. “They will be staffed by more highly trained and compensated universal bankers, and designed more for sales and service than for transactions.” However, he predicts those changes will come gradually because the process is so complex. “Banks have chased the bright, shiny object of mobile banking—responding appropriately to that imperative—but because the branch c h a l lenge i s me s s y a nd e x p en sive , they haven’t made as much progress,” Meara says. “Everyone loves the idea of

The idea that people will still need branches for advice is going to fundamentally change as there are a lot of platforms that allow people to do that online —Margaret Kane, Kane Bank Services generalized self-service, but how do you provide that? With a teller? After hours? With video? Why do you think customers will want to drive to a branch to interact with video?” “Lots of these topics are polarizing,” says Meara, “and there are still relatively few institutions that have tangible experience with new operating devices.” Tynan says there’s a bigger problem. In his view, some of the new techno-offices are just “selling booths,” and customers are leery of the sales culture. “We open automated branches and they can’t solve problems, which is what customers say they want,” he says. “The focus is on reducing transactional cost instead of improving customer experience.” Tynan points to Amazon and Apple earning the top ranks in consumer trust while banks lag in eighth place. “Bankers use technology to reduce transaction costs; retailers use technology to improve c u s t omer ser v ic e ,” he say s. “ We’r e not likely to change the perception of banks if we keep opening automated, techno-offices.” For Tynan, the ideal branch of the future would be a coffee-shop model staffed by one or two people, but with no ATMs or automated deposit machines—“an office where someone can come in and get service with no overtones of selling. That would demonstrate that we’re not in it totally to sell you more and more products.”

PHYSICAL, DIGITAL blend Banks do have to consider their bottom lines, and technology can reduce costs without diminishing customer service. “Certainly, migrating transactions to self-service is key because one of the largest expenses in the branch is labor,” says Bob Gibson, vice-president of branch operations at Cummins Allison, which offers cost-saving tools for customer

self-service and back-office employees. In the back office, banks can save money with technology that enables them to “insource”—for instance, recycling cash deposits to stock the branch’s AT M instead of paying for daily armored truck transport. Or self-service coin handling machines that help banks cut costs and attract customers. Douglas Hartung, senior director, software innovation, at Diebold Nixdorf, says the company is working on facial and voice recognition tools to benefit banks and customers. “Different types of biometrics will be appropriate for different types of uses,” he says. “ATMs could be enabled through a server to activate facial recognition on the customer’s phone. Biometrics are advancing so rapidly that it would be expensive for banks to keep upgrading their ATMs, so why not use the device in everyone’s pocket that already supports biometrics?” As an example of the increasing interconnection of digital technology and physical deliver y channels, Diebold Nixdorf wants to enhance utilization of mobile devices with self-service terminals, in a branch or elsewhere—for example, using beacons and locationbased services at the ATM. “Right now, the ATM doesn’t know it’s dealing with you until you insert your card and type in your PIN,” Hartung explains. “We’re incorporating beacon technology into ATMs so they know you’re approaching before you get there and can tailor the marketing message.” The same technology could be set up for customers coming into a branch.

PLAN TO SURVIVE, THRIVE Cost-saving technology, strategic branch distr ibution, customer ser v ice, and customer preference will help branches sur v ive for the foreseeable f uture—

whether they thrive is up to them. “Branches can either be the primary growth engines of your institution or albatrosses that weigh down your organization’s profitability,” bankmechanics’ Martin says. “If your branches haven’t been spruced up in years and look desolate, if they look like they’re withering on the vine, they become an albatross because they look dated.” Also keep in mind, Martin says, that as customers visit your branches less often, the quality of those visits counts more. “Now that you see them only four or five times a year,” he says, “if they have a bad experience, you’re in trouble.” Banks considering closing branches must factor in CR A requirements. At First Financial Bank, Stollings says, “When we think about strategic locations, we are very purposeful around our community development activities and want to be sure we serve appropriately the lowincome markets. Right now, across our 103 locations, 23% to 25% are located in low- to moderate-income census tracts.” When weighing the value of tellers versus automation, banks also should consider security. Olan points out that when transactions like account openings are conducted in the branch, it adds to the comfort level of both customers and banks. “The customer can come in and talk to someone they expect to be knowledgeable,” he says, “and because the bank can look that person in the eye, fraud risks are diminished.” St i l l, K a ne re c om mend s, “Ba n k s should be relentlessly focused on getting the online experience right. Banks that survive will be those that have the best online experience.” Yet no matter how attractive or technologically advanced they are, branches will be a detriment unless they have a specific role tied to the bank’s business strategy, says Barry of Capital Bank. “If you get [branch distribution] right, it can be a real advantage. If you miss the mark, it’s a ton of capital deployed with dubious payback,” he says. “We’re seeing a lot of people trying to figure out physical and virtual distribution, and where do those strategies converge.” Martin hazards a guess: The future “is going to be high tech, but it’s going to continue to be high touch. There are likely to be fewer branches, but they’ll continue to be the center of the banking universe. Both things can be true.” August/September 2017



/ compliance watch /

Keeping sales culture clean Ask key questions now—or face worse questions from regulators and the public later By Steve Cocheo, executive editor


If something looks “off” Clouthier and other members of the ABA conference panel discussed mechanisms for tracking and evaluating sales results. The back end of such processes is what you do when a red light goes off. Lyn Farrell, senior advisor y board member at Treliant Risk Advisors LLC, said that one client she’s worked with has adopted the policy that if any employee is fired for fraudulent sales activity, it will take that person’s sales pattern and create a “profile.” Then it will search its records to see if any other employee patterns fit the same profile and to see if further investigation is called for. “I thought that was pretty smart,” said Farrell. The profile search is in addition to thoroughly examining the terminated employee’s overall results, to see if a 22


transgression in one area turns out to be one of many for that former staffer. Farrell said banks must be cognizant of the potential implications of shifts in sales volume—up and down. “Is someone spiking in their business generation?” she asked. Conversely, she added, “did somebody’s results suddenly drop off the face of the earth?” Either way, the change could be the result of some innocent cause, or it could indicate that some bad behavior went on. Farrell noted that changes must be considered in the light of policy shifts. One client saw opt-ins on a service drop off after incentives were discontinued. With the revelations at Wells still fresh in bankers’ minds, Farrell said that good, commonsense practices can help. One client has mandated “welcome to the bank” calls for customers who recently signed up for a service. If the call comes as a surprise—as in “What!?! I didn’t sign up for a credit card, and I don’t want one!”—something’s gone awry. Farrell

August/September 2017

noted that this doesn’t always reveal fraud—a customer may have misunderstood something—but, clearly, remedial action or retraining must be done. “And mystery shopping is always an eye opener,” Farrell added. Instituting team-level incentives, in place of employee-level incentives, can help. It’s one of the major shifts Wells made in the wake of its troubles. But this is not foolproof. Clouthier noted that branch-level sales must be monitored. A branch may have legitimate reasons for being a standout, but in today’s atmosphere, it must be checked out.

Pushy or just persuasive? A particular risk for retail products sales is “assumptive closing practices.” Selling is a process that defies hard lines. One person’s “pushy” is another person’s “persuasive,” but Farrell emphasized that the Consumer Financial Protection Bureau has made it clear that it frowns on selling that follows this example: “Let’s get

Shutterstock/ iDesign

f it seems too good to be true, then it probably isn’t true. It’s an old saw. But consider this corollary: If it’s bad on the surface, it could be bad underneath, too. One of the legacies for the entire industry of last year’s Wells Fargo sales scandal is that dramatic—especially sudden— consumer banking sales improvements w ill be subjec t to second thought s. Another is that any time questionable sales practices surface, banks will have to dig deeper to satisfy their own potential suspicions, as well as, potentially, those of regulators. At best, bank sales efforts will be subject to additional measurement and monitoring, and increased attention from banks’ compliance and risk management specialists. “The majority of people don’t get up in the morning and say, ‘I wonder what I can do today to put myself in jeopardy and to put my bank in jeopardy,’” said Mary Clouthier, senior v ice-president and director of enterprise compliance programs at KeyBank, during a session on sales culture compliance at the American Bankers Association’s recent Regulatory Compliance Conference. However, the possibility of even one bad apple serving the public poorly has banks rethinking taking sales success at face value.

you signed up to save money today.” Farrell said she suspects that many people in sales positions don’t realize that, at least in CFPB’s view, assumptive closing is wrong. She admitted that before hearing the bureau’s view, she didn’t think so. Think of how “Can I supersize that for you?” led to a documentary about a decade ago that implicated the fast-food industry in America’s obesity wave. Language and sales “attitude” are not theoretical concerns. Sales speech used for putting customers into overdraft service is part of the lawsuit between CFPB and TCF Financial, whose former CEO became notorious for naming a yacht Overdraft in appreciation for the bank’s huge fee income from this product. CFPB explicitly accused TCF of “tricking” customers. In addition, CFPB charged that “TCF adopted a loose definition of consent for existing customers in order to opt them into the service and pushed back on any customer who questioned the process.” TCF is contesting the suit.

Learning from Wells For a broad overview of how far sales can go wrong, both Clouthier and Farrell recommended that bankers read the massive fact-finding report put together at the behest of the Wells Fargo board of directors and released earlier this year. The report is part of an ongoing series of steps the megabank has been taking very publicly to get past the scandal. “For a compliance person, the report is like reading a novel,” said Farrell. “It’s extremely frank. But they are obviously taking it very seriously.” “It’s a page turner, and a fabulous case study on risk management,” said Clouthier. That document, and a report issued by the Comptroller’s Office, taken together, provide clues on how to keep a program clean. Also helpful, she said, though it doesn’t mention much that’s new, is a more general document issued by the Justice Depar tment , “Eva luation of Corporate Compliance Programs.” Clouthier said she had worked briefly at Wells

and considered its code of ethics one of the best such statements she’s seen. But awareness and execution are critical, she said, because there was clearly a disconnect. Panel members stressed that awareness of trends must go all the way up to a bank’s board. Farrell said boards must have extensive reports that aggregate what is going on with sales and incentives over the entire organization, and be able to ask questions and be assured they are receiving adequate answers.

If less than half your employees can achieve their sales goals, that’s a problem. You have to have realistic goals —Mary Clouthier, KeyBank This is essential for directors to demonstrate that they are exercising their duty of “credible challenge” to what is occurring on their watches. Farrell said that boards should be made aware, in anonymized form, of what whistle-blowers are saying regarding sales practices, and that human resources should be gathering any comments on sales practices made by exiting employees. Clouthier said banks must examine the structure of their incentive programs. A key element of the Wells situation was the pressure many employees said they felt to meet what they considered to be impossible cross-selling goals. “If less than half of your employees can achieve their sales goals, that’s probably a problem,” said Clouthier. “You have to have realistic goals.” While being able to quickly receive incentive payments for sales success works well for incentivized employees, Farrell said that practice can increase the

potential for gaming the system. She suggested banks consider delayed payments to ensure sales pay goes to real results.

Uniform language essential Time lags in reports made to management and the board must be shortened, Clouthier suggested. Banks must be able to spot red flags more quickly, she said. Besides overall trends, several factors can indicate problems, according to speaker Amanda Cox, partner, PricewaterhouseCoopers LLP. Among these are testing of accounts that customers close soon after opening; accounts that aren’t used much; and accounts that don’t rise beyond a low balance. She said independent audit functions should be looking at sales practices as part of routine checks. Beyond this, Cox said, many data items must be pulled together to form a complete, ongoing picture of what’s going on in sales. Among these are customer complaints, including confirmed cases of employee misconduct, and root cause analyses; employee reprimands and terminations for sales practice misconduct; and results from employee sentiment surveys. The further down the corporate chain, the more specific records and reporting should be, Cox said. For all this to make sense, panelists said, banks must break through departmental boundaries and devise common definitions of terms so reports aggregating trends make sense. Clouthier said that something as important as the meaning of “substantial,” in defining a transgression, needs to be standardized. Organizational responses that follow require regimentation, too. Cox said new training isn’t necessarily needed to solve common misunderstandings; sometimes refresher units are more appropriate. In the end, keeping sales culture clean comes down to robust governance, said Farrell. For decades, banks trained employees to get technical compliance right, but now challenges can be grayer. “Conduct risk is different,” said Farrell. “It is the difference between truth in lending disclosures and UDAAP.”

August/September 2017






f that headline reads like a recruiting pitch, so be it. Banks with their “legacy systems”—the ultimate pejorative in Silicon Valley—have a better story to tell than many nonbankers realize. The stereotypical impression of large banks—constrained by cumbersome infrastructure, risk averse, slow to respond to technology changes—has some basis in fact. But not completely. And change is rippling through banks of all sizes. Ongoing modernization is one reason why bank technologist Doug Biever has stayed at U.S. Bank for 23 years—and still finds the work challenging. Equally important, he said in an interview, is that investments in technology are a “big reason why I’ve been successful in hiring new people.” The company doesn’t just invest in core system maintenance. U.S. Bank makes progressive investments in server virtualization, wireless access, network reconf iguration, and other improvements necessary to support changing customer expectations.



Biever is senior vice-president and managing director of the Distributed Technology Services team at U.S. Bank, the fifth-largest U.S. bank with almost $450 billion in assets and approximately 3,200 branches. His group runs pretty much everything in IT, other than the mainframe, phones, and desktops. Biever put himself through college working at the bank, first as a teller, then, after switching his major to computer science, working in one of the bank’s data centers. Now, Biever (pronounced beaver) reports to CIO Christopher Higgins.

“Mission critical” is just that

Although Biever didn’t use this analogy, banks, in a way, are not unlike the military. The mission for both is critical. While changes in military technology often can be seen on the news, bank technology isn’t much on display, other than mobile apps and chip cards. Yet behind the scenes, bank tech has been changing significantly. Banks’ critical mission

August/September 2017

is to safeguard and maintain customer deposit accounts—what Biever calls the “Golden Records.” The mainframe is the system that does this. Biever notes that mainframe growth is very predictable as the bank regularly makes major investments to keep it ironclad. His area, on the other hand, is where the most interesting change and innovation is occurring. But even there, banks face a different dynamic than nonbank tech firms. “The stakes are high with us,” he says. “As a bank, one of our biggest assets is customers’ trust. We all know that all it takes is one breach.” Pointing to the Target breach of several years ago, Biever says, “I still shop at Target even though I lost my credit card in that breach. If U.S. Bank loses your credit card or your personal information, however, that’s a different story.”

Add Wi-Fi? Not that simple

That omnipresent concern over security plays into everything Biever’s group

Shutterstock/ GaudiLab

Cool stuff is happening at banks—not all of it web related. U.S. Bank’s distributed tech chief explains By Bill Streeter, editor & publisher

does. For example, U.S. Bank is part way through setting up Wi-Fi for customer and employee use in an initial group of 700 branches. The project began about a year ago, and Biever says the team’s initial take was that it would cost maybe $500 a branch with a fairly simple process: Order some routers and plug them into the bank’s network. “It certainly could be that simple,” Biever says. But when you start investigating what’s required to secure the routers properly, he says, cost and complexity rise. “As soon as you start layering in all the security technology, you’re well over $1,000 per branch.” That’s big money when applied across 3,200 branches. The project, however, will bring much more than a customer benefit. It will enable a “refreshing” of branch technology, as Biever puts it; “rewriting branch applications to be compatible with tablets, wireless printers, etc.” One other plus: The Wi-Fi access points have radios that pick up active mobile phones within a certain range. The radios only acquire the phone identification, not personal data, Biever says. Even that bit of information can be useful for staffing or marketing purposes.

Cell/broadband choices

The branch tech changes Biever describes will impact the bank’s network infrastructure. U.S. Bank primarily uses private circuits to carry branch communications. “Private circuits,” he says, “are very secure, point-to-point connections that do not traverse the internet. They have limited capacity, however, and are very expensive to expand.” His group is exploring use cases for, and in some cases already installing, alternative networks. There are two primary options: broadband and cellular. The bank has already invested heavily in cellular as a backup net work, according to Biever. “It’s been terrific as a backup,” he says. “It’s very inexpensive and easy to deploy; capacity is excellent.” In fact, in some cases where a primary circuit “fails over” to a cellular

connection, the performance is better. “The problem with cellular is that you get charged by the megabyte,” says Biever, “so it does become cost prohibitive at a certain point.” But data plans continue to evolve, he adds, just as with consumer usage, so it could eventually make sense to run cellular as the primary circuit. Business broadband offers more bandwidth, says Biever. But it is not inherently secure, as it connects right to the internet. A cha nge to broa dba nd ma kes economic sense for a variety of reasons, however. One is that the bank currently has to cache software patches or distributions out to its branch servers. It does the same with videos. “If we streamed video during the day over the WA N circuit, it would completely consume the bandw idth and quality would be terrible,” says Biever.

Security will be solved

Biever says the bank wants to eliminate branch ser vers to reduce costs, a nd wa nt s to bet ter leverage cloud applications to enhance the customer experience. Doing those things requires a bigger network connection. Security issues have held up the change so far. However, Biever says, U.S. Bank is working on setting up a secure configuration. It could involve encryption, a virtual private network (a “secure tunnel” back to the data center) along with other operational investments. He adds that they have found other banks have adopted broadband only for high-capacity traffic, such as video, while keeping their private circuits for more “quality-based use cases,” and relying on cellular for “last mile” connections— i.e. protecting against the possibility of a backhoe cutting all network lines while digging up the street outside the bank. Biever says he wouldn’t be surprised if more than 50% of U.S. Bank’s branches eliminate private circuits in time. Some of the more remote locations would likely keep them to ensure quality. “If you replace private with broadband and implement all the security controls,” he

says, “you can see an average four-times performance increase at the same cost as the original private circuit.” There are other considerations, however. “Broadband doesn’t suppor t QOS [quality of service] features,” says Biever, “and latency is not as predictive due to all the different ways your network traffic can route over the internet.”

Pressure is on

Despite the need for banks to maintain ironclad security, Biever agrees that the rise of fintech innovation has upped the ante for all banks. He does think the day is coming when fintechs will be regulated. (See Threads, p. 8, for one fintech that wants to be regulated.) For now, Biever says, the fintech companies are able to do things quicker and cheaper—and better, in some cases. Their widespread use of APIs—application programming interfaces—for example, is something U.S. Bank is taking seriously, he says. “Banks will have to either adapt or just hang it up,” Biever adds.

SVP Doug Biever heads up a large chunk of U.S. Bank’s sizeable IT universe. To hear more from him on the bank’s increased use of video, the bank’s use of cellular networks, plus a description of Software-Defined Wide-Area Network technology from Comcast Senior Director Randy Reitz, go to

August/September 2017



/ risk adjusted /

Embrace change, manage risk Four strategies for innovating—without betting the bank By John A. Epperson, Crowe Horwath LLP, and Jason Henrichs, Fintech Forge


ost banks recognize that innovation, particularly technological advances and the new business strategies they enable, is critical to their ongoing success. The challenge is how to build a risk-tolerant culture that encourages and even enables innovation without compromising the necessary risk management capabilities of a sound financial services organization.

Need for innovation



growth rate. Collectively, the financial industry now seems to be getting the message that it must adapt and embrace change in order to survive.

Banks eager, but lagging Beyond overall industry awareness, there are signs that more individual banking organizations are coming to recognize the need to embrace change. At the same time, however, many organizations are struggling to address the challenge. For example, a recent online webinar sponsored by Crowe Horwath LLP asked

August/September 2017

a diverse group of 270 banking executives to characterize the current state of innovation within their organizations, using one of the four following descriptions: • Initial. Innovation processes, strategy, culture, and tools are in the early development stages. • Elementary. Innovation processes, strategy, culture, and tools are in place and are sophisticated enough to support the occasional repetition, but they are not integrated to assure ongoing or sustainable innovation. • Defined. Innovation processes, strategy,

How would you define your institution’s current state of innovation? Optimized (ongoing, proactive across the enterprise)

34% 39%

Defined (developed, but output not yet realized) Elementary (in place, but not ongoing or sustainable) Initial (early development or nonexistent) Source: Crowe Horwath LLP



Shutterstock/ Khakimullin Aleksandr

The ability to embrace uncertainty and to recognize and respond nimbly to change is critical to any business. History offers numerous examples of companies that have failed to recognize the importance and urgency of innovation, particularly in the past few decades when technology has enabled game-changing, new business approaches. The pace of these changes continues to accelerate as both star t-ups and large companies alike invest in disruptive change. There a re st a rk contra st s a mong companies in regard to change: some actively embraced it, some avoided it altogether, and others struggled and failed to manage it. For example, traditional brick-and-mortar retailers are struggling to survive as technologically nimble, online retailers offer customers unmatched convenience and pricing advantages. Companies like Amazon, having remade consumer sales, have even begun to venture into new twists on traditional retailing: through the Amazon Go concept and the Amazon Pop-Up stores, and Amazon’s recently announced purchase of Whole Foods Market. The same pressures and trends can be seen in banking and in the broader f inancial ser vices sector. One recent study, the “2017 Global Fintech Report” by PricewaterhouseCoopers, found that collaborative ef for ts between mains t r e a m f i n a nc i a l i n s t it ut ion s a nd fintechs had led to a cumulative investment of more than $40 billion in fintech start-ups in the past four years. In fact, fintech investment grew at a 41% annual

Competitive intelligence for bankers

March 2015



The key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself



Subscribe to continue to receive the latest banking news, trends and analysis.

/ risk adjusted / culture, and tools have been developed, documented, and integrated within the organization, but output may not be sufficient or has not yet been realized. • Optimized. Innovation processes, strategy, culture, and tools have been optimized to a level of sophistication to support the ongoing, automated, integrated, and proactive innovation across the enterprise. More than half the banking executives sur veyed (53%) said their organizations were still in either the “initial” or “elementar y” stages when it came to innovation (see chart, p. 26). Thirty-nine percent described their innovation efforts as “def ined.” Only 8% of the participants characterized their organization’s approach as “optimized.” Nevertheless, despite the relatively modest levels of innovation they perceived in their organizations, more than two-thirds (68%) of the participating executives indicated that their organizations have been eager to embrace change and financial services innovation. Comparing the survey responses leads to the obvious question: If so many banks are approaching innovation eagerly, why have so few banks been successful in optimizing innovation in their organizations?

The struggle with innovation Like many long-established businesses, financial institutions often find themselves at a disadvantage when trying to adapt to changing technology and the new opportunities it brings. This challenge is par ticularly tr ue in heav ily regulated industries, such as financial services. The need to maintain and continue to operate their core business securely, reliably, and in a compliant manner has historically resulted in people, processes, and technology that seek to eliminate risk. On the other hand, doing something new inherently involves taking on risk. These two conf licting approaches can seem like an inherent and insurmountable contradiction. Among the survey respondents, nearly half (44%) said that compliance, risk, and legal issues were the biggest challenges that they faced in ter ms of innovation (see chart, right). This number far exceeded those who cited budget or resource restraints, lack of executive support, or fear of failure. There are understandable reasons why compliance, risk, and legal issues 28


are widely viewed as the most critical factors inhibiting innovation. Entirely new risks—that is, the invention of new products, new customer segments, new marketing strategies, or new strategic par tners—present the r isk management function with difficult challenges, bec ause t here may be no model for identifying, quantifying, and mitigating these new types of risk. These new initiatives often are targeted at problems that are not and cannot be well categorized in advance of a launch. The new world of innovation requires an

risk-averse; it’s the nature of the business. Moreover, that innate tendency is reinforced almost daily by news of significant fines and penalties for compliance failures—not to mention the adverse headlines and reputational risk that such failures generate. The crucial challenge to overcome then is how to help develop an organizational culture that accepts and embraces reasonable levels of risk that support innovation, while still ma int a ining appropriate risk management as well as risk mitigation processes.

Four critical factors

The goal: apply the same ingenuity toward mitigating risk as in developing a new service iterative approach to problem discovery and solution development. Many executives conclude that their organizations simply can’t respond nimbly enough. By the time the risks are fully assessed and addressed, they contend, the opportunity already has passed or the result is incremental to existing products and services. At the same time, however, most of these same executives will concede that there are valid reasons for those multiple layers of approval and red tape. The banking industry is inherently

August/September 2017

Obviously, there is not only one approach for establishing an environment that supports innovation. By its very nature, innovation cannot be prescribed or mandated through a checklist. Nevertheless, industry observation suggests four broad areas in which effective management can have a direct impact on how well an organization overcomes inertia and encourages an environment in which appropriate levels of risk are viewed as acceptable. These areas are: 1 . Culture. Adapting the culture to encourage a more entrepreneurial spirit as well as a more balanced approach to risk is essential. This cultural shift starts at the top of the organization and requires many processes to be rebuilt. Critical f irst steps include establishing a common risk language and incorporating risk management into business planning; employee training; and individual performance evaluations. Furthermore, as the financial services ecosystem continues to broaden with

What is your institution’s biggest challenge to innovation? Overcoming compliance, risk, and legal issues


17% 44%

Lack of budget or resources Fear of failure or anticipated business returns Lack of innovative ideas or support for innovation from executive leadership Source: Crowe Horwath LLP


new strategic alliances, partnerships, and ventures, it is important that banking executives consider how these values and the culture are aligned. 2. Strategy. Banks also can benefit by adapting their business strategies to accommodate an environment of continuous change and to support strategic collaboration between risk management and the lines of business. The ultimate goal then is to develop a mind-set that recognizes that compliance is simply good business and to encourage innovators to apply the same levels of ingenuity toward mitigating risk as they do when developing a new product or service. Critical early steps in this effort include developing formalized, documented, and transparent risk appetite and tolerance statements, while also taking steps to encourage a more collaborative approach by seeing that the risk and compliance functions have a defined role in strategic decision-making. 3. Organization. To support the cultural and strategic elements just described, f inancial institutions also should be

prepared to rework their internal leadership and organization structures. The purpose of this reorganization effort is to establish a dedicated focus on innovation throughout the bank, while also breaking down silos to improve coordination and transparency across the three lines of defense: management control; risk and compliance oversight; and independent audit or assurance. In many instances, another useful organizational change is establishing a formalized and dedicated innovation office with clearly defined responsibilities and priorities. 4. Change enablement. A significant challenge for many banks is how to enable change and innovation, while still maintaining stability within their core lines of business. Successf ul change enablement approaches often involve establishing formalized incubation and accelerator programs. Such programs can be used to help mobilize multidisciplinary teams and establish plans for resilience and change management.

The risk management function should be included in these efforts, because risk professionals can make a valuable contribution to innovation by identifying early any potential compliance risk. Their involvement can help product developers adapt their offerings as necessary in order to “innovate the compliance risk out� of a new product or service. By addressing these four critical areas, and by establishing greater collaboration among the risk management function, the dedicated innovation team, and the existing lines of business, banks can find the right balance between innovation and risk. Ultimately, board members and senior executives must take the lead in establishing a risk-tolerant culture that encourages innovation while still maintaining the necessary risk management functions that are indispensable to a stable financial services organization.

John A. Epperson is principal at Crowe Horwath LLP. Jason Henrichs is managing director at Fintech Forge.

August/September 2017



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 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 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.

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More than a prize winning magazine


anking Exchange, now in its third year, represents more than the print magazine in your hand. We’re also, covering everything from community banking to compliance to fintech to current bank-relevant books. A stable of regular bloggers and guest bloggers give experienced views on topics including compliance, credit,



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fintech, tech trends, and more. Learn of our latest web postings by subscribing to our e-newsletters, the award-winning Editors Exchange and Tech Exchange (subscribe at Follow us... … on Twitter: @BankingExchange … or LinkedIn: company/banking-exchange

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INTERACTIVE index of advertisers Welcome to Banking Exchange’s Interactive Service Center. This section has been created to allow you to interact with the advertisers who appear in this issue and to gain information on the products and services offered in the following pages of the magazine. Company Phone


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August/September 2017



/ CounterIntuitive /

Who the heck are you? In a digital world, identity grows more important than ever By Steve Cocheo, executive editor



standards that can be built upon.” Jarae says that identification can be broken into four key components. First is creation—typically through some stateprovided scheme, such as Social Security or tax identification numbers. Second is verif ication or associating identity data with a specific individual. Third is authentication or matching the individual to a trusted database to prove he is who he says he is. And there is authorization—what the identification system enables the proper individual to use or do. Creating a system per mitting the unidentified to be identified and given the ability to identify themselves has been attempted and solved here and there. Jarae points to the Indian Aadhaar system, introduced in 2016 and administered by the Unique Identif ication Authority of India, as an example. “Aadhaar” has various translations, including “base” or “foundation.” The voluntary system uses a combination of demographic and biometric data—including fingerprints, iris scans, and a facial photograph—to generate a 12-digit number that becomes an identification. IDs created in this way can be verified online. Among the goals of the program is promotion of financial inclusion. Jarae’s group monitors a growing list of identification issues, outlined in an OWI blog. Many of these are being tackled by various fintech players. They range from

August/September 2017

physical biometrics and behaviorial biometrics—what you are to how you act—to marriages of social media and traditional data sources to turn “anonymous [website] visitors into known customers.” Fraud prevention and ID protection also are facets of this ID world. Mobile devices have introduced a new wrinkle. Jarae points out that people are more apt to have a mobile phone today than they are to have a bank account. Can that device become a basis for identification? Perhaps, but, Jarae asks, how secure can that be made? Jarae says the device as ID could come as more technology is applied, such as using machine learning to figure out how to use geolocation as part of proving who someone is—e.g., “Does it make sense that my phone is in Chicago today?” The ID conversation is fluid and influenced by technological developments, societal change, and, not surprisingly, politics. Jarae says he frequently worked with Obama administration officials, who saw ID issues more as World Bank and U.N. initiatives. He says the Trump administration tends to view ID issues through a security lens. “It’s the other side of the coin,” Jarae says. OWI is creating a series of working groups within fintech players’ leadership ranks. Jarae hopes the end product can be a technology solution for identification that can be built upon.



icense and registration please.” In the United States, we take the ability to prove who we are as routinely as that law enforcement request is uttered. From birth, we have a Social Security number and a birth certificate. So remarkable is falling into the cracks in this country that Radiolab did a podcast last year titled “The Girl Who Doesn’t Exist,” which covered the struggles of a young Texan born at home and homeschooled who officially doesn’t exist. Much a s bankers complain about the compliance burden of anti-money laundering regulation, the know-yourcustomer reg ime demonstrates how well identity can be administered in the United States, says Travis Jarae, CEO at One World Identity (OWI), a consulting and conference firm dedicated to identification issues. Jarae says anyone who meets U.S. identification standards can pretty much bank anywhere in the world. “How do we get other people to that point?” asks Jarae. This is a larger matter than many Americans may appreciate. The World Bank states that one in six people in the world—many in Africa and Asia—cannot prove who they are. That’s about 1.1 billion who have no formal identity. Anonymity creates difficulties in opening a bank account or accessing credit. An array of life connections hinges on being “somebody.” So integral is identification that providing it for all, from birth, is among the many goals outlined in the United Nations’ 2030 Agenda for Sustainable Development. This challenge of identity has grown larger still in our increasingly digital age. Prior to cofounding OWI a little over a year ago, Jarae, who started in compliance at Citibank, headed up a team in Google’s innovation lab, Area 120. His job was to help Google identify “the next billion users.” For a firm that rules vast parts of the internet, identification is critical. A n old meme of t he web c a n b e expressed freshly as, “Nobody on the internet knows you are a dog pretending to be a friend,” says Jarae. “But the problem hasn’t been solved yet—a universal set of identity


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