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Competitive intelligence for bankers

June/july 2017


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/Contents June/July 2017

14 Is regtech real? Compliance burdens aren’t going away, but there’s hope: New tech promises to carry more of the load. But can tech deal with growing gray areas? By Steve Cocheo, executive editor & digital content mgr. Cover image: Shutterstock

20 11 actions to spur change When same-old same-old doesn’t cut it anymore. By Lisa Joyce, senior contributing editor June/July 2017



/ contents / 4 On the Web

June/July 2017, Vol. 3, No. 3 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

Banking marijuana in Colorado; 5 ways not to solve tech crises; 10 questions for vendors

6 Like it or Not What do you really want your bank to be known for?

8 Threads SBA loan enabler; Lending snapshot; Eye on deposit betas; Was “Wannacry” precursor to the “Big One”?


11 11 Seven Questions Should banks become guardians of Americans’ financial health? CFSI’s Jennifer Tescher backs that.

25 Bank Tech “Up to speed on Artificial Intelligence” launches print/web series on key topic.

28 Risk Adjusted “Sideloading” can turn mobile devices into risky malware magnets.

30 Compliance Watch How many experts does it take to turn a supercomputer into a compliance guru?


33 Idea Exchange Community bank’s traditional approach to Trust generates 10% of net income.

34 Industry Resources White papers, eBooks, Webinars

36 Counterintuitive Time for a “banker on your wrist”? 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


June/July 2017

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









/ ON THE WEB / Now Showing at

5 ways not to save failing tech projects

10 questions to weigh vendor relationships by

Letter from Colorado: banking marijuana

Every bank has had an IT effort run slow—or even off the rails. Blogger Anna Murray presents 5 sure-fire ways to not save the day. You’ll enjoy Murray’s plain-English, often funny “Tech Sherpa” blog every month. Read this blog at

Banks hear much about seeking “partnerships” these days. Is your vendor relationship truly a partnership? Cornerstone Advisors’ Terence Roche suggests 10 pointed questions that will get at the truth. Read more at

Recreational use of this drug has been legal in blogger Nancy Derr-Castiglione’s home state since 2014. One of our “Common Sense Compliance” bloggers, she describes the confusing state of compliance. Read more at

ALCO Beat: Solving challenges all banks face No matter how large, no matter how small, every bank must deal with asset-liability management. The Federal Reserve’s changing rate policies will bring up new issues, new questions. Darling Consulting Group experts address key issues in the “ALCO Beat” column. Read the latest article, on deposit strategies, at

@BankingExchange banking-exchange



June/July 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

Competitive Intelligence for Bankers Magazine: Banking Exchange is an indispensable resource for the management of today’s bank, conveying fresh ideas, solutions, and insight from award-winning journalists. Website: offers continuous banking news coverage, analysis, and blogs.

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/ like it or not /

What do you want to be known for?


ou may or may not have heard of the Center for Financial Services Innovation or its founder, Jennifer Tescher. Our Seven Questions interview with her will fill you in on both. Not all bankers will embrace her views, but the premise that financial institutions as profit-making private enterprises can be a force for good in people’s lives is hard to argue with. Bankers have been saying that for years. Tescher takes the point a step further, though. She says that banks should be promoting financial health, and that this, in fact, will become the new basis for competition in a rapidly changing financial services world. That’s a concept worth some thought. In some cases, however, that could mean abandoning certain products and practices, leading to short-term hits to earnings. Tescher advocates, for example, eliminating checking accounts. They are out-of-date, she says, and cause a great deal of stress for millions of Americans. She’s well aware that they are a source of considerable revenue from service charges and overdraft fees. With the ever-g row ing wave of innovative fintech applications, the disappearance of checking accounts as they now exist could happen. At the least it’s healthy to think about better ways banks could meet core transactional needs of individuals and businesses. Some banks have been doing that. We w rote about one example in the last issue—Fifth Third Bank’s popular Express Banking account. It has no minimum balance, no check writing, and no overdrafts. It’s not a checking account, but for certain customers it is their primary transaction account. The product generates fees from check cashing, debit card use, and optional services such as identity theft protection, and the bank says it is accretive to shareholders. If somet h i ng li ke E x pre ss Ba n king were a bank’s principal transaction account offering, however, that could be a tough revenue hurdle to clear without something to offset it. Nevertheless



June/July 2017

we believe banks increasingly will be challenged to invent alternative ways to create sustainable return on capital in an increasingly “transparent world.” Let’s amend that to say: “In a world in which information f lows increasingly fast.” There’s actually very little real transparency. Although transparency often is claimed in public statements, claiming it does not make it so. The word means “free from pretense or deceit; readily understood”—i.e. not misleading. It is the antithesis of “spin,” one of our current society’s worst addictions. If applied in business in its true sense, transparency would, among other things, cause companies to question products that profit purposely from people’s misfortunes, mistakes, misbehavior. For banking, an industry based on trust and service to the community, offering such products is not a good place to be. We know bankers who would agree w ith that. One is quoted in the Idea Exchange department where we write about Kansas-based Central Bank & Trust’s trust and brokerage business. Years ago the bank shifted the brokerage business from a packaged product with a front-load fee to an assets-under-management arrangement that was “much more black and white” for customers to understand. It has done very well. Many banks have long offered options to avoid unnecessary fees, it’s true. But those options are not always practical for many customers, or known about. Technology now enables choices that are widely available and easier to use. Embracing them will benefit both the industry’s reputation and its success. You may be thinking: At a time when many banks are scratching for new revenue sources, isn’t that a bit idealistic? Integrity is never idealistic. Sad to say, integrity is not a word that comes to people’s minds when they think about banks. In part that stems from the regrettable actions of a few institutions. Yet in truth, every bank (and the industry overall) would benefit by reevaluating how it prices, what it offers and to whom, and what it wants to be known for.

BILL STREETER, Editor & Publisher

‘Transparency’ is often claimed in public statements. Claiming it does not make it so

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SBA ENABLER SmartBiz likes small end of SBA market and helps banks get back in

By Bill Streeter Editor & Publisher

SBA Loan Snapshot Of the 2,045 lending institutions active in the Small Business Administration’s 7(a) loan program in 2016, 95% were depository institutions. Of those, 735 had Preferred Lenders Program (PLP) status. The agency’s fiscal year ends Sept. 30, and the data at right are through May 26 for both 2016 and 2017, so they are directly comparable. Rankings are as of Dec. 31, 2016. All data from SBA.



June/July 2017

LOAN VOLUMES (millions)



FY2016 7(a) $14,842 504 $2,978

FY2017 7(a) $16,028 504 $3,403



ou’d think government-guaranteed small business loans would be a commodity market if ever there was one. But the SBA market is alive with innovative approaches. In recent issues, we have profiled two distinct bank players—San Diego’s Seacoast Bank, an SBA real estate lending specialist operating in the western states, and Live Oak Bank, the North Carolina-based SBA lender that relies on multiple market specialists operating nationwide. Add to this mix the fintech company SmartBiz, growing rapidly in the SBA lending market since the fall of 2013. Collaboration with banks is a key part of the SmartBiz business model. SmartBiz CEO Evan Singer says the private company currently works with five banks in the U.S., but is interested in

Shutterstock/Maksim M

expanding that number. Two of the five he mentioned in an interview were Salt Lake City-based Celtic Bank, an SBA specialist, and Seminole, Fla.-based First Home Bank, a small community bank now making SBA loans nationally. SmartBiz began life as a consumer online lender in 2010, but three years in, switched gears when client Metro PCS asked if SmartBiz could finance some of Metro’s independent dealers. Singer and his team realized their origination software could be adapted to the smaller end of the SBA loan market, a market he says most banks had lost interest in because of the cost of originating and handling these small loans. Borrowers were left with few options and the void was filled by online or marketplace lenders, but at a very high cost, often requiring high monthly payments. SmartBiz stepped in with an arrangement that creates, as Singer likes to call it, an “ecosystem” for small businesses and lenders. The company’s online (and mobile) application system makes it simpler and quicker for small businesses to apply for an SBA 7(a) loan, simplifying a complex, time-consuming process. The applications that make it through the company’s artificial intelligence filter are offered to the group of banks working with SmartBiz. The fintech incorporates (digitizes) each bank’s unique underw r it i ng—it s “c re d it b ox ”—i nt o t he

underwriting system the bank licenses from SmartBiz. It doesn’t impose one standard on all banks. This allows the banks to be in control, says Singer, and gives the borrowers a better shot at a “yes.” The underwriting is not fully automated—a human at the participating bank makes the final decision. The APR for SmartBiz loans averages between 7-8% says Singer, compared with other marketplace lenders where the APR can be 40% or higher. As a result, about 50% of the company’s business is refinancing other loans. The underwriting software that the banks license simplifies and streamlines a time-consuming process, Singer says, which makes it more appealing for banks to be in the lower end of the market. The bulk of SmartBiz-arranged loans are SBA 7(a) loans of less than $350,000, says Singer, although the firm has a program for larger loans, as well. Even with just f ive partner banks, SmartBiz arranged $225 million in originations last year making it the largest program for traditional SBA 7(a) loans under $350,000. Singer says the company is looking to add bank partners, but not necessarily “hundreds” of them. A bank must be an SBA Preferred Lender to join up. @ To read an edited Q&A of the interview with Singer on BankingExchange. com, go to

KEY 7(a) BORROWER DATA FY2017* Ethnicity 31% All Minority 54% White 15% Undetermined Gender 16% Female Owned 50% or less 14% Female Owned more than 50% 70% Male Owned

Banking Exchange wins 7 awards


undreds of publications vie for the coveted peer awards known as “Azbees,” handed out by the American Societ y of Business Publication Editors. For the second straight year, Banking Exchange won multiple awards for editorial excellence. The magazine and website took home four awards in the Northeast competition. Three of the four entries also won national awards. Banking Exchange was the only banking publication to win national awards. The awards were: Gold national/Gold regional for online Q&A: “Fair Lending from a Veteran’s Perspective” by Steve Cocheo Silver national/Gold regional for print article: “Signature Bank Profile” by Bill Streeter Bronze national/Silver regional for print article: “Eastern Bank Profile” by Steve Cocheo Silver regional for print article: “Sales Under Scrutiny” by Steve Cocheo @ To view any of these articles, go to

TOP FIVE 7(a) LENDERS (millions)

$839 $710 $337 $305 $282

Wells Fargo Bank Live Oak Banking Co. Huntington National Bank JPMorgan Chase Bank U.S. Bank

*Based on $ volume

June/July 2017





Gauging the impact of rising rates By Nathan Stovall, S&P Global Market Intelligence


ven as rates increased over the last 18 months, deposit costs have only moved modestly higher, but funding pressures could soon emerge. In 2016, the deposit beta—or how much of the change in rate banks passed on to customers—was just 12%, well below the 41% and 62% levels sustained in 2005 and 2006, respectively, during the last tightening cycle. Betas are expected to rise as the Fed continues raising short-term rates. Bankers said during their respective f irst-quarter earnings calls and at the Gulf South Bank Conference on May 8 that the impact of higher rates on funding will be more evident in future quarters, particularly if the pace of rate hikes increases. Mike Achary, CFO at Gulfport, Miss.based Hancock Holding Co., said at the conference that the first two rate increases in December 2015 and December 2016 resulted in virtually no change in deposit costs. He added that the last rate hike in March put slightly more pressure on customer rates. Achary expects further rate increases to push deposit betas even higher. Economists expect at least two more rate increases this year. Some bank advisers, such as JPMorgan

Chase & Co., believe the industry as a whole will face greater liquidity pressures over the next 12 to 24 months as the value of core deposits is once again recognized. The Fed is now considering shrinking its balance sheet and JPMorgan believes the effective reversal of quantitative easing could reduce bank deposits and funds institutions park at the central bank by

approximately $1.5 trillion. Under that scenario, JPMorgan analysts argued that loan growth would exceed deposit growth by $200 billion to $300 billion per year, pushing loan-to-deposit ratios up to 95%. Read the full article on at depositbetas


he recent global ransomware a t t a c k d u b b e d “ Wa n n a c r y ” likely will serve as a wake-up call for everybody on the internet to pay attention to their cyber defenses. Repor t s indicate that more than 230,000 users in 150 countries had their computer screens taken over by an ugly red page on which the criminals demanded $300 in bitcoins, or else all data would be wiped. Fortunately, it seems that no U.S. banks were so targeted, according to the Financial Services Information Sharing and Analysis Center. But it’s sobering to consider what a close call this really was for U.S. banks. As recounted in a podcast sponsored



June/July 2017

by Wharton School of the University of Pennsy lvania, a big reason the United States in general was spared was because one researcher found a “kill switch” that effectively contained the attack. “This was not the big one,” said Andrea Matwyshyn, professor of law and computer science at Northeastern University, during the podcast. “This was a precursor of a far worse attack that will inevitably strike—and it is likely, unfortunately, that [the next] attack will not have a kill switch.” Cybersecurity in the banking industry has long been top of mind. Still, the world has changed and that attention will only need to be ratcheted up.

The basic issue facing bank cyber defenses comes down to vulnerability—and plugging all the gaps as soon as they can be identified. But it’s not that simple. At the same time, most banks are wrangling with new demands from their customers for easier and faster access and services. That opens huge gaps. To put a number to it, cybersecurity firm Kaspersky Lab in a recent survey found that “24% of banks worldwide struggle with the identification of their customers when delivering digital and online banking services.” — John Ginovsky, senior contributing editor Read the full blog at BigOneBEblog

Shutterstock/MIND AND I

Wannacry, precursor of the “Big One”?

/ Seven Questions /


Part missionary, part venture capitalist, Jennifer Tescher works to improve everyday Americans’ financial health By Bill Streeter, editor & publisher


f you place yourself between two opposing sides, you are likely to become a target for both. If both sides respect you, however, you can be the means to channel divergent views into a common good. Jennifer Tescher and the organization she founded and leads, the Center for Financial Services Innovation, walk in that middle ground every day. Although the center’s name suggests a group dedicated to enhancing the role of financial institutions, CFSI’s reason for being is to help improve financial health for the majority of Americans. It is not a lobbying organization. It is not a traditional consumer advocate. In large measure, its 13-year existence has centered on raising awareness of a largely overlooked, but widespread situation: the financial difficulties faced by a majority of working Americans—an

ongoing, and often stressful, struggle to make ends meet. The recent presidential election shined a spotlight on this issue. C F SI i s no long er b a n k- c ent r ic . Although banks are financial supporters and bankers sit on the board, so do representatives of credit unions, fintech companies, and technology companies. Tescher grew up in Florida and says she has always had a strong interest in issues related to poverty and inequality. This led her to a journalism degree from Northwestern University, after which she worked at the Charlotte Observer in North Carolina for several years. When she went back to Chicago to get a graduate degree in public policy from the University of Chicago, one of several jobs she held was an internship at ShoreBank, where she eventually worked full time. The bank, since closed, was the country’s

original community development bank. Tescher’s work involved helping people to save and build assets. While at ShoreBank, she became taken with the idea that finance can be a force for good in people’s lives and that the private sector can bring significant scale to this work. After about seven years, Tescher joined the Ford Foundation, one of the bank’s shareholders. The foundation tasked her with creating a strategy to implement the findings of a paper on how the internet was going to reduce the cost of serving bank customers and dramatically increase access. Foundation officials liked her plan so much they handed her a check and said, “Go do that.” This three-year funding commitment launched CFSI. This was in 2004, the year Mark Zuckerberg invented Facebook in his dorm room, and three years before the rollout of the iPhone. Thir teen years later, CFSI ha s 55 employees and 99 member companies; hosts a major f inancial health forum called Emerge; and operates the Financial Solutions Lab. Tescher is president and CEO of the Chicago-based organization ( One notable CFSI research project was the U.S. Financial Diaries. The sevenyear project followed the lives of 235 low- and middle-income families/individuals through a year, and chronicled the financial distress of many working Americans in a time of unprecedented prosperity. The research culminated in the publication this spring of The Financial Diaries (Princeton University Press). The follow ing dialogue, edited for length and clarity, is based on an hourlong interview with Tescher. Q1. CFSI uses the term “underserved” now versus “underbanked” and “unbanked.” Why the change? When we started, we were about putting the un- and underbanked on the map— working largely with banks, trying to show them that these groups represented a business opportunity. Over the next ten June/July 2017



/ Seven Questions /

years, three big things happened. One, the iPhone was invented, and between the iPhone and prepaid debit cards, access became a nonissue. Second, the financial crisis and recession really laid bare the fact that the majority of Americans were financially challenged. Up until then, it had been masked by overindebtedness. This wasn’t just a blip. The financial struggles of Americans continued after the economy began to improve. The third thing was Silicon Valley waking up to the opportunity to disrupt the financial services industry—the rise of fintech. So all three reasons led us to conclude that access for the un- and underbanked was no longer the right focus. Having a bank account, in and of itself, is no guarantee that you’re going to be in good financial shape. We realized that what we really cared about was financial health. That is the ultimate outcome we are promoting. Further, we think that everyone else in financial services should be promoting it too, because that’s the business they’re in; that’s what their customers want from them. We believe financial health represents the future basis of competition, because location doesn’t matter anymore and price increasingly doesn’t matter, but engagement with the customer around their financial wellbeing does. So we’ve spent the last three years working with a range of companies to define financial health, measure it, and 12


June/July 2017

We believe financial health represents the future basis of competition — Jennifer Tescher, CFSI create a set of indicators and metrics, and we’re using that to think differently about the kinds of products and experiences being created, and ultimately about how financial services companies measure their success. One other thing has evolved. When we started, we were heavily focused on products. But we realized if products were the answer to improving people’s financial health, we’d be there by now. It has to be more than that. It has to be in the DNA of a financial institution that the business it’s in is to help consumers improve their financial well-being, not just to sell another checking account. Q2. The Financial Diaries profiles the Johnsons, who are not poor and use many financial products, yet struggle to make ends meet. The book says “The system is not working for them.” How can it be made to work for them? I have two answers. The f irst is that technology can help to optimize decision-making with people—for example, an app that tells you when and in what order to pay your bills, which was a big

problem for the Johnson family. What if you could draw down money you’ve already earned, but haven’t been paid for? That could help you smooth out your cash f low. That solution exists today. Companies, such as Activehours and PayActiv, offer it. So, for example, if I normally get paid on Friday for a week’s work, but I have a bill due on Wednesday, after I’ve worked three days, it would be really helpful to me to have that three days’ pay rather than having to get an advance. These companies, essentially, are making your pay available on a more frequent basis. It’s different from a payday lender because being given money you’ve already earned isn’t credit—the money already belongs to you. [Activehours has no fees or interest rates, but most users leave a “tip” for the app. PayActiv charges a f lat $5 per transaction fee, which some employers pick up.] But technology, in and of itself, is not the answer—not the full answer. The other part is engagement. I hesitate to call it counseling because it could be virtual. It would involve one or all of the financial providers in the Johnsons’ lives

looking at the big picture with them— having a real conversation about not only the problems they’re having with their checking account, but conversations about their goals, or at least what their next goal is. We have a framework of eight indicators of financial health built around spend, save, borrow, and plan. It’s a way to organize your engagement with the customer. If improv ing a customer’s f inancial health was measured, then even the way we compensate front-line employees would be different. It wouldn’t necessarily be on product sale, or even necessarily on a satisfaction score. Q3. What was the goal of setting up the Financial Solutions Lab? We were founded to answer the question: How can technological changes in financial services benefit those who need help the most? That has involved, essentially, two things: one was research and writing, but also, from the very beginning, we have been investing in innovation. In the early days, we literally were investing off our balance sheet. Later, we helped create and then spun out a venture fund called Core Innovation Capital. We also have done some hackathons and other competitions. Several years ago, JPMorgan Chase approached us about doing something together. We combined all our experiences up to that point and said, “Let’s create a lab as a competition to find the most promising entrepreneurs to solve consumers’ financial health challenges.” We decided not to just give the winning entrepreneurs money, but to give them exposure, connection to legal and regulatory resources, marketing support, and, most importantly, connect them to the broader CFSI network for advice, partnerships, and potential exits. This spring we completed our third cohort of companies. [Those companies competed at CFSI’s Emerge Conference in June for top honors as well as support.] Our model is unique because we’re working with a diverse array of companies, organizations, and stakeholders. The interconnections are really where the most exciting things are happening. Banks do not submit entries into the CFSI lab competition. We work w ith banks through consulting and other ways that do not involve a financial investment. The lab is a different format.

Q4. CFSI came out in support of the fintech charter proposal put forward by the Comptroller’s Office. Why was that? It’s an increasingly unpopular position, isn’t it? I don’t think any of us know what will happen on this issue, particularly in this version of Washington. But technology is changing everything in our lives so dramatically that to think that regulatory structures and frameworks we’ve put in place for decades will stand the test of time without any alteration is shortsighted. I appreciate that it’s difficult to make changes when you’re not 100% sure what the end state is going to look like. But we can’t wait until we get to some stopping point. It doesn’t work that way. Is the fintech charter as envisioned perfect? Absolutely not. Do I applaud the OCC for being willing to evolve how it does business? Absolutely. Regulation is more art than science. Whether or not this charter comes to pass, introduction of the concept is already doing some important things. For instance, it has really lit a fire under state regulators, causing them to think how to modernize and engage with newer actors. Q5. How do you view the new administration from the perspective of CFSI’s work? The Trump campaign and election shined a spotlight on the financial challenges of everyday Americans. We have been focused on that for a long time. So to the degree that this administration is raising this issue and causing more conversation and, hopefully, action, that’s a positive. Some of the choices that the President is making, whether in his budget or some of his executive orders related to retirement or savings, are contrary to helping everyday Americans improve their financial lives. So I think it’s a mixed bag. When I talk about financial health in regard to the government, my dream is that government would see it as a matter of affirmative responsibility to promote financial health of its citizens. It would be analogous to what it does with public health, where we have a surgeon general, the Centers for Disease Control and Prevention, standards, and regulations. Q6. You’re not a fan of checking accounts. Can you explain why? I’m all for financial services that meet people’s needs and provide some level of convenience. But the world has changed a lot from the time many of these products

were created. Many don’t ref lect the financial lives people live anymore. As an example, a checking account is predicated on liquidity, right? The idea that you have funds in your account. In the past, when you deposited a check, it didn’t really matter if the bank was going to give you all the money right away because you had a balance in your account. But as more and more people live paycheck to paycheck, there is no cushion. A checking account doesn’t make a lot of sense. To get on my soap box for a minute, the fact that we are still using checks in this country is crazy. Checks are like a blunt instrument. They cause so much of the problem for people who struggle financially. Getting rid of checks, in and of itself, would be a huge help for people from a cash f low perspective. We really should phase out checks entirely and use all the time, money, and energy spent managing and handling checks and use it for faster payments or spending more time with the customer. Q7. What has changed to have so many people struggling financially now? Part of the challenge we have in this country is that wages haven’t kept pace. They have been stagnant. People have spent the last 20 years filling the gap using credit. Products that were originally envisioned as a courtesy, like overdrafts, have become the way in which people get by on not enough income [or not enough at the right time]. It’s not that people aren’t working hard enough. It’s not always because they’re poor money managers, either. We have an income problem in this country. Banks can’t solve an income problem, and there is a fine line between helping someone bridge a gap and setting them back. After 13 years, I’ve learned you can never stop telling the stories of real people and their financial lives to remind people in business a nd gover nment what many consumers are dealing with. Because if you haven’t had that kind of life experience yourself, it can be hard to relate to it. That’s why The Financial Diaries is so valuable. It doesn’t just talk about a particular decision a family made or what products they use, it tells how they actually live their lives. The more we can put ourselves in the shoes of our customers, the more we can actually design and deliver an experience that’s going to meet them where they are. June/July 2017




f banking’s compliance fraternity had a coat of arms like those made for the knightly orders of old, it might include the following heraldic devices: • An hourglass, almost out of sand, to symbolize how compliance officers are nearly always facing some issue with inadequate time. • A stack of papers depicting the vast body of fine print they must be up on. • A stack of $100 bills burning to symbolize ongoing and rising costs of compliance. • A mythical beast with 1,000 eyes that symbolizes their need to look in many



June/July 2017

different directions at once. • A scroll at the bottom with the Latin equivalent of, “What will Washington think of next?” Probably way too much to fit on a shield. Yet all those images, and others any banker could add, do not exaggerate the challenges facing banking. For many institutions, the regulatory vat has been overf lowing for some time. Gridlock in Washington only underscores that nothing meaningful will change soon on the “supply” side of compliance. But there’s a consensus that something has to change. That something may be the industry’s compliance solutions. And regtech may be the answer if the industry goes in with open eyes.

More people isn’t the answer

“We’ve gotten to the point where financial institutions can’t just throw more FTEs at the problem anymore,” says Andrew Sandler, a veteran banking attorney and chairman and executive partner at Buckley Sandler LLP. “There needs to be an alternative solution.” Capturing the cost of compliance in money and human capital has been a challenge. One provider of compliance technology solutions, Continuity, has offered its Banking Compliance Index since 2013. In the first quarter of 2017, the index dipped for the first time since Continuity launched it. It meant that less than one extra full-time employee


By Steve Cocheo, executive editor & digital content manager

Fintech’s cousin could be an answer to compliance overload

was needed to cope with the quarter’s regulatory changes, and the firm indicated that the slowdown was likely an aberration. Volume was affected by a combination of factors, including the transition to a new administration and the uncertain status of certain regulatory posts and organizations. “Nobody’s popping the champagne cork s yet ,” Pa m Perdue, C ontinuit y executive vice-president and chief regulatory officer, allowed when the firm announced the dip. “One down quarter does not make a trend line.” Even if nothing new came out of Washington for a couple of years, however, the challenges of compliance risk management remain daunting. Many facets of

regulation won’t go away, and the evolving nature of banking and financial services today drives more and more work. “Hiring lots of people is just not sustainable,” says Monica Summer ville, senior analyst at TABB Group, a Londonbased firm that has studied regtech. “Often, fintech is a solution looking for a problem,” says Summerville. “But regtech reflects a pressing need.”

What is regtech? Different people define it differently. A good overall definition comes from the United Kingdom’s Financial Conduct Authority, which many credit with coining the concept. In a white paper issued last year, FCA stated: “RegTech is a

subset of FinTech that focuses on technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” That’s a concise definition of a trend that grows broader and deeper, changing as you read this article. Regtech—we’ll use that spelling in this a r t icle—is spawning all kinds of activity in financial services—from a growing number of companies to newly formed associations to brand-new conferences and strong investor interest. Regtech is, and will be, applied to traditional compliance challenges, for sure, but it also may drive new ways of promulgating and analyzing regulations themselves. One example, cited later on, monitors June/July 2017



employee interactions on digital channels. In time, regtech may redefine what compliance officers do all day; how they relate to the rest of their organizations; how much and what kind of expertise a bank must have on staff; and how the three lines of defense—line-of-business front line; compliance; internal audit— will evolve in practice.

Tech’s role grows cheaper and deeper

This new science builds on an open secret about compliance: Many aspects of this quintessential banking responsibility have long depended on technology. “ The marr iage of compliance and technolog y goes ba ck ma ny yea rs,” say s T imot hy Bu r n ist on, exec ut ive vice-president, advisory services and regulatory relations at Wolters Kluwer Financial Services. “But back then, it was for mechanical operations.” That use of technology in compliance will continue to expand. But regtech will morph technology’s role into areas previously considered the province solely of human brains. Regtech will include elements of artificial intelligence, augmented intelligence, robotics, cognitive computing, machine learning, and more. It’s quite conceivable that regulators will 16


June/July 2017

expand their own use of technology. One of the biggest bets placed on regtech was last year’s purchase of Promontory Financial Group LLP by IBM, specifically to bring IBM Watson, the supercomputer, into the compliance world. Watson is being trained by Promontor y experts to learn how to read, comprehend, and analyze regulations to augment human compliance efforts. And that is just the beginning. (See this month’s Compliance Watch, p. 30.) The foundations of today’s regulatory regime were laid when data processing and analysis were comparatively cumbersome, highly specialized, and very expensive, notes Jo Ann Barefoot, a former reg ulator and consultant and a longtime regulatory guru. Now, there is more computing power in an iPhone than in a whole block of the old mainframe computers, and low processing costs have made much possible in the realm of big data and analytics than was the case previously, says Barefoot. The API—application programming interface—is redefining how software is built. Barefoot’s belief in this new science manifests itself in her own decision to found start-up Hummingbird Regtech, Inc. Initially, the firm will bring out regtech to assist bankers with Suspicious Activity

Reports (SARs), but Barefoot sees great potential in other areas, as well. “ Today, there’s not a piece of data someone doesn’t like,” says Richard Riese of SMA ART.COnsulting, and a former senior federal regulator and ABA compliance official. Yet that very ability to crunch data to our heart’s content affects the gut and the brain. One compliance officer states that data overload is general now and that simply absorbing all the raw information coming to his desk robs him of sleep. A growing part of regtech is based in the cloud, something that requires a comfort level throughout the bank, but especially in information technology, where bank data allowed outside of the bank’s firewall can cause twitchiness, according to banking attorney Sandler. “Most of the really good stuf f out there is cloud-based,” says Sandler, who is involved in both a regtech firm and a proposed regtech conference. By contrast to IT officials, he says, “the regulators are getting much more comfortable with cloud-based solutions.” One of the benefits of the cloud, discussed in the FCA white paper mentioned earlier, is that tapping it can reduce costs and make innovative solutions and advanced computing more accessible.



Early days in regtech land A creative tension is already developing in American regtech. On the one hand, there are solutions out there or in development that come from software engineers—the “techs.” These players have their roots in fintech—players who think they can bring a new eye to long-standing problems. Established information technology and software companies also are striving to be part of this. One example is Barometer, a regtech service unveiled by D+H, which is designed to test how well bank staff understands various compliance responsibilit ies. (A major Ca na d ia n ba n k collaborated in its development.) The technology, offered in subject-specific modules, presents scenarios to employees whose reactions are evaluated. On the other hand, there are regtech ventures run by veterans like Barefoot and Sandler who come from deep regulatory roots—the “regs.” Sandler’s regtech company, Asurity Technologies, representing a merger of three players in regtech, will offer technology assisting in mortgage document preparation, fair lending, and redlining, with more areas of coverage planned. Major consulting firms also play both active and advisory roles. “I see a lot of fintech firms who want to get into the regulatory space, who think they can do it better, and, in fact, may be able to do so,” says Dan Soto, a longtime regulator who is now chief compliance officer at Ally Financial. “Just trying to keep up with who is out there and what their capabilities are is challenging.” “A lot of the people who come in with smart ideas have never worked in a bank,” says Accenture’s Samantha Regan, managing director—f inance and risk and North American practice lead. “There needs to be some alignment to help solve banking clients’ problems. It’s very much early days. But we do see a lot of interest.” But Soto appreciates the developing battle between the new techs and the seasoned regs because it is raising the bar, in his view. “I actually don’t mind the creative tension,” says Soto. Getting past the wow factor of regtech applications, Soto goes to the heart of what the compliance fraternity most desires out of the regtech: that it will “bolt on” to good processes. “Ultimately, what you want is to be

able to stop things before they become bigger problems,” says Soto. The closer to real-time compliance a bank can get, the fewer 60-day-old surprises will be found, for example. Indeed, Barefoot compares the potential for some forms of regtech to those continuous blood pressure cuffs patients are f itted w ith. These dev ices per iodically inf late automatically, take a reading, and relay the data to physicians for ongoing monitoring. “We’re at the forefront of a very significant integration of technology to improve the effectiveness of compliance and to drive down the cost of compliance,” says Sandler. “Regtech is a new term, but it’s not a new concept. But we are at an inflection point in terms of finding more profoundly effective solutions.”

Remembering the point

One must beware of a bandwagon effect with new technology. SMA ART.COnsulting’s Riese warns that banks buying regtech must separate the fancy from the essential. “They’ll have to be clear on how well it performs,” he explains, “and on how much of what they see is eye candy.” In the wake of the Wells Fargo sales scandal, points out Riese, banks need regtech solutions that assure upfront compliance and reflect a “zero defects” aspiration. Indeed, get ting complia nce r ight proves more crucial than ever. Subas Roy, global regtech leader at EY out of London, recently took on the post of executive chairman of the brand-new International RegTech Association, which plans to establish branches internationally. Roy says that one of the group’s goals is to encourage what he calls “innovations in trust.” In the wake of the financial crisis, trust must be rebuilt and compliance regtech can help, he believes. Many don’t see compliance as a competitive matter, but more a shared responsibility in financial services that can improve conditions for everyone. Roy says one of the group’s goals is neutrality, and, perhaps, that is one reason for its formation in Switzerland.

What does regtech look like?

Regtech has become a large category enc ompa s si ng c ompl ia nc e de f i ne d b e yond “c l a s s ic ” b a n k c ompl i a nc e types. For example, one leading regtech

What about the “squishy” stuff??


any elements of compliance are “squishy.” Bankers rail about the soft definitions in expanded UDAAP, for example. Someday, maybe, CFPB’s thought processes could be captured technologically. But for now, experts suggest that the key is not thinking of regtech taking on the whole task, but helping with pieces. Jo Ann Barefoot, veteran compliance expert and consultant, talks extensively to regulators here and abroad about postcrisis fairness and regtech. She suggests that analysis made possible through technology can help banks demonstrate that they have treated customers fairly. A bank can show, she says, that “our products did what they were designed to do, and we have held a line on penalty fees,” for example. Some experts point to consumer complaints as a place where regtech can help. Complaint programs have been held up, in recent years, as a way for banks to spot gestating problems, potential trends, and even problem departments or branches before issues become widespread. David Skanderson, vice-president at Charles River Associates, notes that data analysis is a major focus for CFPB, which mines its complaints database for trends and alerts. Ally Financial’s top compliance officer Dan Soto says his company already uses technology to monitor customer data for keywords to see what trends reveal themselves. “ Yo u’ ve g o t to f i n d a b a l a n ce between too much data in favor of focusing on information that aids in key decisions and key issues.” Timothy Burniston, a top regulatory consultant at Wolters Kluwer, suggests that technology can help spot patterns based on geography and other factors that can point out potential UDAAP and other issues before they become widespread.

June/July 2017



/ REGTECH / category, coming out of the securities trading space, involves market surveillance. While that isn’t something most banks handle, similar techniques are developing to deal with conduct surveillance. Every bank has officers, directors, and staff whose conduct can get the bank into trouble. Could such regtech have formalized the rumors of bad sales practices at Wells Fargo, brought it down to hard numbers, and, perhaps, saved the giant major reputational damage? Estimates of regtech providers vary with the source and each source’s definition. Bain & Company partner Matthias Memminger says the management consulting f irm has over 200 prov iders worldwide on its radar—mostly based in the United Kingdom and Europe, for now. Others set the number at 400 or more. Here is a very general categorization of regtech, drawn from work by FCA, Bain & Company, and many interviews. The mix promises to evolve as technology and regtech applications mature. • Automating compliance awareness. The sheer volume of compliance developments that staff must be aware of grows more staggering. Beyond the simple volume of rules and proposals are interpretations, legal settlements, enforcement orders, regulatory speeches, news developments, and more. Accenture has developed a prototype chatbot that answers questions about

corporate expense account policies to demonstrate regtech’s “answer man” possibilities. The hope for this type of regtech is to automate not only the acquisition of relevant knowledge, but also the analysis and guidance of what activities will be affected by new developments. One way to think of this would be if a bank’s compliance program were a giant Excel spreadsheet that would update globally as new developments poured in. The IBM Watson effort mentioned earlier is another example. A less-complex solution already out there is Continuity’s RegAdvisorPro, which combines human

expertise to comb the Federal Register for developments applicable to banks. The firm says the technology can reduce regulatory reading time by 90%. Burniston, formerly a top regulator at four federal banking regulatory agencies, sees the challenge today as being not only aware of what’s changing, but acting on the knowledge. Regtech that addresses this “is something that institutions are finding more and more use for,” he says. At the far end of this facet of regtech is technology that would convert the text of regulations into actionable computer code. Consider how much the industry


ill regtech — driven by the quest for cost saving and efficiency—“Uber” compliance officers out of their jobs? The experts’ consensus: No. “ You can automate par ts of the function,” says Bain & Company partner Matthias Memminger, “but in the end, humans need to make the decisions. That’s where the buck stops.” Adds Andrew Sandler of the Buckley Sandler law firm and a regtech entrepreneur: “Regtech is the enhancer. It turbocharges the capability of the people who have the ultimate responsibility for compliance.” Says Deloitte & Touche Managing Direc tor Dilip Krishna: “Human judgment is critical.” However, the experts say that regtech, as it finds wide adoption, will be



June/July 2017

transformative. What the job entails, how it will sit in relation to the rest of the bank, how it will impact compliance officers’ working lives—they say all that will change drastically. Today, much of compliance, especially in smaller banks, remains a roll-up-your-sleeves profession. Regtech promises to reduce that. “I don’t see layoffs here,” says consultant and regtech entrepreneur Jo Ann Barefoot. “I foresee compliance officers’ deployment to higher-value work.” Former regulator and Wolters Kluwer regulatory expert Timothy Burniston suggests the job will become easier because the burden of detail work will be reduced in favor of oversight and application of expertise. Krishna sees compliance jobs evolv-

ing to be much more like an in-house legal func tion. Time will be spent being a source of expertise and providing perspective. Ally Financial’s compliance chief Dan Soto sees regtech freeing up time for personally touching issues that need the hand of compliance experience on them. How will this look in practice? The three-lines-of-defense framework may be strengthened, Krishna suggests. Under that scheme, the line business unit is responsible for compliance closest to the task. Regtech improves the tools the front line relies on, and compliance, the second line, will help the line apply those tools—designing, customizing, applying, setting rules for the tech. The third line, internal audit, will have additional tools, as well.

Shutterstock/ESB Professional

What happens to all those compliance people?

now depends, when racing to comply with a new rule with a tight deadline, on internal IT and on how quickly vendors can make their products compliant. The raft of Consumer Financial Protection Bureau mortgage rules coming out of the crisis was a stinging recent example. • Ri sk an d complian ce m onitor ing. Monitoring has long been part of the compliance discipline—tracking to prevent “structuring” in anti-money laundering compliance, for example—but regtech raises the bar. This is in response, in part, to tech’s overall explosion raising the stakes. Take the many ways financial services people communicate digitally now, including social media streams and more. Qumram, based in Germany, for example, watches over the many digital platforms employees use to record and monitor behavior. “Every touch point needs to be documented,” says Qumram CEO Patrick Barnert. “Think about a f light recorder recording everything about a flight. That is how our product works.” He likes to compare it to the classic recording of customer communications long used by call centers for voice traffic. Qumram can search for interactions, and could be used to investigate deceptive marketing complaints. Monitoring increasingly will be a risk management tool. “You need to have a holistic view of your data to have a holistic view of the risk,” says TABB’s Summerville. Banks live in silos, but risk crosses those lines. • Regulatory reporting. Bankers spend hours filing reports with regulators. The idea is to automate much of the process. C la s sic a l a nt i-mone y lau nder i ng reporting is one example, notably the SARs filed with FinCEN. Dilip Krishna, managing director at Deloitte & Touche LLP, says that he draws a line between “old regtech” and “new regtech” in this area. The latter tracks, monitors, aggregates, and flags, for example. But then the compliance loop must be closed by intensive human involvement. The bane of the “false positive,” for example, must be sorted out by human investigators, with much of the data tossed out after review. More automation of this latter function, and of the reporting follow up, involves regtech. This is the aim of Hummingbird’s initial regtech product, under development. One of the principals at the firm, Matthew Van Buskirk, began developing streamlined, automated approaches to BSA/

“There are risks” as more regtech relies on ‘thinking’ technology that can ‘learn.’ Quality control will be essential — Dilip Krishna, Deloitte & Touche AML while at an international consumer payments f intech. Today, Hummingbird research indicates that regtech can reduce the drudge work from three to four hours per SAR to about 45 minutes—and soon much less. In part, this is through making SAR elements visual. “The human brain is so good at recognizing visual patterns,” says Barefoot. The product will be able to draft aspects of SARs, subject to human review. Initially, the technology will engage in automated “cut and paste” of key SAR data into a template of the official form. At the far end—for now—of the reporting facet is use of blockchain technology. The ability to provide controlled access to a shared base of information, ideally “immutable”—incapable of being changed once recorded—ha s been a dream of those who see the blockchain, in time, providing regulators a real-time view of what is going on in markets and other activities. The idea is to see what is happening, not what happened. One element of this that may come a long sooner is a mea ns of improving the industry’s ability to share data. Some compliance vendors already prov ide manual “sharing spaces” under intra-industry sharing permissions in federal law. There is hope, for instance, for shared know-your-customer capabilities that would lessen the need for each company serving a customer to have to verify customer information. Speaking of spotting patterns: These broad facets of regtech have a point of commonalit y, notes Dav id Skanderson, a former bank compliance official now with Charles River Associates, an

analytics firm with a specialty in fairlending analysis for banks and fintech lenders. “There’s an element to compliance that looks like a funnel,” says Skanderson, vice-president in the firm’s financial economics practice. Right now, the compliance officer is swimming in the data pouring through that funnel. Regtech holds the promise, he says, “of narrowing down what a human needs to look at.” In a sense, he explains, this follows on efforts in areas such as fair-lending compliance. “The more you can structure the lending process to take the human element out of the places it isn’t really needed, the more you can solve the risk of the appearance of someone having discriminated.” Regtech can allow compliance staff to concentrate on higher-value tasks. We examine the impact of regtech on the profession in the box on the facing page.

Can regtech be a problem?

A lready, says A lly Fina ncia l’s Soto, “there are so many entrepreneurs building capabilities, and you have to look at these options and see if they fit your strategic plans.” The question is, as more regtech relies on “thinking” technology that can even “learn,” are there risks? “Absolutely,” says Deloitte’s Krishna. “There are always risks.” Take robotics, one of the tech forms that is driving regtech. “The risk there is around the robot being pretty stupid at the end of the day,” says Krishna. It’s the old, “garbage in, garbage out.” Continued on page 32 June/July 2017





agents Eleven actions to help you remove roadblocks to change By Lisa Joyce, senior contributing editor



June/July 2017



ou can either embrace change or be run over by it. Ken Burgess prefers the former. The chairman of Midland-based FirstCapital Bank of Texas says this about his $1 billion-assets institution: “We aren’t the same bank we were last year, and we won’t be the same bank next year. Change is a given.” Launched as a de novo in 1998 with six employees, FirstCapital Bank now has more than 200 employees. Its growth rate has averaged 15%, topping 20% in some high-growth years. “You need to embrace change if you want to be a part of this team,” laughs Burgess. Burgess credits a strong, positive culture in which employees feel part of a team as making change less traumatic. “It’s easier to make changes when employees feel part of a team,” he says. “They don’t feel beaten down by all the changes coming at them.” FirstCapital Bank, while not unique, certainly, is outside the norm. According to McKinsey & Company, about 70% of the changes attempted in an organization—including financial services institutions—fail. That’s partly because change management means balancing a lot of balls in the air. “Financial services organizations have a lot of change to navigate,” says Tyler Degenhardt, managing director and lead for Accenture’s Financial Services Talent and Organization practice. “Digital disruption, regulatory and compliance pressures, and nontraditional competitors are a continual challenge for banks,” he explains. Degenhardt calls out regulations as a particular detriment to change. “Compliance requires so many resources,” he says, “that banks have difficulty focusing on implementing those big changes that could really drive value for the bank, such as reinventing the organizational culture to fully leverage digital delivery.” Following are 11 recommendations for navigating change, which are distilled from wide-ranging interviews with bankers, analysts, and consultants—all of

June/July 2017




1. make a decision

Ross Perot said, “If you see a snake, kill it. Don’t appoint a committee on snakes.” Committees and lengthy studies are a change buzzkill, agrees Tom Brown, CEO and founder of financial servicesfo c u s e d he dge f u nd S e c ond C u r ve Capital and creator of, a news website. Senior management tends to study a problem for so long that the initial challenge is no longer relevant due to a shifting competitive market or regulatory changes. And these lengthy studies often result in project scope creep, which delays needed changes even further. “Banks will decide to upgrade their online banking system, and the next thing you know, they are now adding mobile banking to the project,” explains Brown. “The project keeps getting bigger and bigger, and the bank never makes a decision.” When a decision is finally reached, it’s often based on the lowest common denominator the committee can agree on, says Brown. An initial recommendation for a $10 million investment becomes watered down to a $1 million investment, notes Brown.

2. create a Leadership Team willing to Change

According to an Accenture survey of 1,300 senior executives, “building the right leadership team” is one of the key success factors in fostering change. “Having leaders committed to change is

the number one element in change management,” says Degenhardt. But the role of a leader in a changing environment should shift. Rather than making decisions, senior management sets a clear vision that can inform decision-making by others in the organization. While effective, it can be difficult to give up decision-making in a bureaucratic management culture. For example, cross-functional teams could be given decision-making authority so they can quickly respond to disruptive technologies, regulatory changes, or new market opportunities.

3. Fail Quickly

Brown believes that senior leaders should encourage experimentation and “fast fails” in which failure becomes a learning opportunity, rather than a liability. He says that the difficulty of fostering an environment of fast fails is illustrated by banks’ propensity to keep floundering branches afloat. “By year two, only 8% of the de novo branches in the bottom 20% have ever risen to average,” Brown says. “At the end of year two, banks know if they made a mistake opening a branch. But most banks won’t admit that, so they continue to operate subpar branches.” FirstCapital Bank’s Burgess explains that the bank encourages employees to be creative and experiment, and doesn’t slap their hands when they make a move. “We have risk tolerances, of course, but we try to give employees enough freedom to try new things. If we fail, we adjust and try again,” he points out.

“It’s easier to make changes when employees feel part of a team. They don’t feel beaten down by all the changes coming at them” ­ Ken Burgess, — FirstCapital Bank of Texas 22


June/July 2017

4. Learn from banks

When asked if banks should learn how to manage change by studying organizations outside of financial services, Brown says that’s the wrong approach. Instead, banks should learn from other banks. “Banks don’t spend as much time as they should on intelligence—what other banks are doing,” he explains, adding, “Intelligence requires broadening your horizons, and looking beyond the obvious competitor down the street or in the next town.” “A bank in Chicago should be analy zing what’s going on in a bank in Washington state, rather than just looking at Chicago-area banks,” says Brown. “A $20 billion bank should look at what’s happening in the biggest banks as well as $500 million banks.” To gather this intelligence, Brown suggests hiring a young employee and tasking her with scanning the banking landscape and summarizing changes.

5. Find an Internal Change Agent

While the strategy of bringing in talent from other industries to facilitate change was popular a few years ago, Ja me s Mc C or m ic k , c h a i r m a n a nd founder of First Manhattan Consulting Group (recently acquired by Deluxe Corporation), says it has lost favor as banks recognized that few outsiders


whom are familiar with the peculiarities of f inancial services.

really understand the uniqueness of the financial services industry. “The idea was to jumpstart change by bringing in someone from another industry, such as package goods, who understands marketing or customer service,” explains McCormick. Some of these hires were successful, but most never really understood the economics and regulator y realities of financial services, he says. Accenture’s Degenhardt agrees that bringing in an external change agent may backfire. Often, he points out, the change agent is viewed as an outsider brought in to tell everyone else what to do. “Successful change comes from the business and relies on buy-in from within,” he explains. Instead, Degenhardt recommends that banks select an internal change agent. However, that change agent doesn’t need the highest-level title. “Select someone who people respect, regardless of title,” he suggests. “A change agent could be the

Bringing in someone from outside banking has lost favor. “Most never really understood the economics and realities of financial services” — James McCormick, FMCG most tenured branch employee. Invite them to management meetings to keep them informed and get them on board w ith the change.” Degenhardt adds, “These respected employees can help pull everyone else along.”

6. Communicate: Repeat, Repeat, and Repeat Getting bank employees to embrace change can be difficult. The only strategy that Second Curve’s Brown finds successful is for the organization to reiterate the change needed and publicly reward the desired changed behavior. On the flip side, he points out that banks also need to publicly punish the behavior that they don’t want. “Repeat, repeat, and repeat,” maint a i n s B r o w n . “A l l t o o o f t e n , t o p executives believe they have communicated the changes they want, but the message hasn’t sunk in at the lower levels of the organization.”

7. Hire Right FirstCapit a l Ba nk uses persona lit y assessments as part of the interview process to measure a potential employee’s propensity to adapt to change. For officer-level positions, candidates spend a full day at the bank, speaking with everyone they would work with to judge whether or not they would fit with the other personalities on the team. A s a re su lt , t he va s t m ajor it y of employees thrive within change, including Burgess. “I would get bored with the same thing every day,” he says. However, the transition to a growing institution can be difficult for some. “There are people who are well qualified to work in a $100 million bank, but can’t transition to working at a $500 million bank,” he points out. Even if employees are, by nature, June/July 2017



/ LET CHANGE HAPPEN / adaptable to change, FirstCapital Bank recognizes that change can create stress. To combat potential stress, the bank plans a wide variety of fun events for employees, such as quarterly celebration days and bowling events. “We are constantly planning departmental parties or awards to keep it light, so employees aren’t stressed out,” says Burgess. Change is hard, agrees H. McCall Wilson, president and CEO of the Bank of Fayette County, but hiring really good people who care about the bank, other employees, and customers helps the bank adapt. “If you have good people, change isn’t a problem,” he says. By good people, Wilson means those employees who have a willingness to serve. “I’m less concerned about someone’s background or experience,” he explains. “If you are a good person and have the desire to take care of people, we can make you into a banker.”

employees used to working in box two to adjust,” he explains. “Box two is necessary because that is where the bank makes money today, but box two is often in conflict with box three.” Brown tells the story of a CEO of a Peruvian bank who used the three-box solution to upgrade staff from BlackBerr ys to iPhones. K now ing that his management team would follow his lead, the CEO announced that he was getting rid of his BlackBerry. To formalize the change from box two to box three, the bank held a mock funeral for the devices, including giving the BlackBerrys last rites. While a BlackBerry funeral may seem a bit extreme, the point, according to Brown, is that the CEO believed the current technology in box two was inhibiting the bank from moving forward to box three, and felt that a high-profile event would help employees accept the change. The strategy worked.

8. Look to the Future

10. Try the Champion/ Challenger Paradigm

Wilson, 51 years old, says he will be facing personal change as he prepares for his eventual succession. Although he has no imminent plans to retire, he feels that it is his responsibility to ensure that when the change occurs, the next president of the Bank of Fayette County will be ready. “When it’s time, I will relinquish my title and responsibility willingly, so the person in line behind me has an opportunity to grow,” says Wilson. “You have to be strong enough to let go of your current situation to allow the bank to continue. Not grooming my successor would be a disservice to the community, to our employees, and to our customers.”

9. Put Change in a Box Second Curve’s Brown is a proponent of a change-management strategy outlined in Vijay Govindarajan’s 2016 book The Three Box Solution: A Strategy for Leading Innovation. The book recommends putting all activities into three boxes. Box one contains activities that the organization no longer needs to do; box two contains activities that need to be done in today’s environment; and box three contains activities that represent the bank of the future. Brown acknowledges that the bank may need to hire a different skill set for employe e s work i ng w it h i n b ox three. “Box three is where the business is headed, so it can be difficult for 24


June/July 2017

Consultant McCormick frames change as the juxtaposition between champion and challenger in which the champion represents the current method, and the challenger is the new approach. “The challenger has the potential to replace the current champion,” he explains, but it is difficult to complete the transition

Where change fails According to First Manhattan Consulting Group, there are seven areas in which banks attempt to make signi f ic an t chan g es , b u t where failure is common: 1. Building and capitalizing on comprehensive data warehouses. 2. Dissecting profitability by line of business, produc t, customer, or segment. 3. Defining and capturing new revenue sources. 4. Defining and segmenting market s in ways that are useful for Marketing. 5. Evaluating marketing spend in terms of ROI. 6. Understanding the skews in sales force productivity. 7. Redesigning and simplifying customer service/experience.

within the culture of many banks. Banks, he says, need to embrace a culture in which employees are never satisfied with business as usual and are seeking new challenge approaches. McCormick says marketing is one function in which the champion/challeng er c omp e t it ion c a n help d r i ve change. For example, many banks find it difficult to accurately calculate the return on investment on their marketing spend, particularly for digital marketing. He suggests banks perform a champion/ challenger test that compares the current measurement approach to a new one. “There are banks with marketing ROI over 1,000%,” points out McCormick. “Being open-minded to change could pay dramatic returns.”

11. Measure the Change Readiness

Accenture’s Degenhardt recommends that banks establish a process to measure their employees’ readiness for change— something he admits is difficult. “When it comes to change management, banks often use the strategy of hope: If leaders say the right things and you put the systems and processes in place, you hope people will be ready to embrace the change,” he says. Instead, Degenhardt advocates that banks use tools, such as sur veys and interviews, to better gauge if employees are engaged and prepared for change. If not, the bank can consider the training or messaging needed to move employees toward readiness. Having a centralized, controlled message about a change is important, says Degenhardt. The danger, he says, is that leaders can get so excited about the change that they either overpromise or overburden already stressed or busy employees. “You don’t want to have to backtrack on the good news that you promise. Counsel leadership on the right way to communicate about change,” he suggests.

Parting words McCormick sums up his advice to banks grappling with change: “Acknowledge the impediments to change and tackle them with cultural change from the top. Make sure those people you challenge to be the catalyst for change have the necessary knowledge of the business at hand, competencies, and respect from others. And empower them to win the battle.”

/ Bank Tech /

up to speed on “AI”

You may know AI refers to artificial intelligence, but do you know what it encompasses and why it matters? By John Ginovsky, senior contributing editor


achine learning. Deep le a r n i ng. Robot ic proc e s s automation. Natura l voice recognition (chatbots). These terms—just now coming into the banking vernacular—can be confusing, especially since they are all subsets of the equally dense term artificial intelligence or AI. It behooves bankers to make the effort to get a handle on what they mean, how they are interrelated, and, most important, what potential they offer to improve customer relationships, reduce fraud, beef up operational efficiency, reduce costs, and, ultimately, add to revenues. Through a number of interviews with Banking Exchange, bankers, analysts, and a prominent futurist paint a picture of what AI and its various subsets will mean to the banking industry. “AI is making it possible for customers to engage with companies in more ways than ever before through voice, gesture recognition, video, and chat, while opening up possibilities to serve customers beyond their own digital properties,” says Brad Stewart, senior vice-president, head of product, AI Enterprise Solutions, at Wells Fargo. “We think these will continue to get even more sophisticated. Projects range from systems that can spot payments fraud or misconduct by employees, to technology that can make more personal recommendations on financial products to clients.”

Shutterstock/ Fatmawati Achmad Zaenuri

Who is interested in AI? It’s not just the big banks that are making headway with AI, although that’s where the leading edge of progress is. “We are just in the f irst couple of innings of this,” says Michael Abbott, managing director of financial services/ digital, North America, at Accenture. “The transformation is going to occur over the next four to five years. It is going to be spectacular.” Peter Graves, chief information officer, Independent Bank Corp., Grand Rapids, Mich., says his bank uses a form of AI mainly for fraud mitigation, but sees the day when it could be more widely applied.

biggest factor that will change banking,” Nichols says. “It has widespread applications across many areas of the bank.” This includes fraud prevention, marketing, branch selection, profitability, and underwriting applications at his bank.

AI may be the single biggest factor that changes banking— with widespread Where does AI stand? applications. Big banks Still, AI now is in the realm of large banking organizations with lots of resources are leading the way to apply to these particular technologies The immediate hurdle is to coach the bank’s existing customers—many of whom require personal interaction—to accept a digital interaction that is indistinguishable from that of a human. “Getting them [existing customers] to adopt it is a challenge,” Graves says. “It has to be smooth and personable as much as possible. Otherwise, you feel like you’re still talking to a machine on the other end of the phone.” The goal, he says, is “to make it personable even though it’s digital. That enables behavior transition to happen much more quickly.” Chris Nichols, chief strategy officer at CenterState Bank, Winter Haven, Fla., makes no bones about it. “I consider AI . . . as probably the single

as well as simultaneously to all the rest of the technological upheavals affecting the banking industry. Here are a couple of anecdotal examples that are gleaned from the internet. The Royal Bank of Canada recently hired a PhD pioneer in AI as head academic advisor to RBC Research for machine learning studies. Similarly, Lloyds Banking Group, L ondon, recently placed an employment solicitation for someone to join its information management group—specifically to lead its machine learning team. Looked at in a more quantifiable way, however, a couple of unrelated surveys illustrate why actual implementation of AI today stands at a very early stage in banking. On the one hand, Accenture recently found that 82% of the U.S. bankers it polled believe that AI will June/July 2017



/ Bank Tech /

AI’s robotics and machine- and deep-learning technologies mimic human judgment at high speed, high scale, and low cost

banks in particular, below $50 billion in assets, are so overwhelmed and so preoccupied with all this other stuff on their to-do list,” says Daniel Latimore, senior vice-president, banking, at Celent. “AI is something they are keeping their eye on and they would like to do more in, but they have other stuff to do that requires some degree of expertise.” Nevertheless, he points out, while most banks will be followers on AI, “they should definitely be paying attention to it.”

What is AI?

At Wells, AI can enhance the customer experience, protect against fraud, and further deep learning, says Brad Stewart.



June/July 2017

So what is AI, and how is it related to these other terms: machine learning and robotic process automation (sometimes shortened to robotics or RPA)? “At Wells Fargo, we define artificial intelligence as a global term encompassing a number of individual and nested constituent technologies, disciplines, and scientific fields,” says Stewart. In a similar vein, Antonis Papatsaras, chief technology officer at SpringCM, an enterprise content management company based in Chicago, explains it this way: “Think of a concentric circle where the outer circle is artificial intelligence.

The next inner circle is machine learning . . . Then, in the center, is robotic process automation.” To be sure, there are subsets of subsets. In machine learning, for example, there is deep learning, which generally supersizes the amount and sources of data with which the machine learning technology absorbs and uses. In addition, there are AI-related technologies that blend, such as natural voice recognition, which can work with both machine learning and robotics, as in the use of chatbots—systems that can intelligently converse with customers. In general, then, AI is composed of “technologies that mimic human judgment at high speed, high scale, and low cost,” says Sridhar Rajan, robotics and cognitive automation lead for Financial Services, Deloitte Consultants. Given that AI is the encompassing term for a number of related technologies, it is important to distinguish them.

What is machine learning? Wells Fargo’s Stewart defines machine learning as “a branch of AI that utilizes data and algorithms to train software

Shutterstock/ Bakhtiar Zein

revolutionize the way banks gather information and interact with customers, and 72% believe that within three years banks will deploy AI as their primary method for interacting with customers. On the other ha nd, in December, Celent issued a report in which it polled 100 U.S. bankers and asked them which emerging technologies were most important to deliver their top priorities. On the top of the list was mobile banking channel development, at 96%. Last on the list was AI-based initiatives, at 6%. “Our best hypothesis [for the low showing of AI] is that it’s because the smaller

logic instead of programming that logic through explicit rules.” CenterState’s Nichols puts it this way: “When we talk about machine learning, we basically talk about using a set of algorithms that gets smart, that improves the base algorithm. It draws conclusions from it and learns over time.” Thus, in a simplified example, a given machine learning algorithm may dive into a vast sea of data and draw correlations between various, apparently disconnected inputs—transaction history, social media postings, customer locations, dev ice t y pes—and decide whether or not a particular transaction is fraudulent or not. That decision may or may not be correct. If it’s not correct in a given instance, a human operator can step in and make an adjustment to the algorithm. Afterward, should similar instances arise, the machine will have learned not to make the w rong decision again. Deep learning is a subset of machine learning and basically funnels massive amounts of data from many different sources very quickly into a neural network (modeled after the human brain), and then responds to specific questions about specific customers or trends.

Robotic process automation Moving to another subset, RPA, SpringC M’s Papat sa ra s poi nt s out t hat it involves “tools that automate a special work environment, taking tasks that humans are bogged down with . . . to achieve consistency.” In other words, in a rules-based system in which every time X, Y, and Z are considered, the outcome must be A (an “if-then” circumstance, says Latimore). The RPA system can do that task better and faster than humans. “If you get hu ma ns involved, t he human emotion, human fatigue, and mentality of the moment could affect the outcome of the [task],” Papatsaras says, even though the outcome should always be the same given all the factors involved. With RPA, he points out, every customer can be assured of having been treated fairly and consistently, which then increases customer satisfaction.

Good data is required Crucial to all AI applications is their dependence on good data—the more the better. “Banks are built upon data,”

says Chris Skinner, financial technology futurist and noted author on the subject, including the recent book ValueWeb. “ That data is what w ill power these machines and these robotics and these intelligence capabilities.” Adds Papatsaras: “It’s about a huge, insane amount of data that we collect these days in a bank organization—about our customers and their behaviors in our system, about advanced algorithms that parse that data and make a prediction or a determination.” The whole point of AI, in fact, is to quickly and seamlessly assess the disparate sources and immense quantity of data in order to, as Independent Bank’s Graves says, “bridge the gap between the information and the end user.” So who is most likely to have the “huge, insane amount of data” for which AI likely is most useful? The easy answer is: the largest banks. “ T her e i s a r ic h ne s s of d a t a , a n abundance of data in large f inancial institutions,” says Sasi Mudigonda, chief product strategist for financial crime and compliance at Oracle Financial Services. “I’m not saying for smaller financial institutions it doesn’t exist, especially if they pool the data over time.” Graves sees a potential avenue to pursue for smaller banks, and that is the use of aggregator services that can collect all of a given customer’s banking relationships—not just within one bank—and put all that into one place. “What it does is it creates a database that is bigger than what you have in [the relationships with one bank],” says Graves. “If you had five to ten relationships with a bank customer, you think you’re doing pretty good. But what if you had 20 to 30 relationships that are all put in one place where the data from that is now bigger than just what’s in your own bank?”

AI improves relationships When it comes down to it, the crucial potential of AI and its manifestations is ref lected in how it can substantially improve customer relationships. “We’ve identified use cases for AI that can ultimately help in enhancing customer experience, protecting against fraud, and furthering our application of deep-learning algorithms,” says Wells Fargo’s Stewart. With AI, and particularly its application to chatbots, says Graves, customer

AI “bridges the gap between the information and the end user,” explains Independent Bank’s Peter Graves. interactions can combine with actual savings to the bank. “You [can] apply the AI around voice recognition and big data, then you can start to have a conversation with the customer that is completely digital, but that has some meaning to the consumer and gets them the information they want. . . . You don’t have people sitting around doing this—that’s the huge savings.”

What’s to come Looking forward, Celent’s Latimore sums up the likely progression of benefits as AI seeps into the banking industry in the coming years: “Decreasing expenses is probably the No. 1 rationale. Mitigating risk is No. 2, on the fraud side. Then the revenue side is No. 3, for now, but they all play in all these things.” The futurist Skinner puts it another way: “The banks that get the best intelligence out of their data will probably get the majority of the market in the next decade.”

Want to know more? Online articles by the same author go into further detail on two AI technologies covered briefly here: machine learning and robotics. Find them at and See also Compliance Clinic (p. 30), covering IBM Watson, and the cover story on regtech (p. 14) in this issue. June/July 2017



/ risk adjusted /

Beware Mobile malware Smartphones increasingly dominate all our lives, and the bad guys know it By Steve Cocheo, executive editor


hile banks broadly appear to have avoided the scourge of the WannaCry attacks of May, a serious threat may be right at hand—literally. The source of that risk is customer and banker smartphones. A nalyst A l Pa scual’s examination of mobile malware risks began with a casual comment by one of Javelin’s clients. The customer and Pascual had been discussing risks facing mobile services, and the client remarked that mobile malware might be something like Bigfoot. That is, in spite of the rumors and the “sightings,” was it really even out there? That got Pascual wondering, and he dug into the matter. He found that mobile malware indeed does exist, and can wind up on a device in several different ways. As a result of his inquiry, Javelin recently published its 2017 Mobile Banking Malware Report as a warning to the industry for bankers with company devices as well as BYOD (bring your own device) connections to bank systems. Of potentially more importance, actually, was Javelin’s intent to raise the bankers’ awareness of the risks mobile malware poses to bank customers’ devices. Fraud seems almost inevitable today in the age of the mobile device. “At the end of the day,” points out Pascual, “we pay a price for increased convenience. Insuring security is on you.”

Where do you get apps? Typically, the apps that people put on their dev ices come f rom an of f icia l source related to that device. For iPhone users, home base is Apple’s App Store. For Android users, there is the Google Play store, formerly known as Android Market. In both cases, the store operators are supposed to vet the offerings available to be sure that, among other things, they don’t contain harmful code. Pascual says that the App Store has historically done a better job in vetting apps, though he says that’s not to say that risks don’t slip through. He says Google’s store has grown better in vetting. Among recent efforts to improve app safety is 28


June/July 2017

The ‘beauty’ of app fraud is automation. Criminals set up false apps with malware, and wait for the compromised data to roll in the developer tool Google SafetyNet and the consumer-oriented Google Bouncer, which screens apps for risks. These efforts can protect many users, says Pascual, but a risk remains that “you can drive a truck through.” This is a practice called “sideloading.” Sideloading refers to obtaining apps from a source other than one of the official stores. Accomplishing this requires making a change to security settings to allow the device to download from other than its home base. It’s the device equivalent of turning off your home’s burglar alarm system. Or, perhaps more exactly, it’s venturing into a sketchy part of your town where you know the police don’t patrol. It’s possible that nothing may happen, but you never know.

You can find readily the instructions for doing this on either family of devices by Googling the word “sideload.” (This is not a recommendation to do so.) Says Gizmodo’s online “Field Guide”: “So why is sideloading important? Sometimes you might want to install an app that doesn’t meet the rules of iOS and Android; or you might want to join a beta test where only unofficial app packages are available. Most users will never need to sideload an app in their lives, but it can be a handy trick to know.” You may wonder why a nyone but the technically initiated would meddle with this sideload capability when there are huge numbers of apps that have at least been subjected to the giants’ vetting. One point is that not ever yone

downloading apps is accessing “Joe Schmo’s Bargain App Basement.”

Dangers of nonofficial apps Pascual points out that there’s a major source of nonofficial apps. It’s part of the world’s biggest online retailer and goes by the name of Amazon Underground. On this service, Amazon offers many popular apps that it calls “actually free.” Even in-app purchases are free. They can be downloaded to Android devices and to Amazon Fire tablets. (In 2019, Amazon plans to end support for this oddly named service in favor of concentrating on its own Amazon Appstore.) Pascual uses Amazon Underground apps himself. However, he points out that there are risks. First off, he explains, “Who’s to say that Amazon vets apps as well as others?” Second, the risk of unlocking security to permit sideloading involves not only the initial load, but the risk that security doesn’t get turned back on. People do things very quickly on their devices. How often have you suddenly realized how many apps you have open on your device that you thought you had shut off? One of the risks of not restoring security settings is that this can expose the device to a “drive-by” download. That is a download of malware going on in the background when an unprotected device is visiting a compromised website, for example. But Pascual says the other risk is the app that materializes out on the internet from some unknown source, not even from a quasi-official site like Amazon’s. He says this often happens when a popular new app, especially a hot, new mobile game, becomes available in one app store but initially not on the other. Excited fans often don’t want to wait for the official release on their platform of choice. So they succumb to the temptation to download the supposedly re-ported version of the hot property. The bootleg may turn out to be carrying malware. One example, says Pascual, is the popular Super Mario Run, released for Apple devices several months ahead of

the Android version. Fraudsters used a phony version of the game to infect Android users with the Marcher mobile banking Trojan malware.

Extent of the risk Javelin’s report estimates that nearly 8 million mobile banking users expose themselves to the risk of malware infiltration because of sideloading. “Un li ke de sk t op ma lwa re , wh ich can infect dev ices inv isibly through malicious websites, mobile malware typically requires the user to actively consent to install the app,” according to the Javelin report’s executive summary. “This requires malware operators to disguise their app as something with legitimate functionality.” Javelin’s research indicates that only 6.1% of smar tphone owners say that they have sideloaded. However, the research determined that among active users of mobile person-to-person payments and mobile wallets, over 10% have sideloaded. One common way that the malware attacks, once loaded, is by placing an overlay on the desired app. This screen requires entry of log-in information, payment information, and other details that can be used by the malware attacker to rip off the consumer and his bank. The report details how one overlay actually required duped users to shoot photos of identification documents. “Malware is designed to compromise the individual user,” says Pascual. From the criminals’ perspective, the “beauty” of this method is that the fraud is automated, he explains. They set up the false apps, and build in the malware. Then they wait for the compromised data they seek to roll in. This adds to an exposure that already exists. “Existing malware families have long had the ability to compromise SMS [text] messages, undermining the most prevalent form of two-factor authentication used by U.S. financial institutions,” according to the Javelin executive summary. “Overlay attacks represent a potent

new means of compromising static credentials, such as passwords and security questions.” Sideloading can increase the potential for having both forms of security negated.

What can be done? Javelin’s report warns that countries outside the United States, where thirdparty app sources are more prevalent, have seen more malware attacks. But this is expected to change as criminals further exploit fresh targets in the United States. Regarding consumers, Pascual recommends that banks reach out to educate them about the risks to their legitimate apps and device functionality of going outside the official app zone. While he has done so himself, he stresses that after downloading something from, say, Amazon Underground, he makes sure that he’s turned security settings back on. He also recommends turning on all alerts offered by financial providers. Activating both text and email alerts will provide an email backup in case the text alert channel has been compromised. Malware fraudsters may intercept the alert. Pascual says BYOD is less common among banks than other types of companies. But he adds that this doesn’t mean employees with company-provided devices aren’t sideloading third-party apps. “Who knows what’s tagging along with the app from that third-party store?” says Pascual. “You want to be sure that this practice is completely disallowed.” Increasingly, the ability to detect overlay fraud and related malware practices on a device is being built into mobile financial apps. This enables an institution to shut down all or selected functionality of its app on a compromised device. Javelin’s report stresses that phasing out of text-based authentication to alternative methods like biometrics will make it harder for crooks to infiltrate accounts.

Editor’s note: More report data at http:// June/July 2017



/ compliance watch /

WATSON takes on compliance Imagine compliance without straining your eyes, brain, patience, or marriage By Steve Cocheo, executive editor


Building a regtech solution Late last year, IBM acquired Promontory Financial Group LLP, a compliance consulting firm including many former, senior federal regulators and industry compliance experts. The idea was to have those specialists train Watson to assist the compliance function. The compliance effort is part of Watson Financial S er v ic e s , a nd I BM pl a n s t o b e g i n announcing specific parts of this major regtech project—including services for smaller banks—in mid-June. “Our goal is to have people doing the right things, rather than looking for needles in haystacks,” explains Alistair R en n ie , g ener a l m a n a g er, Wa t s on Financial Services Products. Any compliance officer who has spent an entire 30


June/July 2017

morning researching the answer to a question about the nearly 50-year-old Truth in Lending Act can appreciate that. Often, the answer doesn’t lie in one single document. Most new developments in the field fit into a wide and deep body of compliance data, and ongoing learning is part of the compliance job. Compliance officers were among the first in banking to latch onto the internet as a working resource. “We took a step back and looked at major areas of concern for our financial clients,” says Rennie, and a key one was the feeling that the industry is constantly in reaction mode. “That’s clearly a pressure,” he points out. “If we don’t start applying other techniques to this, it won’t change.” Eugene Ludwig, founder and CEO of Promontory, says he became interested in technology that could tackle compliance from the regulatory side when he was Comptroller of the Currency. OCC had a system called Examiner View that was an early attempt to synthesize what examiners were learning in the field. It helped, to a point. “Prior to Watson, the systems available were less robust,” says Ludwig. IBM sees Watson as serving as much

Our goal is to have people doing the right things, rather than looking for needles in haystacks —Alistair Rennie, IBM, Watson more than a glorified search engine. A search engine just organizes a stack of reading, including laws, rules, regulations, enforcement actions, guidances, interpretations, key regulatory speeches, and more. There’s no digestion—just an assembly of data—and there’s always the worry that search terms will leave something out. Even a keyword search in a document isn’t foolproof. Ever try searching a PDF for something you know is there, but you can’t find it? Eventually, a compliance officer could query Watson on a specific task and be presented with many relevant facts, pinpointing exactly what relates to the query


ompliance officers frequently speak of the challenge of information overload. Cer tainly, they could sy mpathize w ith this fact: “It would take physicians 29 hours of reading each workday to stay abreast of new medical research, let alone educate themselves about past discoveries. . . . Additionally, there is a clear gap between the information that is readily available and physicians’ ability to assimilate and apply it.” Sound familiar? That state of affairs, described in an IBM blog, inspired what became IBM Watson for Oncolog y, a subset of the array of services IBM has been developi ng for he a lt h ser v ic e s u si ng it s supercomputer. Beginning in 2012, IBM and doctors at Memorial Sloan Kettering Cancer Center began training Watson to assist oncologists. This entailed feeding Watson with historical and new articles from over 300 medical journals, 200 textbooks, and millions of pages of other text. Memorial Sloan Kettering doctors trained Watson to extract and interpret physician notes, lab results, and clinical research—all rendered anonymous. C a n Wat son’s c og n it ive c omputing ability similarly attack the banking industry’s compliance challenges?

in the context of the bank’s size, location, and other factors. The compliance officer could then customize recommendations and action steps for her particular organization based on what is learned. Watson, says Rennie, will be able to “read, understand, and be able to work through data in order to f ind out the bank’s obligations.” Beyond that, Rennie sees Watson playing a role where banks today typically have to apply human power. Take systems that f lag potential suspicious activity in the anti-money laundering area. The large number of false positives require manual intervention. “ You c a n t ra i n a Wat son t o lo ok through the haystack better,” says Rennie. (Earlier this year, IBM introduced Watson for Cyber Security, designed to amass and analyze thousands of cyber alerts and research reports to help security centers tackle developing threats.)

Teaching compliance IBM and Promontory officials avoid the term “artificial intelligence” when speaking of Watson. They prefer to speak of “augmented intelligence,” acknowledging that the consulting firm’s experts play a key role. Much basic regulatory information must be fed to Watson raw to give it a fundamental source of data, but that’s just the beginning. Classification and tagging follows, as does deconstruction of raw information into key nuggets that can be manipulated. Cognitive computing is Watson’s key ability. Rennie describes this as the ability to gain insight from a mass of unstructured information. Regulatory information may seem to be structured, but there are many interconnections w ith other information sources, and understanding how regulators think and work helps tremendously. Rennie a lso point s out t hat even among regulators, terminology, usage, and style can differ—some speak in “thou musts,” he says, while others speak in terms like “we recommend.” Getting to answers requires rationalizing all that,

and a key part of the experts’ input is guiding Watson to learn how to draw appropriate conclusions. Part of what makes Watson tick is neural net technology. Simply put, this is technology that imitates the way the human brain and nervous system work. In terms of functionality, this technology delivers the ability to see how items in a body of knowledge relate to each other. Humans build on this ability through experience—sometimes through trial and error, and sometimes via pain, such as when a child learns that a hot stove will burn his hand. In computing, Rennie explains, “you want experts interacting with the system to say ‘yes’ or ‘no’ and to explain why.” The actual “learning” in Watson, Rennie boils down, can be expressed as “hypothesis, conclusion, and testing.”

Sifting unstructured data Compliance entails much more than black-and-white words, of course. Many elements of compliance involve factors that don’t fit a formula. Elements of UDAAP (unfair, deceptive, and abusive acts and practices), fair banking, and fair lending are examples of these. Rennie says Watson will, in time, be able to help with such challenges. He sees banks wanting better early warning systems, which he says Watson can help achieve. Input from the Promontory team will be part of developing this functionality, as well as unstructured information that the bank already has on hand, but has lacked the ability to gather and analyze. “You can tell a lot about what is going on from client-facing operations, such as call centers and complaint databases,” says Rennie. Cognitive computing’s ability to make sense from unstructured data is the means here. A recorded call center conversation can impart meaningful indicators, for example. Tone of voice and use of language hold clues that can be analyzed. Cognitive computing is f lexible in how it sifts through data, according to

Ludwig, and adapts as it is taught. “It is not static, and that is the advantage,” he says. “It develops and evolves.”

Watson, regtech, and compliance jobs

Tools like Watson “enhance the compliance off icer’s job,” says Ludwig. “The job we’ve given compliance officers is daunting. There are tens of millions of transactions, and hundreds of thousands of employees, and thousands of products to keep track of.” Ludwig says he has long seen technology as a key part of compliance, and adds that “the case is more compelling than ever.” “Nobody is say ing that the human expert is being replaced,” Ludwig says. “This is an attempt to make the best better.” Harking back to IBM’s Watson for Oncology, he points out that Watson hasn’t replaced doctors. The aim is to make them more effective with the ability to draw on more input than people can absorb and use on their own. “Watson has the ability to look at more data than any single human could— there’s just so much out there—and synthesize it,” say Ludwig. Will the experts at Promontory train themselves out of their jobs? Not likely. “I view this as the beginning,” says Rennie. “ This w ill be an ongoing process that will get better and better as it gets more use.” “You don’t ship ‘Release 1’ and declare victory,” points out Rennie. From the get-go, IBM has made the point that Watson will be continually taking in regulatory information as it comes up and learning through real-world applications of the technology. Will only the largest banks be able to tap Watson? Rennie says he and Ludwig believe that smaller banks, with less scale and complexity, will be able to make use of it, too—perhaps faster than some larger organizations. “We’d like to believe that most of this, and our cloud-based services, will be quite accessible by a lot of institutions,” Rennie says. June/July 2017



/ REGTECH / Continued from page 19 Krishna points out that artificial intelligence and cognitive computing rely on training based on data. Banks will have to be careful that regtech used for rendering decisions isn’t taught with samples that are too small, for instance, or the technology could lead to bad decisions. Quality control will be essential. Soto says an ongoing challenge in using regtech will be ensuring the data streams feeding it begin clean and stay so. This is fundamental when more and more will be in the hands of technology. Compliance staff must keep watch, see when something is changing, and intervene if necessary. “Before you launch any regtech,” he warns, “you have to test, test, and test some more. It’s crucial.” The human element also must account for factors no regtech knows by itself. Take the A ML Analy tics Solution by Fuzzy Logix. This advanced analy tics technology overlays a bank’s existing databases—for the sake of speed and to reduce the need for separate systems and storage—to detect a handful of potentially suspicious transactions. However, “local knowledge” helps. Company officials point to one international application where communication with compliance staff resulted in building in the knowledge that that country’s wedding season generates a huge spike in high-value financial transactions. This reduces false positives. Another regtech firm, Trulioo, offers a solution for electronic identity verification that helps confirm identities of people whose births are undocumented. It relies on both traditional ID sources

“Regtech is the enhancer. It turbocharges the capability of the people who are responsible for compliance” — Andrew Sandler, Buckley Sandler & Asurity Technologies as well as nontraditional ones, such as social media. Scott Pearson, par tner at Ba llard Spahr LLP, works with banks and other players on compliance issues, and heads the firm’s marketplace lending task force. He sees the potential help regtech may bring, but notes how quickly rules change and that there is a danger of obsolescence. He suggests that regulators will not accept regtech as a black box they will leave unopened, but instead may ask to see the code underlying the tech.

Is regtech for you?

Overall, experts see regtech infiltrating all U.S. bank sizes. As the costs of compliance impact financial performance, they see the transition as irresistible, inevitable. Who wants to tell stockholders or analysts that management thinks old, expensive ways are good enough?

“The riskiest thing regulators could do is not change. If they don’t, they won’t catch risks that are emerging, with the old tools” ­ Jo Ann Barefoot, — Hummingbird Regtech 32


June/July 2017

SMA ART.COnsulting’s Riese likes to compare regtech to car backup cameras. Initially, they were only installed on high-end autos, but as the technology became cheaper and mainstream, it expanded into less-expensive models. So smaller banks should benefit quite soon. The largest banks are seen as having more money to try things out and are ahead, but Krishna suggests their size and complexity, and their legacy systems, hinder rapid adoption. Smaller banks should be able to implement regtech more quickly as offerings improve. “The benefits of using regtech will be humongous for smaller banks,” says International RegTech Association’s Roy. The American banking system’s size makes a huge market for developers, he adds. A wrinkle is American regulators. In the United Kingdom, FCA has been a catalyst for regtech and very public—fintech over there is as much an economic movement as a regulatory one. With the exception of some aspects of the Comptroller’s responsible innovation and fintech push, U.S. regulators have not publicly played much of a role. “Our regulators are very careful not to declare winners and losers in the marketplace,” says banking attorney Sandler. And there will be attention paid to regtech, he says, along the lines of regulators’ concerns about vendor management. Yet regulators themselves may, in time, find regtech tools that will improve their performance, some suggest. Jo Ann Barefoot adds: “The riskiest thing the reg ulators could do is not change. If they don’t, they won’t catch risks that are emerging, with the old tools.”

/ idea Exchange /

Trust me, I’m not a robot Community bank’s traditional approach to Trust generates 10% of net income By Bill Streeter, editor & publisher


ll politics is local, they say. And so it is with banking. What works in New York, San Francisco, or Boston may not work in Hutchinson, Kans., and vice versa. Three issues ago in this department, we chronicled the matchup of Bostonbased Cambridge Savings Bank with robo-advisor SigFig on a product for small retail investors. Here’s the f lip side of that story. Central Bank & Trust, situated near the middle of the country, also has customers with small-dollar investing needs, but it has no plans to partner with a fintech for robo advice. “We’re far from it,” says Brian Schmidtberger, senior vice-president and trust officer for the $290 million-assets bank. “Not even in the cards.” The bank is not out of touch. Schmidtberger oversees a trust operation that has $400 million in discretionary assets under management and is corporate custodian for another $1.5 billion. Securities brokerage also falls under the trust umbrella. Overall, the operation contributes 8%-10% of the bank’s profit.

Shutterstock/ Pratchaya.Lee

Source of steady income Schmidtberger joined CB&T nine years ago after running trust departments at two other community banks. About two years ago, he says, the CB&T trust unit moved into the farm management business. Schmidtberger hired a full-time person for the farm business last summer, and since then, it has grown rapidly. Several other lines of business fall within the bank’s trust group, which has ten f ull-time employees. One is employee benef its—401(k)s and IR A rollovers. Another is investment managed accounts, or agency accounts. A third is traditional trust and estate work. It doesn’t stop there. “ We’re a cor porat e cust od ia n for a t h i r d-pa r t y a d m i n i s t r at or,” say s Schmidtberger. That business—a 15-year relationship requiring a strong back office—has begun to slow a bit, he says. But the bank recently contracted to do directed trustee services for another

f irm. “When outside entities want to do certain f iduciary functions in the state, they have to find a Kansas-based trustee,” he explains. As noted, full-service brokerage is part of Schmidtberger’s group. “That’s another $75 million that we take care of.” “The good thing about the trust department,” Schmidtberger says, “is that no matter what’s going on in the loan business or the mortgage business, the fiduciary or the trust income is pretty steady income every year.” Exceptions occur if there is a big drop in the stock market since some revenue is based on asset values. Back to the question of robo-investment options, Schmidtberger and the bank’s management are not anti-technology. But they are a bit contrarian. Schmidtberger says that old-school relationships are still valued and preferred. “There’s a niche out there that wants to go robo, but I can tell you right now the bulk of the people we deal with still want somebody to manage [their money]. They say, ‘I’m so glad you’re taking care of this so I don’t have to.’” Even some young people feel that way, says Schmidtberger.

Transparency is good The contrarian streak at CB&T goes beyond robo advice. Many in the banking

and securities industries regard the Department of Labor’s Fiduciary Rule (expanding the circumstances under which a person is considered to be a fiduciary) to be overbroad. Schmidtberger says the rule—slated to take effect June 9—has helped. “We’re already a f iduciary,” he says. Ten years ago, he adds, the bank’s president and CEO, Earl McVicker, made the decision to shift the bank’s brokerage business from a packaged product with a front-load fee into an assets-under-management arrangement. Schmidtberger believes more transparency is good. “All our stuff is disclosed in black and white. Why not make our competitors do the same thing?” he says. He notes that the DOL ruling has sent business to CB&T as some brokers have stopped selling packaged products. Some maintain the rule will disadva ntage sma ll investors. For CB&T customers, however, that is not the case. “The trust department, like the bank, is a ref lection of our community,” says Schmidtberger. “And so we don’t set minimums because there are cases where we will take a small account that’s not going to be profitable to us.” While it’s not promoted, he says: “As a corporate citizen and member of the community, there are times that you just need to help people out.” June/July 2017



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/ CounterIntuitive /

Banker on your wrist What if bank apps worked more like Fitbits and Apple Watches? By Steve Cocheo, executive editor


he biblical observation on the love of money notw ithstanding, David Lester thinks money should be seen as a positive thing. After all, money pays for many items that improve our lives—a house, an education, retirement. Lester doesn’t think money should be siloed in our lives. Much of what makes our lives tick requires the prudent use of money, he says. While many banks have introduced apps to put their services right in customers’ pockets, Lester, managing director and U.S. finance lead at Brightworks Interactive Marketing, says these haven’t improved the experience. Most messages relayed by apps carry a negative tone, he says. An app may deliver a fraud alert or warn that your balance has grown low. Helpful data, but Lester wonders if apps could do more, especially by making use of an app a more positive experience. Also, “bankers tend to talk to people as they talk to each other, rather than as consumers,” says Lester, who is a former banker and investment firm employee. What he has in mind are apps that more resemble the experience of using a Fitbit or, as he does, a fitness app tied to an Apple Watch. His ideal financial app would deliver the warnings and updates, but that would be just the beginning. Lester wants to see f inancial apps give the kind of reinforcement, encoura gement , a nd a dv ic e t hat t he be s t health-oriented apps and gadgets do. If technology can improve physical health, he argues, why not financial health? “Fintech firms are nibbling at this,” says Lester, but most haven’t made a big commitment, which leaves an opportunity for banks that see the logic of building a broader app experience. “Banks could have a much better brand affiliation,” he suggests. “Banks need to make things more like a game, as the Fitbit does.” Fitbit, for example, sends a special celebratory signal to its wearer when he has made his daily step goal. Here’s an example of the positive reinforcement that Lester would like to see. At the end of a month, a consumer has



June/July 2017

Brightworks’ David Lester thinks money is too important to be boring.

spent $200 less on restaurant meals than in the previous month. The ordinary app would be silent on this thrift. A Lesterinspired app would congratulate the consumer on cutting spending. It would follow up and suggest putting the money into savings, paying down debt, or placing funds into a retirement account. “ These are the k inds of messages that bank apps should be sending,” says Lester, who is in his 40s. “Imagine the ‘brand-halo’ this would produce.” The latter is the positive association of the bank’s brand in the consumer’s mind. “This would be your little banker coach on your wrist,” says Lester. “We all need a little banker on our wrists.” Building on health apps’ goal-oriented approach, New York City-based Lester thinks bank apps could adopt similar encouragement that could last over the long term. This could take the form of “badges,” icons that establish recognition for having met a financial goal. Lester thinks these “feel-good” rewards could be made more tangible if banks established actual rewards for accumulation of a given

number of badges. For example, for customers who love to travel, bank apps could help them track their way to trip rewards— somewhat like frequent-flier programs. Lester sees the appeal of a positive bank app going beyond younger customers. Smartphones and tablets have infiltrated every demographic, and he believes many older customers would find such a financial app appealing. Here’s an attractive wrinkle. For a bank app to become a true wrist-based financial coach, Lester says that, ideally, a customer would centralize all financial relationships with one institution—something banks have often tried to do, with varying success. Overall, Lester sees apps that deliver positive, helpful, even educational messages as humanizing banking in a way that only a relationship with a personal banker has, up until now. “Part of the reason that people don’t want to interact with banking is that it’s like going to the dentist,” Lester says. Adding some fun and positivity to the mix, he believes, “could be a game changer.”


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