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Competitive intelligence for bankers

December 2016/January 2017


Selling’s not abusive when done right... But what’s “done right”?

ready for “cecl” accounting? Linkedin’s unseen CRM impact 1



Much rests on the valuation of real property, especially when there is a property dispute or complicated filing. So, your choice of a valuation professional should give you unshakeable certainty. MAI, SRPA and SRA Designated members of the Appraisal Institute are widely recognized as among the most qualified real property professionals practicing today. In fact, Appraisal Institute Designated members: • Meet the highest educational standards in the profession; • Have extensive real-life valuation experience; and • Complete a comprehensive demonstration of knowledge requirement to achieve designation. Excellence? Appraisal Institute Designated members raise it to a whole new level. Find An Appraiser at:

/Contents December 2016/January 2017

16 Dare banks sell? Banks can’t grow without sales. Adopting best practices will help. By Steve Cocheo, executive editor

22 Preparing for “CECL” Community banks gear up for major accounting shift, while many question value. By Kathie Beans

December 2016/January 2017



/ contents / 4 On the Web 10 ways fintech can flop; “Cowboys & Dinosaurs”; “Tech Touchpoints”

Dec. 2016-Jan. 2017, Vol. 2, No. 6


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

6 Like it or Not Change is a given—how to make it work for you and your bank is the question

Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email:

8 Threads BofA’s virtual assistant “Erica”; Postcards from a good quarter; Prospects for CFPB change; Time for “platformification”

37 42 Bank Tech

Chairman & President Arthur J. McGinnis, Jr.

13 Seven Questions

Editor & Publisher William Streeter

The Business Blockchain author William Mougayar on why blockchain technology is the next internet

Executive Editor & Digital Content Manager Steve Cocheo

37 Compliance Watch

Creative Director Wendy Williams

When cryptocurrencies and AML meet, banks must rethink BSA/AML

Art Director Nicole Cassano

40 Idea Exchange

Graphic Designer Aleza Leinwand

Cambridge Savings partners with fintech robo advisor Sigfig, and learns agility

Editorial & Sales Associate Andrea Rovira Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Lucy Griffin, Mike Moebs, Ed O’Leary, Melanie Scarborough, Lisa Valentine


LinkedIn’s unseen CRM and IT impact

47 Industry Resources

Differentiate with data

Director, National Sales Robert Vitriol

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

White papers, webinars & more

Production Director Mary Conyers

48 Counterintuitive Don’t miss the “pivot,” warns former Apple CEO John Sculley.

27 Insights on using data for a better banking experience Subscription Information: Banking Exchange Magazine (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 2016. All rights reserved. Contents 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: PO Box 3135, Northbrook IL 60062-2620 Postmaster: Send address changes to Banking Exchange magazine, PO Box 3135, Northbrook IL 60062-2620 2


December 2016/January 2017

Circulation Director Maureen Cooney Marketing Director 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 McCall Wilson, Bank of Fayette County

THE FUTURE OF MOBILE BANKING WILL BE BUILT ON A HIGH-PERFORMANCE NETWORK. The future of banking is digital. In fact, 32% of adults currently use mobile banking, and that’s only expected to grow. While this new era of banking offers opportunities to increase revenue, it also comes with new layers of complexity. The expanding functionalities of mobile banking require a network that makes it all feel as seamless as the consumer expects. The Comcast Business high-performance,

low-latency network solutions offer a level of customization that allows banks to focus on revenue, not the network. And with one of the nation’s largest advanced networks, it’s built to connect multiple locations so banks can meet the demands of the future. Visit nancial-services or call 888-317-9627 to learn more.

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/ ON THE WEB / Popular fintech stories on

10 reasons fintech startups fail

Diplomacy between “cowboys & dinosaurs”

First Internet Bank’s life in the web lane

How will you know if you are partnering with a survivor if you work with a fintech firm? Kelly Williams of William Mills draws on his company’s extensive work with fintech companies to help you pick a winning partner. Read more at tinyurl. com/fintechflop

Lawyering between two worlds—fintech firms and traditional banks—Goodwin Procter LLC attorney Veronica McGregor says her job “is helping banks deal with cowboys, and helping cowboys deal with dinosaur banks.” Read more at

A financial pioneer on the web found that flourishing online relies on melding tech and “touch.” The human element—accessed in an interesting way—helps differentiate this online player. Read more at fibprofile

Moving at blockchain breakneck speed If the 7 Questions profile on p. 13 of The Business Blockchain’s author William Mougayar piques your interest, check out our new Blockchain Channel. Find it at bankingexchange. com/technology-channel/blockchain And if fintech in all its ramifications interests you, visit our Fintech Channel too. Find it at bankingexchange. com/technology-channel/fintech

@BankingExchange banking-exchange



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

December 2016/January 2017

sponsored statement

Instant Issuance Holds the Key to Successful Branch Transformation By Rob Dixon, product manager, Instant Issuance


s consumers have embraced online and mobile channels, bankers are evaluating the branch’s role moving forward. While digital account solutions provide new levels of convenience and flexibility, the branch still serves as perhaps the most important channel as it supports more meaningful, face-to-face interactions with customers. Instant issuance is establishing itself as a proven program to attract more customers to the branch by enabling financial institutions to print credit and debit cards on demand and make them available for immediate use. Customer preferences shape their experiences, and within the branch, shorter lines and compressed wait times will always resonate, but banks that take the additional step in providing permanent payment cards on the spot realize a much stronger ROI in terms of customer acquisition, satisfaction and loyalty. This is especially true for millennials, who are more open to exploring their options when selecting a financial institution. In its white paper, “What Small- To Mid-Sized Financial Institutions Can Learn From Millennials,” CPI Card Group cites an Accenture survey from 2015 that finds large regional and national banks lost 16 percent of their millennial customer base within 12 months, while local community banks witnessed a five-percent increase among that population. Perhaps surprisingly, cash remains a large draw for millennials. A 2016 GoBanking Rates survey found 60 percent of

millennials still prefer to be paid in cash, meaning millennials’ preference for debit cards over credit cards is likely to continue, presenting a natural opportunity to actively engage millennials more effectively in branches. Instant issuance also provides a chance for banks to lead the conversation around EMV® integration and security, providing a convenient method for facilitating in-person opportunities to educate customers on changes to the transaction process, the security benefits of EMV and how to use their new card immediately. Responding to the need for issuers to implement a scalable, cost effective solution, CPI Card Group developed Card@Once®, a Software-as-a-Service (SaaS) instant issuance solution, available to financial institutions of any size to provide customers with ready-to-use, EMV-enabled payment cards. Today, bank customers seem to be subject to card data breaches with alarming regularity and protecting customer data is paramount to the success of any financial institution initiative. Aligning with these initiatives, Card@Once ® is Payment Card Industry Data Security Standards (PCI DSS) compliant to ensure that the printer, printing process and card composition all meet or exceed required certifications. A well-designed instant issuance program can serve as a key component of a bank’s customer service and fraud response strategy. It can also eliminate the risk and expense of distributing replacement cards via the postal service as issuers can personally hand deliver a customer’s new card and answer any questions they may have. Instant issuance is a secure and affordable way to help financial institutions extend the value of their branches by attracting customers and getting credit and debit cards to market quicker – keeping their card top-of-wallet and increasing interchange revenue. Customers, in turn, benefit from immediate purchasing power and increased satisfaction with their bank. Bankers that leverage instant issuance as a strategic differentiator and recognize its role in driving customer activity within their branches will be better positioned to exceed customer expectations. EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries CPI Card Group 10368 West Centennial Rd. Littleton, CO 80127 303-973-9311

December 2016/January 2017



/ like it or not /

Change is in the air


ou might think this will be about the change of Administration in our nation’s capital. That’s certainly a big change, but, no, we’re looking at the ability to deal with change—political or otherwise. Most people will say publicly that they embrace change, that change is good, or that change is inevitable in any case so we might as well accept it. Privately, however, many resist it, even while trying to convince themselves otherwise. What is it about change that causes so many people—and, by extension, businesses—to freeze in the headlights? It’s not one thing, certainly. Mostly it’s human nature. Many business books have been written on the need to change, yet the topic never grows stale. That’s because every day brings reminders of the never-ending stream of trends and developments that steadily erode the status quo. Herewith a few factors—pro and con—that affect an organization’s ability to change. • You need keen observers. Many trends develop over time, under the radar, then “blossom” seemingly overnight. You need people on board who see patterns developing before they pop and before everyone joins the rush and no one gains an edge. • You also need “inside” observers. These are folks (probably different people from those just described) who have an eye for how things are done within a company compared with elsewhere. Without them you cede advantage to clever outsiders who look at what you do, scratch their heads, and ask, “Why do they make it so difficult? (Bankers will answer, “Regulations!” which, of course, is true, but not the whole story.) • You need quiet time to reflect on what your observers have seen. Such time is hard to come by. You have to carve it out. Remember, however, there will always be naysayers to any proposed change in direction. Listen to too many voices and you’ll end up doing nothing. Careful consideration is good. Hesitation is the enemy. Better to make a mistake than to hesitate. • Be willing to take a calculated risk. Bankers by definition take calculated



risks every day, of course, but not always in areas outside their “comfort zone.” The fast-moving world of mobility, artificial intelligence, et al, is one such area for many in so-called traditional businesses. One of the toughest decisions in business is to know when to let go of what’s familiar and still profitable. Too soon and you hurt earnings. Too late and you may never catch up. • Get a “driver.” Once a decision is made to change direction, every organization needs drivers. These are the people who make things happen. Drivers are different from leaders. Leaders set the goals and tone, communicate the mission. Drivers get people to move toward the goal. You need both. Drivers, as we know from recent industry events, need proper goals and supervision. But they are still needed. • Be willing to fail. Yes, this is a darling of the fintech crowd (they often call it “fast fail”), but it’s a valid point. For the record, let’s note that it’s easy to extol the virtues of failing when it’s someone else’s money, reputation, or livelihood on the line. Even so, those in charge should encourage subordinates to try new things and not penalize them if they don’t work out. Related point: If you do nothing because you’re not sure you’ll succeed, that’s just a slow road to failure when the marketplace is changing all around you. • Beware success. As John Sculley observes in “Counterintuitive,” page 48, the banking industry overall is very profitable. As a result, he questions whether banks have the incentive to “pivot,” as he says, toward the fintech world in a way that plays off banks’ strengths. He thinks some will do so, but others will be like Kodak—ver y successful until quite quickly it was left behind for failing to change. • Acknowledge the “X” factor. Recognize that even if you’ve embraced all the above, to succeed in executing a major change in direction always involves good fortune, fate, Providence—call it what you will. Many successful people acknowledge this nonquantifiable contributor to success. Doing so helps keep one humble.

December 2016/January 2017

BILL STREETER, Editor & Publisher

One of the toughest decisions is to know when to let go of what’s familiar and still profitable. Too soon and you hurt earnings. Too late and you may never catch up



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/ THREADS Enter Erica

BofA’s virtual assistant uses AI to offer proactive suggestions By Ashley Bray, contributing editor


n a year when Amazon’s Echo and Echo Dot—digital devices that communicate with the company’s Alexa digital concierge—were among the hottest gift items, it’s no surprise that banks are ramping up their efforts in this space. Several, including Capital One Bank, are already working with Amazon. Others are blazing their own trails, including Ally Bank and Canada’s Tangerine Bank, as reported in an earlier issue of Banking Exchange (August/ September 2016, p. 32). Add Bank of America to that list. The number two bank in the United States stands to make a big statement with the rollout of its virtual assistant, Erica, sometime in 2017. Users will interact with Erica through voice or text, and she will be driven by the latest artificial intelligence, predictive analytics, and cognitive messaging


Postcards from a good quarter


Strong loan and deposit growth offset increased charge-offs in the third quarter and decreased net interest margins. Community banks outpaced the industry in loan and revenue growth.

$40.4 billion 3rd quarter '15

Source: FDIC Quarterly Banking Profile.

*FDIC-insured institutions


December 2016/January 2017

$45.6 billion 3rd quarter '16

FEWER BANKS* 5,980 3rd quarter '16 6,270 3rd quarter '15

technology. The virtual assistant will be integrated into BofA’s mobile app, which has over 21 million active users. BofA isn’t ignoring Alexa. Head of Digital Banking Michelle Moore said at an October press briefing that the bank will do basic transactions with Alexa. Voice is increasingly seen as the interface of the future. Voice allows for easier navigation, and it’s an option in situations where texting isn’t possible. The challenge is in getting customers to come to rely on voice and virtual assistants for financial content and transactions. “Consumers haven’t really seen the use of voice control be deep enough, helpful enough, to really come to rely on it on a regular basis,” says Emmett Higdon, director of mobile at Javelin. Developing that trust begins w ith automating routine transactions like bill pay and money transfers through virtual assistants, such as Erica. But it’s important that virtual assistants get these transactions right. “You have to develop a confidence level that those types of simple interactions are going to be done quickly, simply, and correctly 100% of the time before we start to move into the more proactive phase,” says Higdon. The proactive phase is where Erica stands to make big waves. The virtual assistant will use information about a client—spending habits, account balances,

credit scores, etc.—combined with predictive analytics and machine learning to reach out to customers with suggestions, solutions, and ways to save money. Customers will receive a text from Erica if she senses there’s an opportunity to provide financial guidance. At the 2016 Money 20/20 conference, BofA’s Moore demoed an example of receiving a text from Erica, in which the digital assistant says she’s found a way to save Moore $300 this year. Moore clicked on the text to launch the mobile app, and Erica explained by voice that, based on spending habits, Moore could add $150 toward her credit card bill to save up to $300 a year. At the press briefing, Moore said that Erica “goes beyond chat bots. It doesn’t just answer,” she continued, “it analyzes and gives you options.” Moore said Erica will become a “trusted advisor” in the growing realm of “conversational commerce,” an increasingly popular term in the world of e-commerce and virtual assistants. She also noted that virtual assistant Erica has more data available to it than the bank’s call center people do. Erica can even prevent fees and overdrafts by analyzing account balances and spending habits. “A lot of that cash f low analysis type of interaction is very, very valuable to customers,” says Higdon. “And I think that’s what Bank of America is focused on with Erica because that has

the highest potential to deepen that relationship with that customer.” Deepening relationships w ill ultimately lead to the f inal stage of the evolution of virtual assistants—personal, human-like interactions. While these human-like interactions are a ways off, Erica still has valuable content to offer customers, including w e b - ba s e d , e duc a t ion a l r e s ou r c e s through BofA’s Better Money Habits site, a partnership with Khan Academy. Users will be prompted to videos as well as other in-app content when Erica senses a need for it, such as when a credit score has gone down. “Linking those resources together, in a contextual way for consumers, is very powerful,” says Higdon. As more banks begin to move in this direction, virtual assistant technology may be the catalyst that leads to mobile replacing the branch as the primar y channel of interaction. “Virtual assistants start to play that bigger, more human role, and as a result, it creates the opportunity to fundamentally shift the business model and put mobile at the forefront of the experience,” points out Tiffani Montez, senior analyst at Aite Group. “The branch, the call center, and even online will become the complementary channels.” (Editor & Publisher Bill Streeter contributed to this story.)


C&I +82.7% *Year-over-year

Credit cards +13.4%

Residential & commercial real estate –39.1%

Net loan losses, overall +16.9%

December 2016/January 2017




Time for “platformification”

Why a plug-and-play platform is banking’s future By Lisa Valentine, contributing editor


side from any online shopping that bankers may do, quite a few banks now use A mazon’s outsourced IT services. Unlike most vendors they rely on, financial institutions would do well to aspire to Amazon’s business model, according to Ron Shevlin, research director for Cornerstone Advisors. Amazon is the truest example of what Shevlin calls “platformification”—an admittedly “ugly word” that he believes will have a significant impact on the financial services industry. Shevlin, speaking at the fall BAI Beacon conference, described how Amazon has built an e-commerce infrastructure with a toolkit to integrate producers into its platform. “Amazon has created a plugand-play platform that allows producers and consumers to exchange and create value,” he said. Such an approach in banking, Shevlin added, would support an environment in which fintech and traditional financial services providers work together. But Shevlin noted: “Ask consumers how many of these fintech start-ups they want to do business with to solve their financial needs. The answer is that they don’t. Someone has to pull everything together in a cohesive way for consumers that makes sense.” That’s where financial institutions add value, providing “a platform in which multiple providers can play

together nicely in the sandbox to meet consumers’ financial services needs.” “The bank of the future will embrace a plug-and-play business model that allows multiple participants—producers and consumers—to connect, interact, and exchange value,” predicted Shevlin. A platformification strategy requires institutions to become magnets that attract both producers and consumers; become matchmakers that provide a platform for consumers to find the right products and services across a series of

producers; and have toolkits that integrate producers easily into the platform. Shevlin noted that BBVA Compass is working on platformification in Europe. “BBVA application programming interfaces [API] allow third parties to give their clients access to information in BBVA accounts.” He said U.S.-based Capital One also is launching a series of APIs. Shevlin added that “platformification is an open environment. You don’t need to partner with these producers; just offer them easy plug and play.”

Why cyber paranoia can be healthy


n September, New York proposed a new regulation on cybersecurity for the financial services industry. It underscores the need to do more. Even when your bank is closed and the door is locked, your enterprise is exposed 24 hours a day. Look at the proposed New York rules (23 NYCRR 500), and at the recently updated FFIEC Handbook on Information Security. Even if your bank is outside New York, set a plan in place to emulate the controls. Consider: • Data storage. It should be encrypted



December 2016/January 2017

(moving or at rest) at all times. • Vulnerability. Conduct tests quarterly. • Multi-factor authentication methods. Adopt them. • Threat detec tion and analysis. Adopt them, not just blocks. • Data and enterprise compromise simulations. Practice with a true wargame scenario. • Track data movement. Track it within your enterprise and when it leaves. Excerpted from a blog by consultant Dan Fisher. Read the full blog at


Millennials’ fixation isn’t just about selfies By John Ginovsky, contributing editor


key to capturing millennial attention—and business—stares in the face any banker holding a smartphone: the camera. A large percentage of millennials—particularly older ones between the ages of 29 and 34—say the camera is the one smartphone function they can’t live without. Mitek’s third annual report on millennials looks at their behavior regarding image capture, particularly with mobile devices. With Osterman Research, it surveyed 3,000 millennials in the United States, Canada, and the United Kingdom. For the first time, Mitek’s study differentiates younger millennials (18-22); midrange millennials (23-28); and older millennials (29-34). “What really surprised us is the older millennials are quite a lot more active with their cameras on their smartphones than the younger millennials,” says Kalle Marsal, Mitek’s chief marketing officer. The study found it is not uncommon for millennials to take 20 or more selfies a day. Another key takeaway: “There is a huge unmet demand for use of the mobile camera in commerce and different services,” Marsal says. Only 5% of survey respondents said they had used selfies to authorize purchases, but almost 50% said they would like to. Less than 10%

had used selfies to verify identity, but more than 40% said they would prefer that. Less than 10% said they had used a photo of themselves to enroll or open an account, but about 40% said they would. The third main takeaway: Mobile ex per ience mat ters. “Nearly ha lf of the older millennials told us that they switched or selected a service based on the mobile experience,” says Marsal. Banks should consider these factors: • Use clear terminology. Users must understand what banking app buttons do, if there are limits, and how to get help.

• Match user expectations. Consistency must be built in from channel to channel. • Provide feedback. “Technolog y is advanced enough that you can recognize that there’s an error about to be made, or that there is confusion on the part of the customer, and then proactively provide useful directions,” says Marsal. It comes down to four key steps, sums up Marsal: “Eliminate confusion, enable it to be seamless, ensure success, and speed the customer through the process.” Read a longer version of this story at

Millennials’ desire for engaging with banks, retailers, and other businesses from their mobile devices A good mobile experience is mandatory for any organization that wants to connect with me




I might not change where I do business right away, but if an organization falls too far behind their competitors with their mobile user experience, I will start looking for other places to do business The mobile experience doesn’t matter at all to me Source: Osterman Research, Inc.

TBTF DEBATE WILL CONTINUE Minneapolis Fed’s plan will keep issue alive post-election By Nathan Stovall, staff writer, S&P Global Market Intelligence


hile many bank observers herald the prospect of deregulation following the 2016 election, Minneapolis Federal Reserve President Neel Kashkari’s plan to end “too big to fail” should keep pressure on the nation’s largest banks. His new proposal requires banks with more than $250 billion in assets to build common equity to 23.5% of risk-weighted assets—nearly double current levels—over a five-year period. If enacted, Kashkari

could push away investors and prompt the break up of the nation’s biggest banks. He has said big banks should not exist in their current form, suggesting they should be split up or turned into utilities, and that they need to hold more capital. Kashkari, who oversaw the Troubled Assets Relief Program during the financial crisis, believes this plan is the only way to avoid repeating the past. He estimates the 13 impacted banks would have to raise $807 billion more in capital to comply.

The plan’s cost would be considerable and reduce economic activity due to credit restriction. Kashkari accounts for this, estimating that the plan would result in a 24% hit to GDP at the base case and up to 41% of GDP if the highest level of proposed capital standards were imposed. He notes the cost of a typical banking crisis equates to 158% of GDP. The plan seems unlikely to be enacted, but will impact the regulation debate. Read more:

December 2016/January 2017





Near term, Congress presents best hopes. Longer term, a new director will bring change By Richard Riese, principal, SMAART.COnsulting


fter a presidential campaign pr e d ic at e d on sh a k i ng up Washington, the prospects for a Consumer Financial Protection Bureau transition are comparatively modest—and bankers need to play a part in realizing what can be accomplished. The first reality: Until a new CFPB director takes office, Congress will play a more immediate role in bringing about change. Agency leadership, unless Richard Cordray were to leave, won’t change for another year and a half. With that in mind, here is what bankers may expect.

Agency leadership

Unlike Treasury, with key appointees who serve at the pleasure of the president, CFPB has one Senate-confirmed director, whose term does not expire until spring 2018. It is inevitable that President Trump will have an opportunity to appoint the second CFPB director. Once a Republican director makes it through the confirmation gauntlet, the biggest impacts should be in these areas: Rulemaking. Hav ing completed the Dodd-Frank Act mandatory rule assignments, CFPB’s agenda has been taken over by discretionary rules like arbitration, debt collection, and payday lending. Not only will there be fewer such initiatives under a Republican director, he or she also will be in a position to reconsider discretionary rules already promulgated. Enforcement. Enforcement priorities will change. First, the penchant for developing a novel application of UDAAP or fair-lending theories and applying them retroactively will diminish. A second area is the likely insistence on a greater degree of proportionality between alleged consumer harm and enforcement remedies. Far less reliance on civ il money penalties being superimposed on consumer compensatory damages and more credit given for self-identifying and self-correcting compliance programs will characterize future CFPB enforcement cases. 12


Burden reduction. During the term of the next director, the Dodd-Frank mandated, regulatory review cycle will take place. With Republican hands at the helm, this should result in more realistic adjustments than would be expected under a Democratic regime.

Legislative activity

The next Congress likely will be engaged along three lines of activ ity regarding CFPB transition: amending agency structure, fine-tuning agency statutory authority, and conducting oversight. S t ru c t u r a l c h a n g e . No doubt , t he Republican majority in both houses will continue efforts to change the regulatory structure of CFPB and alter its budgetary appropriation status. Whether or not the prospect of a Republican bureau director changes the Democrats’ opposition to a commission-type organizational structure is unknown. If the commission proposal is pursued separately from the appropriation issue, it could have a greater likelihood of success. On the other hand, Republicans may be less enthusiastic about creating a commission on the eve of their opportunity to appoint the next independent CFPB director. Authority amendments. Beyond the battle over structure, legislative change also

December 2016/January 2017

should include an array of other reforms to Dodd-Frank’s Title X. These include eliminating CFPB authority to prohibit predispute arbitration agreements and refining Equal Credit Opportunity Act rule-writing provisions to remove CFPB authority to regulate commercial credit discrimination standards. Oversight. Congress is well-practiced in conducting agency oversight hearings. This will take on an even more robust posture in the next administration when the current director knows that the White House no longer has his back. However, bankers and trade associations cannot simply trust to an amorphous electoral mandate to block CFPB efforts to embed the last agenda items of the Democratic administration into the bureau’s DNA. They will need to mobilize facts and effort to turn back unwarranted rules and enforcement initiatives. Without this degree of commitment, congressional oversight will be more political theater than the exercise of real political power. In addition, bankers have a lways asserted that they are the trusted providers of financial services and products to responsible customers. They must live up to that pledge every day. Adapted from an article on CFPBprospects

/ Seven Questions /


Blockchain author and investor William Mougayar says the fledgling tech could reboot financial services By Steve Cocheo, executive editor

Photo Courtesy William Mougayar


entralization makes many people, but especially bankers, comfortable, secure, and able to sleep at night. As much as bankers may beef about regulators and “inside the Beltway” thinking, the idea of federal regulation and supervision provides a magnetic north. The Federal Reserve itself is a “central bank,” and it and key private players, like The Clearing House, Visa, MasterCard, and NACHA, serve as key central points for the movement of what we consider to be real “money,” even though today it mostly consists of blips in databases. But blockchain technology and cryptocurrencies—founded on the concept of the distributed ledger, the opposite of a central database—are, to use the vernacular, messing with the centralized concepts about financial services that bankers grew up with. Steem is an example—one of author and venture capitalist William Moug ay a r ’s c u r r ent , blo c kc h a i n- ba s e d favorites. The Steem website (https:// defines itself as “a blockchain database that supports community building and social interaction w ith cyrptocurrency rewards.” “If you publish some content on Steem and somebody ‘up-votes’ it, then it earns you some money,” says Mougayar. Within the Steem community, there are ways to spend that money. “I call this approach a circular economy, where you can earn and spend money without leaving the marketplace,” Mougayar continues. “It looks like ‘funny money’ to outsiders. They’ll say, ‘How can you print money?’ But it’s the same as greenbacks. You earn it, get a paycheck, go spend it. It’s like going into a new country with a new currency.” What relates most to banking about Steem is the trust aspect of its blockchain, an illustration of a key element of this technology. “Blockchain solves the ‘double-spend’ problem,” Mougayar explains. “We can send value back and forth digitally without fearing that it’s been used twice. If I

send you value, I don’t have it anymore, in a blockchain, and the blockchain can be used to track all of this value because its records are immutable.” Not that the payments system that we live with was planned to be the way it is. “Business-to-business payments are full of inefficiencies,” points out Mougayar. He sees blockchain technology disrupting this sphere sooner than consumer payments. “Blockchain is a new set of rails,” he says. “And it is going to be a more efficient set of rails than the

multitude of proprietary solutions and spaghetti kind of integrations that we have today. We now have a chance to rethink all of this.” Mougayar has been on a personal voyage of discovery about blockchain technology. His quest became The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology, published in 2016. Next year, Mougayar will continue his thinking in the book Centerless: Rethinking Trust, Wealth, and Information in

December 2016/January 2017



/ Seven Questions /

Q1. You made a point in a blog that the blockchain is “80% business and 20% technology.” Do you think blockchain will alter the mechanisms of business or the very nature of business today? Actually, I have updated that statement, inspired by Yogi Berra. Now, I’m saying the blockchain is 90% business and 50% technology. Yes, it doesn’t add up to 100%. If it did, it would end up being like any old IT project. You can think of improving current processes as many big companies do. But if you do that—not changing anything and just using blockchain to support existing processes—you are just using a fraction of its potential benefits. Blockchain can be used, like the web, to reengineer and rethink processes. That’s why I say it’s 90% business. You have to figure out what is going to change in your business. The blockchain is here to force us to rethink existing business models. Blockchain technology is a little bit daunting today because it is still immature in some senses. We are still not too sure what’s going to scale and what’s not. We’re still in the early days of learning the limits of the technology. Right now, most of the innovation I’ve seen is taking place outside of large companies. That’s because large companies traditionally are challenged in 14


“Big banks can afford to invest in blockchain, but smaller banks need to use tried-and-true technology. We are not yet at a stage where they can buy an outof-the-box solution for payments or securities trading, but we may see that in two years” creating new business models. Big companies aren’t ver y good at acquir ing new customers. They are good at keeping customers. On the other hand, take Clearmatics, for example, out of the United Kingdom. The firm is a start-up that is creating a new, decentralized clearing network for overthe-counter derivatives. It will start out with zero customers. Some large companies do what I call “hand waving as a strategy.” They feel they have to indicate they are doing something in a space, and, depending on who you are, you can hold your audience captive for a while. Not picking on IBM in particular, but IBM is notorious for making announcements ahead of product deliveries. Customers will wait a year for IBM because it’s IBM. Start-ups will push the envelope, and some will not succeed. But that’s the nature of the field. Without ambitious start-ups, we’ll never know where the boundaries are. At present, banks aren’t feeling any of the blockchain start-ups. But everything starts small, and before you know it, it gets huge. PayPal began very small and is now a multibillion-dollar company that has expanded into lending. Banks may end up becoming back shops, no longer the front ends. Q2. Do you think that the banking industry has been going about blockchain research and development in the right way? I think ba nk s ought to be t a k ing a

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portfolio approach to blockchain projects—not counting on one thing. Nearly all of the big banks are involved in the R3 CEV consortium, for example, and in bilateral or trilateral projects, or mini-groups. My message is: “That’s not enough.” In a consortium, everyone is moving on the same level and in the same direction. No one is going to one up the other when they are all playing the same game. Collaboration is a good way to test concepts. But you’re not going to get much competitive advantage out of collaboration. And banks do not like to share everything, so they will share the minimum. So in their portfolio, banks must leave some room for new and innovative projects that will give them a competitive edge. That is where creativity and real innovation come into play. I see some large companies now talking to startups, trying to find ideas that could move their needle. [Editor’s note: Subsequent to the interview, several large banks left R3 CEV, reportedly in part out of concern for too little competitive help for their involvement.] Q3. What about the smaller banks? Should they be looking at blockchain now, too? They will have to wait a bit longer. They don’t have big budgets to invest. There is no payback yet. Big banks can afford to invest in blockchain, but smaller banks and credit unions need to utilize technology that is tried and true. We are not yet at the stage where they can buy an

Illustration © George Diebold/Blend

the Age of Decentralization. Mougayar’s earliest take on blockchain was that it was just a new wrinkle in the internet or a new feature of the web. At the time, people still thought chief ly in terms of Bitcoin as well as other cryptocurrencies when discussing blockchain. Further study, however, changed Mougayar’s mind. “I saw that it would be very similar in impact to the web, which was transformational,” says Mougayar. Not that everything in the blockchain world has gone smoothly. Bitcoin has had its difficulties. Mougayar likes to quote Andreas Antonopoulos, a tech writer and entrepreneur, that Bitcoin “has died 120 times already and yet it’s still there.” But Mougayar is convinced that ubiquitous adoption of blockchain technology in financial services has become a “when,” not an “if.” The following summary of a far-ranging interview with Mougayar has been edited for length and clarity.

out-of-the-box blockchain solution for business-to-business payments, securities trading, or anything else they offer. But I think we will start to see those, perhaps, two years from now. There’s an exception: an executive at a small bank who sees the blockchain as a really important technology. That executive will say, “I’m going to bet a small part of my company on that.” That bank will need to think and act like a start-up, get aggressive, and be willing to take risks. This takes unconventional thinking. Q4. That brings us to regulation. Much of the rest of the world seems to have a friendly regulatory attitude toward innovation and blockchain development. I’m not quite getting that feeling from U.S. regulators. The United States is more complex. You can’t totally compare the United States to Singapore, for example. Singapore is a very centralized government without a lot of moving parts. So if the government wants to do something, it can make that happen fairly efficiently. And there’s a lot at stake in U.S. financial markets and many regulatory agencies. It takes a bit more to wrap your head around it. A wait-and-see attitude is not bad. Not taking regulatory action is good. It means regulators are letting blockchain technology evolve and mature, seeing what shape it will take. The worst thing you can do is regulate something too early. My message to the regulators is that technology is all about innovation and that they have to innovate, too. I suspect that many of them will do so. Q5. In late October, Comptroller of the Currency Thomas Curry made it pretty clear that he did not favor the concept of “sandboxes”—permitting innovation to proceed in a contained, protected environment. What are your thoughts on this? I think sandboxes would be a way to test the implications of new technology without doing any damage to the rest of the system. If somebody says they don’t want to do sandboxes, that’s not a very progressive statement, in my book. That means they don’t want to push the envelope outside of the boundaries they know. When the blockchain and cr y pto currencies are fully deployed, they will change the existing central authorities

that we have. I think regulators must come to grips with this. Bitcoin has a market cap of $11 billion, which is not a big number, comparatively speaking. But significantly, it stands on its own 6,000 nodes of computers. Choke one or 100, and thousands keep on humming. No one body governs it. The central authorities used to controlling every thing will have to learn to coexist with such new forces. However, there’s a n innovation that the blockchain enables that could benefit regulators. They can be a node on a blockchain network. That can give them the same seat as any other player, the same insights into transactions—all in real time. That would be a big change from the traditional pattern of demanding reports long after the fact. Q6. “Smart contracts,” or self-executing business arrangements built on the blockchain, seem to be gathering momentum. How soon do you think true blockchain-based smart contracts will debut worldwide? I’m disappointed that we haven’t seen some very simple use cases around smart contracts that touch consumers. A lot of the work done has been a bit too ambitious—centered on solving big problems with big companies, with smart contracts that are very complicated and part of bigger applications. I’d love to see someone launch a very simple smar t contract. How about a wager application? If you and I want to bet on the World Series or tomorrow’s weather, we could bet via smart contract. The smart contract would check the scores or check the weather, and automatically pay you a Bitcoin or pay me one. At the end of the day, sma r t contracts are just log ic—business log ic encoded in software—allowing money to be exchanged if certain conditions are met or not met. Q7. You are both a student of this technology and an investor. What is a yardstick for projects with potential versus those that don’t look like they will get legs? There’s a wide range of composition and “f lavors” among start-ups. One factor that’s different today is that start-ups don’t necessarily need to go to venture capital to raise money. A credible start-up

could raise its own money by spinning off its own currency. That is a very unique and innovative method for the cryptocurrency environment. Et hereu m , a Bit c oi n c omp e t it or, started that way with an $18 million ICO (Initial Cryptocurrency Offering) as opposed to an IPO. Before you knew it, an ecosystem had been created. There are over 300 start-ups built on Ethereum and more than 100 big companies developing projects and proofs of concept on it. Its valuation is over $1 billion, and there are thousands of developers. It’s not just Ethereum. There are dozens of others at this point, tying their business model to a token of some sort that has value. Yes, there will be speculation. And that’s okay, if it is short-lived, because speculation funds innovation. Money that’s generated by prices that rise end up benef itting the entrepreneur and benefitting the investors. Some start-ups are using these windfalls from cr y ptocurrency appreciation to fund their operations. One thing required is human capital. I’d like to see more developers who are knowledgeable about blockchain technologies. When I wrote The Business Blockchain, I found there were about 5,000 blockchain developers worldwide. Now, it is up to, maybe, 7,000 or so. Compare that to nine million Java developers. I cite Java because it proved instrumental for the web. Java allowed developers to write an application once, and it could run anywhere on the web. The web took off. So we need more blockchain developers, and for that, we need courses teaching blockchain, cryptocurrencies, consensus models [which help blockchain communities work], game theory—all computer science stuff and software engineering. If we don’t do it here in North America, I know China is very serious about blockchain. China will take all of the research we’ve done, and it could, maybe, apply it better. Consider this: The top three languages that my book has been translated into are Chinese, Japanese, and Korean.

Disclosure: William Mougayar is an advisor to Steem, and holds Steem, Bitcoin, and Ethereum cryptocurrencies.He is based in Toronto, Canada.

December 2016/January 2017 BANKING EXCHANGE



“Sell” went from no-no to go-go to uh-oh. What’s the right perspective on banks in the selling role? By Steve Cocheo, executive editor & digital content manager



December 2016/January 2017


orty-odd years ago, banks didn’t “sell.” Yes, they had new accounts representatives and calling officers. Some even a d m it t ed t o having marketing directors. But no salesmen. Sell was a dirty word. That was something they did down at the used car lot. That was the business of people who pushed life insurance. That was something that, frankly, everybody else did. There was something plain unbankerly about selling. But gradually, banks realized that sa le s a nd a l l t he t rappi ng s—goa ls, incentive pay, and sales management— re a l ly were pa r t of ba n k i ng. S ome accepted this grudgingly, some realistically, and some enthusiastically. One of the latter, although hardly the only one, was Wells Fargo. This brings us to September 2016, when regulators slammed Wells Fargo— darling of analysts and others for its power f ul cross-selling ratios—for a much-recounted series of sins. Congress weighed in. Heads and reputations rolled. In just days, a powerful corporate image went down the drain, and in the process, the concept of banks in the selling role got sucked toward the spiral. Is sell a dirty word in banking again? In a post-Wells Fargo settlement period, dare bankers utter that word? In a time when UDAAP has become, and remains, the law of the land, can selling in banks survive? And, looking forward, do these questions matter as much in the era of the virtual assistant? Where a human may have one eye on incentive pay, will an unpaid “bot” prove more trustworthy?

In the wake of Wells Even w ithout the Wells af fair, such questions are healthy for the banking industry to be asking. Asking them now may prove especially relevant. The industry appears to be on the verge of exiting the low-rate era. Just as rates begin to rise again, abundant cheap deposits may leave the bank. Banks may be entering a period where selling becomes more important than ever.

This would be so even had Wells not happened. But in the wake of that unfortunate situation, banks anticipate close inspection of their sales practices by regulators. In late November, the Consumer Financial Protection Bureau connected the dots—for the minority of players who didn’t already get the message—in its Compliance Bulletin 2016-03, Detecting and Preventing Consumer Harm from Production Incentives. Even before CFPB published its message, the Wells consent order represented a road map banks need to follow to make sure their sales and incentive practices are acceptable, observes Annette Tripp, partner at Bracewell LLP. The role of independent audit and the role of customer complaints are two messages to take from the order, according to Tripp. A nyone who t h in k s ba n k s d id n’t take notice of the warnings implicit in the Wells case doesn’t talk to enough banks. Informa Research Services has been working with banks for decades, providing mystery shopping and other consumer research. Informa executives have heard a good deal of feedback from bank clients. “There is a little timidity about crossselling now, and making sure that they really earn the right to have the cross-sell conversation,” says Sue Hines, manager of customer engagement at Informa. Chad Watkins, director, market intelligence, says there has been a blending of two traditional types of mystery shopping assignments: sales-oriented tests versus compliance-oriented ones. Now, concerned banks have the firm’s mystery shoppers evaluating both issues. Reaction to the Wells settlements has been broad, according to Watkins. “At the end of the day, this is about brand and brand risk. Banks don’t have a monopoly. While Wells Fargo will be fine in the long run, if you are a smaller bank, you may not survive.” Such banks realize that they can’t afford a misstep. More than ever, at least since the Great Recession, banks face being lumped into one group. Besides its client-focused

December 2016/January 2017



/ SALES / research, Informa surveys 16,000 consumers annually. Watkins says recent research indicates consumers are well aware of what happened at Wells Fargo. Community banks may see this as an opportunity to distance themselves from the giants. Compliance consultant Patti Blenden sees the smaller banks’ challenge here as a double-edged sword. On the one hand, she believes sales in a community bank, by its nature, will be cleaner, because the person on the other side of the desk may very well be a friend or neighbor, not an anonymous member of an endless stream of customers. On the other hand, “for community banks, there’s nowhere to hide. They are clearly aware that everything they do is scrutinized closely. And there are only so many people in your community.” Wells Fargo’s cross-selling prowess dazzled the industry, with everyone wondering how bankers hit their ambitious targets, says David Kerstein, president of Peak Performance Consulting Group. One factor that Kerstein says hasn’t been discussed much is the potential influence of what he calls the “Wells alumni club,” a large group of people raised in a culture where “hitting your numbers every day, every week, every month” was paramount. By his own rough research using LinkedIn, says Kerstein, there are at least 15,000 former Wells employees in positions at other banks. “So I wouldn’t be surprised if these practices didn’t show up in other places as well,” he concludes.

Do “sell” and “bank” fit in same sentence?

Veteran consultant, former regulator, and reg tech entrepreneur Jo Ann Barefoot has watched banks go through the long arc of their involvement in sales. “Banks try to approach sales in the belief that the product will be good for the person,” says Barefoot. “That’s how they got over their historical reticence regarding selling.” Considered this way, sales is seen not as exploitative, but as customer service. Many bankers take pride in matching customers with the right product, she says, avoiding what some call “the hard sell,” in favor of a more consultative role. “We keep the conversation around how to solve the customer’s needs,” says Brian Higgins, f irst vice-president, digital and payments, at First Financial Bank, N.A. “Internally, we talk about selling 18


the customer everything they need, but nothing more. Overall, we offer customers clarity, simplicity, and transparency.” Monitoring and coaching represent important parts of the sales approach at $8.4 billion-assets First Financial, headquartered in Cincinnati. Higgins says management wants to be sure that bankers work the process, asking the questions that will bring out the customers’ needs. Ultimately, there is consideration of “what did the customer wind up buying from us?” he explains. Adds Higgins, who came into banking four years ago after working in other parts of the financial services business: “One thing we are very clear on internally is we shouldn’t apologize for selling. We offer products and services that fulfill fundamental needs. We shouldn’t shy away from that.” At Frost Bank, there’s a belief that the best sales effort is one that develops customer connections to the $29.6 billion-assets institution over time. “We’re not product pushers; we’re relationship managers,” explains Phillip

December 2016/January 2017

Green, chairman and CEO, and a 36-year veteran of the Texas organization. When relat ion sh ips work , t he y nat u r a l ly expand. “You get to grow with the customer,” Green explains. (Earlier this year, Frost was ranked highest in retail banking customer satisfaction in Texas by J.D. Power, for the seventh year in a row.) G oa l-set ting comes up. Green a ck nowledges that “ever y compa ny has goals. That’s just a natural part of business. It’s there, a goal to achieve.” However, he doesn’t see quotas and the like as helping that. Instead, he says, supervisors are constantly asking staff, “Did you make calls to customers today? Did you reach out to a customer?” “ That’s what keeps a relationship strong,” points out Green. “If you can become a trusted advisor to someone, then you will get opportunities to suggest services to them. Relationship banking has a longer sales cycle, but when you succeed, it results in a higher level of customer satisfaction.” “We look at sales as a service,” says

Banks that speak of a more enlightened sales view but fall back on ‘Sell more!’ send employees the wrong message

Higgins. “If we are selling effectively, we are providing a good service to that consumer. If we are fulfilling a need they don’t have, then we are providing bad service.” In fact, a common error may be in thinking of sales as a series of individual events, rather than as an ongoing process. The latter broadens the concept of “relationship.” Dan Kleinman, of a sales consulting firm bearing his name, says a strong relationship is one in which the banker is not just suggesting products, but asking about needs the bank isn’t filling. That, and having a good enough handle on each customer’s behavior to know when he isn’t using a service he already has, and finding out why. Green notes that finding a customer who isn’t using the bank’s proprietar y, mobile banking service is a big deal because the app improves convenience tremendously.

Barefoot, a consultant. “But there needs to be a focus on customer service and customer centricism.” Barefoot believes monitoring customer complaints can help banks steer the right course. “That’s one way to detect overly aggressive selling,” she says. When phrases like “That wasn’t fair!” or “I didn’t understand what I was being sold” begin to recur in complaints, steps must be taken. Ba re fo ot say s she ha s no doubt s that UDAAP, and CFPB’s use of it, has changed the industry. “I know a lot of banks that felt that this was good,” Barefoot maintains. “It encouraged some soul searching and encouraged people to push back on some things that might not be benef icia l to customers.” Barefoot believes every bank should have a sa les culture statement that managers and employees know of and understand to be real that says the bank will not sell customers any product that isn’t good for them. And anyone in a sales role should be trained to listen to cues that a prospect doesn’t like where a conversation is going. “I have listened in to some sales calls in my work,” says Barefoot, “and sometimes the customer is trying to express reservations to the sales rep.” The greatest concern in bank selling is the cross-sell, in Barefoot’s view. When a customer comes in to open an account of this kind or that, offering alternatives in that product category works. When the conversation moves beyond the initial idea, that’s a step beyond and should

be treated with a tempering caution, according to Barefoot. Peak Performance’s Kerstein suggests that employee complaints, explicitly or more likely in the form of some anonymous whistle-blower or similar process, should be taken very seriously. At Wells, he says, “complaints from employees about the sales program should have been a warning that something bad was going on.” Complaints in general are much more important than reports about high rates of customer satisfaction, says Kerstein. “Talk to the 5% who aren’t happy,” he suggests. “You may find some patterns.” Informa’s Hines says that banks ought to strive for customer satisfaction, but in today’s competitive picture, consider it only a beginning. “Satisfaction is just cost of entry now,” she explains. In Informa’s work, high 90s out of 100 are common to most evaluations. Banks should want to be sure, she says, that trust is present; that customers feel the bank offers real value; and that what the bank provides relates to customers’ lives. “You really have to know that your bank is doing the right things,” Hines explains. An interesting alternative view on what banks should be striving for in service comes from the Center for Financial Services Innovation: financial health. John Thompson, senior vice-president, says that a recent study by the center found that 57% of the U.S. population is struggling financially. This goes beyond the unbanked and underbanked portions of the population. The report states that

Monitoring customer, and employee, complaints can help banks detect overly aggressive selling

Finding the “line” When the topic is sales, there is talk, inevitably, about efforts that “cross the line.” But where exactly is the line? “It’s dif f icult to def ine that,” says Demember 2016/January 2017



/ SALES / these Americans are having difficulty establishing a cushion for financial resilience, and ensuring financial security and mobility. “What consumers are really looking for from financial institutions is health and stability, rather than getting rich,” ex plains Thompson. CFSI’s concept includes elements of improving financial literacy as well as banks stepping in to help consumers manage their affairs. In essence, the center sees a bank becoming a “financial Fitbit.” Thompson says the long-term benefit to the bank is that “as the consumer’s financial health improves, so does their value to the institution.” One caveat, however, according to Thompson, is that “it’s not like you can put this into the hands of your sales team.” Likewise, he says, a bank would have to make a sincere commitment to this concept for it to work. “If it becomes a veneer, it will fade,” he says. “Employees would see through that.”

Setting goals and measuring sales

Much thought goes into sales programs and their direct relative, sales incentive compensation. Yet the consensus of experts interviewed is that much misguided thinking has gone into the setting of sales goals, the metrics chosen, the timing of incentives, and how employees and managers are evaluated for their sales performance. First Financial’s Higgins boils down concisely one key problem: “Banking for too long has been product-focused.

‘We have to sell widgets.’ Our thinking shouldn’t always be about ‘credit card Tuesday’ or the big red button that says ‘buy now’.” “ The more you measure people on the basis of raw numbers and the more you push them hard for those kinds of results, the more you’ll get behaviors that are not desirable,” points out Peak Performance’s Kerstein. Sales exper t K leinman blames the t y pica l bank promotion process for engendering a simplistic view of selling. Bankers who prove adept at sales often wind up being promoted to being—whatever the bankerly title may be—sales managers. The problem is that they have selling skills, but perhaps not analytical skills or tools. Lacking those, “they fall back on ‘Sell more! Sell more!’” says K leinman. A bank that speaks of a more enlightened viewpoint but that still falls back on “sell more” sends employees the wrong message. “Employees pick up on it when you are just ‘doing something for the tourists’,” says Kleinman. Selling “more” is a curious concept. At first blush, more would seem to imply more profits. But for many banking services, the initial sale means far less than does usage of the product and retention of the relationship. Take a consumer line of credit. Until it is drawn on, the bank isn’t making a dime, so why pay an incentive for that? Informa’s Watkins shakes his head over the many accounts opened at Wells unbeknownst to the account holders. Why didn’t anyone point out, Watkins asks, how many accounts the

The best sales develop customer relationships over time. When they work, banks grow with their customers



December 2016/January 2017

bank had on its books that were basically dormant? “Why would you measure a ccount s rather tha n a dopt ion a nd usage?” he adds. This comes down to the issue of quality versus quantity. “A bank can’t drop its focus on quality growth,” says Kleinman. Ultimately, the value of the entire relationship with a customer produces a net gain or net loss for the bank. Focusing on one account, one kind of metric by itself, does the bank no good. Ultimately, retention means more to Kleinman than initial sales. In his own view, that means that banking companies shouldn’t be paying commissions on sales. The industry’s products are not “products” typically, but services, and service implies the ongoing relationship already spoken of. Frost’s Green says incentives play a small part in the compensation of those employees in sales roles. “We make our base pay a little higher,” he explains. Setting goals isn’t done at the individual level, but at the branch and market levels at First Financial, notes Higgins. The contributions made to the whole by individuals is reviewed, he adds, but the overall idea is to encourage teamwork.

Compensation: green and otherwise

Before becoming a banking compensation expert for Crowe Horwath LLP, managing director Timothy Reimink spent years in banking. Among other things, he oversaw branch systems and he saw the lengths that branch managers would go to make quotas. One expense that always gave him a chuckle was the branch manager who charged the promotion budget for cans of Coca-Cola that employees would give to drive-through customers to get them to hear a message about credit cards. According to Reimink, there are some best practices for the sales incentive pay system: • Multiple metrics. Banks should select a set of meaningful metrics—not making the program dependent on one factor. They should present a balanced picture of sales performance. • Judge the details. Mov ing product should be balanced by per formance related to that. Does the sales ace handle documentation properly? Do the loans made generally perform satisfactorily? • Broaden program qualifications. Sales

staff shouldn’t be evaluated solely on the basis of sales. Reimink suggests that overall job performance should be taken into account. Of ten, bank sales programs focus on the performance of the individual banker. Reimink says that can be trouble when a top performer’s “halo effect” sets him up for different treatment from other employees. Another practice with pros and cons is “stack ranking.” Reimink understands that the idea here—of letting every sales staffer see where he ranks versus others— is supposed to tap into competitive spirit. However, Reimink warns that public rankings can undermine teamwork. “It doesn’t create an env ironment where everyone is cheering for everyone el se ,” t he c on su lt a nt e x pla i n s. Ultimately, management has to consider the kind of behavior compensation incents. When the individual becomes the focus of a program, “top performers will hold very tightly to their customer base,” Reimink explains. Reimink suggests that some organizations lean too heavily on incentive pay for sales. Kleinman agrees. He says organizations can sometimes overpay, which begs the question of clawbacks—taking money back where things don’t pan out. Reimink says this has been mostly an upper- and senior-management issue, “though it is trickling down in areas where the impact of employee behavior on result is not always immediately seen.”

is robo selling better? Sales expert Kleinman is based in San Francisco near Valencia Street, once a blue-collar neighborhood, but now given over to trendy coffee shops where millennial business people can imbibe caffeine and plug in to work off laptops all day. “These are people who get together and don’t really communicate except through machines,” maintains K leinman. His question is: How do banks bring sales and ser vice cultures, as practiced by banks, to this millennial generation that hardly goes near a bank and may hardly talk to other people? P ut t i ng a side t he whole i s sue of the future of the branch versus digital bank ing, w ill technolog y render the concern over sales moot? Is the app the solution to such problems? It is said that Amazon’s pages are personalized by 26 different factors. Will the

algorithm—uncompensated, unemotional, and lacking a family, mortgage, or expenses—replace the fallible human? Maybe. But probably not. Informa’s Hines says her work observations demonstrate that “‘Let me do it myself’ is winning. For banks, the number one lesson in Amazon is that people are happy to serve themselves. They want convenience.” Banks that don’t climb aboard that train, Hines points out, will see attrition. Will the emerging fields of artificial intelligence and machine learning be a magic wand that makes all sales pure and customer centric? Hines doubts it. So long as humans program apps, the human element won’t be absent from sales. Consultant Barefoot, while a believer in the power of good in technology, says it’s much too early to decide the ultimate impact of behavioral science on customer service. On the other hand, she hypothesizes that as virtual assistants become more power f ul and adept, they w ill become the tech equivalent of a biological membrane, “something that keeps out the bad stuff and lets in the good stuff.” A great offer with no strings will pass through to the human owning the mobile device. Fishy deals won’t meet human eyes, she suggests. Higg ins says First Financia l isn’t bringing customers an Amazonian 26 points of differentiation, but the bank has worked hard over recent years to build more sophisticated approaches to understanding customer needs. What concerns Higgins more is that customers have become much more sophisticated about online account openings than many banks are. “We risk that gap increasing,” he says. Ultimately, Higgins suggests, as geography becomes less important, banks will adapt responsive design in their electronic face to customers. This won’t just be a matter of adapting to each potential device that a customer may be using, but responding to individual preferences. The comparatively homogenous neighborhood of a branch will give way to the “neighborhood” of one person who wants the bank to serve him his way. Yet sales culture will continue to matter, Higgins believes, because customers will still prefer human interaction for many types of services, such as mortgages and 401(k) programs.

Banking Exchange bloggers tackle Wells Fargo sales issues • Ed O’Leary, Talking Credit: “Selling and banking can’t be strangers,”; “Leadership lessons from Wells,” • Jeff Gerrish, Community Banking Blog: “5 Wells lessons for community banks,” http://tinyurl. com/communitywells • Mike Moebs, The Prairie Economist: “Do’s and don’t’s when selling financial services,”; “Banks sell services, not products,” notproducts • Nancy Derr-Castiglione, Common Sense Compliance: “Seeking common sense compensation,” commonsensecompensation • Lucy Griffin, Common Sense Compliance: “Wells Problem”: How could you stop it in your bank?”, stopproblem • Richard Riese, guest blog: “Compliance risk rises to top of board agenda,” salescompliance • David Baris, UNconventional Wisdom: “15 questions your board must ask about sales,” http://

New blog entries appear in Editors Exchange and Tech Exchange e-newsletters. Subscribe at www.bankingexchange. com/newsletters

Demember 2016/January 2017



community banks prepare for

“CECL” By Kathie Beans, freelance writer



December 2016/January 2017

Despite continued questions as to its value, banks are gearing up for a major shift in accounting rules


E CL i s c om i ng! CE CL i s coming! Will communit y banks be ready on time? The short answer: Yes. But smaller banks are divided on whether or not the time-consuming transition to the new accounting standard will provide useful information for all the work needed to prepare and comply. The new accounting standard for “current expected credit losses,” or CECL, was adopted by the Financial Accounting Standards Board (FASB) in June 2016. The new r u le s a re intended to address concerns raised by a wide range of stakeholders following the 2008 financial crisis. The effective date for CECL implementation is 2020 for SEC-registered banks and 2021 for others. Under CECL, financial institutions will be required to include reasonable and supportable forecasts in a forward-looking credit loss estimate, rather than relying on past events and current conditions. Prior to CECL, banks could only report losses when they occurred. CECL will entail crossfunctional changes to the end-to-end reserving process for financial assets measured at amortized cost.

CATCHING CECL train Ba nkers inter v iewed by Banking Exchange are confident they can meet the implementation deadline, but they disagree about whether or not the new standard will improve risk management or loan forecasting. Views differ among bankers and their industr y associations concerning the impact CECL will have on institutions. James Kendrick, first vice-president of accounting and capital policy at the Independent Community Bankers Association (ICBA), says CECL’s impact on communit y bank s w ill be minimal. “Community banks are using a for ward-looking approach now because the regulators require it,” he says. “The successful transition to the new standard is not an issue at this

point because they can use existing processes. If they are using narratives or existing spreadsheets, they can continue doing that.” Mark Zmiewski, director of enterprise risk and product management at the Risk Management Association (RMA) agrees. “Practices and policies are already in place to produce and govern the ALLL,” he says, referring to Allowance for Loan and Lease Losses. “The underpinnings—or inputs—are changing, which will require a different way of thinking about estimating losses. For example, the starting point for recognition is moving up, but the fundamental concept of reasonably predicting the future state of the portfolio is very similar.” In terms of banks’ readiness to implement CECL , Zmiewsk i says there are several pre-adoption stages: awareness, preparation, and implementation. “Most banks are aware and many are scoping out the resources they will need,” he says. “Implementation is still a ways off, especially since it does not go into effect until year-end 2019 for early adoption. We expect that preparation will pick up considerable speed in 2017.” Banking associations are helping members prepare. RMA developed a Community Bank CECL Service to capture, store, and report on loan loss information. It provides a framework for data that can be leveraged for use with the ALLL, risk ratings, concentrations, and limits, and provides insight into deal structures. The American Bankers Association and ICBA offer webinars, videos, and workshops. A future ICBA webinar will focus on regulator implementation and scrutiny. Mike Gullette, ABA vice-president of accounting and financial management, says most community banks are in the early planning stages, if they have started. “Right now, we’re trying to get them to focus on what kind of data they need to start collecting.” It is rare for any bank to track and

December 2016/January 2017



/ CECL /

“CECL is an effort in futility that won’t help banks, regulators, or consumers” —McCall Wilson, Bank of Fayette County maintain any credit-related information on a lifetime basis, according to Gullette. He points out: • Origination dates are rarely maintained more than three years. • Charge-off rates are normally based on annual data, not lifetime, even for large banks. That must change. For example, banks normally track classified loan loss percentages only over the next year. It’s the same for delinquencies. Even large banks that have probabilities of default compute them over one year, not a lifetime. Formulating the percentages on a lifetime basis is very data intensive. • Key underwriting drivers like FICO have never been analyzed over a lifetime at most institutions. • Banks will need to collect data to give a basis regarding how their forecast assumptions will impact future chargeoffs over a lifetime. Gullette says it won’t be difficult for banks to meet the deadline or get past the first audit. He believes banks may 24


run into difficulties after the second or third audits, when credit conditions have changed. That’s why he believes that banks won’t know if their transitions to CECL are successful by the implementation date. “This is about how banks will manage capital and view credit risk,” he says. Success will be demonstrated when a bank can back up why its allowance should be 50 or 100 basis points higher.

investor benefitS? When asked if CECL will provide more useful information to stakeholders, Gullette and Zmiewski say, “It depends.” Gullette says new disclosures about the loan portfolio may result in new questions: “It’s opening up a black box, and now, all of a sudden, people will see what you are doing about this or doing about that. Transparency is a good thing.” Zmiewski says the bank’s accountants and regulators have always had an in-depth look into banks’ books, and CECL will not provide them with more

December 2016/January 2017

information. But investors may f ind better quality information disclosed in financial statement footnotes. “In this sense,” he says, “there is an opportunity for banks to tell a good story about their risk management capabilities and how they have translated it into performance.”

portfolio Ups, downs Ideally, A LLL isn’t just about keeping auditors, regulators, and investors happy, but about running the bank well. Portfolio volatility could impact a bank’s credit loss forecast, and many banks are not sure whether or not the CECL analysis will provide a better fix on what their risk is, explains Gullette. Institutions are concerned about explaining volatility to the aforementioned parties. Zmiewski isn’t as concerned. “The biggest change will obviously come at the point of transition in either 2019 or 2020,” he says. “By all forecasts, ‘the number’ will be bigger. Perhaps for a few quarters after that there may be some movement as the process evolves and refinements are made, but in terms of random volatility, I don’t think there will be much. Unless your bank has radically changed its risk appetite—and thus its risk profile—or has grown significantly through

introducing new products or expanding into new markets, for example, the relative stability of the customer base should keep things within a reasonable band.”

STARTING with CECL Chad Kellar, partner, Crowe Horwath Advisory Services, says most banks are in the education stage of CECL preparation, participating in conferences and webinars, talking to service providers, and considering software packages. His organization offers transition guidance (, illustrating how methodologies may change using bank practices today. Kellar emphasizes that banks should sta r t the process ea rly, per for ming assessments and collecting data. “CECL is a change in perspective in how you look at the allowance, and so it requires different data points and methodolog ies.” Yes, there is f lexibilit y in the standard, but “scalability is in the eye of the beholder,” he says. As with all regulatory and accounting changes, it will require time and effort. CECL prov ides some benef its. A s par t of an overall business strateg y, CECL pulls credit losses forward, which impacts capital planning and budgeting. It helps organizations view the business holistically. The disclosures that appear in financial statement footnotes will be useful to the marketplace, particularly during a bank merger or acquisition. Kellar recommends that banks begin assembling information for the transition now, so they can run the models for 12 to 18 months before the effective date. “ That’s a best practice for any model implementation,” he says. “It will give you four to six quarterly observations on how the model will react in that environment.” Kellar says the models should ref lect market dynamics, but notes: “Banks need to be careful about the volatility assumptions built into their models. The current credit environment is fairly stable, but those assumptions may not be as relevant in the future, as the magnitude of that volatility could be significantly different when CECL is fully implemented in the future.” Some of Kellar’s clients are exploring using outside technical help. He advises them to take control of the process and look at various types of data that can be collected and utilized. “Our own process starts with risk identification and then

drilling down to see what kind of models may be needed,” he says. “Next is assembling teams and getting a collaborative view of where the risk is and then incorporating data into methodologies.”

banks GETTING READY There isn’t unanimity on CECL implementation among the community bankers interviewed by Banking Exchange. Most aren’t sure if the new standard’s requirements will impact their performance; a few believe that the change is part of their enterprise risk management journey.

Powell Valley Bankshares, Inc. Leton Harding, CEO of this $270 million-assets bank in Jonesville, Va., says his bank began preparing for CECL before the standard was f inalized in June. It began to question RMA, ABA, and its CPA f irm about how best to prepare. The bank also made CECL a discussion item with its outside vendor in August during its core software IT transfer to a service bureau. Internally, the bank’s asset liability management committee, which also serves as its risk management committee, considered what would be needed to comply. Powell Valley is currently evaluating a new loan platform system that will help gather information for CECL as well as contribute to its general risk management. The focus will be on the data points and information needed for input into the core system for current and future loan trend assessments. Harding believes that banks in rural markets like his are unique—not only from larger institutions, which don’t operate there, but from rural banks in other parts of the country, which may have a client base more dependent on specific industries, such as cattle, energy production and natural resource development, or tourism. He says regulators should provide guidance specifically for rural banks because they face challenges in collateral and portfolio diversification. “Much of the land here in our county do e sn’t h ave mu n ic ipa l- de velop e d water and sewer; some land may have timber; some proper ties a re multiuse, combining, for example, farming, cattle production, or retail,” says Harding. “Customers’ incomes are generally low-to-moderate or unstable; some customers are self-employed.” While Harding believes CECL will

cause banks to analyze the data they measure, he doesn’t expect it will cause his bank to change its “fairly conservative” practices on loan policy and loan loss reserves. But he believes the potential for information and measurement will be improved in as much as its loan system’s robustness will improve via CECL. Harding is providing staff members with information about CECL and asking them to participate in training. “There may be some point where we have to work on pricing structures, but that’s yet to come,” he says. “We’re doing assessments on the front end. We might have to document somewhat differently, but the process shouldn’t change much if you’re already practicing good risk management.”

Bank of Fayette County McCall Wilson, president and CEO of the $460 million-assets bank in Moscow, Tenn., says his bank has started preparing for CECL, but is “nowhere near where we need to be.” No fan of CECL, Wilson calls it “an effort in futility” that will not help the bank, the regulators, or the consumers to whom the compliance costs will have to be passed. Wilson’s bank got through the Great Recession using only $1.2 million of its $4.5 million in reserves. “The current system has served us well, and our bankers understand the exposure that’s in our portfolios,” he explains. But Wilson says his bank will modify its system to fit CECL requirements, which will require manual reports and add to the workload of an employee in operations or

CECL “shouldn’t change much, if you are practicing good risk management,” says Leton Harding of Powell Valley.

December 2016/January 2017



/ CECL / First Bethany Bank & Trust

Loan loss calculation complexity must reflect bank complexity under CECL, says Jane Haskin, First Bethany Bank. accounting. If necessary, the bank would consider hiring another person.

Lewis & Clark Bank Trey Maust, copresident and CEO, says this $170 million-assets bank in Portland, Ore., has been capturing data points needed for CECL in a model it created six or seven years ago. Because the bank has a high concentration in CRE loans, it needs a more sophisticated model than what a bank its size would typically employ. “We’re missing just a couple of the pieces for CECL,” Maust says, noting the bank needs to do migration analysis to identify probability of default for loans through their life cycle. “When CECL was first proposed, we had already been thinking the methodology we are using today aligns with the requirements. It was commensurate with the concentration of risk in our portfolio. It supported the loan loss allowance levels that we were holding on the books. My concern with the implementation process is that ALLL will rise significantly across the industry.” Maust worries regulators will assume something is wrong with a bank’s model if it indicates a bank does not need to increase its allowance as much as its peers. Maust expects the transition to CECL to be incremental. He is concerned about its impact on capital and staff workload. He believes additional disclosures that appear in footnotes will be useful to investors, and the new standard creates the potential for the balance sheet to be a more accurate representation of discounted cash flow in the loan portfolio. 26


Jane Haskin, president and CEO of this $196 million-assets Oklahoma bank, believes the model her bank uses for loan loss calculation is similar to what it will need for the new accounting standard. “As a small community bank, I was relieved that the document specifically says the complexity of the calculation needs to ref lect the complexity of the bank,” she says. “Community banks don’t have the same risk profile as larger banks. The loans we make are not as complicated.” The bank is discussing CECL implementation with its board and is providing a review of what it may entail. It is identifying how current practices may be used in the new system; reviewing how its current system for loan loss calculation can be leveraged for use with the new standard; and analyzing CECL’s effect on capital. The bank has realized it will not have to do a great deal of new modeling for its calculations. “We pretty much have a lot of compliance in place,” Haskin says.

The First National Bank of Elmer Brian Jones, CEO of this $244 millionassets New Jersey bank, expected to be CECL compliant by year-end 2016, thanks to its engagement of a third-party vendor to perform ALLL, stress testing, and portfolio and concentration management. Jones believes CECL accounting will provide more useful information than accounting for expected loss (EL). He says the bank will run EL and CECL for a period of time to evaluate the differences before fully integrating the new standard. “Nobody really knows the impact CECL will have on loan loss reserves,” he says. “Some people think it would require as much as 30% more in loan loss reserves.” Jones says CECL requires banks to have a more holistic understanding of reserves and forward-looking assumptions. “You have to understand what you’re doing to the nth level. It’s a more complicated model that requires you to build a system or use a vendor.” He hopes regulators will give banks time to adjust even after the effective date.

on the document that was released. “Community banks absolutely will not need to purchase a model,” he says. “That was clear out of FASB. The regulators know the community banks have a variety of techniques to develop their forecasts.” Ohlendor f adv ises small bank s to understand how their portfolios w ill perform in the future in terms of the economy and competition in their markets. “Reviewing qualitative risk factors will take us a long way down the road toward CECL compliance,” he says. While it’s too early to know if the bank will continue to use its current loss estimation for CECL , Ohlendorf says, “it will be interesting to see what sources of information the regulators will want to see. They’re giving us plenty of time to test models prior to implementation.” Ohlendorf has met with the president and staff of the Federal Reserve Bank of Chicago and with field examiners to share their understanding of what will be required to comply with CECL and to provide the bank’s thoughts regarding compliance. “It’s important that every bank engage in open dialogue with other key stakeholders. The sooner they start having those conversations, the better off we’ll all be,” he says. Ohlendorf does not complain about the workload CECL compliance represents. “There’s always work that has to be done to comply with the changing regulatory and accounting landscape, but that’s our business,” he says. “Not a year goes by that we don’t have to implement changes. This one is not insurmountable.”

First Community Bank and Trust As one of three bankers representing ICBA at the FASB board meeting, Greg Ohlendorf, CEO of this $150 millionassets bank in Beecher, Ill., spent two months preparing for the meeting and four to five months working with FASB

December 2016/January 2017

Brian Jones expected First National Bank of Elmer to be CECL compliant by year-end 2016, thanks to vendor help.

RounDtable Sponsored

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

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Differentiate with data How banks can use data to maximize touch points throughout the customer life cycle

is beginning to change, yet many financial institutions are looking for guidance and insights as to how to effectively and appropriately tap into the data they have. During a recent roundtable hosted by Banking Exchange and sponsored by Deluxe Financial Services, five industry participants from inside and outside of banking shared their insights into how banks can overcome data obstacles—including regulations—and employ strategies, such as signaling, soft messaging, and attribution, to leverage the wealth of data to which they have access. Here a re t he f ive rou ndt able participants: Rob Cook, vice-president, retail marketing, BMO Harris Bank, Chicago. The regional, owned by the Bank of Montreal, has 600 branches in the United States. [Editor’s Note: Subsequent to participating in this roundtable, Cook took a position at another financial services company.] Kesna Lawrence, chief data scientist at Deluxe, helps financial 28


December 2016/January 2017

services institutions leverage data, analytics, and technology to get the right product in front of the right consumer at the right time. Scott Moore, president, M32 Partners, St. Paul, Minn. The firm advises and invests in companies on their growth and innovation strategies. Prior to founding M32 Partners, Moore was the chief marketing officer of Best Buy Mobile. Drew McMonigle, vice-president, head of product development and product marketing, NBH Bank, Kansas City, Mo. The $4.6 billion-assets bank is the sole subsidiary of Colorado-based National Bank Holdings Corp., and operates under three distinct retail brands—Bank Midwest, Community Banks of Colorado, and Hillcrest Bank—in Missouri, Kansas, Colorado, and Texas. Bob Meara, senior analyst, Celent, a division of Oliver Wyman Group. Meara covers several areas, including customer analytics, branching, and ATM channels. Bill Streeter, editor and publ i s h e r, B a n k i n g E xc h a n ge a n d, moderated the roundtable. Contributing Editor Lisa Valentine wrote this report. What follows is an edited and condensed recounting of a more than two-hour discussion.

Scott Moore “Companies are starting to focus on digital signal capture—analyzing intentional and unintentional signals sent by customers. Marketers must capture both”

Photos by Francis Son

Using data for customer marketing has been around for a very long time. But being able to track consumer behaviors in real time and understand where consumers are within the purchase journey—to see into each and every one of those events—is a much more recent phenomenon. So is the ability to effectively process the vast amounts of data that emanates from digital tracking. Banks have long had access to more customer data than almost any other industry, yet they often struggle to use that data to improve the customer experience. This, too,

What are some of the data challenges banks face? Rob Cook: Banks have made great strides in tapping into transactional data and identifying customer needs earlier, as well as understanding customer behavior and offering more relevant solutions. But banks are still woefully behind other industries, and the gap has widened. Our customers’ frame of reference is not other banks. Customers compare their banking experience to their experiences with Amazon or Starbucks, and banks are scrambling to catch up in using data insights to drive relevant solutions. Kesna Lawrence, Deluxe: I agree that banks have made great strides, but it’s still a challenge to link the events and signals that lead up to a consumer transaction to better understand how to qualify a consumer and how to market to them. Drew McMonigle, NBH Bank: Banks do have access to a tremendous amount of internal data from digital acquisition and account opening and loan processing systems, as well as third-party data they can leverage to create segmentation strategies. However, most lack the organizational prowess to get internal lines of business on the same page to turn that data into an actionable marketing campaign, and to fulfill the product or the service that they market. Bob Meara, Celent: Many banks talk about delighting the customer, but they don’t really use data to make decisions with that mind-set. Instead, they focus on how to translate customer experience into return on investment. For example, banks consistently say that they struggle with the ROI on mobile banking—they’re not opening many accounts on mobile and the channel is getting more expensive to support. This has been a data analytics challenge for a long time. There’s faith involved: If we delight customers, then good things will happen. Scott Moore, M32 Partners: It’s a problem if businesses are not delivering value for their customers. All companies need to attack that issue first and then worry

about marketing, data science, and go-to market strategy. The thing about competition is that it takes the question of value creation, puts it on the end of a baseball bat, and smashes you in the face every so often.

Drew McMonigle “Banks feel they have to offer every product and service. We have too many priorities, which can sometimes put us at a disadvantage. At the end of the day, focus on your core competencies and partner when necessary”

It seems banks are at a point where they question what value they provide relative to fintech firms. Do you agree? Moore: The nature of the value that banks provide probably hasn’t shifted that much over time. From an outsider’s perspective, I still go to the bank to get money. That said, the way I get access to that money has changed radically, and I expect that to continue. Lawrence: You have to ask, “What’s our purpose in existing? ” Once you know your purpose, then you can figure out the right things to measure to guide your success. Too many people don’t ask themselves that question often enough. They think they can be great at everything, and that’s not true. McMonigle: Nonbanks can do almost everything that a bank can do, but most fintech firms just do one or two things really well. Banks feel they have to offer every product and service, and have to execute at a high level. We have too many priorities, which can sometimes put us at a disadvantage. At the end of the day, focus on your core competencies and partner outside the bank when necessary. Cook: The revolution has been in how you deliver the customer experience. New entrants start with insight into a customer need and figure out the best way to meet that need. Or a new entrant may start with a new way of looking at customers. They use big data for behavioral insights. You need those insights—what keeps customers up at night?—and then solve for that, whether you are a bank or a player in another industry. Lawrence: We call that looking at the right thing. And too often, people think more data is better. This is not necessarily true if you’re not looking at the right thing and not able to tie it back to a real-world need December 2016/January 2017



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“Understanding the behavioral drivers of your customers and then marrying that with big data can be so powerful” — Rob Cook

or problem. Consumers don’t mind being marketed to. What they don’t like is marketing that’s not relevant to them at that particular moment in time. Banks can use insights from transactions within the bank and from other providers to offer products customers would like. McMonigle: Bankers ask a ton of questions. Our compliance team asks a ton of questions. We like to understand the person opening an account or doing a transaction in the hopes of creating a long-lasting relationship. So what do we do with all this data? How fresh is your information? By the time you build a marketing campaign, that data could be years old. It’s stale. Now, every time we do a new campaign, we always gather fresh data and overwrite our system with what we think that consumer looks like today. A customer may have reported that they make $50,000 a year, but based on their monthly deposits, we know it’s more like $120,000 a year. We are always “rebucketing” our consumers. For small business customers, we look at receivables, credit card transactions, and deposit data to make marketing campaigns more relevant. Lawrence: That’s great how your bank is making marketing relevant by maximizing the information at each touch point with the consumer. That’s key to having appropriate and timely conversations. Meara: Most banks aren’t that far along in their data differentiation journey and aren’t investing in what you’re both talking about. What impact does regulation play in how banks access and use data? Cook: Regulations play a critical role in making sure that consumers are treated fairly, but banks focus too much on what they can’t do because of regulations. That makes it hard to 30


December 2016/January 2017

Kesna Lawrence “Banks tend to approach data by first considering how to avoid risk, whereas other industries consider how they can ensure they are getting the appropriate return on the amount of risk that they’re taking”

think outside the box and be creative. Other, less-regulated industries can be more entrepreneurial and think more creatively in how to apply data insights. We also tend to invest only in things we can measure. So that means sticking with more traditional marketing, like direct mail, that you can quantify easily. Lawrence: Banks tend to approach data by first considering how to avoid risk, whereas other industries consider how they can ensure they are getting the appropriate return on the amount of risk that they’re taking. That’s a key difference. McMonigle: We’re always pushing the envelope with our compliance, legal, and risk teams—not because we want the bank to be shut down for something that we shouldn’t be doing, but because we want to focus on providing value to our clients. What do we want clients to experience? What services do they need? What products add value? We then execute on that within the regulatory framework. Cook: The issue is also that data is not always available in the right way. Many of the technology investments banks make are driven by regulations, such as anti-money laundering compliance. There are opportunities to leverage some of those compliance investments for broader marketing purposes. Many regulations require having a 360-degree view of the customer, for example, and you can use that data in other ways, although sometimes you have to retool the systems to get the data you need. Meara: Netflix knows their customers not because regulators told them to, but because that’s how they serve customers better. So if banks have to know their customers from a compliance standpoint, why not use that data to better serve them? McMonigle: Yes, but due to Reg ulat ion B, I ca n’t market to

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“Consumers don’t mind being marketed to. What they don’t like is marketing that’s not relevant to them at that particular moment in time” — Kesna Lawrence

consumers based on some of the data points I collect, such as if someone is married or had a child. At least that’s the way we look at it. Lawrence: Everyone approaches Reg B differently. Some very large organizations feel that they can’t look at anything that remotely touches Reg B, and others feel if they are using that data to benefit the consumer, then they are not having an adverse impact. Is innovation in banking a function of technology or bringing in people from the outside who have a different perspective? Cook: We shouldn’t wait for outsiders to get a fresh perspective. And that’s not just a banking issue. Look at everything from your customers’ point of view. How do they interact with your product category? What are the pain points? How can things be done better? Understanding the behavioral drivers of your customers and then marrying that with big data can be so powerful. McMonigle: But again, there are so many things a bank has to do well. Every single product is a different process, right? Think about your sales, onboarding, and support processes—they’re all different. As a bank, you focus so much on trying to protect yourself from regulation, or even looking at the client experience, but resources are not allocated to innovation. We don’t have an R&D group. As a smaller bank, we’re basically saying, “Okay tech nology vendors out there, what are you doing to innovate? We’ll help you; we’ll partner with you to give insights about our clients, and then we’ll buy that product from you.” That’s how most banks our size should work. Meara: Technology does take investment, and there’s some risk involved. If nothing else, it’s an opportunity cost because you take 32


December 2016/January 2017

Bob Meara “Banks talk about delighting the customer, but they don’t use data to make decisions with that mind-set. Instead they focus on how to translate customer experience into ROI”

money away from something that always worked to try something that is uncertain. Do you develop a lab and give it lots of autonomy? That’s one way to do it, but more banks are doing deals with fintech firms. There is no shortage of fintechs that would love to have a bank on their reference list. The industry has evolved from looking at fintechs as the enemy to seeing them as a rich opportunity for collaboration. Fintech firms need market exposure, and that’s what banks—with their installed base of customers—can bring them. What are key differences and similarities between banks and retailers? Cook: Unlike retailers, banks have a few product sets that address fundamental life events, like buying a home, opening up a joint account if you’re getting married, or trying to save for your child’s future. We have an opportunity to add more va lue by helpi ng c u stomers through those different stages in their life. This is not a high-transaction retail environment, but more of a higher-level service environment. McMonigle: But it’s also very similar. Look at the wireless industry. The consumer doesn’t go in and buy a cell phone signal. They want to buy a particular device with a service, right? But the buying experience needs to be easy. Don’t put me through a 45-minute activation process—I want to do things seamlessly. Banking is retail. You’re buying a product. So make it fun to buy it. Lawrence: There’s a lot banks can learn from retailers. How retailers leverage data to control every interaction they have with their customers is absolutely amazing. The biggest retailers don’t randomly send emails to their customers. They know what customers buy and

when. They use data to learn about customer interactions and leverage that data to have better interactions going forward. Banks have that information as well and can use it to message appropriately, which results in greater conversion and h igher consumer engagement. Moore: Companies are starting to focus on digital signal capture— a na ly z i ng t he i ntent iona l a nd unintentional signals sent by their customers. Marketers need to focus on capturing both kinds of signals. While they’ll find it frustrating at first—Which data? What’s it signaling?—over time, the strategy will bear fruit. Can you talk a little more about what you mean by signal capture? Moore: Companies are starting to build marketing plans by looking first at the signals they have captured about their customers, instead of focusing on the media where they expect the customers to appear. In the future, marketers will prioritize for customers that have signaled “clear intent”—where they have raised their hand to say, “I’m interested; tell me more!” Next, by looking at the signals in the data, they will prioritize customers where they can start to “suspect” purchase intent. For example: customers who have made many visits to a particular part of the website. As a marketer, you need to talk to them right now. In an ideal world, these two strategies would give you 80% of your targets. You’ll still have to use your traditional marketing brains to go after that last 20% for a good long while. McMonigle: We do use some transactional data for messaging. If a customer has a car payment for four years, we start dripping content about auto lending or tips on buying a car. When they get to the end of their payment term, we have the ability to send promotional offers for financing. Lawrence: Exactly. Don’t put an offer for auto financing in front of a consumer if they aren’t thinking about buying a car right now. But do use a drip

Rob Cook “Our customers’ frame of reference is not other banks. Customers compare their banking experience to their experiences with Amazon or Starbucks. Banks are scrambling to catch up”

campaign about the benefits of a car loan that consolidates their financial activity with a single entity. This establishes a foundation, so that when the customer is ready to buy a car and you put a financing offer in front of them, the message resonates. McMonigle: We have six or seven campaigns running to different segments per month, and communicate those to our front line and sales teams, so they know the offer we’ve sent. We also integrate these offers with our CRM [customer relationship management] system. It’s not real time; we process the information overnight. Lawrence: But you have to be mindful of the number of times you touch the consumer, so you don’t overwhelm them. Too many institutions leverage inserts to constantly have an offer in front of their customers. There’s nothing wrong with an insert if it’s well timed. You have to leverage signals to know when to dial it up and dial it down based upon where customers are in these various journeys and then increase the number of touch points at the later stages. Moore: It’s about capturing a very micro-moment. When you do that, customers are delighted. You get a chance to pull them further down the funnel. Sure, there will be some fall off, but I think customers might be happily surprised that their bank was paying that much attention. Any other examples of how signaling may work? Meara: A significant majority of U.S. consumers research products online, but still prefer to originate the relationship in person. We can debate how that’s changing, but the fact is that most want to go to a branch, so why not use the mobile app to make an appointment? Moore: And that seems incredibly doable. If you capture the signal on the mobile device, send a link to the closest branch. McMonigle: We’ve been looking at ways to digitally interview our clients on mobile in a tasteful, December 2016/January 2017



sponsored roundtable

“You cannot go from zero to machine learning in the blink of an eye. Start small. First, do a few things really well to create a foundational mind-set, and then grow over time”­ — Drew McMonigle tactful way—before they buy. We don’t want to throw five different offers at someone, but ask about things that are coming up in their lives. Cook: That’s a good signal, but we still need to determine their underlying product need, so we can speak to them in a way that’s meaningful. Something we’ve done is to shorten our forms. Rather than throw the whole application at them, customers enter a small number of fields, and the contact center will reach out to have a fuller conversation. How do you get signals from sites, transactions, and social media? Cook: Social is definitely a platform we’re investing in and seeing good returns on. But the challenge is that you have to be relevant. Social media sites, such as Facebook, have pretty advanced targeting data elements that you can leverage. You can also marry these elements with your own customer data. If my customers are on Facebook and I think



December 2016/January 2017

Scott Moore “You can, in almost real time, know how well your social and CRM marketing is working and where you can shift your spend to improve performance”

they are in the market for a mortgage, I can push out a video that gives guidance about how to maintain a house. It’s not a hard sell. Customers opt in, and you build an audience you can target with more relevant offers. Lawrence: The technology has advanced in its ability to combine offline information with a customer’s online information and their specific location. We do a lot of powerful inferencing to deliver soft messaging based on websites customers visit or different searches they’ve done. The ability exists today to combine that data with other demographic elements, such as identifying customers with children who are high school seniors who may be in the market for a student loan. You can easily do this anonymously online, but imagine being able to continue that messaging offline. You can then do additional marketing one-to-one. How do you know if the messaging works? Moore: Online you can attribute every dollar you spend. Some retail companies are becoming better at

doing offline attributions as well. No one is perfect yet, but the math inside the attribution tools has gotten better. You can, in almost real time, know how well your social and CRM marketing is working and where you can shift your spend to improve performance. Lawrence: We’re helping our customers with attribution every day. Attribution is, in simple terms, understanding the impact that your actions had on the consumer buying decision. You can see the impact that your touch points and your marketing have on specific consumer behaviors, even if they don’t buy that product from you. Moore: You can make better messaging, channel, and media decisions. With the right attribution tools, you just get sharper. Does all this apply to small business and commercial customers? Cook: Attribution is important on the commercial side as well, although the tactics you use are obviously different and the sales cycle is a little bit longer. But in terms of thought leadership, you can push out digital content to establish your brand and build awareness. You just need to link that activity to a conversion process that tends to be more sales driven. Connecting those dots is a little bit harder sometimes on the business side, but it’s the same approach. Lawrence: We’ve seen that small businesses— specifically sub $5 million and sub 100-employee businesses—are a direct ref lection of their owner. You can take that personality profile of that owner and apply it to the business. If the owner is having financial difficulties, the business is going to have financial difficulties. So we’ve actually begun the process of linking consumer information and information about business owners back to their businesses, so you can have more effective touch points and interactions with them. How do banks get started with data differentiation? McMonigle: Big companies that have a lot of money also have a lot of innovation going on within their four walls. For the rest of us, you cannot go from

Bob Meara “Netflix knows their customers not because regulators told them to, but to serve customers better. So if banks have to know their customers from a compliance standpoint, why not use that data to better serve them?”

zero to machine learning in the blink of an eye. Start small. First, do a few things really well to create a foundational mind-set, and then grow it over time. For example, something we do the day after a client opens a new account is to send an email asking them to rate their experience. Meara: A small bank isn’t going to hire a bunch of data scientists. But the good news today is that the data and predictive models are already built, and they’re available in the cloud. It doesn’t take a big investment. It won’t be perfect, but it will be much better than not doing anything. Cook: Make sure you are very disciplined about setting up clear testing controls, so you can really measure what you’re doing. You don’t want to blindly go with what your vendors are pitching. Evaluate their offering against the alternatives to make sure you are optimizing and getting the most out of your investment. Views on using data to increase financial inclusiveness Moore: I have a question for the group. We’ve talked about how data can help financial institutions in many ways, but what’s the impact of these new data capabilities on inclusiveness? McMonigle: There are qualified consumers everywhere. You can use data insights to, perhaps, serve them a little bit differently, or provide education or different experiences to different segments. Digital technology has provided a way of capturing that business at a lower overall expense, which, in turn, means that you don’t need to have a banking center on every corner to be competitive. Cook: I agree that we can use data to create more opportunities for everyone. You create value by proposing solutions that are relevant to your customer. It’s built into the DNA of the most responsible banks to use data to support their entire community. Lawrence: There’s a very large, underserved market in the United States that doesn’t have access to traditional banking products and services, and has to seek alternatives to meet their needs. You can’t pull a FICO score on a person who hasn’t had credit before. So why not look to see if they pay their gym December 2016/January 2017



sponsored roundtable

“The thing about competition is that it takes the question of value creation, puts it on the end of a baseball bat, and smashes you in the face every so often” — Scott Moore membership on time? You can then develop specialized, beneficial products for them. McMonigle: We found an opportunity for inclusiveness by setting up our data rules to manage the risk of people who haven’t traditionally been able to open up a bank account. We now offer a checkless, overdraftfree account with a debit card that significantly lowers their chance of a charge off. What’s the impact of data on product development? Lawrence: There are many new products that have not yet been created that should exist, such as revamping home equity loans. But people haven’t taken the time to think about how to leverage all the industry learning on home equity loans over the last 30 years. Meara: That’s a great example. I was thinking of the relatively small number of banks that have invested in chat bots or virtual agents to replace traditional FAQs on mobile apps to improve the customer experience and deflect call volume out of their call centers. That’s terrific ROI. Or banks that have invested in



December 2016/January 2017

Kesna Lawrence “There are many new products that should exist, such as revamping home equity loans. But people haven’t taken the time to think about how to leverage all the industry learning on home equity loans over the last 30 years”

digital appointment booking that significantly improves the sales success rate. McMonigle: We look at call drivers, such as the number of questions about certain features. And often, we can alleviate that pain through the development of something very simple and actionable. For instance, we just converted to a new online platform a year ago, and we didn’t give customers the ability to unlock their account if they get their password wrong three times. We recently installed a password reset functionality within the application and had a 70% decrease in those calls the week after. Meara: That proves that even if you don’t have a ton of analytical sophistication, you can use the data that you do have to improve the customer experience. There are off-the-shelf solutions that are not expensive and relatively easy to implement. But very few banks are buying them. McMonigle: It’s not always going to be this “ahha” technological moment. Sometimes it’s really simple low-hanging fruit that’s low cost but makes a significant improvement in the client experience.


COMPLying IN a BLOCKCHAIN AGE When blockchain, cryptocurrencies, and AML meet, banks must rethink BSA/AML practices By Joseph Mari, Bank of Montreal


ver the past year, blockchain has become the buzzword for major financial institutions, and while its capabilities and purpose continue to evolve, its basic concept of a shared ledger has become mainstream. But there are ramif ications beyond technology and new ways of doing business. There are compliance implications. However, let’s get everyone on the same page first.

Solution for everything? Blockchain is a technology platform that enables multiple parties to view and update an immutable, shared ledger. The ledger can be decentralized or distributed, meaning that it can be open or closed. A similar comparison is the internet versus a private intranet. In concept, this seems simple enough. But blockchain has excited people’s imaginations, and advocates for the technolog y suggest endless possible applications that reach far beyond the financial services industry. Do you want to lease a car? Blockchain can help. Are you looking to identify thousands of undocumented migrants? Try leveraging blockchain. Are independently thinking machines threatening humankind with nuclear war? Release the blockchain. That last one is in jest, of course, but you get the point. The jury is still out on whether or not blockchain technology can live up to high expectations. However, the uncertain future has proven to be one of its most valuable marketing points, with nearly every major financial institution pledging allegiance to a blockchain-inspired consortium aimed at tapping its potential. At the same time, the uncertainty acts as an Achilles heel, providing ample fodder for skeptics. Regardless of which camp one belongs to—if one has chosen a camp—the technology does work and is already being used on a daily basis by thousands of people around the world via decentralized cryptocurrencies, such as Bitcoin. This rise in cr y ptocurrency usage,

along with the exploration of blockchain solutions for traditional banking services, puts anti-money laundering (AML) professionals on the front line of a possible tipping point event—one which requires a re e va luat ion of t ra d it iona l A ML methodologies that will not only allow regulatory adherence, but technological innovation and marketplace growth.

Bitcoin’s challenges While 2016 was blockchain’s year, it definitely was not the year for its largest proof of concept, the cryptocurrency network known as Bitcoin. Understandably, referring to Bitcoin as a proof of concept may be viewed by many as an understatement. However, when it comes to blockchain technology’s adoption by international financial institutions, Bitcoin’s approximately $10 billion market cap and limited transaction execution rate relegate it to the level of a science project by many in the financial services industry. T h i s d i sm i s sive at t it ude t ow a r d Bitcoin occasionally spills over onto blockchain, although this has decreased over the past year due to increased focus on the technology as a whole. AML professionals do not have the luxury of brushing aside any aspect of

blockchain, especially cryptocurrencies. This is primarily due to the year-overyear increase in cryptocurrency usage. According to Crypto-Currency Market Capitalizations, there are currently 645 cryptocurrencies in the world, with a combined market cap of $12.5 billion. While this does not seem like much when compared to the total value of American dollars or British pounds in circulation, it is impressive that currencies issued virtually, devoid of any central bank, have attained this level of valuation. Note that a lthough decentra lized cryptocurrency is created outside a central bank, it does not operate entirely in a vacuum. Cryptocurrency is being exchanged daily for traditional fiat currency, with many of these transactions being facilitated through traditional financial institutions. Furthermore, a significant amount of transactional cryptocurrency activity has been tied to criminality worldwide, including money laundering.

Crypto transaction varieties Cr y ptocur renc y tra nsa c tions operate largely w ithin two separate environments: contained and interactive. This has been discussed in depth by international AML professional Peter

December 2016/January 2017



/ COMPLIANCE WATCH / Warrack, and indirectly builds on the research completed in 2014 by Vivian Shum at the University of Toronto. In summary, both report that cryptocurrencies operate within separate environments that either interact with traditional financial institutions and fiat currency, or operate independently. This observation is crucial for AML professionals when establishing the parameters of an investigation. The environments proposed by Warrack in ACAMS Today magazine will be used here to show how they operate in relation to money laundering. Examples of each environment (with a drug dealer facilitating the transactions) follow. In the top diagram, at right, cryptocurrency is transferred through different virtual wallets and is eventually utilized for purchase at an online retailer. There is no nexus with traditional financial institutions, such as banks. In the bottom diagram, cryptocurrency is transferred through different virtual wallets and is eventually conver ted to f iat currency and w ired to traditional financial institutions.

blockchain’s ledger. This essentially eliminates one of blockchain technology’s most celebrated features when it comes to AML—the ability to trace transactions. The first cryptocurrency to implement this technology is referred to as Zcash, and the Zcash motto is: “All coins are created equal.” This slogan undoubtedly refers to the debated issue surrounding the fungibility of cryptocurrency. According to Zcash: “If Bitcoin is like http for money, Zcash is https. Zcash offers total payment confidentiality, while still maintaining a decentralized network using a public blockchain. Unlike Bitcoin, Zcash transactions can be shielded to hide the sender, recipient, and value of all transactions on the blockchain. Only those with the correct view key can see the contents. Users have complete control and can opt-in to provide others with their view key at their discretion.” Since Bitcoin’s inception, the concept

of a decentralized, international open ledger has enticed many to attempt to regulate or monitor its activity. This has led some to attempt to mark specific coins that have been determined to be related to criminal activity and render them less valuable or valueless due to their involvement in a suspicious transaction. The notion of marking cryptocurrency has irked many in the decentralized blockchain space as they believe cryptocurrencies, such as Bitcoin, should be equally as fungible, or interchangeable, as any fiat currency. Recently, the debate on fungibility appears to be tipping in the favor of those who believe in universal fungibility for cryptocurrency. This is due to the advent of seemingly anony mous blockchain transactions, which are made possible through zero-proof technology. Fully a nony mous cr y ptocur renc y transactions represent a concept that

Contained environment

New compliance approach Blockchain and cryptocurrencies present A ML professionals w ith several new challenges that require an evolved approach. This approach needs to utilize existing transaction monitoring, risk rating, and Know Your Customer documentation methodologies, and modify them for inclusion of the advances blockchain technology introduces. Also, institutional ledger sharing and transmission of funds between entities without a traditional financial institution nexus requires a realignment of resources to focus on the entities themselves, as opposed to trying to determine the life cycle of a cryptocurrency transaction. To some, this proposal may be controversial. However, the rapid evolution of blockchain and cryptocurrency technology is forcing AML professionals to become increasingly creative when devising adequate and effective controls.

“Zero hour” approaches An example of a technological advancement that has been recently introduced is “zero-proof.” Zero-proof technology removes any identifying information (sender, recipient, and transaction amount) from a 38


December 2016/January 2017

Interactive environment

Worldwide, there are 645 cryptocurrencies like Bitcoin—issued virtually, devoid of any central bank—with a $12.5 billion combined market cap many AML professionals will struggle to come to terms with. Having only been in existence since late October 2016, it is uncertain whether Zcash w ill succeed in maintaining a sustainable, anony mous blockchain. However, there are several cryptocurrencies currently available that offer less advanced forms of anonymity. Monero and Dash are just two of many crypt oc u r rencie s t hat of fer a nony mou s transactions. Neither one utilizes zeroproof technology. AML professionals must begin to envision a future where cryptocurrencies are exchanged anonymously and operate similarly to physical, fiat cash transactions. Furthermore, it would be prudent to take this concept one step further and visualize what it would take to effectively monitor existing banking products on a blockchain that utilizes zero-proof technology. International wire payments, trade finance, and trading product settlement are just a few of the many products that may incorporate blockchain and zero-proof technology in the near future.

Staying ahead of the curve AML professionals must begin preparing to address the imminent threat of cryptocurrency misuse. Preparation will contribute to the creation of a new framework for more complex uses of blockchain technology on a larger institutional scale. Here are two recommendations for staying ahead of the curve: 1. Review any previously reported suspicious activit y repor ts that involve cryptocurrencies. Determine what similar characteristics they display. When overarching trends are noted, compile them for distribution throughout the bank’s investigative group or groups. Identifying common traits will assist in minimizing false positives while increasing investigative efficiency. 2. Consider a unified approach: cryptocurrency compliance collaboration. A ML groups need to follow in the

footsteps of other departments within financial institutions and begin to leverage the advantages of collaborative approaches, such as the R3 CEV and Digital Asset Group consortiums. Group ventures or consortiums can be cha lleng ing for competing businesses. However, when coming together to discuss emerg ing A ML trends or typologies for the purpose of increased regulatory adherence, the outcome is usually positive. A unified approach can assist in establishing a stronger knowledge base and standardized terminology. This approach also can help to form critical partnerships that can be leveraged to explore additional AML possibilities. An example of an AML consortium approa ch would be the Blockcha in, C r y p t o c u r r e n c y, a n d A n t i - Mo n e y Laundering event held in August 2016 in Toronto, Canada. This conference included over 100 attendees from major financial institutions, law enforcement, regulatory bodies, and the blockchain industr y. A mong the spea kers were M ic h a el Perk l i n of L e dger L ab s , a blockchain consulting, forensic investigation company hired to investigate the $70 million Bitfinex hack, and former White House Deputy Press Secretary Spokesperson Jamie Smith, now of Bitcoin infrastructure provider BitFury. Also at the event was Alan Cohn of the Blockchain Alliance. Previously, Cohn served for almost a decade in senior policy positions at the U.S. Department of Homeland Security. The Blockchain A lliance is a U.S.based, public-private forum consisting of a broad coalition of companies and organizations that have come together with a common goal: to make the blockchain ecosystem more secure and to promote further development of this transformative technology. The alliance aims to increase blockchain and cryptocurrency knowledge in the hopes of increasing investigative effectiveness among law enforcement agencies.

Looking ahead

This year saw blockchain, and to a lesser degree cryptocurrencies, emerge from the shadows of the internet, with one being more celebrated than the other. However, while the excitement of blockc h a i n t e c h nolog y t r ic k le s t h r oug h banking and nonbanking institutions alike, AML professionals continue to be directly affected by both. The f ina ncia l cr isis of 2008, a nd it s increa sed focus on reg ulator y requirements, has transformed A ML professionals into the metaphorical gatekeepers of growth and opportunity for international financial institutions. Successful regulatory AML adherence allows for any proposed changes, by way of blockchain technology, to be responsibly realized. This heightened sense of responsibility requires AML professionals to be thinking ahead, and critically, as they will be on the front line of the blockchain revolution, should it take hold. However, the role of A ML professiona ls, w ith respec t to blockcha in technolog y, does not stop at thought leader. AML professionals have faced the task of mitigating material risks posed by blockchain technology for the better part of the past five years, as the rise of blockchain technology’s first use case, cryptocurrency, continually intersected with traditional financial institutions. The AML community will be able to build on the cryptocurrency experience to find ways to accommodate compliance necessities to the broader blockchain risk management framework and to accommodate new technologies.

Joseph Mari is senior manager of major investigations in the Anti-Money Laundering Financial Intelligence Unit at Bank of Montreal. He is responsible for coordinating complex, cross-compliance investigations on an international client base, and leading risk intelligence initiatives on money laundering and terrorist financing.

December 2016/January 2017 BANKING EXCHANGE


/ Idea Exchange /


Cambridge Savings gets a lesson in agility from robo-advisor SigFig By Bill Streeter, editor & publisher


he notion exists that digital startups are, in general, more agile than traditional companies. It’s often true. Yet, over time, partnerships between the two camps have emerged as viable options. O ne e x a mple i s t he pa r t ner sh ip between San Francisco-based robo-advisor SigFig and Cambridge (Mass.) Savings Bank to offer retail investment services, which the bank named Connect Invest. Connect Invest is available through a dashboard on the bank’s website, a dedicated mobile app, and the existing CSB banking app. Customers can easily open, fund, and manage automated investment accounts tailored to their goals. The arrangement and service was the subject of a presentation at the Beacon event put on by the Bank Administration Institute in October. One speaker, David Kerstein, president of Peak Performance Consulting Group, observed that there is no need for community banks to sit on the digital sidelines. “Partnership is a nobrainer,” he said. “Fintechs are happy to work with small banks.” Located just west of Boston, $3.2 billion-assets CSB did not have a product option for small retail investors, noted



Dan Mercurio, CSB’s senior vice-president, consumer and small business banking, who also spoke. He said CSB was headed down the traditional brokerage route, but pulled up short after listening to customers complain they were paying too much for investment services at other providers. Casting about for a different way, CSB approached SigFig, whose business model embraces partnering with financial institutions. SigFig was founded in 2007. In May, it received a big capital infusion from UBS, and just before Thanksgiv ing, Wells Fargo announced that it will use SigFig. One of CSB’s requirements was to enable it s investment customers to interact with humans when necessary. Connect Invest allows free videoconferencing with SigFig advisors. Customers also can communicate via chat or email.

Embracing “agile workflow” Building the product took four months from when the deal was inked to full rollout in May 2016. During the process, the bank received a lesson in agile workflow. “They have a radically different culture from us,” said Mercurio, “but we both share a focus on the customer.”

December 2016/January 2017

The bank’s technology group learned what a “daily scrum” is. Every morning, they would be in contact with SigFig’s engineers and a specif ic set of deliverables would be outlined that had to happen that day. CSB was exposed to a whole new way of thinking about “task deliverables,” as Mercurio put it. Another key factor was that compliance was brought in from day one, he noted. Kerstein obser ved that traditional companies that partner with fintechs quickly realize they can apply agile—or lean—processes to other products. They also begin to look for “friction” in various products and processes. For Connect Invest, initial sign-up can be completed online in less than four minutes—slightly longer for people who are not bank customers, Mercurio said. One hurdle was that Digital Insight, CSB’s online banking vendor, initially couldn’t integrate the new service. SigFig felt that its engineers could get it done if they could talk directly to Digital Insight’s engineers. “Digital Insight was great in allowing this,” Mercurio said. “We didn’t have to spend big dollars.”

Initial uptake promising As of mid-November, CSB had more than 100 customers using the Connect Invest platform. Mercurio says the goal is to get 10% of its core banking retail customer base using the automated investment advisor, which would be 4,600 users. The average age of CSB’s Connect Invest customer is 47, said the banker— the same as the average age of SigFig’s overall customer base. “Interest in the service is pretty broad based,” he said, although it does drop off with customers over 65. The bank allows noncustomers to sign up for the service and does not require them to open a checking account. Although it’s not the primary reason for of fer i ng t he ser v ic e , C SB do e s earn fee income from Connect Invest. A $2 ,0 0 0 m i n i mu m i nve s t ment i s required, a nd the ba n k cha rges a n annual advisory fee of 0.5% of the average invested balance.

Competitive intelligence for bankers

March 2015



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



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It’s used everywhere in banks, now, and increasingly is melding with CRM, which brings some IT challenges By Sam Kilmer, Cornerstone Advisors


in kedIn is becom ing a n 800 pound gorilla impacting banking. Ye s , b a n k i ng. Even for s ome veteran bankers not nor ma lly engaged in social media or inclined to care about technology trends, this is an important development. LinkedIn rose up organically as an app used mostly by Human Resources, then by lenders and community outreach leaders, and, ultimately, by the banking C-suite. The phenomenon is that the technology managed to inf iltrate the workplace without information technology or any line of business driving or overseeing it. With the rising importance of data and social media in business relationship development and now with Microsoft’s $26 billion acquisition of LinkedIn, it may well become a key part



of many banks’ vendor management programs. How did banks get here?

LinkedIn’s first four stages 1. The “Eddie Haskell” connec tion stage. Techies, headhunters, Realtors, vendors, consultants, and that “kid you met at summer camp” all united to slam inboxes with “since we trust each other” connection invitations. 2. The “if Human Resources builds it, recruits will come” stage. Human Resources began using LinkedIn to recruit new employees and worked to get LinkedIn pages for their banks, if just to protect their recruiting image. Realizing the power of information, references, and targeting capabilities, LinkedIn’s use grew naturally and at the expense of less social Human Resources’ recruiting

December 2016/January 2017

platforms. For a sense of how dramatic this shift has been, recruiting platform Monster was once worth $8 billion and was still worth $5 billion in 2007 as LinkedIn began its ascent. Monster recently sold in a $429 million fire sale, a valuation below one-times revenue. By contrast, the LinkedIn sale to Microsoft is valued at eight-times revenue. At a recent roundtable of banking industry human resources executives, 100% reported using LinkedIn every day. And what functioning competition is there now to LinkedIn? 3. The “show me the money” stage. After initially networking for their jobs, loan officers saw the marketing value within their personal networks. Some commercial and mortgage lenders took this to new levels, and LinkedIn began

fanning the f lame with industry exposure and promoting some services. It’s no wonder that a Microsoft executive said that the combination with LinkedIn could create “the ultimate selling tool, the ultimate customer support tool.” In addition, it was no surprise that Salesforce fought the acquisition tooth and nail as Salesforce envisions tight (read: anticompetitive) Microsoft-LinkedIn integration. 4. The “cat is out of the bag” stage. CEOs and other senior leaders outside Human Resources got into the action with personal recruiting of management and specialized talent. Banks realized the power of personal over corporate LinkedIn dialogue. This is the reason why the Microsoft-LinkedIn combination has so much potential. It’s not just LinkedIn’s unique data and network. It’s that the combination can tie a historic commercial banking strength (the human energy of lenders driving community connections to banking relationships) to a historic commercial banking weakness (engineering the revenue generation process in a scalable way to leverage talent).

New 5th stage: Social/CRM mash-up?

Microsoft’s acquisition of LinkedIn will bring a new, potential fifth stage. The development is as much about business impact as technology impact, and it should have the attention of every CEO, CFO, and CLO—not to mention the CIOs or CMOs already reading the tea leaves. The driver is the growing connection between social networking and customer relationship management. Increasingly, business and consumer relationships are initiated or proliferated in social media. More and more purchases are being influenced by social interactions, social connections, reviews, and endorsements. And more and more critical communication is reaching decision-makers in opt-in social networks versus opt-out, f iltered and blocked email or the open internet. Not just consumers, but businesses.

In a recent review of similar banks that are stronger and weaker users of LinkedIn in Cornerstone Advisor’s GonzoBanker blog (, the stronger use was tied to three-times higher return on assets driven by fivetimes higher loan growth. It was clear that senior management recruiting of lenders using LinkedIn was a key driver of the difference. Tying that strength into engineered relationship management is the logical next step. Beyond Microsoft’s move to expand its value proposition in data and the cloud, the company has a stated aim to better integrate social (LinkedIn) with automation, including relationship management (Dynamics CRM). While both Microsoft and Salesforce have acquired some social management capabilities, the value of LinkedIn’s network and data is unique. CRM by itself (and especially without good data and integration) has turned out to have limited proof points, especially in the banking industry.

A recent study of midsize banks in the Cornerstone Performance Report found that while there is a small growing list of banks deploying Salesforce and Microsoft Dynamics CRM, around half are deploying nothing and the majority deploying CRM are doing so with lowercost solutions integrated from their core system vendors. The uniqueness of LinkedIn’s data clearly drove the acquisition bidding war between Microsoft and Salesforce because it increases its own integration strengths outside of banking systems— specifically integration to social data. So how will relationship management technology and social technology work together to create real business impact? The jury is still out. Most industry best practices on CRM don’t involve social yet. However, the growing information technolog y and marketing partnership is unmistakable. At a recent roundtable of industry CIOs, the number one technology app on the 0.4

Engineering for Revenue Growth Planned System Replacement 25%






Online Account Opening


Online Banking




Source: What’s Going On 2016, Cornerstone Advisors; Loan Origination, Online Banking and Payments are category averages

December 2016/January 2017



/ BANK TECH / and relationship management technology are typically deployed.

Bankers’ next steps

Microsoft’s acquisition of LinkedIn should catch the attention of every bank CEO, CFO, and CLO because of the growing connection between social networking and customer relationship management discussion agenda was CRM. Conversely, at a recent roundtable of industry CMOs, collaboration with information technology was at the top of the agenda. Recent Cornerstone Advisors research on system add/replace rates shows that planned changes in marketing and sales systems like CRM and origination are two times higher than those in core and payments systems. And even in online or mobile banking replacements, the user experience connection among transactions, relationship management, and content management is a growing driver of change. Increasingly, it’s about how does a bank convert better online and mobile experiences to new expanded relationships. Without a doubt, the industry is in the process of engineering its human energydriven revenue generation processes to be more systematic and scalable. And social technology sits in the middle of those processes and can have a real impact. Leaders will shape that impact as the capabilities unfold.

Enterprise accountability? The Microsof t/LinkedIn acquisition points to another growing phenomenon in banking: Enterprisewide technology 44


initiatives are now as common as departmental initiatives. As noted, LinkedIn is leveraged by users all across the bank. It’s not a line of business app like a mortgage origination system driven by Lending or a payroll or performance management system driven by Human Resources. It’s driven by nearly everyone. But it’s also not centrally managed at a bank like a core system. And, increasingly, these enterprisewide systems are used in the cloud, even in the very largest banks. Te c h nolo g y c o or d i n a t ion a c r o s s lines of business is a grow ing, complicated phenomenon that requires a new vendor/partner management process, covering risk, cost, and benef it assessments, and resulting in higher organizational accountability. Bankers tend to think about vendor accountability in terms of compliance, but our experience has been that most vendor performance failures at banks are due as much to internal coordination issues as to vendor wrongdoing. In addition, per formance fail ures are especially common in technologies deployed across the enterprise without central oversight. And, operationally, that is exactly how both social

December 2016/January 2017

Banks often do have central oversight on paper. But it’s mainly from a risk perspective. What the Microsoft-LinkedIn merger points out is the other two pillars of vendor management—cost and benefit—are actually more important than the risk pillar. From a risk management perspective, if banks increasingly leverage Microsoft and LinkedIn capabilities (cloud-based email, CRM, recruiting), they still may not be considering Microsoft a critical vendor. Some CRM systems are viewed by many banks to be of lower criticality. Origination systems are typically viewed as more critical, but only some origination systems also include CRM capabilities. T he mor e i mp or t a nt pa r t of t he e quat ion i s m a na gement over sig ht and coordination from cost and benef it assessments. It’s not just vendor management, but vendor performance m a na gement—a c c ou nt abi l it y. A s a bank generates more of its revenue from engineered processes (like relationship management and social), it’s more important to the bank’s viability that the technology driving those processes has a successful cost/benefit outcome. Does the bank have an effective means for the CFO to oversee and gauge bankwide cost management of technologies and push spending redirects to fund key growth initiatives? Does the bank have a coordinated way for lines of business to gauge the successes or challenges in the benefit from these deployments? The now-completed Microsoft-LinkedIn combination is one of many industry developments that point to how addressing these questions will increasingly be important for banks going forward as part of a total risk-cost-benefit approach to vendor performance management. This is true especially as banks are more and more reliant upon technology providers not just to automate and manage costs, but to engineer revenue creation.

Sam Kilmer is senior director at Cornerstone Advisors. He can be reached at, on Twitter @SamKilmer, and—yes—on LinkedIn. Aspects of this story were first covered on

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Se 2016 April

/ CounterIntuitive /

Don’t miss the pivot

John Sculley warns that success creates disincentive to change. Just ask Kodak By Bill Streeter, editor & publisher


anks are eagerly anticipating rollbacks of some of the most onerous provisions of the 2010 Dodd-Frank Act following Donald Trump’s election victory. For mer Apple CEO John Sculley, entrepreneur and investor in technology and health care companies, would find that interesting. In a preelection appearance at this fall’s Money20/20 conference, Sculley noted that financial services has put up some striking recent numbers: It accounts for 7% of U.S. gross domestic product and 30% of U.S. corporate prof its. The second f igure, he said, is three times larger than 30 years ago. So despite all the costs and restrictions of Dodd-Frank, the industry overall has thrived. It also has thrived amid the fintech revolution, in which technologydriven companies have made inroads into niche markets—traditionally the territory of banks. The question is whether or not banks’ success will continue. Sculley—who is on the board of Lantern Credit, which is using artif icial intelligence (AI) and machine learning to create an “intelligent credit score”—said he sees a convergence of financial services and digital technology, in which banks increasingly will embrace adaptations of technologies used by Google, Apple, and Facebook. He said new companies intended to be bank alternatives will continue to form, but many banks will pivot from their strengths and adapt new technologies in ways that will both change their businesses and leverage them. One of the things Sculley said he learned from Steve Jobs at Apple was to “zoom out”—look beyond your industry. Banks, he said, need to do the same with digital technologies, which are growing at an exponential rate. These include cloud computing, mobility, structured data analytics, and the internet of things. Banks have great domain expertise, pointed out Sculley, including how to operate in a complex, highly regulated marketplace. This gives them an advantage if they combine their expertise with the latest technolog y, because, as he



explained, “Technology advantages alone are not enough to secure sustainability in most industries.” This won’t be simple, however, and Sculley predicted there will be casualties. “The tricky thing about the f inancial services world,” he told conference attendees, “is that it’s so prof itable. The real question is: ‘Does the banking industry have the incentives to be able to pivot towards some of the things that are working in other industries, but adapt them to the uniqueness of its domain?’”

Perils of being “linear” Computer scientist and futurist Ray Kurzweil, according to Sculley, describes the rate of technology change that we’re seeing now as the “law of accelerating returns.” Problem is, “We’re all intuitively conditioned to think in linear terms,” said Sculley. He cited Kodak as an example. “Kodak was a smart company with bright engineers,” Sculley said. “They invented the digital camera.” Kodak also had one of the largest photo printing

December 2016/January 2017

businesses in the world. Because the company was losing market share in the printing business to Walmart, he said, it “doubled down” on film at exactly the time that Steve Jobs was introducing the iPhone with its built-in camera. “Kodak was thinking in linear time. Apple was thinking in exponential time,” said Sculley. “With this ‘blue ocean’ around us of entirely new ways to think about financial services,” said Sculley, “if you sit back and wait in linear time for these things to roll out because you’re used to working that way,” it won’t turn out well. He predicted there will be “Kodaks” in financial services—leading banks that miss the pivot to a marketplace in which customers pay more attention to the opinions of other customers than to the reputations of the incumbents. Sculley said fintech companies have begun applying “deep learning,” “cognizant AI,” and similar technologies to financial services. “We are at the moment when this is no longer science fiction,” he said. “It is real.”

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