October/November 2015 Banking Exchange

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Competitive intelligence for bankers

Oct./Nov. 2015 bankingexchange.com

Living with CFPB Love it or hate it, the rapidly expanding bureau is changing what banks can (or will) do

star search—banks share hiring tips colorado banks’ pot-law problems 1


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/Contents October/November 2015

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CFPB, 4 years in Everyone is a consumer and the Consumer Financial Protection Bureau touches us all. Are we better off? In this Special Report, bankers, compliance and legal experts, and former CFPB officials answer that and much more. By Steve Cocheo, executive editor

22

Star search You are who you hire. Bankers and others share their best practices for getting and keeping the good ones. By Melanie Scarborough, contributing editor

October/November 2015

BANKING EXCHANGE

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/ contents / 4 On the Web

October/November 2015, Vol. 1, No. 5 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: bankingexchange@sbpub.com Web: www.bankingexchange.com Twitter: @BankingExchange

Banks vs. fintech; CFPB drives auto lenders to exit lane; Thrown under AML bus

6 Like it or Not CFPB does target nonbanks. But is that worth everything else?

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

8 Threads Handling EMV laggards; Marketplace lending cools; Warehouse lending heats up; FCRA wakes up; Watch Square

8

Chairman & President Arthur J. McGinnis, Jr.

14 Seven Questions

34

Terry Turner doesn’t fixate on fintech. He hires experience and outperforms peers

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

27 Risk Adjusted

Creative Director Wendy Williams

Bad things will happen. Here are four strategies for managing reputation risk

Design Consultants Sarah Vogwill, Gal Dor

30 Compliance Watch

Designer Nicole Cassano

Big challenges for Colorado banks with marijuana laws. Other banks take note

Your dog knows your voice, so does voice ID. Why some banks are plunging in

Director, National Sales Robert Vitriol bvitriol@sbpub.com

36 Idea Exchange To boost savings, banks turn to apps and gamification, and even a lottery

Production Director Mary Conyers mconyers@sbpub.com

40 Counterintuitive

14

Subscription Information: Banking Exchange Magazine (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published March, May, July, 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 2015. All rights reserved. Contents may not be reproduced without permission. Reprints For reprint information Contact: The Reprint Outsource – Betsy White, 877-394-7350, bwhite@reprintoutsource.com For Subscriptions, & Address Changes: Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: bankingexchange@halldata.com Write to: PO Box 1172, Skokie, IL 60076-8172 Postmaster: Send address changes to Banking Exchange magazine, PO Box 1172, Skokie, IL 60076-8172 2

BANKING EXCHANGE

October/November 2015

Editorial & Sales Associate Andrea Rovira arovira@sbpub.com Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Steve Greene, Lucy Griffin, Ed O’Leary, Dan Rothstein, Melanie Scarborough, Lisa Valentine

34 Bank Tech

Redneckbank.com? It’s for real. Parent bank couldn’t handle the traffic initially

Editor & Publisher William Streeter bstreeter@sbpub.com

Circulation Director Maureen Cooney mcooney@sbpub.com Marketing Manager Erica Hayes ehayes@sbpub.com 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 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


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/ ON THE WEB / Popular Stories on

bankingexchange.com

Banks vs. fintech: Who will consumers choose?

Bureau drives some auto lenders to exit lane

Throwing the boss under the AML bus

Is fintech friend, foe—or both? Fourpart series by Paul Schaus of CCG Catalyst describes the “digital arms race,” beginning with an assessment of P2P lending. For his verdict… Read more at http://tinyurl.com/ bankvfintech

CFPB continues its campaign to reform indirect auto credit. Some lenders are adopting flat-fee structures; others are leaving what they see as a low-margin business with growing compliance risks. Read more at http://tinyurl.com/SNLreportauto

New Justice Department policy gives no credit for cooperation in money laundering cases unless a company gives up all individuals involved “regardless of their position,” writes John Byrne. Read more at http:// tinyurl.com/AnybodyListening

Do correlation statistics lead to bad policy? Scotch and soda, rye and soda, and bourbon and soda can all make you drunk. Must be the soda, right? Such simplistic cause-and-effect reasoning drives too many Washington decisions, says Zoot’s Eric Lindeen. He says one case in point is CFPB’s thinking on payday loans and overdraft service. Read more at http://tinyurl. com/notthesoda

Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters

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October/November 2015

To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, scocheo@sbpub.com, 212-620-7219


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/ like it or not /

Let’s have two-way oversight

N

o matter how you feel about the Consumer Financial Protection Bureau—and not all ba nkers a re aga inst it—the agency does do something quite positive for the industry. It pulls a wide variety of nonbank financial services providers under the net of consumer compliance regulations. Already, nonbank auto lenders, payday lenders, mortgage servicers, and others come under the authority of CFPB, and several have faced enforcement actions. An interesting corollary to this was raised by Bill Neville, U.S. president of D&H Corp., at a recent conference. Banks, he said, can better adapt to the changing technology used by many of the new nonbank financial companies, than the latter will be able to adapt to the heavy hand of bank compliance. So the costly infrastructure banks have had to create to deal with the continual stream of new and amended laws and regulations gives them an edge over nonbank “disruptor” companies. That may be of little comfort to small banks in slow-growth markets struggling under the costs and restrictions of too many regs. But for others, it is a positive. Does that justify the creation of an entirely new agency with few restrictions on its reach, scope, and power? Hardly. CFPB is overkill. Its existence is a kick in the teeth to prudential bank regulators for failing to red-f lag mortgage abuses, among other things. They did miss things, but there were other ways to deal with that. Worse, the bureau’s unspoken premise is that the financial services industry can’t be tr usted. (A nd governments can?) There are bad actors in every area of human endeavor, including government. In a perfect world nothing would be unfair, deceptive, or abusive. In the world as it is, we all need checks and balances. But they should address the most egregious and harmful behaviors and not attempt to micro-govern an entire industry. Perhaps if governments were judged according to UDA AP, too, that might reduce unnecessary intervention.

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W it h ever y day t hat goe s by, t he bureau’s size increases, and its reach extends. One thing bankers should be grateful for is that Sen. Elizabeth Warren, whose brainchild CFPB is, was not permitted to stay and run her creation. Instead, the agency is headed by Richard Cordray, who, as the cover stor y reports, is given credit for thoughtfulness, balance, and good listening skills by many interviewed by Executive Editor Steve Cocheo. Cordray to a degree is a check on the crusader mindset of some of the staffers who populate the bureau. Most of them are well meaning, no doubt, in their intent to protect consumers. But most consumers don’t need protecting from most financial institutions. Yet when the new agency applies broad rules to right the wrongs of a few, the result is that others—sometimes many others—are disadvantaged, as the cover story (p. 16) describes. The bureau has on several occasions been willing to make changes to rules, when pressed by the industry. And in some areas, CFPB has done a better job in its singular focus on consumers than was being done before. But here’s the problem: All the other agencies—not only the prudential banking regulators, but “horizontal” agencies such as FTC, FCC, Dept. of Labor, Dept. of Defense, and on and on—still exist and often compete for jurisdiction or bragging rights. Add to that the countless state and local government bodies looking after consumer interests. In any event, CFPB won’t go away. That makes it essential for there to be greater oversight and accountability of the bureau—accountability must be twoway. That is something bankers can unite behind and work for. The other thing they can do is always strive to live up to the trust they claim and believe the public has in them. All business decisions should be run through that filter. It’s the right way to conduct business, and it will deny Washington the opportunity to “fix things” by imposing yet another layer of “protection.”

BILL STREETER, Editor & Publisher bstreeter@sbpub.com

We need checks and balances. But they should address the most harmful behaviors and not micro-govern an entire industry


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/ THREADS THE SHIFT IS ON For merchants not ready for the EMV liability shift, what happens now?

By Lisa Valentine, contributing editor

I

t’s been talked about since August 2011, when Visa, followed shortly by other card brands, announced it was accelerating the migration to EMV chip cards by shifting the liability for fraudulent cards at the point of sale to the party that does not support EMV. On Oct. 1, 2015, the shift goes into effect. Although the majority of large merchants have upgraded POS terminals to accept EMV chip cards, there are a number of smaller businesses that are either unaware of the shift or have determined the cost to upgrade terminals is not worth the potential liability. Will the EMV liability shift have a significant impact on merchants that choose not to upgrade? What role do banks play in educating merchants about the pros and cons of upgrading their POS terminals to accept EMV chip cards?

Small businesses lag

According to the most recent Wells Fargo/Gallup Small Business Index , slightly less than half (49%) of small businesses are aware of the liability shift. “It’s no secret that the communication to the smaller merchants about EMV liability shift hasn’t gotten through,” notes Nick Holland, Javelin’s head of mobile.

STRONG FIRST HALF, but to varying degrees FDIC’s most recent data show a profitable industry with improving earnings. Some key performance indicators exhibit some telling differences across the industry by size.

8

BANKING EXCHANGE

October/November 2015

And even if merchants are aware, they don’t have a vested interest in upgrading their POS terminals, he says. However, Holland predicts that sma ller merchants will be in for “quite a surprise” as fraudsters shift their focus from larger merchants to smaller merchants. “ We ex pec t f raudsters to shif t to the weakest link, which will be those

Return on assets <$100M $100M – $1B $1B – $10B >$10B

0.92 1.00 1.18 1.05


merchants that have not yet adopted EMV and only accept magnetic stripe cards,” agrees Deanna Karhuniemi, vicepresident of EMV Strategy for Chase Commerce Solutions. “There will be some horror stories from smaller merchants,” says Holland. “Not only will they be hit with increased fraud, but they will be liable for it.” In some cases, he adds, smaller merchants could be put out of business. Some merchants, such as groceries and electronic retailers that traditionally experience higher fraud rates, may be especially hard hit, explains Karhuniemi. She also notes that not all large merchants will decide to install EMV POS terminals right away. In Canada, the liability shift occurred in spring 2011, and even now, not all large merchants have installed EMV-supported POS terminals, although the gap is closing. “We are still not at 100% acceptance in Canada.”

Stress the benefits Fi na nc ia l i n st it ut ion s—a long w it h all entities in the pay ments ecosystem—have a responsibility to educate merchants about the EMV liability shift, notes Holland. However, he says that a different set of communications tactics is required. Rather than warning about fraud and the liability shift, financial institutions also should highlight the benefits of upgrading POS terminals,

such as the ability to accept new payment types, such as Apple Pay. K a rhu n iem i a g r e e s t h at a c qu i r ers, payment processors, issuers, and f inancial institutions should educate merchants and that education should extend to a holistic approach to fraud. Even merchants that do install POS terminals to support EMV chip cards are not in the clear, she says. While EMV chip cards eliminate counterfeit card fraud at the POS by creating dynamic data that is authenticated for each transaction, merchants need complimentary security technology, like point-to-point encryption, to protect data in transit. Merchants that retain cardholder data for recurring payments need to consider tokenization that protects data at rest.

Impact on CNP fraud A s merchants shif t to EM V-enabled POS terminals, fraudsters may move to online fraud. Although statistics show a rise of card-not-present fraud in the United K ingdom once the shift took effect in 2005, Holland says the increase is because of more e-commerce. “Increases in card-not-present fraud due to EMV adoption is an urban legend,” says Holland. “Fraudsters won’t f lock to card-not-present fraud because of EMV. They will flock to card-not-present transactions because that’s where the volume growth is.”

T

here have been lots of conversations among bankers since the Great Recession about how work isn’t fun anymore. Years ago, I had a boss who told all his subordinates that the way to have a good day is to go make a new business call. To convert a good day into a great one, convert that prospect into a customer. As a new hire at Florida’s thenlargest bank, I assumed much of a predecessor’s established book of business. My first priority was to get to know as many as I could, as quickly as I could. My customers were pleased to have someone from “downtown” call on them, and I learned many had not had a banker call in their place of business in several years. My efforts were rewarded as customers introduced me to friends, many of whom became prospects and, ultimately, customers. It’s time we get back to basics. Business development requires that first step and that’s up to us. Adapted from Ed O’Leary’s blog at http://tinyurl.com/GoMakeaCall

efficiency ratio

net interest margin <$100M $100M – $1B $1B – $10B >$10B

No app can do what you can do

3.61 3.64 3.72 2.90

<$100M $100M – $1B $1B – $10B >$10B

October/November 2015

75.09 69.86 62.49 58.53

BANKING EXCHANGE

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/ THREADS /

MARKETPLACE LENDING COOLs off Regulatory scrutiny is impacting the growth of alternative lending By Lisa Valentine, contributing editor

M

arketplace lending grew to an estimated $12 billion in new loan orig inations in 2014, the major it y in consumer lending, according to Morgan Stanley Research. Impressive, but are the glory days for marketplace lending over? Marketplace lenders like Lending Club, Prosper, and Kabbage—online marketplaces with algorithms to connect borrowers, lenders, and investors—have received a sizeable share of media attention in the last few years. Although it’s difficult to determine an exact number of marketplace lenders due to the quick entry (and exit) of players, KPMG, in its report, Value-Based Compliance: A Marketplace Lending Call to Action , estimates that there are more than 50 platform lenders globally, noting there are likely others in emerging economies. Marketplace lenders are particularly attractive to small businesses that are unable to access credit. According to a February 2015 Federal Reserve study, a majority of businesses less than five years old and less than $1 million in annual revenues were unable to secure credit in the prior year. Marketplace lenders don’t hold deposit s, but a c t a s m idd lemen bet ween lenders and borrowers. The loans are issued through a bank: Lending Club and Prosper issue loans through Web

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Bank, and Kabbage through Celtic Bank. Both banks are chartered in Utah, a state with a complicated system for establishing interest rates on loans that enable marketplace lenders to legally charge interest rates as high as 36%. The marketplace lending business model has a few advantages. First, a technology-focused approach to underwriting allows them to offer loans quickly. Here’s how Lending Club describes its lending process: • Customers interested in a loan complete a simple online application.

While there is still promise in the small business space, marketplace lenders may be a fad • We leverage online data and technology to quickly assess risk, determine a credit rating, and assign appropriate interest rates. Qualified applicants receive offers in minutes and can evaluate loan options with no impact to their credit scores. • Investors ranging from individuals to institutions select loans in which to invest and can earn monthly returns. • The process is online, using technology

October/November 2015

to lower the cost of credit and pass savings back in the form of lower rates for borrowers and solid returns for investors. The second advantage: Marketplace lenders are not subject to the same regulatory scrutiny as traditional banks.

No preemption, says court This advantage may be slipping away, and as it does, it will slow the growth of marketplace lending, says Christine Pratt, senior analyst at Aite. “Marketplace lenders are facing new challenges that will severely impact their market.” Pratt is referring to the May 2015 decision by the U.S. Court of Appeals for the Second Circuit in the case of Madden v. Midland Funding, LLC. The court ruled that non-banks could no longer rely on federal preemption under the National Bank Act to override state usury laws. In other words, online marketplaces would have to adhere to state usury laws. The state usury interest rate in Utah is 10%. About 12.5% of Lending Club’s loans exceed that interest rate cap, says Pratt. But alternative lenders aren’t going to succumb to case law without a fight. Although the U.S. Second Circuit Court denied a request in August from Midland Funding to rehear the case, it’s likely that Midland Funding will bring the appeal to the U.S. Supreme Court. Pratt is doubtful that marketplace lenders can fight case law and win. And as to all the talk that marketplace lenders will severely disrupt traditional lending, “It’s a great story, but it’s not true.” There is more promise for marketplace lenders in the small business space—not yet under the Consumer Financial Protection Bureau’s purview. But marketplace lenders face consumer market competitors, including Ally Bank and Quicken Loans, says Pratt. In small business lending, Amazon’s invitation-only working capital loan to sellers on its platform and PayPal’s Working Capital product are gaining traction, says Pratt. Pratt doesn’t mince words about the future of marketplace lenders: “Marketplace lenders are a fad.”


6 tips for better shareholder letters

B

FCRA wakes up

Everyone in credit reporting is now on the hook—banks included By Lyn Farrell, Treliant Risk Advisors

T

he Fair Credit Reporting Act, enacted in 1970, has not been a compliance problem for 45 years. That has changed. A primary purpose of the law is to ensure that credit reporting agencies report accurate information and consumers have a method to dispute what’s reported. FCRA also has requirements for “users”—those who purchase reports and reporters of consumer credit data like financial institutions, retailers, utility companies, and credit card companies. Congress did not authorize issuing regulations to implement FCRA, and there have been few regulatory enforcement actions related to its requirements. But in 2010 in the Dodd-Frank Act, Congress gave the Consumer Financial Protection Bureau jurisdiction over FCRA. CFPB was concerned with inaccurate credit reports and the damage to consumers’ ability to get quality, reasonably priced credit products. In 2014, CFPB issued an enforcement action against a furnisher of consumer credit information, finding the company did not have procedures to ensure accuracy. The lack of compliance was found

to be a violation of Unfair, Deceptive, or Abusive Acts or Practices and FCRA. F i n a nc i a l i n s t it ut ion s h ave long reported credit history automatically from one system (the bank’s loan system) to another (credit agencies’ databases). While this is generally how the process works, many hire third-party servicers and debt collectors to report data. Now, with the intense scrutiny that consumer credit reporting is drawing, financial institutions should consider: 1. Strengthen your FCRA compliance management program, including reviewing the compliance program and overall FCRA governance for completeness. 2. Conduct an assessment of FCR A operations, which include all processes— from uploading consumer credit history from the lender’s files to transmission of data to the credit reporting agencies. 3. Review your procedures for resolving credit disputes. 4. Remediate all known issues. 5. Pay attention to debt sales and debt collectors. Scrutinize how credit accounts are reported by these entities. Adapted from a longer article at http://tinyurl.com/FCRAawakens

erkshire Hathaway has undoubtedly the best shareholder let ter in corporate America—better than 80% of novels. While it’s difficult for banks to achieve that level of financial storytelling, they can at least include some personality and insight. The shareholder letter is usually the single most impor tant piece of shareholder communication. To make your next letter a best seller, make sure you are transparent, balanced, and honest about your challenges. Get your achievements out there without ego. Six items set top letters apart: 1. Educate. Great letters make readers smarter, not just about the company, but about the industry. 2. Show some culture. If your letter does double duty as a recruiting tool, you’re on the right track. 3. Business model and metrics. Explain why you outper formed your competition and highlight any special metrics that drive value. 4. Innovation. New products, technology, and cost savings processes should all be highlighted. 5. Be clear on your message. 6. Call to action. The act of asking for help to try your new product will make readers more attracted. Adapted from a longer article by Chris Nichols, CenterState Bank Central Florida, NA, at http:// tinyurl.com/BetterLetters-BE

October/November 2015 BANKING EXCHANGE

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/ THREADS /

Square In sight

Moving beyond card acceptance, Square is your new competitor By John Ginovsky, contributing editor

I

f you’ve paid for a (non-Uber) cab ride by card, you’re probably familiar with Square, the device, app, and company that enables smartphones to take payments. But you may not realize that in the past couple years, Square Inc. has started to encroach on banking’s territories. “If I was responsible for small business banking at a bank, I would be concerned about Square. They’ve gone well beyond delivering a dongle for micromerchants,” says Thad Peterson, senior analyst at Aite Group. S t a r t e d i n 2010 by Ja ck D or se y, cofounder of Twitter, Square was identified with the plastic device that plugs into a smartphone, with which small vendors—food trucks, craf ts people, cabs—could process credit card payments. Now, Square offers a wide range of products and services: business financing, gift cards, instant deposits, business analytics, payroll services, peer-to-peer payments, and appointment scheduling. Square is still in the card acceptance business, and now of fers dev ices to

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BANKING EXCHANGE

“If I was responsible for small business banking at a bank, I would be concerned about Square” attach to tablets for easier data input, and to accept Apple Pay and chip cards. Square’s drawn attention from regulators. In a recent speech on the rise of banking innovation, Grovetta Gardineer, deputy comptroller for Compliance Operations and Policy, pointed out that Square processes more than $30 billion in transactions per year. She mentioned Square Capital, a div ision of Square, which “advances money to businesses, which is then paid back by taking a portion of each payment transacted through Square.” A s one banker, who w ished not to be identified, told Banking Exchange: “Square, in my opinion, is a direct competitor to those acquiring associations/

October/November 2015

banks due to the fact that all interchange is retained by Square.” So what does Square offer? • Square Capital. Launched in 2014, it has extended more than $225 million in financing to Square sellers across the country. It claims to advance more than $1 million each day. • Square Cash. Launched in 2013, it’s a peer-to-peer payments system available to individuals and businesses. For businesses, money is deposited into their bank accounts with a surcharge of 1.5%. • Instant Deposit. Just released out of beta testing, this allows Square merchants to instantly deposit money into their bank accounts, with a $50 minimum and a 1% surcharge. It claims that “thousands of merchants deposited more than $10 million into their accounts.” • Square Register. Offers tools like inventory, invoices, analytics and reporting, online scheduling, customer feedback, third-party app integration, and gift cards. • Square Payroll. This ser v ice deals with timecards, taxes, direct deposit, and access to payroll stubs. Currently, it’s available only in California, but with plans to expand to other states soon. • Appointments App. Introduced in summer 2015, it allows merchants to manage appointments, carry client lists, and accept or decline appointments. “The reason they are expanding into other areas is because the core business model that they had when they started with micromerchants, using this little Square dongle, was not profitable. They found they needed to move up-market to generate sufficient revenue to achieve profitability,” says Aite’s Peterson. “Once [Square has] the card transactions, you have all that information about the merchants. It’s using that information intelligently to come up with other services,” adds Zilvinas Bareisis, senior analyst for banking at Celent. What should banks do now? “If they want to support small to mid-sized businesses and they don’t have a point-of-sale capability that they can offer, then I would say [getting one] would be the first thing to do,” says Peterson. Two examples of related products: First Data’s Clover (an “all-in-one” POS innovation) and Fiserv’s SpotPay (a mobile POS device that reads cards and captures checks). In the meantime, keep tabs on Square. “Banking is happening with or without banks,” says Peterson.


WAREHOUSE LENDING REBOUNDS Banks that stayed in have done well, but the competition is hot again By Melanie Scarborough, contributing editor

D

uring the economic downturn, one of the hardest-hit banking segments was warehouse lending. In 2007, there were around 120 warehouse lenders; by the end of 2008, only about 15 remained, according to Stanley Street, president of Atlantabased Street Resources, which provides expertise to warehouse lenders. As mortgage production fell, so did the need for temporary funding of loans that were to be sold to investors. “ Today, there are about 80 warehouse lenders,” says Street. “About 11 of those are nationwide banks, another 11 are regional banks, 46 are community banks, and the rest are private nonfinancial institutions.” Utilization rates are up. According to Street, there is approximately $90 billion in commitments with about $40 billion outstanding, for a utilization rate around 55%. That’s more than twice what it was in January 2013, when the utilization rate hovered in the low 20s. Comerica Bank, headquar tered in Dallas with assets of almost $70 billion, has been in warehouse lending for more than 50 years. Senior Vice-President Von Ringger, who has managed the department since 1997, says warehouse lending is “a significant line of business for us”— and one that saw substantial growth in the past year. The average loans for Comerica’s mortgage banker finance program jumped from $1.3 billion in June 2014 to $2.1 billion a year later. Ringger says the business is a win-win for banks and consumers. “Warehouse lending allows non-bank lenders the liquidity to originate loans,” he says. “By doing that, it creates more competition in the marketplace, so consumers are going to get the best deals.” Competition has become even more keen as many of the players who dropped out of the market eight years ago have returned and others enter. Jeff Ellison, president of warehouse lending for $220 billion-assets BB&T, based in WinstonSalem, N.C., says the market is “just flooded” today. By 2009, most warehouse

lenders had exited and there were liquidity problems. “A lot of the Wall Street firms got out; now that the market is stable, they’re back in,” he says. “A lot of private equity groups and hedge funds are getting back into the mortgage market.” BB&T stayed in the business. It now has more than $3 billion in warehouse commitments. “We’ve enjoyed a good return over the past six years or so,” says Ellison. “We’ve seen pristine credit metrics. Returns, in general, are down from where they were f ive or six years ago because of competition.” One factor driving competition is that regulatory burdens are forcing some loan originators, particularly small-cap lenders, out of business. “If you have to add a compliance staff and your volume is relatively low, it’s almost impossible to remain profitable,” notes Ellison. “We’re going to see more and more consolidation, and that shrinks the universe of potential clients for warehouse lenders.”

Now that the market is stable, many Wall Street firms are getting back in

Community bank presence

Despite that, a growing number of community banks offer warehouse lending. “Most of the community banks in this space are lending to their own customers,” says Street, “so the competition among them is not as fierce as among regional and national lenders.” Instead of the hundreds of warehouse lending clients a megabank might have, community banks typically have about 20. After 2008, Street Resource Group encouraged community banks to enter the business by providing a software platform that incorporates best practices and standardized risk management. “As mortgage production returned, there weren’t enough wa rehouse lenders, which is why many of the community banks stepped back in,” he says. The business remains highly profitable. “People continue to come into this business because, although there is excess capacity overall, there remain significant opportunities for niche warehouse lenders—such as community banks servicing their mortgage affiliates,” Street says. Many are optimistic. “People initially got in this because it was a relatively safe line where risk-reward made sense,” Ringger says. “For the most part, it has proven to be a very solid line of business.”

October/November 2015 BANKING EXCHANGE

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/ Seven Questions /

APP ALTERNATIVE

Pinnacle Financial thrives on hiring experienced bankers who actually speak with clients, says CEO Terry Turner By Steve Cocheo, executive editor

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c om merc ia l c u st omer ha d an appointment at Pinnacle Bank to sign loan closing documents. He called ahead and told his banker that he’d swing by her office’s drive-through and sign in his car seat. It was close to lunchtime. But he wasn’t touching ground. He drove up and signed. But his banker popped out and brought him two burgers and a Coke, realizing the customer wasn’t going to have time to eat otherwise. “I’m certain that that’s a client for life,” says M. Terry Turner, president and CEO at $8.2 billion-assets Pinnacle Financial Partners, a one-bank holding company based in Nashville, Tenn. This is one of dozens of examples of “wow” service that Turner likes to pull out of his pocket. Pinnacle is one of 25 banks identified in June by Keefe, Bruyette & Woods as “America’s Challenger Banks.” These are mid-size companies with the potential to “challenge large financial institutions and traditional community bank business models.” Writing about Pinnacle, KBW noted that it produces one of the fastest organic growth rates among banks. In the second quarter, its average loans grew by 11.4% over 2014’s second quarter, while making an ROA of 1.44%. KBW credits this to creating a highly desirable place to work that attracts quality bankers who consistently build market share. 14

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Pinnacle was founded in 2000, and although it completed two major mergers over the summer, Turner’s preference is for organic growth. Much thinking has gone into the looming $10 billion Dodd-Frank threshold, with its increased compliance costs and the Durbin amendment penalty on interchange income, but Turner doesn’t blink. “We believe we have the opportunity to build a $15 billion company, so why would we stop at $9 billion?” says the regional-bank veteran. “It takes about $2 billion in assets to run you through breakeven, and then you continue growing the earnings stream.” Pinnacle’s strategy from the beginning: To serve four key urban Tennessee ma rke t s— C hat t a nooga , K nox v i l le , Memphis, and Nashville. The mergers have cemented that structure in place. As noted by KBW, people represent the key to Pinnacle’s story. “Our idea is create what feels like a local bank, and we want decision-making, particularly credit decision-making, to be largely made on a local basis,” says Turner. Pinnacle is predominantly a business bank, with a highly diversified credit mix. Making that happen hinges on hiring experienced bankers only. “We won’t hire people who have less than ten years experience in our markets,” says Turner. “We’ve pledged to our clients that we won’t turn them over to trainees. That resonates with a lot of people.” The average Pinnacle employee has 26 years experience in banking. Building a nd ma inta ining such a workforce means everything to Turner: “Our annual associate retention rate is 95%. We have new hires, but we don’t have people going out the back door.” Q1. Over time, all your experienced people will be retiring. What’s the training challenge going to be then? The biggest piece of turnover last year was retirements. But what people miss is that ten years experience for a college g raduate ma kes you 32. So we can still hire younger people that have

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meaningful experience, rather than hiring them right out of school. We hire them out of large regional banks. This is a great place to work. [Pinnacle has won national best place to work awards.] Half the formula is how much fun it is to work here, but the other half is how bad it is to work in a large regional company. If you are a relationship manager in a large regional headquartered in some other state, if you’re doing anything of consequence, you’ve got to talk to somebody in another state to get your loan approved. They talk to you like you’re stupid. And that’s a hard existence. When we hire these experienced people, they bring their book of business, and you get rapid growth. And you get great asset quality, because if they’ve been banking someone for ten years, they know them. And so they leave the bad credits behind. We have lots of mechanisms here that are built to help us listen to people and make improvements as we go. We have made lots of changes over the years based on what our associates suggest. Q2. Is there more to the preference for experience than the promise to your customers? Yes, when you hire the more experienced, they are not job hoppers. Many young people start out unsure of what they want to do, and they can kind of bounce around. I did that myself. Through our hiring model, we eliminate folks who are unclear. The number one inhibitor to winning when you aim for distinctive service is turnover. Q3. Do your relationship managers take part in underwriting? Yes, our financial advisors, as we call them, participate in the lending decision. We run a signature system approval process, not a hunter-skinner program. They are involved from start to finish. Our financial advisors have a level of authority, and they can then go to their team leader for more, and they can get a credit professional involved for higher limits


“We won’t hire people who have less than ten years experience in our markets. We’ve pledged to our clients that we won’t turn them over to trainees. That resonates with a lot of people”

than that. Three or four people together can lend the house limit. Our people on the ground in local markets can make lending decisions of up to $10 million in that market. As we are dealing with companies chief ly with sales between $5 million and $50 million, that meets 90%-95% of demand. Financial advisors are responsible for the client connection and can meet with customers and talk about how to meet their financial situations and reach their objectives. Their specialty is almost always lending, but they also know treasury management, merchant payments, and international transfers. They’re able to bring in technical experts when they get into more specialized areas. Our intent is to have people with a meaningful presence and power base to do business with clients in their market. Q4. You’ve done two acquisitions recently. Is this a strategy shift? Our strong preference, strategically, is organic growth. We have made acquisitions, but the value of Pinnacle has been organic growth. Acquisitions give us a toehold from which to launch. Our stock is highly valued, an advantaged currency to make acquisitions, so I wouldn’t be surprised if we made some more.

Q5. What do you think of the fintech movement today? There are always early adopters. They are dramatic and predict the demise of everything. Back in the 1970s, I was in the bank systems consulting business, and all the drama was about how checks were going the way of the dodo bird. But 40 years later, there’s a ton of electronic stuff going on, and a lot of this stuff is really cool, but about 18 billion checks are still written. We believe that when people make complicated financial decisions, most frequently they want to talk to somebody. We are commercially oriented, and I believe this is still a people business. There will be continuing movement toward new channels, but in five years, a connection with a banker will still be very important. Q6. What else keeps people interested besides autonomy and being listened to? Compensation is important, but not most important. Experienced people—who many times are the most expensive— who are excited to work here results in unbelievable performance for clients and makes shareholders a lot of money. All salaried and noncommissioned associates participate in annual cash incentives, and every associate receives

equity grants. We used to use stock options; now we use restricted shares. They get shares when they come here, and there’s an annual grant going forward. Last January, we paid our approximately 800 associates a total of $15.2 million in cash incentives. Since we’ve started, in 15 years, the value of equity granted is roughly $200 million. It’s expensive. Our cost per associate is higher versus peers. But our revenue per associate—about $113,000 of net income—is very high among all sorts of financial companies. It is astounding how much our associates feel like this is their company. It makes a difference to them if we make foolish decisions, waste money, or have a loss. Q7. Pinnacle recently formed a capital markets group. How does that fit? We largely serve owner-managed busine s s e s—g e ne r a l l y u nde r s e r v e d b y investment banks, who help larger corporate clients with capital formation and M&A. Our group will help smaller companies in these areas and in exit strategies. We are forming a broker-dealer to facilitate that work, and this new group will work with our financial advisors. It will be a support mechanism. We serve a huge portion of our business communities and there’s a lot of demand for these services.

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CFPB: 4 years in Nobody’s indifferent about the “new cop on the beat”

By Steve Cocheo, executive editor & digital content manager

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October/November 2015

Bill Alatriste

The Consumer Financial Protection Bureau has changed banking. Question is, are all the changes for the better?


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ontroversy and banking regulators are old acquaintances. FDIC insurance, now an essential, was opposed bitterly by many bankers in the 1930s. And the Federal Reserve stirs more controversy on more fronts than you can track, from frustrated investors, savers, and bankers to conspiracy theorists. Yet the Consumer Financial Protection Bureau stands in a class by itself, for controversy. CFPB debuted in the wake of the turmoil of the Great Recession, conceived in the mind of now-Senator Elizabeth Warren, brought into being by the DoddFrank Act, mired in party politics since its beginning. To backers, CFPB is a brainchild long overdue, doing wonderful work. To critics, it’s an unwelcome arrival. To some in the middle ground, it’s been a letdown, a great idea that failed. For an attempt at a balanced look at how CFPB and the banking industr y interact, we approached over 25 sources, a wide range of bankers from institutions of all sizes; compliance, legal, and regulatory experts; bank lobbyists; and former CFPB officials. Representatives of some organizations—including all but one of the four trade groups approached— decided not to be interviewed or did not respond at all. Several large banks with a strong consumer banking orientation flatly declined an interview about CFPB. One pro-consumer organization ignored three emailed requests for an interview. Clearly, while many have strong feelings about CFPB, they won’t always go on the record. That may suggest a lot of negative comments, yet from the 14 sources who ultimately did speak, we heard both positives and negatives, even from bankers who have dealt quite directly with it. In the following report, we quote from interviews with bankers from four institutions over $10 billion in assets that spoke only on condition of complete anonymity. For the sake of reader clarity, we identify these institutions with plain labels of “Bank A, Bank B …,” etc., and the bankers with similar labels. All of these bankers are quoted in second reference as “he” for the sake of simplicity. Some bankers will be angered by some of what they read here, though they will agree with a great deal. Our intent is to bring a balanced look at an agency that most agree that, like it or not, is here to stay, and that has changed the compliance landscape.

Attorney Alan Kaplinsky, a partner at Ballard Spahr LLP, says it was destined, given the crisis, that something like CFPB would arise. “Congress did the politically expedient thing,” he says. “It created a new agency to deal with a problem that had already occurred.” Once created, the bureau took off.

New game, new umpire Name a compliance challenge and CFPB is there, from the expanded UDA AP mandate to post-crisis mortgage lending to fair lending to overdraft service and payday lending to consumer complaints. Some bankers worry that the bureau will stifle innovation when, increasingly, innovation is the name of the game. CFPB began with a broad and deep legis-

compliance landmines have been enunciated through enforcement actions, rather than through before-the-fact guidance. Another banker worries that bureau policy and practices lack real-world perspective. “How expensive do you want to make this ser v ice that we prov ide? ” a sk s Banker B. “The bureau is trying to implement a lot of change without thinking things through. Banks are not nonprofit organizations. We provide a service and there is a cost to that.” Asked if the bureau has changed the level and nature of banks’ consumer protection dialog, Raj Date, a former CFPB official, makes clear that this was by design: “Most importantly, we now have a conduct regulator that doesn’t care what kind of charter a f irm has—the rules

Banker B: “They use a lot of media soundbites that sound rather good. But life is very different outside of Washington, D.C.” lative mandate, and it consistently strives to broaden and deepen its coverage. “CFPB has definitely raised the profile of compliance up the ladder in banks,” says Lyn Farrell, managing director at Treliant Risk Advisors. “Consumer compliance is much more prominent than it used to be. The transition to principlesbased regulation has changed a lot of the perspective on the importance of compliance. Compliance professionals used to be trained on the technical rules, and if you were in compliance with those rules, you’d be OK. And that’s not the case today.” One of the large bank representatives interviewed says the pressures created by the bureau are worrisome. “Overall, we are in a very challenging environment,” says Banker A. “It is difficult work. I grow concerned about maintaining expertise. I’ve seen a lot of experienced compliance people exit the job because it is a very different job than it used to be.” Indeed, one of the objections bankers raised time and again is that too many

apply to everyone. You’re a bank, finance company, thrift, fintech startup, investment bank, industrial loan company … whatever. It doesn’t matter who you are, the same rules apply to everyone. Second, within the banking universe, I really think that for the first time consumer protection is being viewed as an equal and independent set of constraint on business conduct. It’s not more or less important than safety and soundness concerns, and very much a separate lens.” Says Banker B: “They went to work with a very specific vision of what they felt they needed to accomplish. Unfortunately, they use a lot of media soundbites that sound rather good. But life is very different outside of Washington, D.C.”

How is CFPB doing? Texas Republican Jeb Hensarling has had CFPB in his sights for a long time, and kept up the attention and pressure after assuming the chairman’s post at the House Financial Services Committee. October/November 2015 BANKING EXCHANGE

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/ CFPB / CFPB by the Numbers

Enforcement Actions April 2014-March 2015 • 45 enforcement actions • 10 fair-lending referrals to the Justice Department (two settlements made with banks in conjunction with DOJ)

Civil Penalties $47.6 million was collected by the bureau in the first half of FY 2015

Complaints in CFPB database 458,075 (as of 9/30) The total reflects complaints made by consumers and referred to providers by CFPB. They are put in the public database after the companies respond or after they’ve had the complaint for 15 calendar days, whichever comes first.

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But the bureau was politicized from the get go, stirring the bank lobby to some of the most direct attacks ever unleashed on a legislative creation. Date, now in the financial services business as managing partner at venture firm Fenway Summer LLC, served as acting head, and the first CFPB deputy director, before current Director Richard Cordray was in place, and oversaw much of the bureau’s initial structuring, policymaking, and setup. Bankers give the bureau some points for outreach, and that started in Date’s day. But from its formative days, the bureau was a banker bullseye. “I think that some of the opposition to the CFPB’s existence was pragmatic and grounded, but much of it was marked by hysterical hyperbole that was political and short-sighted,” says Date. “Financial reform was a priority for the Obama Administration. A s it turns out, the Obama Administration was one that many of the individual leaders within many of the industry’s trade associations genuinely and viscerally hated, so they let their own personal attitudes get in front of their clients’ best interests.” Even today, with a few years under its belt, the bureau continues to be a “punching bag,” in Date’s words. However, there is dialog between the industry and CFPB now, and, as will be explored later, a willingness, at least at the top, to listen. William Isaac, consultant and former FDIC chairman, says much of the tension between the industry and the bureau is inevitable, and not a product of the bureau, but the bureau’s challenges. “CFPB’s mandate involves it in political controversy,” says Isaac. “If you are trying to regulate financial institutions and their relations with customers, that is pretty political. You’ve always got a tension between financial institutions and their regulators over how they treat their customers. CFPB did not invent that tension.” Isaac, however, does not think that creating CFPB was necessary. “Most of the consumer abuses came from outside of the banking industry,” he explains. “A lot of the mortgage problems, for example, involved nonbank mortgage lenders.” That said, Isaac says there is no going back. He gives the f ledgling regulator a B, overall, considering the huge volume of tasks undertaken by the bureau—both those mandated by legislation and those taken on by the bureau pursuing its goals. Rega rd i ng t he bu re au’s m i s sion,

attorney Alan Kaplinsky says that “I think CFPB has gone well beyond where anybody ever contemplated it would end up going.” Kaplinsky leads Ballard Spahr’s 100+ attorney Consumer Financial Services Group. The group, which publishes a frequent blog called CFPBMonitor.com, has represented banks and nonbanks, including fintech firms such as P2P lenders, in issues related to the bureau. “Everybody knew CFPB was going to be a big deal,” Kaplinsky continues, “but I don’t think people expected that in the short period of time they’ve been around that they would have the enormous impact they’ve had in a lot of different areas.” On every front, he points out— regulation, examination and supervision, and enforcement—the bureau has gone full throttle. Kaplinsky says his firm alone has worked on more than 40 separate client negotiations with bureau staff. Yet some point out that as fast as the


bureau has pushed much of its agenda, some issues percolate more deliberately. Overdraft is one example. Some see the more deliberate pace on this controversial issue as an indication that the bureau isn’t just a loose cannon, though others wish the bureau would finalize some guidance the industry could go on. Lucy Griffin, a veteran compliance consultant, and former attorney at both the Federal Reserve and the Federal Trade Commission, boils her view of how the CFPB has done down to one word: “Disappointment.”

MORE OF SAME, OR LESS? Griffin’s watchword in her work through the years has been consumer fairness, so this verdict intrigues. “It could have been such a great thing, and it has turned into quite literally more of the same,” says Griffin. “It has turned out to be an FTC expanded tenfold.” Her largest objection—putting aside her

concerns about volume of regulation produced and related issues—comes down to results. “The predators are still out there,” Griff in says. Though the bureau has made much of its complaint process, for instance, Griffin says she used to forward examples of misleading advertising to the bureau and seen no action. She’s stopped. “They’ve gone after the easy cases,” says Grif f in, “the ones that prudential regulators brought to them.” Others make this criticism as well. [Griffin blogs on www.BankingExchange.com] “I’d call CFPB a misfire,” says ABA’s Wayne Abernathy. “It has failed to prove itself.” Supporting Griffin’s contention, he says the cases made on the bureau’s own standalone efforts have not been major cases. Going further, Abernathy, who is ABA’s executive vice-president for financial institutions policy and regulatory affairs, calls CFPB “pretty much a dysfunctional agency.” “Richard Cordray has had to preside over a civil war going on in his agency,” says Abernathy. The war, he continues, is between staffers who came over from prudential regulators, who want to run a “real” agency, and people who have come aboard from consumerist backgrounds. The latter, says Abernathy, “don’t give a hang for due process, they’ve got an agenda.” Indeed, Banker A notes that the bureau recruited among existing compliance officers, as well as among staffers at other regulators, but that only went so far. “I think there was a very conscious effort by CFPB to get folks with fresh ideas, that hadn’t been too ingrained w ith the way things had been,” says Banker A. “There was a limit to how much experience was valued. They were trying to think outside of the box.” This creates a situation frequently seen with bureau rulemaking, according to Abernathy: “They put their rules out, finalize them, and then revise them after they finalize them.” Often, he says, the initial try is unworkable, but industry input is discounted. Later, when things don’t work smoothly, rev isions take industry input into account. Abernathy points to the CFPB remittances rule as one example. “And how many times have they revised the QM rules?” he adds. “Sometimes they charge forward, and listen afterward,” says Banker D. Too much energ y goes into what will make a good headline, says Abernathy. Nonetheless, Abernathy says t hat A BA ha s been able t o forge a

CFPB Budget FY 2015, $582.0 million FY 2016 estimate, $605.5 million. About 46% of the 2015 budget was allocated to strategic goal to “Prevent financial harm to consumers while promoting good practices that benefit them.” This includes regulation, supervision, and enforcement. About 23% was allocated to the strategic goal to “inform the public, policy makers, and the CFPB’s own policymaking with data-driven analysis of consumer financial markets and consumer behavior.” About 22% was allocated to the goal to “empower consumers to live better financial lives,” which includes complaint processing and educational outreach

CFPB Staff 1,459 employees (as of March 31, 2015 vs. 750 as of yearend 2011) The largest share, about 45%, work for Supervision, Enforcement, and Fair Lending; about 12% work for Consumer Response, which handles complaints and related matters; and about 9% work for Research, Markets, and Regulations, which includes the rulemaking function. Sources: Semi-Annual Reports of the CFPB to Congress and the President; CFPB Complaint Database; The CFPB Strategic Plan, Budget, and Performance Plan and Report (2/2015).

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/ CFPB / Banker A: “It’s a myth that they are all zealots. I’ve worked with some perfectly normal people from CFPB” working relationship with CFPB. In part he credits this to Steve Antonakes, a former Massachusetts regulator who came aboard as deputy director. Abernathy says that Antonakes, who left CFPB this summer to become a top bank compliance official, “was a calming inf luence and had an inf luence in increasing professionalism at the bureau.” And Abernathy notes that the bureau does learn from experience. Early on, enforcement staff came in on exams with regulatory staff, but banks found this off-putting. “We likened it to a doctor coming in with an undertaker, and the doctor telling the patient, ‘Don’t pay any attention to that guy’,” says Abernathy. The bureau stopped that practice.

Does Cure hurt? While most observers see the bureau as a given going forward, community banker Guy Williams dislikes the bureau enough that he would see it go away, especially if a Republican administration takes the White House. To those who see the bureau as permanent now, Williams offers his own beacon of hope: the current moribund status of the Ex-Im Bank, which was also a target of Chairman Jeb Hensarling. “CFPB is based on a false premise,” says Williams, president at $1.3 billionassets Gulf Coast Bank & Trust, New Orleans. “The Washington viewpoint is that consumers are too stupid to know when they are being treated badly.” Williams disputes that consumers’ lot has changed. “CFPB’s objective is to get consumers better treatment,” he says, “but the result is that they are being treated worse.” Mortgage lending has become more involved, more expensive, and more fraught with paperwork, he points out, with the rising cost of closings only one result. “This wasn’t their intention,” says 20

Williams, “but it is the outcome.” Consumers speak of this sea change themselves. Community bankers interviewed say bureau rulemaking has already led to changes in product offerings, or may do so in the future. West Virginia community banker Bill Grant, for example, says his bank exited indirect lending due to unworkable rules. Even so, he believes the bank will have to add a “person and a half” to handle added compliance duties, such as expanding HMDA reporting. He says that CFPB did give many community banks some relief under the bureau’s mortgage rules: “We may have a little more leeway, but not a whole lot.” Wa sh i ng t on st at e ba n ker L au r ie Stewart, who ser ved on CFPB’s f irst Community Bank Adv isor y Council, says most of her time there was taken up with mortgage rulemaking. Even with some allowances for small banks, the end result “makes me worry that community banks might not be able to stay in the mortgage business—the margins are already so narrow,” says Stewart, president and CEO, $503 million-assets Sound Community Bank, Seattle. “Costs have gone up, compliance has gone up, and the poor are being squeezed out of the banking system,” says Williams. He says big banks can throw many staffers at rules, but community banks must decide when they have to exit a business because the burdens outweigh the gain. “They don’t examine us, but everything that they do filters down to us,” continues Williams. “Any time Washington tells you that something is going to affect the big guys only, that’s the first lie. Complexity favors the large.” Our inter views with bankers from large institutions bear out some of this— certainly they have bigger compliance staffs—but those bankers also feel the impact of the huge amount of rules, studies,

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commentary, and must-read enforcement actions that come out of CFPB.

Exams: bureau IN banks A key difference between CFPB and traditional banking regulators is that the latter physically examine all of their banks. CFPB administers most consumer banking rules now, and can, legally, examine any bank, given cause. But the bureau specifically only examines institutions of $10 billion or more in assets. Each of the four CFPB-examined bank representatives we spoke with had been through multiple CFPB exams. In the early days there seemed to be some element of exposing lots of examiners to the process. One observation was that there’s sometimes turnover in who works on a bank from one exam to another, which does not permit the development of examiner-banker rapport that can exist in prudential agencies’ exams. One banker suggested this may be by design, the bureau desiring to avoid any familiarity between regulator and regulated. Ty pica lly, according to the bankers, the first official bureau exam was extensive, aimed at fully understanding a bank’s systems and approaches. Subsequent exams tended to target specific areas of interest that appeared to come from headquarters. Banker D noted that Washington definitely seems to call the shots for CFPB exam teams in general, with examiners in charge exercising less individual initiative and discretion than might be the case from a prudential regulators’ team leader. Overall, the bankers indicate, the approach, past the f irst exam, tends to be risk-based, though the perspective is a bit different from traditional regulators’ use of that term. “ Their mindset is dif ferent ,” says Banker A. This banker was explicitly told that not all exams would be full-blown affairs, but often an across-the-board a ssessment of cer tain f unctions. In this the bureau is follow ing prudential reg ulators’ approach w ith some safety-and-soundness issues, where they conduct so-called “horizontal exams” that look at one area at multiple banks. Banker A adds that “they don’t think much about materiality,” that is, compliance and consumer protection are viewed on a standalone basis. The bureau has only one mission. “They were very open, they wanted to understand how we operate, before they began to dig down into whether we were


in compliance,” says Banker C. “For both sides there’s been a learning curve.” Asked about surprises seen, Banker A had this to say about bureau examiners: “It’s a myth that they are all zealots. I’ve worked with some perfectly normal people from CFPB. And it’s a myth that they are all unqualified.” Banker A says the “mission” does show. Some examiners have been on a rampage—“I’ve been preached to, a bit, about consumer harm,” says Banker A— but others are respectful and genuinely want to help banks get it right. But the executive adds that while many bankers and lobbyists accuse CFPB of a “gotcha” mentality, “they are not all out to get us. Though there’s no question that their perspective is different.” “I feel like we are moving away from a gotcha mentality,” says Banker C. “Overall, I think CFPB had to establish itself as an agency, had to go down the path of getting some wings.”

Rulemaking for ALL As much as Banker D found the CFPB examination process professional, reasonable, and measured, he believes there is “a disconnect” between that face of the bureau and its rulemaking function. TIL A-RESPA changes, effective in October, ref lect this disconnect, Banker D continues. “The bureau was hell bent to make a deadline date and wasn’t talking to the vendors and the bankers about what was workable,” he says. The bureau has straddled multiple challenges from its beginning. Under Dodd-Frank it faced deadlines to be met from virtually a cold-start, with an increasingly ambitious agenda from within and from without. Layer on top of this a stated pledge to run its regulatory approach on a “data driven” basis, and that’s quite a do-list. “Building the bureau was a formidable challenge,” says Raj Date. “Startups are hard; post-merger environments are hard; strategic overhauls are hard. And CFPB had all of those challenges. We were, by design, a startup, with merged sets of authorities, with a blank-slate strategy. So we had all the challenges of three different tough private-sector environments, but all at the same time, and all within the public sector, which I can assure you is tougher to manage and lead within than within corporate America.” Formidable for the bureau staff, but bankers have felt their own pain. The sheer

flood of paper coming out of CFPB challenges all players. “I can barely keep up,” says Banker B, “and that’s just digesting it. Then you have to figure out how to comply.” That said, Banker B admits “if we weren’t getting all that input, we’d be complaining about the lack of input.” One thing for which bankers give the bureau positive marks is its attempt to provide aids to compliance beyond just the rules and a FAQ. An example several pointed to was the one-pager CFPB designed to help community bankers understand the QM rules and related matters. While this ef for t had its fans, not everyone gave the bureau an “A.” Banker D says more than once the answer to a question has been “it’s there, in the rules.”

came to CFPB from the Office of Regulations in the Federal Reserve’s Division of Consumer and Community Affairs and worked for two years in the bureau’s Office of Regulations. When he left, he was Deputy Assistant Director for the office and had played a leading role in developing the Bureau’s new mortgage disclosures and completing eight other Dodd-Frank mortgage rulemakings, including the ability-to-repay/qualified mortgage rule. Olson says the data-driven policymaking publicized by the CFPB is no mere window-dressing, but a genuine desire to guide regulation writing with facts. He says that he appreciated the bureau’s approach because, at the Fed, he often wished for more help from Fed economists in attempting to predict the real-world impacts of different policy approaches. At CFPB, the Office of Regulations is part of the Division of Research, Markets, and Regulations, headed by Associate Director David Silberman, and Olson says that the trio of functions was intentionally combined when the bureau was organized to foster interdisciplinary policymaking. Olson, today a par tner at Buckley Sandler LLP, acknowledges some of bankers’ frustrations with the CFPB, but notes that “the issues that the bureau is w restling w ith are not ea sy ” and were particularly challenging when the bureau was in its infancy. He adds that staff, faced with a monumental regulatory to-do list when the CFPB was still setting up its offices and getting itself organized, “used to joke among ourselves that we were trying to build the boat while we were steaming down the river.” The regulatory dialog with the banking industry frequently hinges on who is talking, Olson points out. Differing messages were sometimes heard by CFPB staff Continued on page 38

Truly “data driven”? Practical workability has often been an issue for bankers trying to follow regs. An avowed principle from the start for CFPB was its “data driven” approach, portrayed as fact-finding before policy is developed. Opinions differ about this. “They really do seem to use data as much as they can to assess conditions in an unbiased way,” says Banker C. “They are not always successful, but they do try to do it that way.” “The bureau has definitely been very focused on collecting data and studying it,” says Banker B. “But I don’t believe they’ve applied rigorous standards to be sure that what they are interpreting from the data is accurate. That’s dangerous.” “It’s just a lot of words that doesn’t mean a lot,” says attorney Alan Kaplinsky. “They do a lot of studies, no question about that. But they don’t necessarily base their regulations on the results of the studies. They only like the data that supports the direction they want to move in, philosophically.” Ben Olson, now in private practice,

Banker C: “They really do seem to use data as much as they can to assess conditions in an unbiased way. They are not always successful...” October/November 2015 BANKING EXCHANGE

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TALENT MANAGEMENT

Star search In calculating their resources, banks realize that human capital is key. Large and small institutions share their best practices By Melanie Scarborough, contributing editor

Community bank survival strategies Having the right people was identified as one of the keys to survival by bankers and others quoted in our September cover story. This article explores that point more fully. The voices here come from all size banks, and while not all suggestions are applicable to community banks, most are. View last month’s cover story at http:// tinyurl.com/CBsurvive

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October/November 2015


“T

alent is a defining characteristic of banks that will be able to thrive and survive,” says Alan Kaplan, who should know. He began his career 31 years ago as a banker before founding Kaplan Partners, an executive search and talent advisory firm headquartered in Philadelphia that helps banks recruit top-level employees—an increasingly difficult task. “Although there are fewer banks now, the number of people qualified to lead them or take senior roles has not kept pace with the demand. Everyone in banking is going after a finite number of quality people,” says Kaplan. So how can you find, recruit, and retain the best employees for your bank? It turns out that good workers are like financial assets: The more you have, the more you are likely to obtain. “Talent begets talent,” says Jim Cherry, CEO of Park Sterling Bank, headquartered in Charlotte, N.C. In 2010, Cherry,

retired from Wachovia Bank, put together a team for a new regional community bank. Cherry’s first recruit was CFO David Gaines, who also had been at Wachovia. “The two of us worked together to recruit others, and pretty soon we had a management team and a board of directors,” says Cherry. Ultimately, Cherry’s group approached Park Sterling, and that bank agreed to hire Cherry’s management team to supplement its own, and reconstitute its board with Cherry’s board members. This has paid off. Since 2010, the bank has grown from 47 employees in three offices and $480 million in assets to 500 employees in 53 offices and assets of $2.4 billion. Park Sterling hires only within its market and draws people from other banks. “This is where the ‘talent begets talent’ comes in,” Cherry explains. “When we’re trying to recruit someone, we bring have them meet with our team. They leave saying, ‘Gee,

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/ star search / I’d love to work with these people.’” The potentia l dow nside to hir ing from other banks is that poaching can spur poaching. To keep a good team on board, banks have to make sure that employees are empowered and engaged. “Everybody wants to make more money, but high-potential people are motivated by the ability to have an impact,” says Kaplan. “An employee who’s being recognized, rewarded, stretched, and challenged won’t be so eager to leave. If they’re being paid well, but the environment isn’t challenging, the organization may still lose them.”

Park Sterling’s Jim Cherry likes to empower all employees to say, “Here’s how we can make this happen.”

Once you have them, keep them

It ’s impor t a nt not to microma nage talented leaders, says Cherr y, and to empower front-line employees so they “can sit down in front of a customer and say, ‘Here’s how we can make this happen,’ instead of just gathering information. It makes people feel valued when you empower them to do business.” WSFS Bank, a $5.1 billion-asset institution based in Wilmington, Del., ranked as the third-best large employer in a local survey last year. Since 2003, the bank has worked w ith Gallup to measure employee engagement and learn where it can improve, says Peggy Eddens, executive vice-president and chief human capital officer. “If employees are engaged, they’re more committed to what they’re doing. They serve at a higher level.” Staff loyalty can be cemented in unexpected ways, such as the Toastmaster chapter WSFS hosts. “This group that works together becomes friends,” says Eddens. “After the chapter moves on, they retain connections in the company that make them more connected to each other—and that connection is WSFS.” The Virginia Division of SunTrust Bank asks for employee feedback and acts on concerns. “Last year, teammates were concerned about their health and well being, so we developed a program that makes health a priority,” says Division President and CEO John Stallings. The bank also has a financial fitness program for employees and their families. One of his expectations of managers is that they will spend a lot of time coaching their staffs and helping them navigate the next steps in their careers. “For me, it comes down to leadership and teamwork,” Stallings says, “helping create engaged teammates who want to spend their entire careers at SunTrust.”

Talent in your own back yard

Succession planning at Northwest Financial covers 53 of 425 employees, says Alex Oponski.

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Many banks cultivate home-grown talent by grooming employees within the bank. A couple years ago, Northwest Financial Corp., a $1.6 billion-assets bank in Arnolds Park, Iowa, began a succession planning process for 53 of it 425 employees. Alex Oponski, chief people officer, met with those employees, their supervisors, and the CEO to discuss who could replace them if they were promoted (or retired) and whether their potential

October/November 2015

successors were prepared. And if not, what should be done to prepare them? The answer to the latter, says Oponski, could be sending someone to a graduate school of banking or exposing them to a process they need to be familiar with.” Northwest Financial also identified about 50 other employees who weren’t part of the immediate succession plan, but viewed as rising stars. “We’re developing a class that will work on specific projects to see if they’re truly visionary,” says Oponski. Neal and Dwight Conover, the two brothers who own the bank, serve as mentors to this group. “You have to have a plan to keep the organization vibrant and have new leaders come up through the bank,” Oponski says. “A lot of banks don’t have that and will have to sell” when their leaders are gone. Employees may have untapped potential because they haven’t been exposed to an area where they can shine. WSFS has a program where associates form teams and decide what banking operation they want to learn more about. “One wanted to learn about private banking, so we took a trip to Greenville where that office is,” says Eddens. “That’s been very successful. We’ve had people apply for positions they never knew they were interested in until they saw how it worked.”


T h e o b v i o u s —i f y o u w a n t g o o d employees, train them—sometimes is not so obvious. Oponski says when times are lean, banks often cut training programs. “Our owners would say bad times are the exact times you should be training.” WSFS has a self-designed leadership program in which 30 associates, mostly first-level managers, study 16 modules over an 18-month period. The bank also has a rotational leadership program that allows mid-level managers to trade chairs for six months to a year. They learn what other jobs are like and bring

a fresh perspective to a job that may benefit from a different set of eyes. SunTrust has a wholesale analyst program available to about 30 recent college graduates when they join the bank. “We found a real interest level because it allows for on-the-job training and, ultimately, a placement on our wholesale team—a highly sought-after role with the bank,” says Stallings.

Think outside the bank If your bank is good at training, you can tap a wider pool of potential hires

Employees may have untapped potential because they haven’t been exposed to an area where they can shine

outside the industry. Northwest Financial has drawn people from retail stores li ke Wa lma r t . “ S o ma ny ba n k jobs involve selling, so drawing from retail is good,” says Oponski. Because some of its Iowa markets are heavily agricultural, the bank also looks at co-ops for prospective employees. “If someone’s not afraid to make cold calls or is good at selling, we can train them in banking,” he says. In fact, hiring from outside the industry can be preferable. “It might be better to take on someone who hasn’t been in banking and teach them our style, rather than retrain someone who has grown up in another organization,” Oponski notes. Sandy Crawford came to Tioga State Bank from a career as a farmer. After her husband’s death in 2001, she kept the family farm going with the help of her four daughters and her work with Farm Credit in Pennsylvania. “We lured her away from there to come work for us,” says Robert Fisher, president and CEO of the $420 million-assets bank based in Spencer, N.Y. Crawford specializes in agricultural lending, where she brings first-hand knowledge of customer needs. One of Tioga State Bank’s goals is to be a local employer of choice, and it must be succeeding, because Fisher says a lot of his new hires come through referrals from employees. When people enjoy where they work, they recommend it. Northwest Financial advertises jobs in Hispanic newspapers to try to bring minorities into its workforce. Section 342 of Dodd-Frank compels financial institutions to more fully utilize women and minorities, but that isn’t the only reason the bank seeks diversity in its staff. Oponski says some immigrant cultures seem mistrustful of banks, “but if you hire someone who speaks their language, who lives in their community, you overcome that problem.”

Drawing a young crowd

Another cohort accused of being wary of banks is the millennial generation, yet the bankers interviewed say their experience does not reflect it. “In Iowa, coming from a small-town background, young people understand the value of banking,” says Oponski. “They know how important it is to the agricultural community.” Even a me g a ba n k , s uc h a s $1 22 billion-asset Regions Bank, has not discerned any hostility—indeed, quite the October/November 2015

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/ star search / contrary. Its Management Associate Program, which accepts about 40 recent college graduates each year, had almost 1,500 applicants in 2014. Jonathon Studstill, vice-president, program manager, says banking is a good career fit for the youngest workers. “Millennials love the complexity of this type of industry,” he says; plus, the bank’s culture appeals to them. “Regions’ goal is to make an impact in communities, and millennials love making an impact.” Stallings is seeing the same thing at SunTrust, where there are more applicants than job openings for entry-level positions. He believes banking retains its appeal because it’s a profession that offers a future. “When you recruit a young person coming out of college, they’re interested not just in the job, but in a career path,” he says. Ba n k ing ’s increa sing relia nce on technology also is attractive to many in the younger set. “Banking is obviously changing pretty dramatically,” Tioga State Bank’s Fisher says. “The IT side of the shop is where young people have more of an interest.” Cherry finds that to be true at Park Sterling, which has used technologies, such as remote capture, since the bank’s inception in 2006. “People feel like we’re on the leading edge of what’s going on in banking,” he says. Technolog y seems to have limited use in finding potential hires, however. Although experiences vary, many bankers say they have not found Facebook and Twitter particularly effective. LinkedIn can be helpful, Kaplan says, particularly for mid-level employees. But the old standby, college fairs, seems to remain the most productive recruitment venue.

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Banking jobs fit with millennials, who, like banks, “love” making a community impact, says Regions’ Jon Studstill.

Bankers’ hiring tips

Regardless of where you look for talent, you have to be able to know it when you see it. Communication skills, an outgoing nature, and teamwork are basics, but other qualities can be telling as well. For Regions’ Studstill, “the secret sauce” of a good employee is someone who understands that change is constant. “No one is going to stay the same throughout their career, so the ability to learn and grow is something we try to identify,” he says. “The banking environment is going to change, particularly the regulatory environment, and those who thrive are those who can adjust.” Tioga State Bank’s Fisher looks for candidates who have the capacity to listen, because that’s someone who will focus on a customer’s needs. Northwest

“If you have people who enjoy working together, who have fun, and who respect each other, that bank succeeds in the market

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Banking retains its appeal because it’s a profession that offers a future, says SunTrust Div. CEO John Stallings. Financial does a lot of testing, but does not rely solely on the results. “If the job requires detail, but the predictive index shows the candidate has a low capacity for that, then maybe I have a disconnect,” says Oponski. “But if I like what I see, I ask more questions.” Oponski advises managers never to settle for hiring a warm body, even when a department is short-handed and losing money on overtime. “It’s better to wait for the right candidate than to hire for the same position three times,” he says. When scouting for leadership potential w ithin WSFS Bank, Eddens and CEO Mark Turner take cues from an employee’s office. The kind of photos or other displays a person has can tell a lot about what the person considers important, says Eddens. It ’s a l s o p o s s i ble t o h i r e a g o o d employee, but not utilize them correctly, which is why Regions Bank asks prospects not “What role do you want?” but “What do you enjoy doing?” Susan Hengel, executive v ice-president of organizational effectiveness, says that approach is more likely to create a good match between the employee’s aspirations and the bank’s needs. Such unions serve banks well. “If you have people who enjoy working together, who have fun, and who respect each other, that bank succeeds in the market, because one of the things that plays into is low turnover, which the community views as stability,” says Oponski. “The better the team, the more the success.”


/ Risk Adjusted /

When bad things happen 4 strategies for managing reputational risk. Hint: A great reputation helps By Lisa Valentine, contributing editor

Organizations, including f inancial services institutions, are paying more attention to reputational risk management. For the f irst time since 2007, damage to brand and reputation has emerged as the top-ranked risk in the Aon Risk Solutions Global Risk Management 2015 study. Deloitte’s 2014 Global Survey on Reputation Risk also points to a renewed focus, with 88% of executives saying their f irms are explicitly focusing on managing reputational risk. One reason banks, in particular, are paying more attention to it is because reg ulators are as well. There are no regulations governing or quantifying reputational risk, but the banking agencies include it in their commentary on risks banks should pay attention to. It is one of OCC’s eight categories of risk covered in its large-bank supervision handbook, for example.

Dealing with the subjective

T

he good news is that the reputation of the U.S. banking industry has taken a turn for the better, according to the November 2014 U.S. RepTrak Pulse Ranking from Reputation Institute. Banks improved in the perception of stakeholders across seven reputation dimensions, from a reputation score of 58 in 2013 to 62.6 in 2014. The bad news? A score of 62.6 barely puts banks into the “average” reputation category. And some of the larger financial institutions—including Citibank, HSBC, and Bank of America—are in the weak category. (By contrast, the number one company, BMW Group, scored 78.9.) Reputation is all about perception: how customers, employees, investors, and other stakeholders view your financial institution. The goal is alignment b e t w e e n t he i m a g e y ou t h i n k y ou

portray and what people really think. Reputation drives revenues—and it can also help insulate your institution from brand damage due to events such as cyber attacks and regulatory actions. The key is to build your brand resilience so that customers perceive your institution positively, even when unfortunate situations occur.

Managing and measuring reputational risk can be more elusive than managing operational risk or credit risk, according to Merrie Spaeth, president and founder of Spaeth Communications. To make managing reputational risk even more difficult, it’s ill-defined by the regulators, says Peter Weinstock, head of the Financial Institutions Corporate and Regulatory practice at Hunton & Williams LLP. Weinstock ca lls reputationa l r isk a “house of cards” that has no basis in facts and figures. While it’s widely accepted that damage to a f inancial institution’s reputation is f inancially

What not to do in a crisis • Lie • Disappear • I ssue a denial until you have all the facts • Minimize the situation •M ake a joke about the crisis

• Say: “We are taking this matter seriously” • Repeat the problem or accusation in your statement • Let your fears of liability trump

your humanity • Speculate until you understand the facts • Be only inwardly-focused

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Source: Temin and Company

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/ Risk Adjusted / harmful, Weinstock contends that there is no proven correlation between reputational risk and financial stability. “It’s not illegal for banks to engage in activity that has reputational risk.” That said, financial institutions have exited entire lines of business trying to appease regulators, according to Weinstock. “It’s not about what the banks consider risky,” he says. “They are feeling forced to de-risk based on what the regulators subjectively consider risky to the bank’s reputation.” So how can f inancial institutions approach reputational risk, given the challenges of managing and measuring the risk, and—as Weinstock notes—the subjective nature of the regulatory definition of reputational risk? No f inancial institution can f ully protect itself from incidents that can d a m a g e it s r e put at ion , s ay s S t e ve Culp, senior global managing director of Accenture’s Finance and Risk Services practice. “Bad things are going to happen; you can’t build the walls high enough. Financial institutions need to ensure that their risk management programs are compliant and that they have built resiliency.”

to create engagement. Financial institutions also should communicate with and engage their own employees so that employees will serve as brand ambassadors in the community. If you want customers to feel that your bank is a good citizen, you’ve got to be willing to always do the right thing and then get attention for it. “Do what you’ve always done, but do more of it,” advises Spaeth. “Get out in the community, talk about your values, provide testimonials of people you’ve helped.” “Banks are the economic lifeblood of their communities,” Spaeth adds. “They need to do a better job of translating that good work into a good reputation.” A nt her i mp or t a nt c omp onent of building goodwill is how you address customer issues. “Anytime a customer has a problem, take care of it so well that they don’t hold a grudge,” advises Temin. One example of a bank doing a good job of building goodw ill is Barclays, says Accenture’s Culp. The bank sponsors Digital Eagles, a series of free Tea and Teach workshops at branches across the United Kingdom, for customers and their friends and family to get help with online issues

Follow these 4 guidelines

For most financial institutions, the best defense will be a good offense: going out of their way to build goodwill that can carry them through a tarnish to their brand; monitoring their reputation on social media; and preparing for the inevitable event that can potentially damage reputation with a well-thought-out crisis playbook. Below is more detail on these three points, plus a fourth: the importance of being flexible. 1. Build goodwill “A great reputation can get you through a problem,” points out Davia Temin, president and CEO of Temin and Company. “It’s a simple concept, but people often forget it.” For Spaeth, building goodwill requires touching customers on a regular basis, even if that contact is digital. The key is to make customers feel like individuals. “You want customers to be on your side. You don’t get them on your side with facts and statistics, but by forming a bond based on feelings,” she says. This frequent communication with customers should be informal and strive 28

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graphFACT 80

Building goodw ill among customers and employees is a smart strategy, but can’t be the only one. From a regulatory perspective, building goodwill doesn’t work, says Hunton & Williams’ Weinstock. “I’ve never seen regulators acknowledge activities, such as community reinvestment and low-income lending. It’s expected that banks will engage in these activities; the regulators don’t give them any credit for it.” 2. Monitor social media Social media is a big reason for the increased focus on reputational risk. I n on ly a fe w hou r s , for i n s t a nc e ,

Reputation drives revenues—and can help insulate your institution from brand damage due to events such as cyber attacks and regulatory actions

Reputational risk investment

For financial services firms, Deloitte’s 2014 Global Survey on Reputation Risk found five planned investment strategies:

60

40

20

0 62%: Technology (brand monitoring tools, predictive analytic tools, etc.) 60%: Data (traditional media/negative mention monitoring, social media data, surveying, etc.) 55%: People (i.e. reputation risk officer) 38%: Developing reputation risk processes 37%: D eveloping crisis management processes and capabilities Source: Deloitte’s 2014 Global Survey on Reputation Risk


dissatisfied customers and dissatisfied employees can irreparably damage a financial institution’s reputation. As a result, financial institutions are paying much more attention to social media monitoring, notes Culp. Unlike customer surveys or focus groups, social media monitoring provides a financial institution with near real-time insights into how customers view the organization and how the organization compares to its peers. Social media monitoring is becoming more scientific as well, allowing financial institutions to cross-reference data by geography, product line, or customer group, according to Culp. 3. Prepare for a crisis Although most large financial institutions have crisis management programs, only about one-quarter of community banks have one, estimates Spaeth. “You need a plan before a crisis strikes,” she says. “You don’t have time during a crisis to figure everything out and take hours before you talk to your audiences.” The first step is to put together a crisis team. While executive management will likely be involved, be sure to include what Temin calls “fast thinkers,” who can make a quick decision in real time. “You don’t have the luxury of a lot of back and forth in a crisis,” she explains. Chuck Saia, chief strategic risk, reputation, and regulatory affairs officer for Deloitte, suggests that the crisis management team be cross-organizational. Depending on the crisis, financial institutions may need to bring in additional team members. For example, a cyber attack would likely require the input of the chief information off icer and the chief security officer. The crisis management team should meet regularly, perhaps quarterly or even monthly, to talk through reputational events that could impact the institution, and discuss how to adjust strategies to deal with reputational issues. “The committee should focus more on reputation than financial metrics,” says Saia. Temin adds that financial institutions should name a crisis spokesperson—preferably someone with crisis media training. Saia also recommends financial institutions develop a crisis playbook that outlines not only who is on the cr isis team, but how formal reporting to executives and board members about

the crisis will be handled. The oil and gas and pharmaceutical industries are particularly astute at preparing such playbooks, he adds, and can serve as models for financial institutions. T he pl ay b o ok out l i ne s a f or m a l cadence for how the crisis response should unfold. Since everyone knows his roles and responsibilities, the financial institution can execute the crisis response quickly, explains Saia. Saia notes that Deloitte’s own crisis playbook calls for feedback and notifications to be provided to executives and board members at the end of the day. The playbook describes the exact format of the reporting and what will be included, such as potential client impact, financial impact, and media coverage. “Our executives and board know that they will receive updates at the end of the day, halting the barrage of midday phone calls from executives and board members asking for an update,” says Saia. 4. Be flexible during a crisis Every crisis is different and requires a different response, says Temin. What’s critical, she says, is to put a crisis management infrastructure in place and then rehearse what you will do in different scenarios, recognizing that a crisis can be unpredictable or even a “black swan event”—an event so out of the realm of possibility that no one is prepared. It’s dangerous to use the solution from one crisis and superimpose it on another, says Temin. “You can’t have a crisis plan that you kick in mindlessly. The details matter enormously, and those details will differ depending on the crisis.” A nd the crisis itself w ill shif t and morph. The social media conversation going on today will be different than the conversation on social media tomorrow morning, warns Temin. “Your communication response that worked yesterday may not work today. And it really won’t work a month from now.” But your communications response isn’t what should drive how you mitigate the crisis, according to Temin. She refers to communications as “putting lipstick on a pig.” More important than what you say is that you have a way to fix the problem. “Organizations think that a nice communication response will fix a major blunder, but they’re wrong. Fix the blunder, and then communicate nicely,” she explains.

“A great reputation can get you through a problem,” says Davia Temin. “A simple concept, but people often forget it.”

Ensure risk management programs are compliant and that you have built resiliency, says Accenture’s Steve Culp.

Reputation: a moving target Managing reputational risk can seem daunting, especially in an environment of fast-moving social media. “ The velocity of reputation risk is much faster than ever before,” notes Saia. Financial institutions need to be on their toes and manage reputational risk more aggressively. Banks also should recognize, say the experts, that they can’t deal with reputational risk in isolation. It needs to be part of their overall risk governance. It’s now a high-stakes C-suite issue that is getting a lot of needed attention.

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/ Compliance Watch /

GRASS ISN’T ALWAYS GREENER

Colorado banks’ quandaries illustrate challenges others may face as pro-marijuana laws spread like … weeds By Nancy Derr-Castiglione, contributing editor

M

arijuana seems to monopolize the attention of Colorado in so many ways—still. It ha s been nearly three yea rs since C olora do voters pa ssed A mendment 64, w ith Colorado thus becoming the first state to legalize recreational sale and use of marijuana. Washington state passed a similar law at the same time, but its law did not become effective until after Colorado’s law became effective in January 2014, Washington thus becoming the second state to do so. Colorado and Washington have since been joined by Oregon, Alaska, and the District of Columbia, where pot is legal for recreational use. A number of states, including Colorado, already allow for the sale and use of marijuana for medicinal purposes.

Compliance, in the weeds The daily news here in Colorado continues to be heav ily populated w ith marijuana-related articles. It could be a story about how there are more hospital visits than ever before of children accidentally ingesting marijuana edibles that look like candy. Or it could be an article about the tourism benefit to the state from so many more people coming to Colorado to stay at the new “bud and breakfasts” popping up. In Colorado, you have to be 21 years old to buy and use recreational marijuana. You can possess one ounce of marijuana or THC, which includes concentrated forms and edibles. You do not have to be a Colorado resident, but non-Colorado residents are restricted to buying only one-quarter of an ounce at a time. The drug can’t be consumed in public. Of course, you can’t drive or operate machinery while under the inf luence. And there is a huge controversy about how long the substance remains in your system, so you had better not drive for days after you use it. Under the open container law, you can be arrested if the drug is in your vehicle and not in a sealed container. (And before you start to ask, no, I did not do any first-hand research.) 30

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The main selling point for many people in voting for Amendment 64 was the tax revenue that the legalization of marijuana would bring to the state. News reports vary about how successful the law has been. According to the Colorado Department of Revenue, combined medicinal and recreational pot business is a $700 million industry. Combined tax revenue for 2014 was $63 million. The tax rate on legal marijuana is high—25% plus sales tax. It’s cheaper to buy it on the black market.

Conflicting guidance It’s amusing to think about the marijuana businesses that have to pay their sizeable quarterly tax payments by walking down to the tax office with large bags of cash—since they can’t write a check or pay by credit card like everyone else. The problem is that the thriving marijuana businesses cannot get banks to let them open bank accounts in order to conduct their business like normal, legal businesses. The banks and other financial institutions are afraid that they will be in trouble under federal law, where the possession and sale of marijuana is still illegal. There have been a couple of attempts at federal guidance on the subject of what banks should or should not do. The Justice Department issued the “Cole memo” two years ago. The memo basically reiterated the federal government’s position that marijuana is a dangerous illegal drug, but that certain priorities are going to be applied to enforcement of drug laws, such as preventing revenue from the legal sale of marijuana deviating to criminal activities or moving into states where it is not legal. FinCE N later issued g uida nce to financial institutions about filing suspicious activ ity repor ts (SA R s). The FinCEN guidance says that a financial institution is required to file a SAR on activity derived from illegal activity, and a marijuana-related business is an illegal activity under federal law. If a financial institution does choose to

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provide financial services to a marijuana business, a SAR must be filed, regardless of its status under state law. If a SAR is filed and the business remains a customer of the institution, a SAR will have to be filed every 90 days for as long as the business remains a customer. Some institutions have tried this, based on the FinCEN guidance, only to be convinced by examiners that their


when it comes to the conf licting federal and state law. But there has only been silence from Washington. There is not silence from the local examiners, however. They come to the banks with various opinions and interpretations of the guidance.

State of confusion There’s not only confusion in the financial sector. For example, it is legal to use and possess marijuana in Colorado unless you are in a part of the state that is considered federal land, such as Rocky Mountain National Park or a national

Absent clear legal and regulatory guidance, most banks won’t risk doing business with marijuana firms, even as more states legalize the drug

acceptance of marijuana businesses is not legally appropriate and should be discontinued altogether. That has been the state of affairs for more than two years now. There had been promises of more guidance and more clarif ication about how to deal with the difficult dilemma that financial institutions (and, of course, the marijuana businesses) f ind themselves in

w ildlife area. Additionally, the U.S. Postal Service does not allow marijuana to be mailed through the postal system, even if it is being mailed within the state of Colorado or to a state where marijuana also is legal. Since the use of marijuana remains prohibited by federal law, you can still get fired for testing positive for pot in a random drug test from your employer, and not just if the employer is the federal government. Brandon Coats, a Dish employee, found this out when he was fired for smoking marijuana that he said he used to control seizures. Public schools are afraid of losing their federal funding if they allow a quadriplegic student with cerebral palsy to wear a cannabis patch prescribed for symptom relief while on school grounds. Not only does the general public spend

a considerable amount of time hearing about all these issues and stories, but bank compliance officers, and particularly Bank Secrecy Act/Anti-Money Laundering specialists, are spending an inordinate amount of time dealing (no pun intended) with the headache that marijuana laws in Colorado have become. Without taking a scientif ic poll, it would be fair to say that most, if not all, banks in Colorado have a policy of not accepting marijuana businesses as their customers. That is to say, knowingly accepting as their customers. Ma r ijua na bu si ne sse s k now t hat f inancial institutions are not willing to take the risk of accepting them as customers, so if they haven’t given up altogether, they may decide to attempt a backdoor approach. For example, many marijuana businesses have tried to use the ow ner’s personal bank account under the individual name until the bank catches on. Another approach is to set up a business under a generic name, such as Castiglione, LLC, whose name does not offer a clue about the type of business it is in. The business provides easily obtained articles of organization and a certificate of good standing from the secretary of state’s office and a tax identification number from the IRS. Only after a period of monitoring by the bank’s BSA off icer as well as site visitations may the true nature of the business be identified. Colorado banks are now at the point of having to be concerned w ith most new business and nonbusiness customers, given the potential for any of those customers to be hidden marijuana businesses or marijuana business owners. [Editor’s note: Denver’s Fourth Corner Credit Union, specifically founded to serve the marijuana business, sued the Federal Reserve Bank of Kansas City and the National Credit Union Administration in late July. The credit union’s suits concern the Denver Fed branch’s refusal to open a master account for the credit union and NCUA’s refusal to approve the

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/ compliance watch /

state-chartered credit union for federal deposit insurance.]

Appeal hard to resist There also is the mass appeal of the marijuana industry and its profit potential to the entire community. Some businesses are finding it too difficult to stay out of the marijuana business. Farmers are moving away from corn and pumpkins to marijuana, for obvious reasons. Warehouses that would normally rent for $17 a square foot will rent for triple that amount to a marijuana-growing business because they can get it. It’s not necessarily a problem of not identifying marijuana-related businesses as high-risk customers. It’s a problem of identifying them in the first place. It’s not just a matter of detecting the smell of marijuana on large bags of cash deposited at the teller window by a customer. There’s also the example of the “business consulting” company that recently opened an account and only makes cash deposits and withdrawals. Or, the nail salon that has a retail location, but never seems to be open when the account officer drives by. Yet the salon makes large weekly cash deposits on a regular basis. If those types of marijuana businesses weren’t enough to worry about, then there are the ancillary marijuana businesses that financial institutions also have to decide whether to bank and whether the bank has enough resources to manage 32

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It’s tricky to identify marijuana-related firms. Don’t count on detecting the drug’s scent on their cash deposits. Some may not directly touch the marijuana the increased risk associated with maintaining those relationships. If the bank decides to accept the business as a customer, it must be treated as a higher-risk customer and be evaluated, monitored, and documented. There are endless examples of ancillary businesses—a local plumber who installed a plumbing system for the marijuana grow house and was paid in cash; even the local bank director who, as a partner in an entity that owns a shopping mall including a marijuana store, receives rental income from a marijuana business.

Not just for compliance Regulators evaluating a bank’s Bank Secrecy Act/Anti-Money Laundering compliance program will expect that the bank has controls in place and a strong customer due diligence process to

October/November 2015

monitor customers deemed to be higher risk. The loan department is not excluded from the action. Each connection to a marijuana business involv ing a loan customer must be scrutinized and investigated. The connection to a marijuana business could be either too close, making the business relationship too risky for the bank, or just remote enough to allow the loan to proceed, but to still necessitate filing a SAR. Possibly, it is so remote that no SAR is required at all. One Colorado bank had an existing loan that was being evaluated for renewal. The guarantor provided a current financial statement, which included a new significant asset (a note receivable). When asked about it, the guarantor informed the bank it was a loan to an individual to build a marijuana grow greenhouse. The BSA officer was alerted, and had to make a determination as to whether the marijuana connection warranted a SAR filing under the FinCEN guidance. (In the end, the bank didn’t file one.) There are many other examples of loans involving businesses that derive some type of income from marijuana businesses. There are retail shopping centers that include a marijuana outlet. There are accountants who provide tax and accounting services for marijuana businesses. There are companies that provide marketing and signage products for marijuana businesses. Some banks are f iling SARs on the most remote connection to a marijuanarelated business because of examiner pressure. A HVAC contractor that does a one-time repair for a marijuana business and gets paid for that job shouldn’t be placed on the bank’s high-risk list because of that. However, it may be necessary to distinguish that HVAC contractor from a public relations company that specializes in the marijuana industry. There are no clear answers. Either way, a lot more time and effort goes into making and documenting as well as defending the decision. Until the federal government clarifies the banking issue related to marijuana businesses, the problem is going to continue to get worse as more states vote to legalize marijuana.

Contributing Editor Nancy Derr-Castiglione is based in Colorado.


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October/November 2015

BANKING EXCHANGE

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/ BANK TECH /

We recognize your voice

Banks and their customers like the sound of voice biometrics, a big improvement over PINs and passwords By John Ginovsky, contributing editor becomes fairly straightforward for fraudsters to social engineer contact center agents. “The third argument,” he says, “is the operational savings it can provide.”

Early deployment stage

Y

ou have a question about your bank account, and you’ve tried and failed at all the self-service options to get an answer. So you dial up your bank’s call center, and what happens? For 30 to 60 seconds, you have to stop and punch in an identification number, type in a password, or try to remember the make of your first car. Of course, it’s important for your bank to make sure you are who you say you are. It’s also important for you to have the assurance that your bank isn’t giving out your personal information to just anyone. But as it stands, authentication is a pain. Now, suppose you call the contact center, and right away, you say, “I have a question” about XYZ. Within five to ten seconds, a notification pops up on the call center representative’s computer screen saying, “The caller is John Smith.” That is much more digestible for the customer and reliable enough to meet bank security standards. And it’s happening already with voice biometrics.

34

BANKING EXCHANGE

Eastern Bank jumps in

In June, Eastern Bank, a large mutual headquartered in Boston, announced that it deployed voice biometrics technology from Nuance in its call center. “We heard from our customers via various feedback programs that identif ication wa s a pain point , and we wanted to improve on that,” says Heather Allen, senior vice-president and director of Eastern’s corporate call center. “Increased security is obviously a huge plus, but our main goal was really to increase customer satisfaction within the call center channel.” Nuance’s Brett Beranek, director of product strategy for voice biometrics, gives three reasons to deploy the technology. “The number one argument for voice biometrics is to make the authentication process easy and highly accessible for the customer,” he says. Number two is security. As web and mobile channels become more secure, fraud gets displaced to the contact center, says Beranek, and it

October/November 2015

So far, not many U.S. banks have adopted voice biometric authentication, but not for want of potential providers. Verint is another company offering such solutions. “ C on s u me r s w a nt a f r i c t ion l e s s authentication experience,” says Steve Williams, the company’s vice-president and global practice leader for identity analy tics. “It takes 45 seconds to get through security questions, on average. The majority of consumers find it annoying. If we authenticate with voice biometrics, we are authenticating that caller in a fraction of that time.” Saving those seconds leads to operational savings, and can be an important part of building a case for switching authentication systems. As Eastern’s Allen says, “From a business case perspective, we feel we will see long-term benefits in areas such as increased customer satisfaction, lower call-handling times, and a higher level of security that will ultimately lessen account takeover fraud.” Wells Fargo is one of the few banks that has invested in voice biometric research through a pilot program measuring its effectiveness in combination with facial recognition biometrics. “We put these components together and rendered this as a little proof of concept for our corporate banking customers last year,” says Bipin Sahni, head of research and development and innovation in Wells Fargo’s Innovation Group. “The whole idea was to get new technology in front of our customers, and also to understand the feedback from them to see where things could be improved further. “It’s got to be as simple as me taking up my phone and saying that I want to wire or send some payments to you. It’s not there yet,” Sahni says. Still, he’s optimistic. “Two or three years from now, you’ll see a lot happening in this space, when it’s broadly accepted and adopted.”


Challenges exist

While voice biometrics has a lot of potential positives, it’s clear the technology has challenges to overcome. These include disrupting environmental factors, such as noisy backgrounds or users’ voices altered because of illness, says Frank Natoli, executive vice-president for selfservice technology and chief innovation officer for Diebold, which offers voice biometric authentication solutions. Another challenge: having the user say things out loud, which could be offputting if he is in a public area. “In the natural f low of a transaction,” says Natoli, “what things would you naturally be saying? You don’t want to say a code word out loud. You may be uncomfortable stating your name out loud. Certainly, if you say you want to withdraw $1,000, that’s not something you want everybody around you hearing.” This makes its use in a call center more suitable, rather than an ATM—although Natoli doesn’t rule that out, particularly if the machine is in a vestibule.

Active vs. passive choice When considering adopting voice biometric authentication, experts agree there are two fundamentals to understand. First, there are two forms of voice biometrics: active and passive. Second, voice biometrics offers only single-factor authentication, while the industry standard has to be multifactor. Active voice biometr ics, Nuance’s Beranek explains, requires the individual to speak a specific phrase or list of numbers, which the system compares with a similar voice print kept on file. Authentication can be completed within two seconds, he says. Passive voice biometrics just compares the natural conversation to a voice sample kept on file. It can take up to ten seconds to complete. “The key benefit of using the active technolog y is that you can authenticate into a system very, very quickly. It’s very well suited for calling into an IVR [interactive voice response] system,” says Beranek. “Again, though, the drawback

is the need to say something in particular. With the passive technology, the key benefit is you don’t need to say anything in particular, but it takes a little bit more time. . . . Its use case is really uniquely tailored to the contact center application.” Verint’s Williams stresses that, active or passive, the customer must consent to the use of the technology beforehand. For example, the disclaimer one often hears when calling companies—“This phone call may be recorded for quality purposes”—could be modified to, “This phone call may be recorded for quality and security purposes.” Voice biometrics offers other advantages over biometric technolog y like f ingerprints, iris scans, or palm vein scans, says Diebold’s Natoli. With those, he points out, the customer has to posi-

“There is nothing inherent in voice biometrics that would not make it align with a multifactor strategy,” maintains Nuance’s Beranek.

Proof of accuracy What it will probably come down to is this: Just how accurate is voice biometric authentication? There isn’t a lot of empirical evidence yet, due to the newness of its deployment in the United States. Various banks overseas have employed it, notably Barclays in the United Kingdom, which introduced the technology last year for its wealth contact centers. In an article written for Nuance, Beranek says that Barclays claims that 93% of its customers gave voice biometrics a nineout-of-ten approval rating, and that call times were reduced 15%.

Voice biometrics can increase customer satisfaction, lower call-handling times, and reduce fraud. It’s about who you are, not what you know tion himself in a certain way before a camera, or touch something, raising hygiene issues. “It is something the public thinks about,” he says.

Accommodating multifactor The Federa l Fina ncia l Inst it ut ions Examination Council has long maintained: “Where risk assessments indicate that the use of single-factor authentication is inadequate, financial institutions should implement multifactor authentication, layered security, or other controls reasonably calculated to mitigate those risks.” That’s a key reason behind Wells Fargo’s efforts to meld both voice and facial recognition technology into its ultimate authentication system. Verint offers a variant on multifactor authentication by including proprietary technology that not only identifies the caller’s voice, but simultaneously anal y z e s a nd c omp a r e s t he me t a d a t a transmitted along with the call, according to Williams.

Eastern Bank probably has as much live experience as any in the U.S. “We are very satisfied with the reliability we have experienced to date,” says Allen, noting that the bank uses the passive voice biometrics approach. “We measured reliability for ourselves, not relying on industry data or vendor feedback. The majority of our deployment activities involved testing thousands of scenarios to assure accuracy and overall comfort level with the solution. We feel voice biometrics is absolutely superior to any set of questions or personal information that can end up in the wrong hands. Biometrics as a whole is who you are, not what you know.” Customer reaction has been very positive, she adds. A s ex per ience mounts in the rea l world, it’s possible that customers may come to prefer biometric technology. “It’s this whole notion of treating you, the customer, like we know who you are from the company’s perspective. That’s been a huge plus,” says Williams.

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/ Idea Exchange /

stepping up “savings ed” Banks turn to digital tools, gamification to teach and encourage savings By Ashley Bray, contributing editor

S

aving for a rainy day is a common concept, but actually doing it has become not so common. In the first six months of 2015, the U.S. personal savings rate hovered at only 5% of personal income. To encourage customers to save more, banks continue to roll out incentives and programs.

When pigs save Many of these initiatives center around online tools and apps, which automate savings and make tracking expenses easier. These are popular with millennials. “It’s natural when you’re talking about behavior change—which for many of us is what saving really amounts to—to take advantage of that ubiquitous object in your pocket that you develop a very strong relationship with,” says Timothy Flacke, executive director at Doorways to Dreams (D2D) Fund, a not-for-profit, 36

BANKING EXCHANGE

financial innovation shop. “There’s a big potential there.” SmartyPig is one such tool. The free, goal-based program of fers users an online savings account with competitive interest rates to help save for a specific target. It offers online and mobile versions, and allows users to connect their accounts with social media platforms like Facebook and Twitter. This enables friends and family to provide moral and even f inancial support. When a user reaches his goal, he has the option to put his money on a retailer gift card with a cash-back percentage bonus. User deposits are held at BBVA Compass, which had been seeking to dive into the digital banking space through a partnership with a financial technologies company. “SmartyPig was the best choice because they had exhibited the ability to really grow deposits online,” says

October/November 2015

Susan Hooten, product manager at $81.7 billion-assets BBVA Compass in Birmingham, Ala. “Also, their demographic was a younger group of folks.” According to Hooten, BBVA Compass believes the digital aspect and “the convenience of being able to touch that account and see exactly what’s going on at any time” attracts that younger group. BBVA C ompa ss a lso ga i ns bra nd awareness from bank logos and products advertised on the SmartyPig website and is able to build relationships with users. “We, as a bank, maintain and service those customers’ funds, and so that allows us the opportunity to have contact with those customers,” says Hooten. “We can build rapport with those customers; we can deepen their relationship with BBVA Compass when possible.” The digital aspect isn’t the only thing that makes tools like SmartyPig popular. The program succeeds in eliminating the drudgery of saving by making it fun. “So often, money issues for much of the population are really a negative, painful place,” says Flacke. “If you can do something to flip that on its head, you start off with a huge advantage in terms of building people’s trust and helping them to make thoughtful choices.”

Betting on savings Gamification also applies to another initiative—prize-linked savings accounts. D2D first came across prize-linked savings accounts in other countries, and after some observation and research, decided to br ing the concept to the United States. In 2009, the company ran a pilot program in Michigan called Save to Win with eight credit unions. (Credit unions were selected as having fewer legal hurdles than banks.) The pilot was a success: 11,500 people opened accounts in 11 months and saved $8.5 million. Save to Win has since expanded to other states, and the overall cumulative savings from 2009-2014 is over $115 million from 53,589 account holders. “The product appears to have ver y broad appeal,” says Flacke. “We do see


a lot of evidence of people who do not report that they were previously savers, so we think that’s quite encouraging.” Here’s how the prize-linked savings accounts work: A customer earns a raffle entry every time he deposits a certain amount of money each month. Institutions can cap the number of monthly entries. Lotteries are held monthly and annually for cash, gift cards, or other prizes. After the success of the pilot, D2D worked with advocates to remove the legal hurdles preventing banks from offering lotteries. The American Savings Promotion Act (H.R. 3374), which removed federal prohibitions on banks’ involvement in lotteries, was passed and signed into law in December 2014. Now the practice is determined on a stateby-state basis. Currently, 15 states allow banks to offer prize-linked accounts. O ne of t he f i r s t b a n k s t o i n s t itute a prize-linked account was $244

million-assets Blue Ridge Bank in Luray, Va. Virginia passed legislation in early 2015 permitting prize-linked accounts, and Blue Ridge Bank launched its program in late June. “Our CEO Brian Plum just really caught on to the idea,” says Ann Mann, chief compliance officer at Blue Ridge Bank. “It’s a way to entice Americans to actually save money for a rainy day, as well as to build goodwill and grow the bank’s core deposits. I think most community banks are having issues growing core deposits because of the competition out there. We saw it as a win-win situation for both consumers and for the bank itself.” Blue R idge Bank’s program of fers account holders one entry for every $25 deposited, w ith no caps on monthly entries. Four $50 prizes and one $200 prize are raffled monthly, with a $5,000 grand prize raffled at the end of the year. Blue Ridge Bank pulled the cash for the raffles from its advertising budget. In the program’s first month, the bank opened 15 accounts. “I do believe it’s going to be a little slow to take off. People feel this is too good to be true, or ‘What are banks doing, getting into gambling?’” says Mann. “I can foresee it building some real momentum later in the fall, given that we are heavily promoting the product; and then in December, our grand prize is $5,000.” D2D hopes that other banks will follow Blue Ridge Bank’s example. “The challenge is really making sure that banks especially understand this as an opportunity,” points out Flacke.

Class is in session

Doorways to Dreams’ SavingsQuest product makes savings fun, and boosts online deposits—a win-win.

Much of the battle around getting people to save more—especially millennials— is that they haven’t been taught how. To address this knowledge gap, D2D offers financial education tools in the form of a library of casual video games that teach a discreet set of financial skills. On the savings front, the Bite Club game allows users to save for retirement while running a vampire day club. Farm Blitz challenges players to manage farm

resources to build savings and survive financial emergencies. “Ultimately, game play is really puzzle solving, and if you think about trying to help people learn, you want them to be enthusiastically trying to solve the puzzle,” says Flacke. “That’s a learning space where your brain is activated in the right way, as opposed to on the receiving end of some sort of information delivery.” Northwest Savings Bank also offers a number of educational tools on savings, including its MyNorthwest Connections newsletter. “It’s our goal, through efforts like this, to encourage customers to make informed decisions to help improve their financial well being,” says Melanie Clabaugh, communications manager at the $7.9 billion-assets savings bank in Warren, Pa. “Using easy-to-read paper and digital formats, we deliver insightful content, and better connect customers to products and services that will help them today and in the future.” Northwest also partners with EverFi, an education technology company, to bring interactive, web-based education about savings and other topics to kids from kindergarten through 12th grade in Pennsylvania, New York, and Ohio. “The platform uses the latest in new media technologies—video, animations, threedimensional gaming, avatars, and social networking—to bring complex financial concepts to life for today’s digital generation,” explains Clabaugh. Similarly, BBVA Compass offers customers infor mation on sav ings and budgeting v ia “MoneyFit,” an online “financial fitness center” that is populated almost daily with new content. “It grew into a larger communication initiative for us to give voice to helping people understand how to take better control of their financial lives,” says Tuck Ross, senior vice-president of digital marketing at BBVA Compass. “It’s performing above what our expectations are. And we do share that content on our social media channels as well, including Facebook and Twitter, to help make sure that it’s as widely viewed as possible.”

October/November 2015

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/ CFPB / Continued from page 21 from compliance bankers, versus lines of business bankers. In the same way, bankers heard differing kinds of messages when hearing from regulation developers versus enforcement staff versus examiners. Olson says a good tip for working with bureau staff is to consider what perspective they bring—examination, enforcement, etc.—and to always remember that they are people doing a job. “Chances are they are doing that job because they believe they are making the world a better place,” says Olson. “But it’s still a job. They are not out there to get you, but to do their job. They have a boss and an org chart and a performance plan. If the organization is out to get you or your industry, then, of course, you have a problem.” Adds Olson: “Unless you are in enforcement negotiations, then you should want—and you need—to help CFPB staff get their jobs done. Chances are the work will get done with or without your cooperation, but you will get a better final product if you participate.” Approached in such a way, he suggests, banks may find relations with bureau representatives more productive. He has seen it work more effectively than butting heads.

rules after the fact Paradoxically, given the huge amount of paper flowing from CFPB, many bankers interviewed complain that the bureau is making too much policy through enforcement actions, rather than explicit rulemaking. In a way, says Lucy Griffin, “the bureau is using HUD’s philosophical approach of saying, ‘Do your best to guess what we mean, and if we don’t like it,’ we’ll let you know.” U l t i m a t e l y, G r i f f i n c o n t i n u e s , she doe sn’t t h i n k t he bu re au t r u ly understands super v ision, which is a give-and-take process—echoing Olson’s recommendation above. She believes, however, the bureau decided early on that “banks are the bad guys,” and that the tool of choice was enforcement. This would be in keeping with CFPB’s early self-portrayal as a “new cop on the beat.” Early on CFPB’s website actually had an icon of a police badge prominently displayed. Indeed, a common prediction made from the bureau’s formative days was that traditional regulators would strive to prove themselves to be “the tougher cop.” Bankers and obser vers disagree— some say that it didn’t play out, some say it has As a defender of banks and other 38

CFPB by the Numbers

PAPER, ANYBODY?

Since launch, CFPB has published over three dozen final rules, policy statements, guidances, notices, and bulletins. That doesn’t count numerous procedural rules, proposals, manuals, reports & more. providers, Alan Kaplinsky has no doubts. “Each agency has had to show that it was just as tough as CFPB. They don’t want to be shown up by CFPB.” Because the bureau is a one-mission organization by design, Kaplinsky says when an institution finds itself on the outs, CFPB wins. “On enforcement matters, CFPB can be more difficult to deal with because you can’t make a safetyand-soundness argument to them,” he says. “They don’t care.” Consultant Lyn Farrell at Treliant says in her experience, “there has been a significant tightening of the reins by the prudential regulators. They don’t want to be caught f lat-footed again.” She’s actually heard some large-bank executives say that, by contrast, they find the bureau easier to work with as a result.

UDAAP: What is it? Something that sets CFPB’s work apart from other regulation is the nature of the services regulated. “The best thing about working in consumer financial protection is that everyone is a consumer of the products,” says Ben Olson. “Your mother, your brother, your aunt and uncle, yourself. However, policymakers can’t help but be influenced by the experiences that they’ve had with a product or a provider, which can sometimes lead to idiosyncratic results.” Direct or nearly direct experience with products generates empathy, perhaps, but not necessarily precision or clarity. UDAAP—which stands for Unfair, Deceptive, and Abusive Acts and Practices—is one of the biggest question marks for bankers. “For us, it’s feeling your way around in

BANKING EXCHANGE October/November 2015

the dark,” says Banker B. Kaplinsky says that uncertainty is intentional, a regulatory wild card. “If the bureau finds anything that they don’t like, they put the UDAAP label on it,” he explains. “Then they don’t worry about whether it meets the definition.” Buckley Sandler’s Ben Olson takes another slant. “Fundamentally, you want a flexible tool,” he explains. He believes it is necessary to have that flexibility for CFPB to address new products and services but adds that that discretion has to be used wisely. The actual verbiage on UDA A P is found in a very brief mention in CFPB examination procedures, which most bankers find quite vague. And they see that as quite intentional. Kaplinsky has found that the grayness of UDAAP has affected some banks’ ability to try new things. “I can’t tell you how many times I’ve had to say to clients who are doing innovative things, ‘I don’t think CFPB is going to like what you are doing’,” says Kaplinsky. “The bureau has had a chilling effect on some innovation.” L it t le i s he a r d t he se d ay s of t he Bureau’s Project Catalyst, announced in 2012, an effort to spur consumer-friendly innovation. The Catalyst blog has five entries, none made since October 2014. Kaplinsky isn’t surprised. Innovation, he says, “is not what the bureau is about.” ABA’s Abernathy says bankers worry about the “abusive” element of UDAAP, especially. He says their concern is that UDAAP can be used arbitrarily. “I don’t think we’ve seen that yet,” says Abernathy, “but it could happen.” “One of the biggest challenges with CFPB is that its big concern is with softer issues, with fairness issues,” says Banker A. “Sometimes we’re going where there aren’t rules.”

Cordray’s CFPB style Outreach from CFPB gets mixed grades. Community bankers interviewed who have met with bureau representatives in Washington visits have found staffers respectful, but the bankers don’t feel that their points have any traction. Bankers with compliance duties, by contrast have a higher opinion of the many ways that CFPB handles two-way communication with actual bankers. One community banker who has had more than a passing acquaintance with bureau staff and leadership is Seattle’s Laurie Stewart. Shortly after coming off service


on FDIC’s Advisory Committee on Community Banking, Stewart was appointed to CFPB’s Community Bank Advisory Council. “I always felt that Richard Cordray listened to everything [council] bankers had to say. He took copious notes,” says Stewart. However, she found that bureau staff wasn’t as responsive as Cordray himself. “The nature of the agency is to always assume that the consumer is being disserved,” continues Stewart. “They are very passionate about the idea that consumers must be protected.” As a community banker, Stewart found this a disconnect, the assumption that banks are out to cheat customers. “I always think of what works for both the consumer and my bank,” she explains. Staff does not seem to understand banks’ need to be profitable. Cordray, she says, always seemed open to hearing banker opinions about the workability of a proposal, “but when push came to shove, the bureau would tilt towards protecting the consumer.” She refers to a statement the bureau requires banks to provide periodically to consumers who opt for automatic mortgage payments. She says her bank issues the statements as required, and customers wonder why they are getting an advisory about something they know is going on that they chose to have. “CFPB insisted that consumers would only be protected if they got the statement,” says Stewart. ABA’s Wayne Abernathy is quite direct about the council’s role: “Bankers feel it is all for show. The banker members still do it because they are hopeful.” Stewart’s praise of Cordray’s openness is repeated by other bankers. “I think that they do a pretty good job of doing outreach, better than I might have expected, initially,” says Banker A. “The difficulty is in that CFPB is such a bureaucracy. Ultimately, the question is whether the bureau is always getting to the right issues.” Ben Olson says CFPB staff have similarly found Cordray to have an open door as a boss. Olson describes Cordray as someone with firm views but also as a good listener who wants to get it right. “Even if he disagreed with us, he would frequently say, ‘Come back to me if you think we need to explore this further’,” says Olson. “And we did come back, sometimes multiple times. He would always listen and sometimes he would change his mind. That’s unique, in my experience.” Isaac suggests Cordray’s open door is a legacy of his days as Ohio’s attorney general.

“To be a good government leader, you have to be open to hearing a lot of different points of view,” says Isaac. “The good ones tend to be open to all sorts of points of view.” While Banker B gives the bureau high marks for accomplishing so much in so short a time, the executive adds that “its political nature creates a downside.” The murky issue of “culture” came up in discussions, and brought up a feeling bankers, lobbyists, and compliance experts enunciated early on that the bureau suffered from “too much Harvard.” Some would call it a “not invented here” attitude.

still believes it would be a good idea. As structured, says Abernathy, CFPB lacks any check on the director. There’s no one else in the building, he says, who can speak to Cordray as a peer. “It was part of the original proposal,” says Lucy Griffin, “but Elizabeth Warren didn’t like it.” Bill Isaac, who served both as an FDIC board member and as FDIC chairman, believes a bipartisan board would help CFPB. “The bureau needed more guidance as to its function,” says Isaac. “It has a very broad mandate. It has had to develop its direction by itself, with very little direc-

Banker B: “Banks are not nonprofit organizations. We provide a service and there is a cost to that.” Some say this has dissipated, but not all do. “I think that’s fairly accurate,” says Banker B, “and continues to be so.” This banker feels that staff has good intentions, but doesn’t always think through the impact on those the bureau wishes to protect. “I’m talking about the typical Joe or Jane that they think they know,” says Banker B, “but they’ve never been a Joe or Jane.”

BUREAU 2.0? While there is a difference in style and attitude between Cordray and his staff, Alan Kaplinsky firmly believes the bureau’s pace, even setting aside legislative requirements, comes from the corner office. “As long as CFPB has one director, he’s not going to take his foot off the accelerator,” says Kaplinsky. “He knows only one speed, and he’s shrinking the industry.” A theme that comes up frequently in interviews is Cordray’s unusual position, a bureau headed by a single director, with no board accompanying that position such as FDIC’s. “No oversight,” “absolute power,” and similar descriptions are favorites. ABA’s Wayne Abernathy notes that this was a longstanding desire of the association, to have more than one person at the top of the new regulator. ABA

tion given by Congress.” Adds Isaac: “I think having a bipartisan board running CFPB would be helpful in that it would relieve some of the tension between the bureau and the industry and take some of the pressure off the head of the agency.” The country is just beginning the presidential political season, and thus far the bureau is not on the radar. Would a change in party at the White House make a difference? Raj Date doesn’t think so. “I would be very surprised if the American people elect someone—of either party—who believes that protecting consumers is somehow a negative feature of the financial regulatory environment. I’m no political pundit, but I’m also not an idiot. So I don’t think there are giant changes in the offing, irrespective of the election. This is a democracy. In a democracy, what the people want actually does matter. And the people want strong consumer protections, watched over by a competent regulator. And that’s exactly what we were trying to build.”

Steve Cocheo has covered regulation for over 30 years and is the only reporter to sit in on three bank exams.

October/November 2015 BANKING EXCHANGE

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/ CounterIntuitive /

HORSING AROUND

Redneck Bank bucks tradition in an aim to make banking “funner” By Ashley Bray, contributing editor

A

humorous name, a loose grasp on grammar, and a fun take on banking—complete with laughing horse mascot—aren’t the pillars of a successful bank that first spring to mind. But they’ve worked for online-only Redneck Bank. A ll A mer ica Bank launched Redneck Bank in 2008 when it wa s looking for a way to increase deposits. Opening accounts online seemed like a good solution. All America Bank chose to create a different name and brand to give the online bank a national presence. “We felt that if we changed the face of our bank using internet marketing, we could project a fun, upbeat internet bank that was much different than our traditional hometown community bank,” says Wade Huckabay, president of Redneck Bank and $344 million-assets All America Bank in Oklahoma City, Okla. The bank settled on using the name Redneck Bank with a humorous platform. “Our goal was to differentiate ourselves from other traditional, stuffy banks that were trying to be all things to all people,” says Huckabay. “We made a conscious decision to target customers that had a sense of humor.” With Redneck Bank’s horse mascot, its “where bankin’s funner!” tag line, and its three checking account options featuring competitive interest rates, the bank certainly stands out from the crowd. But such an unconventional platform also creates challenges. “In the beginning, one of our biggest concerns was that potential customers might not believe that we are a real bank,” says Huckabay. “As a matter of fact, Visa declined our first debit card design because they did not believe that we were a real bank.” Potential customers called FDIC, the state banking department, and All America Bank to verify that Redneck Bank was indeed the real deal. Over time, people realized this unique platform wasn’t a stunt, but on the level. “We felt like there was a lot of risk having something like RedneckBank.com because we didn’t 40

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Would an extraordinary name help build a national brand online, at a lower cost? Yes— once people realized Redneck Bank was the real deal know if it would discredit us,” says Huckabay. “But doing business on the internet has a different risk profile than changing the sign in front of your building.” It might be expected that a big marketing campaign would accompany the launch of this new venture, but aside from a lone billboard, Redneck Bank spoke for itself. “We felt that we needed an extraordinary name in order to lower the cost of building a national brand on the internet,” says Huckabay. That vision paid off as Redneck Bank had 1.2 million visitors a month within five months, along with thousands of

October/November 2015

accounts for customers in all 50 states. A ll A mer ic a Ba nk found it wa s illequipped to handle the volume of calls it was receiving. “It was right then that chills went up our spines,” says Huckabay. “We didn’t understand the power of the internet. We knew it was powerful, but we didn’t fully understand that.” The bank sprang into action, and in less than two months, it had built a call center staffed with employees from the three banks owned by All America Bank. It also updated its software so key account information was entered automatically, rather than manually, into its core system. One thing the bank couldn’t upgrade as readily was its capital. It was forced to stop accepting new accounts on RedneckBank.com when it could no longer support more deposits. Since recently merging its three commonly owned banks to include just All America Bank and its online division Redneck Bank, the bank has increased its capital from $10 million to $40 million. “We have plenty of room to grow now,” say s Huck abay. “ The suc ce ss caught us f lat-footed and by surprise in the beginning, but if we had that happen again, it would be a nonevent.”


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