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OSA CFPB TICKER Mar 26, 2013

The Ticker is a weekly update from the CFPB Research, Markets, & Regulations Team that highlights key market events, as well as industry and consumer trends. The Office of Servicemember Affairs (OSA) has extracted items that we hope will be of interest to DOD personnel delivering personal financial management education and coaching services.

Hot Off the Press The Growing Market Share of Direct Online Banks: In a study by research firm TNS, the country’s four major direct banks, Ally, Discover, Capital One 360 (formerly ING Direct), and USAA, are starting to gain market share from traditional brick-and-mortar banks and have been attracting retail customers establishing or moving their primary banking relationships. Over the past decade, the share of new relationships captured by large, national banks, regional banks, and even the community banks and credit unions was either flat or down. But the direct banks, which a decade ago attracted about 3.5 percent of new, primary retail banking relationships, have since increased that share to about 8 percent. Deposits at the major direct banks have more than doubled over the past five years-a growth rate, which is three times the industry average for the period. Ally Bank, for example, says its deposits hit $35 billion last year, up 25 percent from 2011, while deposits at Discover Bank reached $27.9 billion in 2012, up 5 percent for the year, according to the company. Despite only holding about 5 percent of total primary banking relationships in the U.S., direct banks have shown some success in attracting customers from key demographics: the young, wealthy, and those who own investable assets. HOPE NOW: Loan Modifications and Short Sales Continue YoY Decrease in January: In its latest mortgage industry data report, HOPE NOW estimated that more than 78,000 homeowners received permanent, affordable loan modifications from in January. This total includes modifications provided by proprietary programs and the U.S. Treasury’s Home Affordable Modification Program (HAMP). Since HOPE NOW began tracking modification data, the organization estimates approximately 6.2 million modifications have been completed since 3Q 2007. The organization also reported that more than 140,000 loans began the foreclosure process in January, while around 60,000 foreclosures were completed. Incoming PNC CEO: Consumer Banking Model Broken: William Demchak, the incoming chief executive of PNC Financial Services Group, says the consumer banking model centered around free checking is outmoded, and that banks must begin considering charging for services that are currently free, such as mobile banking. Demchak said that free checking was paid for by swipe fees and overdraft fees, but that new laws passed in the wake of the financial crisis have

restricted overdraft fees and debit interchange fees so much so that banks now lose about $12 million a year in revenue. Demchak estimates young banking clients might have been willing to pay 25 cents per mobile transaction or $2 for a mobile app, but now will put up resistance because they are not used to paying for such services. The solution is not to cut costs and eliminate bank branches, as many banks have been doing, Demchak said, but to figure out how to charge customers for products and services that banks currently give away for free. Auto-Lease Approval Rates Increase at U.S. Bank: U.S. Bank, the largest independent financer of car leases, increased its approval rate for lease transfers at the beginning of 2013. It approved 80 percent of drivers who applied to take on an auto lease through the site, compared to the average approval rate of about 65 percent last five months of 2012. The approval rate is up from about 50 percent in January 2012. U.S. Bank, a unit of Minneapolis-based U.S. Bancorp, is the largest provider of non-captive auto leases, or leases that are not financed through the car's manufacturer, and is the most commonly used website for facilitating lease transfers. Payments Startups Attracting Capital and Innovating Credit-Card Businesses: Braintree, Square and other startup payments companies are applying web and mobile technologies to overhaul the economic model of the payment industry. These startups are enabling online and brick-and-mortar merchants to use credit- and debit-card payments in innovative ways, and have also enabled small offline merchants and mobile and web commerce companies, often priced out of the larger payments networks, to accept credit and debit cards at a proportional investment level to the business’ size. These companies have been able to attract investments from top-tier venture capitals, including larger networks themselves such as Visa and American Express. This business strategy and the investments have led to significant growth for some of these startups. Square, for example, grew from 1 million customers to more than 3 million in 2012, and is on track to process more than $10 billion in payments in 2013. Braintree, which caters to smaller online merchants, has also received substantial outside investments and is seeing growing merchant transaction volumes.

Company News Discover Plans to Offer Home Equity Loans: Beginning in the second half of 2013, Discover Financial Services plans to offer fixed-rate, closed-end home equity loans between $25,000 and $100,000. The initial rollout will be to existing Discover customers and will eventually expand to other customers. Home equity lending plummeted during the housing crisis, with several lenders scaling back their home equity loan businesses and capping the amounts borrowers could take out. Home equity loans are the latest products Discover will offer in its attempt to expand beyond its traditional credit card products. The company already offers online mortgage origination, student loans, savings accounts, and more recently, checking accounts. Visa and JPMorgan Renew Partnership: Visa and JPMorgan Chase announced that the companies have agreed to a new 10-year partnership agreement. As part of the agreement, JPMorgan will launch Chase Merchant Services, a payments platform powered by Visa that will

process transactions initiated with JPMorgan Chase-issued Visa cards at merchants that enroll in the platform. Chase Merchant Services is expected to be operational by the end of the year. Under the partnership, JPMorgan will also shift additional credit and debit card volume to Visa, driving more transactions to the Visa network. Big Data Helping Visa to Uncover Fraud: Since introducing its own analytic engine to protect against network security risks, Visa estimates that its model has identified $2 billion in potential annual incremental fraud opportunities. Earlier analytic models studied as little as 2 percent of transaction data, and the company based its security assumptions on average fraud rates for merchant categories, like grocery stores. Now, Visa said it can analyze the actual market, right down to individual merchant terminals, which allows it to drill down on as many 500 attributes of a transaction, as well as analyze average authorization volumes, average ticket sizes, and frequency of purchases. Visa said it can identify high-risk purchases such as big screen TVs and prepaid cards that can easily be converted to cash. It determined, for example, that in certain merchant categories, for transactions of $200 or more, prepaid cards were included in 85% of cases that turned out to be fraudulent.

Did You Know? Fannie Mae and Freddie Mac offer special treatment for military personnel with Permanent Change of Station (PCS) orders; Servicemembers who are being relocated will be automatically eligible for short sales, even if they are current on their existing mortgages, and will be under no obligation to contribute funds to cover the shortfall between the outstanding loan balance and the sales price on their homes. This new guidance became effective on November 1, 2012. More details:

OSA Ticker 26 March