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Chairman Timothy M. Warren CEO & Publisher Timothy M. Warren Jr. President & COO David B. Lovins Group Publisher & Editor in Chief Vincent M. Valvo
ur annual guide to products, trends and services in the world of banking this year bears all the signs of the times – risk, compliance, technology, and customer relations. First, there’s risk. You’ll find expert submissions on enterprise risk management, liquidation diligence and ALLL. On the compliance side, in the aftermath of Dodd-Frank and the Durbin amendment, we cover overdraft policy, and how to choose a PIN debit network. And as technology marches on, so do we, with input from experienced parties on developing a formal IT strategic plan, and adapting board distribution packages for the iPad. On the customer-relation side, there are articles on customer retention tools such as focus on checking accounts, and the bank version of mystery shopping. The lead piece is an overview of the entire scene – what banks are buying (or not), and why. We hope you find the 2011 edition of Banking Solutions to be helpful, interesting and informative. COVER STORY
Controller & Director of Operations Jeffrey E. Lewis Custom Publications Editor Christina P. O’Neill Associate Editor Cassidy Norton Murphy Publications Group Sales Manager George Chateauneuf Advertising Account Manager Richard Ofsthun
12 What’s in Your Shopping Cart? Cautious Banks Upgrade Systems to Stay Competitive By Christina P. O'Neill
Planning for Success The Value of IT Strategic Plannings By Dan Vassallo
10 ERM in Action A Financial Institution’s Journey By Michael D. Cohn
As Regulators Fine-Tune Consumer Protection Rules, a Compliant Overdraft Program is Essential By John M. Floyd
16 Choosing a PIN Debit Network The New Value Proposition By Kevin Barry
Advertising Account Manager Cara Inocencio Advertising, Marketing & Events Coordinator Emily Torres Art Director John Bottini Senior Graphic Designer Scott Ellison Graphic Designer Ellie Aliabadi
©2011 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210. Call 800-356-8805.
6 ALLL and GAAP in Agreement Introducing PRISM, the ALLL Calculator By Amit Govil 8
Taking Board Package Distribution to the Next Level By Patrick “PJ” Schunke
18 Keeping the Focus on Checking Accounts By Cindy Draper 20 Liquidation Diligence and the Importance of Acting Quickly By Steve Jones 22 Customer Service Brand Check-up By David Ender
Banking Solutions 2011 | 3
By Dan Vassallo
Planning for Success The Value of IT Strategic Planning
s consumers continue to demand smarter, more convenient electronic banking services, community financial institutions are faced with the challenge of understanding the current market landscape, anticipating future consumer behavior, and forming ways to provide comparable services offered by larger competitors – often at a fraction of the budget. In effect, IT investments can no longer be throttled in reaction to each and every regulatory recommendation or potential new service. Instead, community banks like The Village Bank in Auburndale, Mass., are finding increased value in developing and maintaining a formal IT strategic plan. For many community banks and credit unions, IT-related investments only take place when something bad happens: a server fails, an exam finding calls for instant remediation, a data breach or disaster occurs. In this type of environment, decisions around information technology are reactionary, unplanned and urgent. As a result, IT as a whole is viewed more as an expense rather than an investment of assets. There is nothing strategic or planned about it. Nevertheless, certain community banks like The Village Bank have incorporated into its business model the exact opposite of this break-fix 4 | Banking Solutions 2011
tendency. In fact, for The Village Bank, IT strategic planning has become more than just a sound business practice; it has become a crucial component of successful operations management. The benefits of documenting a formal IT strategic plan are many, including: • Improved project planning and project management. • Avoiding costly missteps and oneoff purchase decisions. • Gaining a better understanding of IT costs and improving budgeting capabilities. • Achieving/ensuring regulatory compliance. • Staying ahead of the curve and remaining a market leader. • Better aligning IT infrastructure with business processes and initiatives. Understanding these and other potential benefits, Jeffrey Tucker, The Village Bank’s vice president of information systems, and the rest of his management team, undertook efforts to initiate bank-wide IT strategic planning in the fall of 2009. To get the ball rolling, the bank asked GraVoc Associates to facilitate the initial discussion and develop the plan document. In retrospect, Tucker explains that “having GraVoc facilitate the input from all departments was key in ensuring a fair and balanced approach. They also offered the perspective of having assisted many of our peers.” Now, two years later, Tucker notes that the bank’s IT strategic plan “has been a useful tool for us to refer back to from an overall resource and budget planning perspective. We give our board of directors annual updates as to the major accomplishments and potential projects looking ahead.” Following the three-year roadmap
set forth by this plan, The Village Bank has been able to consistently meet its primary business objectives and improve service delivery to customers. In 2010, the bank was able to make notable strides toward improving business process and IT infrastructure by increasing document imaging, completing a network migration and introducing server virtualization. This year, the bank focused on enhancing online service delivery channels and rolling out a mobile banking platform. While these types of initiatives are often met with increased scrutiny from auditors and examiners, Tucker explains that “the IT strategic plan has been a great document to give to auditors to show we have given serious consideration and aspirations to the overall development of our infrastructure.” In fact, the bank’s plan carves out a unique space for regulatory compliance and security and covers project initiatives specific to both objectives. As a result, IT and information security have become not a hindrance to service expansion, but an extension of the bank’s commitment to customer service. For The Village Bank, the benefits of IT strategic planning are clear. The process has assisted bank management in making level-headed, rational decisions and investments into the bank’s IT infrastructure, allowing for business objectives and IT initiatives to work hand in hand toward the common goal of ultimately improving product and service delivery to customers. u Dan Vassallo is an associate of the Information Security Practice at GraVoc Associates, Inc., a family-owned and operated consulting firm located in Peabody, Mass. Vassallo has authored several articles and whitepapers on various topics related to IT and information security.
By John M. Floyd
As Regulators Fine-Tune Consumer Protection Rules, a Compliant Overdraft Program is Essential A s final decisions regarding regulations on consumer financial products are being made, efforts by regulatory agencies to protect consumers from undisclosed practices could lead to inconsistent supervision of different kinds of financial institutions, according to an adviser to the Consumer Financial Protection Bureau (CFPB). And while the banking industry has always been carefully regulated, there is little doubt that the renewed focus on compliance related to overdraft programs could lead to confusion for institutions without compliance expertise. In today’s regulatory environment, it is pretty safe to expect that your overdraft program will be reviewed at each examination. Undisclosed programs that are found to pose unacceptable safety and soundness or compliance risk by regulators will be factored into examination ratings and could result in corrective actions. Since 2010, dozens of large banks from coast to coast have faced litigation over undisclosed overdraft policies that pose a hardship for consumers. As a result, fines and penalties – reaching as high as $410 million in one class action suit – have been imposed. You can avoid this level of regulatory scrutiny by providing your customers with a clearly defined overdraft program that guarantees full regulatory compliance.
Management oversight is key
The best way to get ahead of potential problems is to ensure that your bank’s board of directors provides appropriate oversight of your overdraft program. This should be consistent with the board’s ultimate responsibility for overall compliance, and should include ongoing and regular supervision of program features and operations, including an
annual program review. Proper account monitoring and customer communications are critical components of protecting consumers from undisclosed overdraft solutions that can cost more than any account overage they are supposed to correct. While anyone can make a mistake on his or her account, new regulations provide specific requirements for account holders who demonstrate excessive or chronic usage of overdraft services. In an effort to mitigate chronic or excessive use, reasonable efforts should be made to provide the customer with information on alternatives to overdraft payment programs which may be bettersuited to the person’s need for shortterm credit. Banks should also provide a clear opportunity for the customers to access and use those alternatives. According to banks that have undergone recent examinations, examiners have become more rigorous in their efforts to ensure that meaningful efforts are being taken to communicate with chronic or excessive users of automated overdraft programs by: • assessing an institution’s level of commitment to reaching customers. • evaluating its program for notifying customers about available alternatives. • determining how easy it is for customers to select alternative products.
Putting limits on your fees will limit your risk of increased scrutiny
To maintain compliance, it is essential to establish appropriate daily limits on customer costs resulting from overdrafts by limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day. This can prevent a
customer’s individual lapse in financial management from triggering a cascade of overdraft fees, and will be reviewed as one possible element of your institution’s overall approach for addressing chronic or excessive use of automated overdraft payment programs. Institutions should also consider the use of a de minimis threshold before an overdraft fee is charged in order to reduce reputational risk related to charging fees that are disproportionate to the item being cleared.
Make sure your check clearing procedures are in order
Regulators and consumers alike have been critical of banks that take advantage of check-clearing procedures that result in additional overdraft fees. Make sure your procedures, or that of any thirdparty vendor you use, operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order. Examples of appropriate procedures include clearing items in the order received or by check number.
Maintaining compliance is easier with an expert on your side
While having procedures in place to ensure that your overdraft program is compliant may sound overwhelming, a compliance expert can help. By implementing and managing a completely disclosed overdraft program, you can provide a valuable service to your customers and set your bank on a course for success. u John M. Floyd is CEO and president of John M. Floyd & Associates (JMFA), a leading provider of profitability and performance-improvement consulting. To learn more about JMFA, visit www. JMFA.com or call (800) 809-2307. Banking Solutions 2011 | 5
By Amit Govil
ALLL and GAAP in Agreement: Introducing PRISM, the ALLL Calculator
ne of the most challenging issues facing financial institutions has been developing and implementing a methodology for the calculation of their Allowance for Loan and Lease Losses (ALLL) which meets regulatory requirements and is in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The challenge is further compounded as neither regulatory guidance nor GAAP provide a detailed framework. The general guidelines in both have contributed to the significant level of confusion and, at the same time, subjected financial institutions to criticism from their auditors and regulators. What is interesting is that the ALLL methodology framework required by the regulatory policy statement has not really changed much since 1993. Yes, 1993. The recent economic meltdown and asset quality issues have made even the regulators go back and read their own policy statement to rediscover the prescribed ALLL methodology which had been collecting dust all these years. Now, the financial institutions are burdened with the task of implementing it. As a firm involved in assisting financial institutions meeting their risk management needs, P&G Associates observed the new wrath of the regulatory emphasis with respect to the
6 | Banking Solutions 2011
ALLL methodology. It saw a widespread outcry for clarity of this new regulatory mandate. A significant number of clients were baffled as to how to go about the process of developing a methodology that would satisfy the regulatory requirement. One client, a bank based in New York with $700 million in assets, started to feel the pain of the economic decline and asset quality impairment in its loan portfolio. During its next safety and soundness exam, the regulators slammed the bank for implementing an ALLL methodology that was not in conformity with the FFEIC 2006 ALLL Policy Statement (ALLL IPS). This was, of course, the same methodology the bank had in place for several years prior. Initially, the bank attempted to tweak its existing methodology hoping that the regulators would be satisfied with their attempt to modify the model. During an interim review, the regulators again criticized the bank for not being in conformity. The bank reached out to P&G Associates for assistance in helping to develop the right model. The challenge was to use the general framework as specified in ALLL IPS combined with other regulatory and accounting directives, to establish a quantifiable and consistent model which can be used in varying economic times. The first problem for most institutions is that the guidelines and
requirements are themselves subject to varying interpretations. The ASC 450 (FAS 5) is perhaps where the greatest challenge with respect to documentation comes in. Highlighted below are some of the requirements as mandated by ALLL IPS and some interpretative challenges that P&G Associates overcame for its client: Group loans according to type or homogeneous pools of similar risk characteristics. Thatâ€™s easy enough, but the question for our client was how granular do they get in this regard. While the regulatory emphasis initially was to get more granular, the practice seems to now allow the use of call report categories. Unless a bank has maintained better historical records, it is difficult to get prior historical quantitative data relevant to charge-offs or delinquency trend by any other sub-categories. Calculate historical loss rate for each of these loan pools. Of importance here and throughout its process to determine ALLL, the bank must document the method it uses to establish its loan pool historical loss rates. The challenge here was how far back one goes in calculating its loss history. Regulators have been enforcing the concept of â€œrecent historyâ€? (two years). The understanding is that since there have been more charge-offs in recent history compared to the past, the use of the recent two-year history (as opposed to five) would yield a higher charge-off rate, hence a higher reserve. The twoyear history was implemented. Adjust those historical loss ratios for internal and external qualitative factors. This is where most institutions fumble. This is not so easy to justify, quantify or document. P&G Associates developed a risk assessment process for each of the qualitative factors that are identified in the Interagency guidance, allowing the bank to assess a risk rating for each factor and document its conclusions. That assessment was converted into
a numeric factor to adjust the bank’s historical loss percentage. The resulting risk rating of each factor was then used to dial up or down the historical loss percentage. Be able to identify loan loss trends as well as additional issues or factors that affect the quality or risk assessment of its loan pools. P&G Associates interpreted this as being a requirement to further modify the adjusted historical loss rate by an assessment of the delinquency or concentration risk trend. Regulators have also mandated that classified loans for each homogenous pool be further segregated, and those loans be reserved using an even higher adjusted historical loss percentage. Although this last part is not anywhere in the Interagency Policy Statement, it was included this in the model knowing that not doing so would subject the bank to regulatory criticism. Calculate the ALLL for each loan pool to determine its total amount of loan loss reserves. Once the adjusted historical loss percentage is adjusted, it can easily be applied to the outstanding loan
balance for each loan. If you follow the Interagency and GAAP guidelines, off balance sheet items (i.e., unfunded credit lines, loan commitments, are not included. In the case of loans for which an ASC 310 impairment measurement review has been performed (loans you have determined are impaired and measured the potential impairment, even if it is none) – if you follow the Interagency guideline, the answer is no as well. During this process, P&G Associates recognized that the regulatory expectation with respect to the ALLL calculation is no longer a one-page spreadsheet – it is now a 50- to 60-page report. This methodology, the model and the report were well received by the bank and the regulators during their next examination. Realizing the widespread extent of the need for institutions to implement a model which allows them to document and demonstrate and tell their story about the adequacy of their ALLL calculation, P&G Associates incorporated the methodology into a
web-based application called PRISM: The ALLL Calculator. According to the CFO of the bank, “PRISM gives us a solid methodology that we can rely upon to calculate ALLL and we’re able to provide to regulators documentation to support a calculation that they found acceptable. I’m happy that it’s constantly being updated and improved to take into consideration the regulatory environment and concerns.” A large number of institutions are now using this program to help meet this enormous regulatory burden in an effective manner. u Amit Govil, CPA, CRISC, is a partner at P&G Associates, bringing over 25 years of internal audit, compliance and risk management experience to the community banks P&G serves. P&G Associates is a full service provider of outsourced risk management solutions, including internal audit, loan review and the ALLL software: PRISM. Contact Govil at whatsyourrisk@ pgcpa.com or 732-651-1700.
Banking Solutions 2011 | 7
By Patrick “PJ” Schunke
Taking Board Package Distribution to the Next Level T
N O W, T H R O U G H T H E I PA D A N D D I R E C T O R ACCESS, CLIENTS ARE ABLE TO ACCESS B O A R D PA C K A G E S WITH A SINGLE TOUCH.
8 | Banking Solutions 2011
he whole idea of board portals – allowing your board to access board packages online – has been a relatively new concept over the past few years. Institutions have slowly adapted this idea as security, privacy, and speed of delivery have become a growing concern during these tough economic times. Convincing a president or chief operations officer may not be as difficult as convincing the people who will actually be using the portal: the board members themselves. Going from a traditionally bound paper board book to a digital format is a big jump for board members. Being comfortable with a tangible 8.5 by 11 piece of paper is understandable. (In fact, paper, in the form of papyrus fibers, was used as long ago as 3500 BCE.) Is it possible that the newest technology on the market will help bridge that gap? The Apple iPad’s thin, high-resolution, 9.7-inch LED-backlit display is remarkably crisp and vivid, makes it perfect for web browsing, watching movies, viewing photos, or even reviewing board packages. It stands 9.56 inches tall by 7.47 inches wide, making it just a couple of inches smaller than a standard piece of paper. The iPad is lightweight, at 1.5 pounds, and the frame is thin, at half an inch, making it comfortably portable, and not much heavier than a traditional board package. WiFi and 3G capabilities will make it easy to access the Internet from anywhere that coverage is available, including the board room. Director Access is a secure, browserbased, online board portal developed by FSI. It’s because of FSI’s banking experience that Director Access has met the needs of so many financial institutions over the last few years. When the iPad was released, FSI was able to react quickly because Director Access was developed in-house by our own programmers. Within only a few days, Director Access was tested and released for full iPad support. FSI will always do our best to keep existing and future customers ahead of the curve in the technology world.
Now, through the iPad and Director Access, clients are able to access board packages with a single touch. Along with instant access to current board packages, you’ll have access to an archive of board materials, loan request documentation, vendor management tools, calendar of events, secure messaging system, polls, forums, surveys, contact directory, and a central repository reserved for policies, procedures, and any other digital document you’d like your directors to have access to. The display automatically adjusts to being held vertically or horizontally. Directors will have the ability to zoom in to view smaller type and flip from page to page with the simple flick of the fingertip. Multiple documents can be opened simultaneously, with the ability to jump from one document to another by just pressing a thumbnail of the document you want to see enlarged. Security features are built right into the iPad, requiring a fourdigit passcode before gaining access to any applications or documentation on the iPad. What you will not find on the iPad are files, folders or windows. This is because the iPad is not meant to take the place of a desktop computer or laptop. This keeps things simple. Perfect for what a director needs to access their board packages. No fluff, no distractions; just practical, engaging, and convenient. Coupled with Director Access, we may have found the future of the distribution of board packages and their presentment inside the board room. u Patrick “PJ” Schunke is president of FSI, one of the largest independently-owned service providers to the banking industry and has been creating customized, turnkey banking solutions since 1954. For more information about Director Access, visit www.DirectorAccess.com or call 201-652-6000, 1-888-374-6200 toll-free. For more information about Financial Services, Inc., visit www.insideFSI.net.
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By Michael D. Cohn, CPA, CISA, CGEIT
ERM in Action A Financial Institution’s Journey A Case Study
nterprise Risk Management (ERM) programs are not required by current regulatory laws, rules or compliance guidelines. However, the value in these programs lies in the opportunity to expose and prevent potential losses and missed business opportunities. The goal of ERM is to help all areas of the institution run more effectively by providing greater insight for board members, senior executives and line managers.
The financial institution’s senior management team recognized that the operational decision-making process needed to better align with the inherent risks of conducting business. It was important to incorporate the experiences and perspectives of more team members. Managers spent their days stabilizing credit quality, solidifying liquidity sources, and focusing on customer service delivery. This was detrimental to the collaboration and cross functional support that used to be so frequent before the recent financial industry crisis. The question posed was: “Could an ERM program, or at least deployment of the basic tenets, provide better operational decision making throughout the organization?” The CEO was skeptical of the value proposition due to the fact that the institution had a long history of success without an ERM program in place. Additionally, the board was inundated with new compliance requirements and was not seeking additional analysis or reports.
Given these beliefs, senior management’s plan was simple but comprehensive: The new ERM program had to utilize current resources instead of new ones to shed light into technology, 10 | Banking Solutions 2011
vendor, privacy, and operational threats prior to line management committing to any operational expansion and changes. The goal was to improve day-to-day management and oversight through end-to-end policies and procedures. This meant understanding the impact and incremental contribution by each
T H E VA L U E I N T H E S E PROGRAMS LIES IN THE OPPORTUNITY TO EXPOSE AND PREVENT POTENTIAL LOSSES AND MISSED BUSINESS OPPORTUNITIES.
department to the customer’s experience with the institution. Management also realized that critical to the success of ERM was the identification of a senior manager as a single point of contact. If threats to the institution crossed department boundaries, then the senior risk executive required the authority to implement both corporate and department level change. This maintained efficiency, safety and soundness. A senior manager was designated as the institution’s risk officer and took the central role of overseeing all day-to-day risk assessment activities, and was granted the authority to override line management’s risk assessment analysis. As senior management methodically instituted the ERM fundamentals using the WolfPAC Integrated Risk Management® system,
they discovered gaps in internal policies and procedures and oversight of key activities. As they closed the gaps, they collectively strengthened their understanding of end-to-end customer service delivery. The integration of the risk assessments and discussions of threats and internal controls (both actual and missing) forced a discussion on how the institution did business. There were areas at the institution that had the potential to incur operational losses, and it was surprising to some that those losses had not been realized.
After hearing the results of the integrated risk assessments, the board deepened their understanding of the institution’s operations and business plans. WolfPAC® enabled senior management to provide a foundation for reporting on enterprise-wide threats, and to determine if the actual risks being taken were in line with the inherent risks, given the strategic objectives of the bank. Additionally, line management gained a better understanding of potential threats to the institution and how to adjust operational controls to remain safe and sound. WolfPAC served as the risk assessment tool to integrate the risks and control ratings, replacing the many siloed functional risk assessments with a single score card. This knowledge has led to improved oversight and guidance, all without increasing staffing or the number of reports to review. u For more information about WolfPAC Integrated Risk Management, contact Joe Romanello, WolfPAC National Sales Director, at 781799-3966 or jromanello@ wolfandco.com. For more information visit wolfpacsolutions.com.
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What’s in Your Shopping Cart? Cautious Banks Upgrade Systems to Stay Competitive By Christina P. O’Neill
he shrinkage of fee income, bank rates, increased capital requirements, and the trading restrictions imposed on large banks by the newly-implemented Volcker Rule are affecting the marketing and buying habits of banks across the country. After the Durbin amendment went into effect and industry giant Bank of America announced its $5 monthly user fee for debit card purchases (ATM withdrawals at BoA are still fee-free at this writing), ads proliferated proclaiming this bank or that credit union still offers free checking and/or debit cards, leading one to believe that even in a sputtering economy, there seem to be adequate budgets for advertising on matters that are issue-driven. But ultimately, products and services that are offered at no charge or reduced charge must have resources available somewhere to sustain them. Financial institutions are today increasingly focused on the cost/benefit of any purchase. If they can’t make money in one spot, they have to save it somewhere else. Another concern: technology proliferation that allows the entry of non-banks and online banks into the bank market space. These players, among them the retail giant Wal-Mart, have invaded banks’ market space by offering consumers bank-like services cafeteriastyle, not requiring a minimum balance in exchange for the desired service. As with music, today’s financial-service consumers can buy the song, not the whole album. “To improve overall customer experience and maintain loyalty, it’s not [about] rates any more, and rewards programs are fading away,” says Paul Schaus of the financial institution consulting firm CCG Catalyst. “You have to come up with customer experience. Some banks are pushing multiple [banking] avenues, which increases loyalty and improves experience.”
12 | Banking Solutions 2011
To support this, and to remain compliant with the 300-plus regulations coming into effect in 2012, systems need to be upgraded and improved. “You’re not seeing new systems,” Schaus says. “You’re seeing improvements in existing systems.” Between regulation and non-banks, bankers can justifiably feel that they are hemmed in from both sides. In this environment, what are they buying?
Wanted: new technology at a lower cost
“The main new things we see bankers looking for are mobile banking solutions, online account opening, document imaging solutions, business intelligence solutions, and products/services to help them with security and regulatory compliance,” says Andy Burkett, vice president of sales for CSI, a 46-yearold core processing company out of Kentucky. “All coupled with lowering their overall processing costs and increasing the level of customer service they receive from their partner(s). This is sometimes a tall order to accomplish – new technology, better service, all at a lower cost – but those are the things at the top of their mind.” Banks are making their web pages more user-friendly and social-media conscious. They’re spending more on security, and pursuing technologies that reduce back-office processing costs or increase customer service and satisfaction. “Upgrade” is the name of the game today. The big thing holding them back: the underlying infrastructure of the banking network that prevents some institutions from taking advantage of technology, says Curtis Hallowell, vice president at Cummins-Allison, an international company that develops money-handling products and services. Marketing departments with their
goals for growth are up against operations departments with their goals of keeping the bank’s budget balanced. There’s also the technology itself. “They have goals, but not the access; maybe the technology doesn’t exist, it’s too costly, it doesn’t integrate; maybe the infrastructure doesn’t support it,” Hallowell says. “There need to be better synergies between suppliers and technology.” Instead of hardware vendors telling banks what they need, “We need to help banks help themselves; they have to tell us what they need.” Haragopal Mangipudi, global head of Finacle from Infosys, agrees that competitiveness and compliance – particularly global compliance – are driving banks’ purchasing decisions. “Technology is not the new gadget on the block. [One has to] look at the entire chain.” New channels and channel migration are more important in some markets than in others. New technology alone doesn’t interest banks; instead, it’s how to be faster, cheaper, and better for customers, and through better knowledge of the customer, providing products and services that make the most sense for that customer. “You’re not seeing new systems, you’re seeing improvements in existing systems,” says CCG Catalyst’s Schaus. Banks “are trying to upgrade their technology to improve efficiency, not looking to add staff. [They need to] improve efficiency and margins because income is going away ... margin alone is not going to do it.”
Products of interest
Mobile banking is catching bankers’ attention, but how much is it capturing their purchasing dollars? Schaus expresses reservations about how quickly mobile banking is catching on. “Mobile banking
WE NEED TO HELP BANKS HELP T H E M S E LV E S ; T H E Y H AV E T O T E L L U S W H AT T H E Y N E E D .
1.0 was a complete failure … in 2004. The reason you don’t know about it was no one bought it,” he says. “Mobile 2.0 got traction; 3.0 [introduced the] paymentenabled side of the house.” But consumers may not be ready. Bank periodicals have been reporting that the hard part is getting people to swipe with a mobile phone instead of a debit card. “Vendors do a great job pushing mobile, and banks to a degree are buying, [but] it’s not something [that’s] on fire,” he says. Its role today is largely as an inquiry system – checking balances, seeing if bill and credit card payments have been processed. Those who use mobile banking now are more comfortable with mobile devices overall. While banks that don’t offer mobile banking are at a competitive disadvantage, mobile banking won’t be a must-have from an operational standpoint until the mobile payment system grows more robust, Schaus says. Improved teller capture has become mainstream and has had favorable impact on back office operations. Skimming devices at the teller window reduces both paper and errors at the teller window. But, Schaus says, there’s no new “I gotta have” product. “When you look at processes and workflows, do you start at the beginning or the end?” he asks. “Some banks are continued on page
Banking Solutions 2011 | 13
more efficient because of where they are on the curve. When do you put in new workflows to become more efficient? … You have to understand who you are as a bank. Depending on who you are, there are ways to get more efficient based on current technology. If there’s something new you need, what’s good for you in one particular market [may not work elsewhere]. Your competitor might have a totally different answer.” Remote deposit capture (RDC) has been with us for a while, but is garnering new attention because of the potential for efficiency. As the technology becomes more accessible to retail and small-business consumers, it offers the opportunity for customers to cut down on branch visits. However, there’s a catch: In exchange for attracting time-strapped customers and cutting back-office check-processing costs, it eliminates the opportunity for tellers and other branch personnel to cross-sell their customers. As RDC moves from small business to consumers, and from scanners to mobile phones, the question becomes whether market demand will justify the migration. Consumer RDC is the newest segment, but gets no volume compared to smallbusiness customers who may do 30 or 40 checks a day. Image-enabled ATMs which process checks and cash at the point of deposit are another potential for streamlining – but once a financial institution offers one, it has to upgrade all its ATMs – and that’s a cost decision, rather than a technology decision. Developing products: Hallowell says a big challenge for banks is to balance customer strategies with cost-saving strategies. More specific challenges exist in determining an ROI on particular solutions that have success measures too soft to conduct a traditional ROI. Cummins-Allison has developed a desktop device that can process both cash and checks. It eliminates the need for two different machines – for checks and cash – that feed into two different systems.
Shifting economic forces and technologies are changing the purchasing priorities of bank internet security, according to Andrew Young, vice 14 | Banking Solutions 2011
president of authentication for Safenet, a 25-year-old data protection company. The advent of iPhone, iPad and Android technologies has expanded the universe of banking devices but also poses new challenges for internet security firms such as his that don’t want their solutions to inconvenience users. Malware has become “wildly sophisticated” over the last 18 months, he
T H E Y WA N T A SOLUTION NOT FOR T O D AY ’ S P R O B L E M S B U T O N E T H AT W I L L GROW OVER TIME.
says, moving from attacking the user ID to attacking the transaction itself. Even when the customer authenticates using a token, the malware waits for a user to perform a transaction, then “hijacks” that transaction andand alters it for malicious gain. This has caused the FFIEC to publish updated guidelines to security, calling for banks to implement a multilayered approach. “The ROI is starting to really shift,” he says. “A year or two ago, it was not economical to put up a front line [of security]. Fraud was less expensive than the solution. Now, fraud is more expensive.” Coming solutions to combat fraud include trusted browsers restrict the user to the financial institution’s website, and transaction verification technology using an independent channel from the bank to the user via a token or the user’s phone. Any transaction on the latter system, an out-of-band channel, would require user approval. “Identification is not good enough,” says Mangipudi. “It’s what you know, what you have, and what you are. All three are important.” A social media contact that morphs into a bank contact can provide much greater awareness and information
on customers and transactions. An example: a customer’s debit card is used at one location while the customer’s Facebook data places him at another. Convergence intelligence and converging multiple channels can immediately divine that there’s a problem. “Risk is not a static thing,” Young says. “They want a solution not for today’s problems but one that will grow over time.”
During the economic downturn, Paul Schaus stated, clients would tell him they either didn’t have a budget or they couldn’t get approval to spend on anything that wouldn’t deliver a return on investment in 12 months and in some cases, three months. Pent-up demand began in 2010 and is expected to carry through next year, he says. “As a whole, the industry was losing money. You had to get to a point where it was making money to spend money.” Cummins-Allison’s Hallowell advises banks to look at the big picture – for solutions that consolidate and integrate their fractional processes. In the long run, that will accomplish cost-reduction goals, improve productivity, and increase customer satisfaction. Platform standardization is coming to U.S. banks, Mangipudi predicts. Standardization offers a single view of the customer in real time. The challenge for banks operating on home-grown or legacy systems is how to shift all contacts from one device to another. Those who don’t want to completely revamp their legacy systems can take progressive steps to modernization. “It’s no longer a choice,” he says. “You can’t invent everything on your own.” In the 1997 movie Men In Black (the first of three), Tommy Lee Jones’ character, Kay, is regaling new recruit Will Smith’s character, Jay, with the new music technology that civilians haven’t seen yet. He holds up a chewing-gumsized device strikingly similar to a modern flash drive, and says, “This is gonna replace CDs soon. Guess I’ll have to buy The White Album again.” Today’s bankers can probably relate. u Christina P. O’Neill is editor of Banking Solutions.
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Choosing a PIN Debit Network The New Value Proposition capabilities with First Data’s Fraud and Risk Premium Package (FRPP). “Using FRPP and the STAR STATION portal, we have the ability to identify fraud in a real-time setting and respond by locking down a particular card or merchant that may be vulnerable, or even locking out a country,” he says. “Fraudulent cases have decreased dramatically. And there’s a direct correlation between the decrease in cases and dollars lost. That’s a real benefit to our bank and to our customers.” Operational capacity: With growth shifting toward PIN, it’s imperative that banks consider the system integrity of any new partner. The new network partner must be able to handle processing, settlement and support for the influx of transaction volume.
istorically, financial institutions have chosen PIN debit networks based on a variety of factors, many of which had more to do with geographic location and interchange rates than services that were provided. Today, however, the largest networks offer national coverage, and technological advances have created differentiations in products and services. Additionally, when the Federal Reserve Board implemented the Durbin amendment of the Wall Street Reform and Consumer Protection Act by setting a cap for debit interchange rates for institutions over $10 billion in assets, interchange rates became less of a determining factor for many financial institutions. Now, banks have the opportunity to choose a PIN debit network that will create value for them. Some banks
16 | Banking Solutions 2011
will be required to add another debit network to comply with the network non-exclusivity provision within the Durbin amendment. But even without that immediate need, evaluating your choice of debit network against the new value proposition can be strategically advantageous. So what are some of the criteria financial institutions can use to choose the right PIN debit partner? Fraud mitigation and risk reduction: Look for a network partner that has innovative yet cost-effective fraud mitigation and risk reduction solutions that can help drive out fraud. Frank Monterosso, senior vice president of operations for DNB First of southeast Pennsylvania and a STAR and First Data client, recently upgraded his bank’s fraud prevention
Acceptance: Consider partnering with a PIN debit network that can demonstrate superior merchant acceptance throughout the country, ensuring a good experience for cardholders at the point of sale, and encouraging consumers to adopt new form factors and technologies. Relationships: Because merchants will now be able to choose the network routing for debit card transaction processing, banks may want to consider selecting a network partner that already has deep relationships on both the issuing and the acquiring sides of the payments system. Future positioning: The migration from magnetic stripe to contactless and potentially to chip and PIN; the broader acceptance of mobile payments; and the increase of cardnot-present payments for eCommerce are all factors that are changing the
By Kevin Barry
payments landscape. A component of any new debit network strategy should include choosing a partner that is positioned to build and deploy new solutions in the future. For Chris Olson, chief operating officer of Fremont Bank in Fremont, Calif., the choice to issue cards that had STAR CertiFlash technology from his PIN debit network partner enabled on them was a decision based both on security and on future positioning. STAR CertiFlash is a new PIN-based solution that combines contactless chip payment with dynamic one-time card number technology. “I think we prove to our customer base that, in fact, Fremont Bank is looking at technology and implementing it as soon as we have the opportunity to,” Olson said. “We want to keep our existing customers and I think that they will tell other people about the fact that Fremont Bank is ahead of the curve in terms of secure transactions and that will allow us to garner new customers for the bank.”
Now is the time
The bottom line is that now is a great time for financial institutions to evaluate whether their current debit partnerships are creating the value they should. Whether you are compelled to make a choice to comply with regulations or simply want to take advantage of the factors that are contributing to the evolving market today, you have an opportunity to create value by making a strategic decision about your PIN debit network partner. u Kevin Barry is general manager of First Data Solutions’ STAR Network.
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Banking Solutions 2011 | 17
Keeping the Focus on Checking Accounts
redit quality, capital, compliance and change. The four C’s of banking today require so much attention, who has time to focus on checking accounts and retail banking? Acquiring and keeping core customers should be a top priority and a long-term strategy for community banks. Who is your chief checking officer? At most financial institutions, no one is directly held accountable for the growth of checking accounts, the lowest cost of funds and greatest source of non-interest income. Are you opening more accounts than you are closing? How many of your accounts are actively being used? There’s a lot at stake. With all the recent changes in fee structures, now is the time to focus on account acquisition and driving transactional activity. So it’s back to the basics. How do we attract new demand deposit accounts? It’s time to hold up the mirror and ask: “Am I the bank of choice?”
Do people want to visit your bank?
Attracting new checking account customers requires not only having competitive products and services, but also being a destination that people want to visit. On a recent stop at a new bank, I thought I had just entered a museum instead. The marble was beautiful. I guess I was supposed to feel reassured that this was a strong, dependable bank. As I made my way to the teller counter, I passed several empty desks and wondered if it was a result of downsizing or if the branch was just too big. As the only customer, every step echoed through the lobby. People take their money seriously, but how could we make our banks a fun place to visit and not just a dreaded task on the “to-do” list? When you walk 18 | Banking Solutions 2011
T H E B E S T S I G N T H AT AN ACCOUNT IS R E A L LY O N B O A R D IS DEBIT CARD ACTIVITY.
into your bank, do you feel energy in a welcoming environment or do you feel like you’re in a museum?
Is it easy to bank with you?
How many checking account options do you need to serve everyone? If your product offering is so confusing that your staff doesn’t understand it, how do you expect your customers to? Six paragraphs of small print on the bottom of the brochure will not clear things up. The most effective strategy is to simplify your account and service offerings.
Are people talking about you?
How do you get people in your community talking about your bank and considering you for their next banking relationship? Ask your fans – those customers who love you – to talk about you. Offer something that other banks do not. You don’t have to win the rate war to compete. Have you been too busy to focus on training and service standards? Are your expectations clear to every member of your team? You simply have to be the best!
By Cindy Draper
Net Accounts: Are you gaining or losing ground?
We’ve heard it a thousand times: “What gets measured gets done.” Are you closing more checking accounts than you open each month? Analyzing and understanding this part of your business is key. Consider tracking why customers are leaving your bank and where they are going. What does that financial institution offer that you don’t? When I interview consumers who have recently changed banks, they are insulted that no one cared that they closed their account. Show you care by sending a letter asking for their feedback. How many accounts are you opening each month? Of those new accounts, how many are truly active customers? Are your bankers staying with those customers through the transition or just through the new account opening process? Getting people to open an account is only the first hurdle in truly acquiring a new customer. Getting them to use that account is just as important. The best sign that an account is really on board is debit card activity. Is the debit card on the new account being used? Does anyone at your bank know? If you can’t answer these questions, it’s time to act! It’s human nature to play harder when the scoreboard is on. Recognizing and rewarding efforts and identifying areas of opportunity are critical to success. Senior management shining a spotlight on the growth of checking accounts is the first step in growing your account base. It’s time to add the fifth “C” to today’s banking strategy: checking account acquisition. u
Risk Management & Compliance IT Assurance Audit Nathaniel C. Gravel, CISA, CISM, CRISC Director - Information Security Practice Tel: 978-538-9055 ext. 129 Email: email@example.com
Cindy Draper is Retail DDA Strategist for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of profit strategies to community and regional banks and credit unions. She can be reached at firstname.lastname@example.org. Banking Solutions 2011 | 19
Liquidation Diligence and the Importance of Acting Quickly
EVEN WITH THE M O S T AT T E N T I V E AND METICULOUS SCREENING OF LOAN A P P L I C AT I O N S I N PLACE, THE RISK OF DEBTORS GOING I N T O D E FA U L T A N D , U L T I M AT E LY, BANKRUPTCY IS VERY H I G H T O D AY .
20 | Banking Solutions 2011
hen the economy is down, bankruptcies are up. Consequently, as protection against the impending costs associated with this increased risk, lenders should be focusing their attention not only on the quality of collateral but also on just how liquid the collateral offered by their debtors really is. With stagnant business growth, certain assets may be harder to sell, and what once took days to trade may now take weeks, incurring unexpected and sometimes devastating expenses along the way. As financial institutions evaluate collateral, one simple, important yet often over-looked fact to keep in mind is how long it will take to liquidate.
Company vehicles – Cars, trucks and vans lose value fairly quickly. Depreciation is a major concern with this type of asset, as sale prices can plummet even during the liquidation period. Consider whether the values attributed are up to date and how long it may take to move these assets should liquidation occur. In addition to further depreciation on these vehicles during the liquidation process, there are other costs, such as insurance, to consider. Be cognizant of the location of these vehicles, as the more dispersed the company’s fleet is, the more it will cost to ship the vehicles to a centralized location for auction.
Real estate – If the building and grounds have not been appraised within the last 12- to 18-month period, the value attributed to it is most likely incorrect. In addition to the potential of an overvalued asset, possible roadblocks associated with real estate liquidation exist especially in today’s market where we are seeing property remaining on the market longer and longer. During this time, the lender incurs costs from numerous sources, such as real estate taxes, insurance and utilities costs as well as regular upkeep and maintenance – not to mention broker fees. These expenses can quickly erode any expected earnings from the sale.
Machines and equipment – Although companies may have relatively new pieces of machinery on their books with reasonable net book values, the costs associated with dismantling and relocating this equipment must also be considered. Another consideration sometimes overlooked is the fact that machinery is often specialized and may have been customized for the company’s unique needs. This factor may significantly reduce the target market and ultimately the liquidation value of the equipment.
Accounts receivable – What could be simpler? Someone owes the business money; all the lender has to do is collect it, right? In reality, accomplishing this takes time, and while these accounts remain open there are employees to compensate, computer systems to maintain and records to keep – all of which reduce the cash received on the accounts receivable collateral.
Inventory – The key thing to consider here is simple: How quickly can the inventory be sold? Of course the primary sources are the company’s current customers; unfortunately most of the time these customers will only be able to purchase/acquire a portion of the product on hand. The total current supply in these cases exceeds the customers’ immediate demand, which makes selling inventory a timeconsuming process. Employees must
By Steve Jones
It’s Time to Expect More from Currency Automation Solutions and Self-Service Coin Centers
Doing Things the Right Way
be retained and paid, which calls for all applicable employer taxes, health care costs, etc. There are additional costs associated with storing and transporting the inventory. Also remember that the longer these items sit on the shelf, the higher the risk of their obsolescence.
The tip of the iceberg
This is not meant to be an allinclusive list of assets and their associated risks during liquidation. This should, however, serve as a reminder to lenders that there are very real costs connected with the length of time it takes to liquidate collateral. Lenders vigilantly focus on the quality of the collateral, appraisals, obtaining third-party support and accounting documentation to verify a company’s asset value; many times, however, little to no consideration is given to how long it will actually take to liquidate a company … and how costly a prolonged liquidation process can become. Even with the most attentive and meticulous screening of loan applications in place, the risk of debtors going into default and, ultimately, bankruptcy is very high today. Carefully examining collateral values with an eye toward the often unexpected expenses that may occur during liquidation can make a big difference to the security of your funds. If you do not have capabilities in-house to conduct investigations of this depth, or if you feel your organization could benefit from an informed second opinion, consider reaching out to a knowledgeable auditing specialist with experience in this area. u
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Steve Jones is a senior audit manager at Moody, Famiglietti & Andronico, LLP. Banking Solutions 2011 | 21
By David Ender
Customer Service Brand Check-up Rx for Success
s the president and owner of a mystery-shopping service firm that serves the needs of financial institutions, I am always struck by the absence of top-notch quality customer service. At a time when the level of business competition has significantly increased, is it any wonder that customer loyalty is fast becoming an endangered species? Overall, customer service is lackluster and non-descript at best. Given this epidemic of poor or nonexistent customer service, successful business organizations are checking up on their most valuable and important marketing tools –their employees. These organizations know all too well that each member of their customer service team is a critical link and personifies, pleasant or unfriendly, the professional service brand image in the eyes of their customers. Recognizing this vital fact, these companies invest marketing research dollars in a quality service engagement to learn of their customer’s expectations. The conclusions drawn from such customer surveys and focus groups often mirror the ABCs of very basic customer service expectancies. All customers want to feel valued and appreciated by the business organizations to which they have given their trust and their dollars. Customers evaluate service experiences with representatives in two ways – verbal communication and non-verbal communication. Who among us has not experienced the total lack of interest and interpersonal skills demonstrated by the majority of supermarket personnel who process our grocery needs? Generally speaking, these supermarket employees are uninspired, unmotivated and disconnected from the needs of the people who make their employment possible. Unlike 40 years ago when quality customer service went hand-inhand with competitive prices, today’s
22 | Banking Solutions 2011
service experience is often severely lacking in warmth, friendliness and the overall mannerism of helpfulness so critical to customer attraction and retention.
GIVEN THIS EPIDEMIC OF POOR OR NON-EXISTENT CUSTOMER SERVICE, SUCCESSFUL BUSINESS O R G A N I Z AT I O N S ARE CHECKING UP ON THEIR M O S T VA L U A B L E A N D I M P O R TA N T MARKETING TOOLS – THEIR EMPLOYEES.
As the owner of a mystery-shopping company, I tell my clients that their service teams, when interacting with the customers, represent the bank’s image in their business brand. Rather than assuming that these representatives take personal ownership of personifying an exceptional level of quality customer service, these organizations conduct regular, timely customer service quality check-ups that take the form of professional mystery shops. The shops are designed to evaluate incumbent customer service and selling skills based upon an existent and established set of customer service standards that are emblematic of an organization’s service brand. Once initial mystery shops have been completed for a bank, a baseline of service performance can be created to
serve as a diagnostic tool to identify what is working well and what service skills need improvement. As a training and development tool, institutions utilizing these shopping services can strengthen their service brand in the eyes of those they serve. In doing so, these organizations are better equipped to deliver a level of customer service that is in step with customer expectations. When selecting mystery shopping services, financial institutions should always seek out firms that are familiar and qualified in the degree of knowledge necessary to evaluate both customer expectations and employee performance standards. The shops should seek to capture moments of professional real-life employee behavior in both verbal and non-verbal forms of communication in order to assess the overall quality of a one-to-one customer service experience. In working with my clients, I recommend that a series of mystery shops be conducted three to four times annually for an accurate assessment of staff service performance, ensuring that a high level of customer service is consistently delivered and felt by customers. Institutions that regularly include mystery shopping services as part of a total marketing plan soon discover that they have greater control of how their service brand is delivered by their service teams. By following this easy business prescription for success, these banks enhance their competitive ability to attract, retain and grow their customer base. So, if your institution is overdue for a service check-up, perhaps now is the time to consider this straightforward and trouble-free Rx for continued success. u David Ender is owner of Sellright & Customer Insights. His area of expertise is in banker sales training. He can be reached at firstname.lastname@example.org.
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In the 2011 issue of Banking Solutions, we explore some of the hottest topics in banking, including overdraft policies after Dodd-Frank; ent...
Published on Dec 15, 2011
In the 2011 issue of Banking Solutions, we explore some of the hottest topics in banking, including overdraft policies after Dodd-Frank; ent...