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Less than two weeks until Acquire or Be Acquired! Bank Director President Al Dominick previews some of the issues that will be addressed in Arizona.

About That Ratio

On Sunday, January 25, we kick off Bank Director’s 21st annual “Acquire or Be Acquired” Conference (@bankdirector and #AOBA15) at the luxurious Phoenician resort in Scottsdale, Arizona.  I am so very excited to be a part of this three day event — and am supremely proud of our team that is gearing up to host more than 800 men and women.  With so many smart, talented and experienced speakers on the agenda, let me share a primer on a few terms and topics that will come up.  In addition, you will find several links to recent research studies that will be cited before I share one example of the type of issues being both presented and addressed at “AOBA.”

Colorful Language

Just as M&A is a colorful — and complex — issue, so too are the words, terms and considerations used by attorneys, investment bankers and consultants in management meetings, in the boardroom…

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Best Banking Reads of 2014

What a year it’s been for the banking industry! From threats from outside the industry by Apple and Wal-Mart, to questions on whether Colorado and Washington banks should work with legal marijuana businesses, to regulatory shenanigans at the New York Fed, 2014 has been memorable. As the holidays approach and I think back on the year that was, I thought I’d take a few minutes to share some of the banking-related stories I enjoyed in 2014.

Regulations

• Banks given the go-ahead on working with marijuana businesses: Marijuana may be legal in some states, but that doesn’t mean banks are ready to work with marijuana businesses.
• How to Punish a Bank: This is from National Public Radio’s Planet Money, so it’s more of a listen than a read, but delves into the problems of effectively punishing the big banks.
• Bank of America Adds a Mortgage Settlement to Its Collection: Bloomberg’s Matt Levine (also cited in the NPR segment) provides the data on (at the time) Bank of America’s $68 billion in mortgage settlements, and asks how effective these penalties and fines are when they become business-as-usual.
• Inside the Emerald City: Jack Milligan, editor of Bank Director, delved into the culture of the NY Fed following concerns that regulators got just a bit too cozy with the big banks they oversee.

NonBank Competition

• Sizing Up the NonBank Threat: Jack Milligan’s cover story in the 4th quarter 2014 issue of Bank Director magazine was a great way to close out a year that saw a lot of focus on the impact that nonbank competitors, from Wal-Mart to Apple, had on traditional banks.
• Are Wal-Mart and Apple poised to be regulated by the CFPB?: This Washington Post article feels particularly prescient, following news of the Consumer Financial Protection Bureau’s lawsuit against Sprint.
• For Banks, the Sky is Falling: Al Dominick’s blog, AboutThatRatio.com, explored the nonbank threat in a five-part series that examined Facebook, PayPal, Wal-Mart and crowdfunding.
• Wal-Mart’s Getting into Banking, and It Makes a Lot of Sense: FiveThirtyEight delves into data on the unbanked to explain Wal-Mart’s expansion of its financial products.

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Who would you add to this list of the top community bank CEOs?

About That Ratio

We are getting close to that time of year when people start writing their top ten lists, providing year-in-review posts and taking out the proverbial crystal ball.  In this spirit, my post-Thanksgiving piece provides a list of bank CEOs I met this year that impressed me with both their bank’s performance & personal leadership styles.  From the outside looking in, I have to assume shareholders and employees alike appreciate what each has done for their organization.

Look at this leadership

A few days ago, David Reilly authored a piece in the Wall Street Journal entitled “Wanted: Dance Partners for Bank Merger Ball” (sorry, registration required).  Citing Bank Director’s annual M&A research report, he reminded us that it takes two to tango — and “that is still the issue for investors expecting, or hoping for, a significant pickup in bank merger activity in 2015.”  As we showed in our survey of about 200 bank directors and executives…

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Are bankers dishonest?

Honest Abe is not impressed.

A team of Swiss economists claim that the business of banking makes industry employees more dishonest.

“Our results suggest that the social norms in the banking sector tend to be more lenient towards dishonest behavior and thus contribute to the reputational loss in the industry,” says Michel Maréchal, Professor for Experimental Economic Research at the University of Zurich.

I take the conclusions of this study with a heaping dose of salt: Much of the results center on the employees of ONE BANK, and I have strong reservations about a study that is so influenced by the culture of one company. Frank Eliason, global director of the client experience team at Citigroup, expresses similar concerns–and makes an excellent point about the very real reputation damage the industry has witnessed due to some very bad eggs.

And that’s very true. According to Edelman, the financial services industry remains the least trusted industry globally. American sentiments trend with those worldwide–almost half say that there’s not enough regulation of financial services–but here’s a silver lining: Trust of financial institutions has grown in the past year.

One of the Swiss study’s authors, Alain Cohn, thinks some type of Hippocratic oath for bankers would address the issue.

If an oath like this were supported with a corresponding training program in ethics and appropriate financial incentives, this could lead bank employees to focus more strongly on the long-term, social effects of their behavior instead of concentrating on their own, short-term gains.

I’ve met bankers from all across the U.S., and I have a hard time buying that they’re inherently more dishonest than those in any other industry. But both Eliason, in his post, and the Swiss study’s authors (in a roundabout way), allude to the importance of culture. In Bank Director‘s own research, we’re seeing this more and more as a common theme, with the 2014 Compensation Survey underscoring the importance of culture in attracting talent and the 2015 Bank M&A Survey revealing the challenges bank boards and management face in integrating the purchased bank into the surviving institution–and this includes the bank’s culture. Bank Director Editor Jack Milligan wrote recently about the importance First Financial Bankshares CEO Scott Dueser places on culture, concluding:

And you can’t provide great customer service if your employees hate their jobs, which is why First Financial places so much emphasis on training, career management, empowerment, recognition and, yes, compensation.

It’s probably an axiom that only happy employees can provide great customer service, just like the best milk comes from contended cows. So if customer service is one of your core business strategies, make sure your bank is providing an environment where people enjoy coming to work every day and love what they do.

Eliason, I think, makes a similar point:

…it has to do with experiences we, as an industry, have created for Customers. Change must happen, and it must happen now! Stop worrying about studies, or even these headlines, but instead focus on your Customer, and they will return the favor. The fact is Customers are people and our business has always been about relationships. It is time we concentrate on those relationships.

Banking isn’t evil, and many bankers aren’t dishonest. But negative public perception of the industry is very real. Positive customer experiences–the result of an ethical, client-friendly and employee-friendly culture– will go a long way in restoring trust in the banking system.

Growth Driving Hires, But Many Banks Still Don’t Tie Pay to Performance

What’s going to be the primary driver for executive hires at the nation’s banks in 2015? Growth and strategy, say a whopping 80 percent of the 175 bank CEOs, human resources officers, chairmen and board members participating in an audience survey at Bank Director’s 2014 Bank Executive & Board Compensation Conference yesterday at Chicago’s Swissôtel. Meyer-Chatfield Compensation Advisors sponsored the survey. Just 4 percent expect regulations to drive hires.

This lines up with what we saw in the 2014 Bank Compensation Survey earlier this year. And it looks like competition for lenders will remain tough in 2015–62 percent expect to see the strongest demand for lending executives next year, an increase of 41 percent from lending hires in 2013 (also according to the 2014 Bank Compensation Survey). And despite the banking industry’s struggles to keep up with innovation, just 14 percent expect technology executives to be in high demand.

One-quarter of respondents expect at least one key executive departure in 2015. Departing talent may prove difficult to replace, as 41 percent say a lack of talented candidates in their market is the most challenging aspect in attracting executive hires.

Almost half of the respondents cite corporate culture as the primary factor that makes their bank attractive to potential hires, while just 4 percent cite the bank’s compensation program. That said, tying compensation to performance, at 59 percent, remains the top compensation challenge facing bank boards, and 40 percent say that the development of competitive compensation packages is the most challenging aspect when it comes to attracting and retaining talent. There’s no doubt that aligning pay with long-term strategy continues to challenge bank boards: In an audience survey later in the day, 68 percent revealed that tying pay to performance is a bigger challenge for compensation committees than dealing with regulation.

Despite these challenges, almost 40% don’t believe that CEO pay should always be directly tied to the bank’s performance, as revealed in an audience survey later in the day.  Previously, the 2014 Bank Compensation Survey found that less than half of respondents tied CEO pay to the bank’s strategic plan, and more than one-quarter said that CEO compensation was not linked to their bank’s performance.

Interested in more highlights from the 2014 Bank Executive & Board Compensation Conference? Al Dominick, Bank Director’s president, provides his perspective on About That Ratio, and highlights why banks must reward creativity and innovation HERE. Editor Jack Milligan explains the importance of corporate culture HERE.

Access for All?

The 2013 FDIC National Survey of Unbanked and Underbanked Households was released yesterday, and the number of unbanked and underbanked households in the U.S. hasn’t budged much in the last two years (the total percentage has declined slightly, to just under 28 percent, since 2011). Just under eight percent are unbanked–almost 1 million households. Of these:

• Almost half (46 percent) have had a bank account in the past.
• Seventeen percent currently don’t have a bank account due in part to their credit history.

Not surprisingly, the unbanked are highly reliant on alternative financial products:

• 27 percent of the unbanked used prepaid cards, compared to 12 percent of households overall. Two-thirds of those that used prepaid cards in the last 30 days are unbanked or underbanked.
• More than half used money orders in the last 30 days, versus less than 10 percent of all households.
• Thirty-nine percent used checking cashing services, compared to just three percent of all households.

The FDIC and and the Consumer Financial Protection Bureau have been pretty vocal about the fact that they want to decrease consumer use of alternative financial services. Will these regulators make a move to ensure that more Americans have access to a bank account? Last summer, New York Attorney General Eric Schneiderman convinced Capital One Financial Corp. to amend its use of ChexSystems, a database used by many banks to screen applicants for fraud and credit risk. A 2009 report from the FDIC found that almost 90 percent of banks use a credit-screening database like ChexSystems, and one-quarter reject an account application due to a negative result. Earlier this month, Richard Cordray addressed the CFPB’s areas of concern on the matter, which boil down the three areas:

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What are your thoughts on the future of banking? Al Dominick wants to know.

About That Ratio

As shared in Bank Director’s current issue, peer-to-peer lenders, like San Francisco-based Lending Club, are beginning to gain traction as an alternative to banks in both the commercial and consumer loan space.

In the retail sector, well-funded technology companies like Google, Amazon and a host of others are swimming around like sharks looking to tear off chunks of revenue, particularly in the $300 billion a year payments business. These disruptors, as many consultants call them, are generally more nimble and quicker to bring new products to market.

While being “attacked by aggressive competitors from outside the industry is certainly not a new phenomenon for traditional banks,” it is fair to ask what a bank can do today. For inspiration, take a look at what Richard Fairbank, the Chairman and CEO of Capital One, had to say on a recent earnings call.

Ultimately the winners in banking will have the capabilities of a…

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Big Auto vs. The Innovator

Yesterday Michigan Governor Rick Snyder passed Michigan House Bill 5606 (a tip of the hat to a longtime friend and fellow “car brat” who brought the story to my attention), which prevents electric car manufacturer Tesla Motors Inc. from selling vehicles in the state. Snyder, in a signing letter to the Michigan House of Representatives, says that this isn’t really news–the bill just clarifies that rather than using its own franchised network of dealerships, car manufacturers can sell through any franchise. Tesla sells directly to consumers, so sales of Tesla were always illegal in Michigan. Tesla had some damning words to say about the bill:

Not content with enshrining their ability to charge consumers dubious fees, on the last day of the legislative session, the dealers managed to make a last-minute change to the bill in an attempt to cement their broader retail monopoly. Using a procedure that prevented legislators and the public at large from knowing what was happening or allowing debate, Senator Joe Hune added new language in an attempt to lock Tesla out of the state,” Tesla said. “The dealers seek to force Tesla, a company that has never had a franchise dealership, into a body of law solely intended to govern the relationship between a manufacturer and its associated dealers. In so doing, they create an effective prohibition against Tesla opening a store in Michigan.

Either way, General Motors Co. has gone on record as a supporter of the bill, which, in the company’s view, levels the playing field by either forcing Tesla to sell through dealers or bow out of Michigan. Tesla seems committed to its direct-to-consumer strategy, so it looks like Tesla won’t be selling in the Great Lakes State any time soon.

I can’t help but draw parallels between this incident and another time that Big Auto has gone toe-to-toe against an innovator:

Tucker: The Man and His Dream, the 1988 biographical movie, is based on the story of Preston Tucker’s attempt to change the auto industry in the 1940s. His “car of tomorrow”, the Tucker 48, featured several safety innovations, such as a shatterproof glass windshield, roll bar and seatbelts (The Tucker 48 was the first production car to include a seatbelt). In Francis Ford Coppola’s version of the story, the Big Three (Ford, GM and Chrysler) feared competition from the upstart Tucker as well as innovations like seatbelts that implied, in Detroit’s mind, that cars aren’t safe. Tucker’s dream was squashed when he and several other Tucker Corp. executives were indicted for mail fraud, conspiracy to defraud and SEC violations. They were eventually found not guilty, but Tucker Corp. fell apart and Tucker’s dream was dead.

Thinking about U.S./Big Auto vs. Tucker/Tesla brought my thoughts to all the nonbank competition out there today–and whether those nonbank competitors will remain immune from financial regulation for much longer. Of course, the picture in the bank space is significantly more complicated than in the auto industry, with big banks, community banks, credit unions, Big Tech like Google and Apple and small fintech startups all jostling for position.

And as they dig themselves further into the banking space, I think Big Tech and and the smaller fintech firms will come closer and closer to being under the thumb of the Consumer Financial Protection Bureau, an agency that enjoys freer reign than other regulators and relishes its role as the consumers’ protector. At least one law professor believes that Apple Pay already crossed the line. The more financial products and services that ‘Big Tech’ offers, the more they’ll come under the eye of Cordray. If that happens, will the CFPB mark the end of fintech innovation in the U.S.?

*If you’re interested in reading about the threat that technology companies pose to traditional banks, check out the latest issue of Bank Director magazine, featuring Jack Milligan’s cover story, “Sizing Up the Nonbank Threat”.

Meaningful CyberSafety Reform? Not Today.

President Obama today announced measures to ensure more secure transactions, which the White House has dubbed the BuySecure Initiative. The President endorsed chip and pin technology in a speech at the Consumer Financial Protection Bureau, saying that the UK saw a 70 percent reduction in credit card fraud after its adoption, and plans to apply the technology at the federal level to government credit cards and debit cards, and upgrade payment terminals at U.S. facilities to accept the new cards.

But the technology isn’t really new. Some form of chip technology has been used abroad for decades, while the U.S. continued to rely on magnetic stripe cards, which are easier to counterfeit. Chip cards store payment data within a microprocessor chip, and each transaction creates unique data which cannot be used for future transactions. They’re difficult to counterfeit, and definitely safer and more secure than what most Americans have been using–though as mobile payment options grow, you have to wonder how much longer chip and pin will be relevant.

So it looks like the Federal government is getting on board with more secure transactions. The White House also mentions that companies are joining this “national effort to improve transaction security” — stores like Target and Home Depot (both victims of data security breaches within the past year), as well as Wal-Mart and Walgreens. These retailers will roll out secure chip and pin card terminals in stores by January.

But these stores already committed to chip and pin, along with many major banks. After October 2015, the company that has the outdated magnetic stripe technology — the retailer or the bank — will be the one holding the bag if there’s a data breach. (I wrote about this in our 2nd quarter 2014 issue of Bank Director magazine, available here. Registration may be required.) Target stepped up its efforts after its infamous data breach late last year, and already planned a roughly $100 million investment in chip card readers at all its U.S. stores by the first quarter of 2015.

The White House also announced that “Citi, in partnership with FICO, will begin making credit scores available for free to its consumer card customers updated monthly online — joining the over 70 million Americans who already have access to this feature at other nationwide banks and card issuers.” (Emphasis my own). Again, no real news here: Credit scores are often included as checking account add-ons.

President Obama’s goal to protect Americans from identity and data theft is laudable. But I just don’t feel that much was accomplished today.

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How will disruptive competitors like Google, PayPal and Simple impact the banking industry? Bank Director Editor Jack Milligan explores this question.

The Bank Spot

I am writing a story for the fourth quarter issue of Bank Director magazine on the emergence of nonbank disruptors as potentially serious competitors for traditional banks in the personal financial services and payments space. I don’t want to tip my hand before the piece is published in late October, but I would like to share some of my preliminary thoughts. I love writing feature stories like this because they allow you to really dig into a subject. There are fewer magazines out there that still practice long form journalism, but Bank Director is one of them.

There has certainly been a lot of activity in the PFS and payments space of late. The disruptors have been very busy. (You should definitely read a string of insightful blogs on the nonbank competitive threat written by my colleague, Bank Director President Al Dominick, at AboutThatRato.) Here are some of the…

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