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.

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.

Financial Research: Grappling with Technology

Bank leaders want to know more about how to leverage technology to make their institutions more profitable, but don’t know where to start, reveals the 2014 Growth Strategy Survey. Bank Director and CDW surveyed 145 independent directors and executives in June and July to uncover technology’s role in growth strategy.

Bank leaders know that technology can make their banks more efficient, and know that customer demands are only growing. But less than one-third talk about technology at every board meeting, and one-quarter of banks lack the IT staff to grow the bank.

When asked about the top technology concerns for their banks, keeping up with the evolution of mobile banking is a concern for more than half. Data analytics is also top of mind, and the survey finds that big banks are better users of data. Forty percent of respondents overall use business intelligence tools and analytics within their organization, but more than three-quarters of banks over $5 billion in assets currently use data to support growth goals.

One-third are concerned that the bank’s core processor impedes the bank’s ability to innovate. Community banks in particular depend on vendors for their technological expertise, yet half say that their core processor is slow to respond to innovations.

It’s important to note that many of these concerns about innovation and the use of data tie into growing concerns about competition from outside the industry. Eighty-four percent of respondents say that today’s highly competitive environment is their greatest challenge when it comes to growing the bank, and 83 percent worry about nonbank competitors. Banks above $5 billion in assets reveal a heightened concern about PayPal and Amazon.

Full survey results are available online at BankDirector.com.

The Growth of the…Branch?

The American Bankers Association just released survey results that say that the number of Americans that prefer to bank within a branch actually grew within the last year. Americans opting for internet banking fell by 8 percentage points, while the number who prefer to meet their banking needs through ATM or mobile each grew slightly.  The ABA theorizes that recent technological advancements made within bank branches have made the channel more efficient and therefore, more attractive to customers.

Reflecting the view across the pond, Accenture released a study last month, focusing on the UK financial services industry, with similar findings–online banking remains steady, while the use of branch and mobile channels grow.

There are certainly branch success stories for community banks in the U.S., and most of these involve a transition to self-service, whether through the use of image-enabled ATMs or video tellers. Kennebec Savings Bank uses image-enabled ATMs to handle one-third of the bank’s deposits, and the machines allow the bank to expand in its market through self-service branches more cheaply  than through a traditional branch. And Conestoga Bank opens two-to-three times more accounts each quarter through video tellers. (For more on how these banks are using technology in the branch, please read my contribution to Bank Director magazine’s innovation section, “Will Video Kill the Teller Line?“.)

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A Bank Director audience survey found that 91 percent of bank executives and directors are worried about competition from outsiders like Walmart, Google and PayPal. Bank Director Editor Jack Milligan addresses whether they really should be worried, or whether this is just a distraction from the bigger challenges plaguing the industry.

The Bank Spot

Walmart has announced that it is launching a money transfer service that will enable its customers to send funds from one store location to another at fees that are significantly less than many of its competitors. This is not the first time that Walmart has offered a money transfer capability – for the past 12 years it has provided a service with many more features through MoneyGram International – but now it is taking on more of a principal role.

Since 2011, Walmart has also teamed up with American Express to offer a prepaid card product called Bluebird that can be used in the same way as a debit card linked to a checking account, and provides its customers with a retail banking capability that does not come from a traditional bank. (American Express became a bank holding company during the financial crisis in 2008 so it could gain access…

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Consolidation isn’t killing community banking, but it is changing the landscape,and significant challenges remain.

The Bank Spot

An argument that I hear occasionally is that consolidation of the U.S. banking industry has put community banks on a path towards extinction. Two economists at the Federal Deposit Insurance Corp. have shot down this theory in a new research study whose findings are counterintuitive.

On the face of it, the industry’s consolidation over the past 30-plus years has been pretty dramatic. The FDIC says there were approximately 20,000 U.S. banks and thrifts in 1980, and this number had dropped to 6,812 by the end of 2013. A variety of factors have been at work. The biggest contributor, according to the study, was the voluntary closure of bank charters brought about by deregulation, including the advent of interstate banking. A lot of the “shrinkage” that occurred between the mid-1980s and mid-1990s wasn’t so much the disappearance of whole banks as it was the rationalization of multiple charters by the same…

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Decline in Branch Banking, or an Evolution?

Several news outlets have picked up on recent data from Bankrate.com revealing that 30 percent of Americans haven’t visited a branch in at least six months, among them Time.com, which called it the one stat big bank CEOs are freaking out about.

Half of Americans visited a branch at least within the last month, 64 percent within the last six months and 73 percent in the last year. A request to Bankrate.com for past data on branch visits was not answered.

Financial Research: Building for Growth (Means Getting Risk Right)

A bank’s approach to risk management may be impacted by its plans to grow. The Dodd-Frank Act requires publicly traded banks with more than $10 billion in assets to establish a separate risk committee of the board, but Bank Director‘s 2014 Risk Practices Survey, sponsored by FIS, found that more than half of banks with between $1 billion and $5 billion in assets have proactively established a risk committee, despite not being required to do so.

Comparing this to the results of the 2014 Bank M&A Survey may indicate that stepping up the bank’s approach to risk management may be directly tied to strategic growth plans. This survey found that 68 percent of banks with between $1 billion and $5 billion in assets plan to buy a bank this year. These banks also made more acquisitions in 2013, including healthy bank deals, FDIC-assisted transactions and branch purchases.

Getting the ducks in a row on risk management is a crucial step to ensure future regulatory approval for any acquisition that may take the bank north of $10 billion. When I spoke with him last October, Midland States Bank CFO Jeff Ludwig indicated that the bank’s good relationship with its regulators typically resulted in relatively quick and easy approval for deals. This good relationship was founded not only on transparency, but also meeting regulatory expectations.

Midland States has made a significant investment in risk management ‘so the regulators can see that we’re building the infrastructure ahead of our growth.’

The 2014 Risk Practices Survey strongly indicates that a focus on risk management results in better financial performance.  Respondents from banks with a separate board-level risk committee report a higher median return on assets (ROA) and higher median return on equity (ROE) compared to banks that govern risk within a combined audit/risk committee or within the audit committee.

The survey also reveals several best practices for bank boards and management.

Partnering for Better Innovation

Instead of viewing fintech companies as disruptive competitors, should the banking industry embrace these innovators as potential partners?

While writing my latest for BankDirector.com, “Three Things Bank Boards Can Do to Improve the Use of Technology”, I had the chance to speak with Ryan Gilbert, a board member at Sacramento-based River City Bank. In his day job, he’s the CEO of Better Finance Inc., a financial technology company that provides leasing and credit solutions to consumers and small businesses. As both a director of a traditional community bank as well as the head of a fintech company, he has a unique perspective on the intersection of banking and innovation. So I was curious what he thought about the impact of non-bank competitors, like Square (where Gilbert serves as an advisory board member), on the industry.

Will Banking Keep the USPS Afloat?

I’m absolutely fascinated by the latest idea (though not an old one) that the United States Postal Service should offering banking services, but can’t help but think that this is more about keeping the USPS afloat than helping the unbanked. That doesn’t mean it won’t work, but banking ain’t easy, y’all. As Billy Beale, CEO of Union First Market Bankshares Corp., said at Bank Director’s Acquire or Be Acquired Conference last month: “Banking isn’t complicated. It’s complex.”

The USPS has been bleeding money for years, suffering from the dual challenges of keeping pace with an increasingly technological population relying less and less on traditional mail coupled with its obligation to contribute $5.6 billion to retiree health care benefits–a payment the agency failed to make last year. The USPS ended 2013 with a net loss of $5 billion, and has posted losses for 7 consecutive years.