Banking New York 3Qtr 2017 by ambizmedia

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • THIRD QUARTER 2017 • VOLUME 45

SBLI of MA

Reverse-Engineers

Produced in partnership with the Independent Bankers Association of New York State

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Reverse-Engineers

04 PRESIDENT’S MESSAGE

A Preview of the Annual Convention

06 PUBLIC AFFAIRS UPDATE Year of Change 08 SOFTWARE MODERNIZATION Data-Driven Overdraft Systems Reap Improved Service, Compliance

CONTRIBUTING WRITERS Linda Goodspeed, Christina O’Neil and Steve Viuker TWG STAFF CEO & PUBLISHER Timothy Warren Jr. PRESIDENT David Lovins ACCOUNTING MANAGER Mark DiSerio

10 BANK PROFILE New President At Mascoma Savings

20 ROBUST REGULATION

16 WORKING TOGETHER

21 CYBERSECURITY REGULATION

Bank Steers Community Reach

Structuring Bank and Fintech Collaborations

18 COMMUNITY CONTRIBUTION

If Your Bank is a Strong Contributor to the Community, Do You Get Recognition For It?

First Round of Compliance Required for New Policy

Talking DSF 500 with Ken Bigelow, Managing Partner at Sionic Advisors

22 INDUSTRY NEWS

SALES DIRECTOR OF BUSINESS MEDIA George Chateauneuf PUBLISHING GROUP SALES MANAGER Claire Merritt SENIOR ADVERTISING ACCOUNT MANAGER Mike Lydon ADVERTISING ACCOUNT MANAGERS Jon Patsavos & Megan Kurtz ADVERTISING & SALES COORDINATOR Meghan Killian EDITORIAL EDITORIAL DIRECTOR Cassidy Murphy EDITOR Malea Ritz ASSOCIATE EDITOR Mike Flaim CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES John Bottini SENIOR BRAND DESIGN MANAGER Scott Ellison COMMUNICATIONS MANAGER Michael Breed PUBLIC RELATIONS & SOCIAL MEDIA SPECIALIST Joe Kourieh GRAPHIC DESIGNERS Amanda Martocchio, Elizabeth Rennie & Tom Agostino ©2017 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 www.thewarrengroup.com

PRESIDENT’S MESSAGE | By John Witkowski

A Preview of the Annual Convention At the Independent Bankers Association of New York State (IBANYS), we take great pride in providing educational programming for our member banks through a number of different platforms. These include regular webinars on a myriad of subjects every month; our one-day Regional Security, Compliance, Directors and Senior Lenders Conferences, and our three-day CFO/Senior Management Conference.

ll provide timely, important presentations, outstanding speakers and roundtable discussions on subjects designed for the specific community bank officers and board members participating. However, each fall we hold the signature event of our calendar year: Our Annual Convention. It’s when we bring together New York community bankers, IBANYS preferred providers, associate members and special guests for three days of outstanding John Witkowski business programs, recreational activities, networking opportunities, camaraderie – and just good old fashioned fun. This year’s convention, “The Power of Community Banking” Sept. 25-27 in Niagara Falls, attracted the CEOs, top executives and senior management teams from New York’s community banking industry and representatives from important allies we count as our partners – IBANYS preferred provider firms, associate members and vendors. Of course, our agenda is jam-packed with general sessions, break-out sessions, speaker presentations, roundtables and forums on the most important issues, trends and developments impacting our business. Some of our topics: risk of deposit flight in a rising rate environment, regaining customer intimacy: apply proven customer experience management practices to your highest-priority customers, cybersecurity – are you ready to face the number one threat, how to attract and retain mil4 | Banking New York

lennials as bank customers and employees, the new administration and your balance sheet and so much more, including a session on peer analysis: how does your bank stack up. There are also exciting new twists, such as our “Innovation Showcase” highlighting new products and services to help community banks survive and thrive in today’s marketplace and our “Emerging Leaders,” welcoming the New York community banking industry’s next generation of leaders. Our trade show/exhibitors conference is a chance to learn more about the myriad programs and services offered by our exhibiting firms – designed to help New York community banks successfully and profitably navigate today’s business landscape. Meanwhile, at IBANYS we are already planning for next year – preparing for the 2018 sessions of Congress and New York State Legislature, seeking new ways to bring value to our members through our government relations efforts, our products and services and our educational programming. Most importantly, we continue to seek feedback and input from our membership. At IBANYS, we truly mean it when we say we are “member driven” – we take our mission and direction from our members! It’s the core of why we were formed back in 1974, and as we head into the final quarter of 2017 we are more dedicated than ever to that idea. ■ John Witkowski is president and CEO of the Independent Bankers Association of New York State. He may be reached at johnw@ibanys.net or (518) 436-4646.

IBANYS Board of Directors Officers Chairman Doug Manditch Empire National Bank, Islandia Vice Chairman R. Michael Briggs USNY Bank, Geneva Treasurer/Secretary Thomas Amell Pioneer Bank, Albany Immediate Past Chairman John Buhrmaster First National Bank of Scotia, Scotia Directors Thomas Carr Elmira Savings Bank, Elmira Brenda Copeland Steuben Trust, Hornell Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden Christopher Dowd Ballston Spa National Bank, Ballston Spa Robert Fisher Tioga State Bank, Spencer E. Peter Forrestel II Bank of Akron, Akron Stephen Gobel First National Bank of Groton, Groton Gerald Klein Tompkins Mahopac Bank, Brewster Richard Koelbl Alden State Bank, Alden Paul Mello Solvay Bank, Solvay G. William Ryan Cayuga Lake National Bank, Union Springs Anders Tomson Capital Bank/ a division of Chemung Canal Trust Co., Albany Kathleen Whelehan Upstate National Bank, Rochester Michael Wimer Cattaraugus County Bank, Little Valley IBANYS STAFF John J. Witkowski President and CEO Stephen W. Rice Vice President of Government Relations and Communications William Y. Crowell III Legislative Counsel Linda Gregware Director of Administration and Membership Services

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PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

Year of Change As we approach the last quarter of 2017, it’s a good time to reflect upon what community banks have achieved – and what we continue to work toward – in both Albany and Washington, D.C. It has been a year of change and transition, filled with encouraging signs, but tempered by the knowledge that many more challenges lie ahead.

n Washington, the year has been marked by a new administration, a number of new faces in key places and some positive developments on the regulatory relief front. In our capital meetings, we have heard from our new Treasury Secretary Steven Mnuchin and the top White House economic advisor Gary Cohn. We held a meeting with the president and vice president in the White House Rose garden. We also discussed top industry concerns and priorities with the U.S. Senate Minority Leader, New York’s Chuck Schumer and with key repreStephen W. Rice sentatives on the Financial Services, Ways and Means and other relevant committees. With Congress set to return for its final push this fall, there appears to be some optimism that we may see the repeal or rollback of some of Dodd-Frank’s onerous provisions that have had such a negative impact on community banks. IBANYS members have played a key role in these outreach meetings, and with follow-up phone calls and emails urging our federal government to act to lift the restraints and burdens that have made it so challenging for local banks to meet the lending and housing needs of our local customers and communities. In Albany, we also had a year of change, with new chairs of both the state Senate and Assembly Banks Committees and the first full year of our new Financial Services Superintendent Maria Vullo. The Legislature adjourned in late June and will not return until next January. Before leaving, they approved a bill drafted and supported by IBANYS that extends the state DFS regulatory exam cycle for community banks from 12 to 18 months, and increases the qualifying asset threshold. Furthermore, after a hard push by IBANYS and the industry, we once again defeated legislation (strongly supported by the governor and the Department of Financial Services superintendent) that would have allowed tax-exempt credit unions to participate in the state Banking Development Districts program. This 6 | Banking New York

would have been a “nose under the tent” threat to eventually allow them to participate in municipal deposits business. Recognizing that this issue that will likely resurface in new legislation in 2018, IBANYS is taking a proactive approach. IBANYS President John Witkowski met with DFS Superintendent Vullo, and held conference call meetings with senior DFS leadership to discuss this and a host of other regulatory concerns impacting community banks. He also led a group of IBANYS member banks who participated in a roundtable meeting with state Senate Banking Committee Chairman Jesse Hamilton of Brooklyn to continue our dialogue, fully inform him about the role of community banks and discuss our priority issues and concerns. The pace will only increase as we move forward. Next year is an election year, when we will see every seat in both the New York Congressional Delegation and New York State Legislature on the ballot. The governor, attorney general, state comptroller and lt. governor will also be elected, as will our junior U.S. Sen. Kirsten Gillibrand. With the leadership and guidance of IBANYS’ government relations committee, board of directors and executive committee, we will be taking a careful look at all new legislative introductions and regulatory proposals. We’ll continue working with public officials at every level to represent the interests of New York community banks, and promote measures to boost economic growth and productivity. With much at stake in the coming year, we plan to continue working hard to protect and enhance our members’ future prosperity, and to demonstrate their critical importance to the economy and social fabric of our state and our local communities. ■ Steve Rice coordinates government relations and communications for the Independent Bankers Association of New York State. He has worked in the New York banking industry and New York state government for more than three decades.

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SOFTWARE MODERNIZATION | By Trevor Knott, Senior Vice President, BSG Financial Group

Data-Driven Overdraft Systems Reap Improved Service, Compliance Today’s automated overdraft management systems are a far cry from the software and practices of yesterday. These modern systems capitalize on information gleaned from each customer’s account activities to provide better service, enhance compliance, reduce risk to the bank and even reduce costs.

t is through the analysis of this data that banks can set individualized overdraft limits, create personalized communications, reduce collection expenses and provide regulators with a myriad of reports to help justify the service and explain procedures. The Evolution of Overdrafts

As recently as 10 years ago, banks began implementing automated software developed by third-party vendors to help reduce the “disparate treatment” inherent in making ad hoc “pay or return” decisions, which were often based on subjective factors. Trevor Knott Using these automated overdraft management systems, banks qualified customers for the service, providing overdraft protection up to a fixed limit (e.g., $500) at the bank’s discretion. The providers also recommended specific communications pieces (notices, scripts and letters) to be used by bank personnel in dealing with overdrawn customers. The majority of banks in the U.S. (80 percent) adopted this new overdraft technology, which resulted in record levels of non-interest income as qualified customers readily took advantage of the privilege. The service, however, also garnered unprecedented regulatory scrutiny, due to concern that these customers would abuse the service and create long-term problems for themselves and undue risk for the institution. Specifically, the 2005 Joint Guidance on Overdraft Protection Programs stated that: “Institutions should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk to the institution. Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations.” 8 | Banking New York

Likewise, the 2011 OCC-proposed Guidance on Deposit Related Consumer Credit Products (which include automated overdraft protection products) stated: “Changes in customer usage should be regularly monitored to identify risk. Appropriate action should be taken to address any risks that are identified including excessive usage and nonperformance, such as reassessing a customer’s creditworthiness; adjusting credit terms, fees or limits; suspending or terminating the credit feature; or closing accounts.” As stated above, regulators want banks to adjust their overdraft programs in order to identify and reduce risk to both the customer and the bank. The only way to do so is to actively monitor their customers’ accounts to determine what, if any, adjustments need to be made. The data helps make the decisions. Limit-Setting for Compliance and Service

Until now almost all accounts, once qualified into the overdraft program, retained the same fixed overdraft limit. This “set-it-and-forget-it” strategy assumes all customers are worthy of the same overdraft limit at any given time. This is certainly detrimental to a customer whose account indicates he cannot repay the overdraft, and likewise unfair to the individual who can afford (and is willing to incur) an overdraft in order to purchase an item outside of the fixed limit. The solution in either case is twofold: • You need to have the ability to automatically and dynamically create a risk profile on a daily basis for each individual customer, then • Adjust overdraft limits based on a customer’s ability to repay. This type of matrix scoring automatically calculates individual daily overdraft limits based on a multitude of customer data points and advanced algorithms, including specific deposit and overdraft activity, as well as related balances and more. By analyzing the customer’s account activity and applying dynamic overdraft limits, your bank maximizes service by paying/authorizing more items for those customers who can afford it and want to use it, while pulling back on overdraft limits for those who do not have the ability to repay. Your bank also incurs less risk with fewer charge-offs; and saves time making fewer pay/return decisions. Well-Timed, Personalized Communications

Mike Volpe, chief marketing officer at Hubspot, a leader

in marketing automation, said companies must use available technology and data to “make sure you touch your customers in the right way at the right time with the right information.” One-to-one communications are proven to generate better response rates and increase loyal customer relationships. With modern overdraft management software, this type of personalized communication can be created dynamically based on your customer’s account activity and other data points. For instance, let’s pretend that two different customers are both 10 days overdrawn. One has made no deposits in that 10-day period and has, in fact, incurred several more NSF items. The other has made two deposits over the past 10 days, and his history indicates he typically repays overdrafts within 15 days or less. It is the bank’s policy to send a standard 10-day overdraft letter to both customers. However, in the latter case, the bank may want to forgo sending this generic notification, because statistically, it will likely be delivered after the account has been brought back into good standing. An ill-timed, impersonal letter of this kind is a wasted expense (printing/letterhead/postage/time), and it suggests the bank does not have a relevant relationship with its customer. Whether your bank relies on internal resources, coregenerated communications or third-party software, it would be wise to evaluate how personal and dynamic your messages are and determine if there is room for improvement. A few questions to ask: • Are your overdraft communications branded to your bank? Do they look generic and unappealing? • Are you able to identify customers based on their overdraft and other account activities and automatically produce relevant, custom messaging? ºº These account activities include: experiencing an ATM/debit card denial due to NSF, overdrawn balances, days overdrawn, customer overdraft repayment capacity and other changes in account activity? • Do you communicate the relevant message using the customer’s preferred channels of communication (i.e., call/email/letter/text)? • Are you able to determine the best time to engage the customer to enhance response and collections? • Do you identify frequent ‘overdrafters’ and provide counseling alternatives and repayment plans? • Can you communicate about account activities other than overdrafts and keep a record of all engagement in a single repository? Digging Even Deeper

All too often, institutions let their overdraft programs run on auto pilot, without analyzing key program performance metrics. However, it is in these details, that you can

unearth additional service and income opportunities beyond limit-setting and communications, as outlined above. The importance of tracking these metrics consistently and reviewing them annually cannot be overstated. In fact, responsible third-party overdraft providers offer this type of annual review as part of their service. One performance metric that is particularly valuable to track is the percentage of debit card/ATM transactions that are denied due to NSF. The opportunity here is to identify those customers who have experienced such a denial and have not made a decision about opting in to overdraft protection under Reg E. These customers are demonstrating that they want to use your bank’s debit card at POS and/ or the ATM, yet their attempts at a transaction have been denied. Many of these customers have simply not responded to your bank’s invitations to opt-in under Reg. E; however, they also have not said “No.” Wouldn’t they benefit from a strategy to educate them regarding their ability to utilize this service? Consider also that repeated denials of your bank debit card will eventually result in your customer using a different card and a loss in interchange fees from that action. Now, consider the boost in revenue from capturing only 25 percent of these NSF debit denials as Reg E opt-ins increase. Other data-driven performance metrics that your bank should monitor at least on an annual basis are (but not limited to): • Eligibility of accounts in the service • Percentage of accounts overdrafting • Effectiveness of overdraft limit • Charge-off ratios and concentrations • Waiver and refund analysis Today data-driven, automated overdraft management systems offer the best way to meet compliance directives, reduce risk and improve customer service. If your bank is considering implementing a formal, automated overdraft program, a good starting point is finding a solution that can facilitate gathering and tracking this important account data. Even better, is to find a provider-partner – one that offers: • an annual review of the data with recommendations for program optimization, • a set of formal best practices, • employee training, • house-holding of account information and • ongoing consulting on policies/practices. ■ Trevor Knott is a strategic marketing veteran who has spent much of his 20year career developing marketing and distribution products and services for top-tier banks and suppliers to the banking industry. With BSG Financial Group, he develops new client relationships in the Northeast region of the U.S, forges industry partnerships and advises corporate marketing activities. Third Quarter 2017 | 9

BANK PROFILE | By Linda Goodspeed

New President At Mascoma Savings Bank Steers Community Reach

layton R. Adams sees many similarities between his old job as president of a national retail company and his new job as president of New Hampshire’s largest bank. “I absolutely have a retail perspective,” explained Adams, former CEO of glassware maker Simon Pearce of Quechee, Vermont. “I came from a business that didn’t have branches, online banking. We had retail stores and ecommerce. Our customer base wanted to be served where they want, when, how they want. It’s no different from banking Clayton Adams – mobile devices, offices, bank locations, call it omni banking. The adoption of technology is going up each year; inbranch transactions are going down. We have to accept that and listen to the voice of the customer. I think the regulatory environment the last several years allowed many banking institutions to take their eye off that. The voice of the customer is paramount. It gets back to remaining relevant.” Adams, the first new president and CEO in 27 years at Mascoma Savings Bank is well-suited to keep the Granite 10 | Banking New York

state’s largest mutual bank relevant. A graduate of Dartmouth College and its Amos Tuck School of Business, Adams is an experienced CEO. In addition to leading Simon Pierce the last five years, he spent a decade with White River Junction-based strategic consulting firm RSG Inc, and is former chairman of Vital Communities and Delta Dental Plan of Vermont. Although new to banking, he is not new to Mascoma, having spent the last six years on the board. “I relish the opportunity to lead,” said Adams who took over Mascoma in January from Stephen F. Christy, president since 1990. “I feel strongly about the role community banks play in society and making communities stronger.” Mascoma Savings Bank, headquartered in Lebanon, has been making communities stronger since 1899. Today, it has $1.5 billion in assets and 27 offices up and down both sides of the Connecticut River in New Hampshire and Vermont. It has 340 employees, two loan production facilities, another $300 million under management and a property and casualty insurance business. Northern New England is a surprisingly dynamic and competitive banking environment with several strong community banks, regionals and credit unions. In the last year, two major mergers – Bar Harbor, Maine and Lake Sunapee, New Hampshire; and Community Bank, New York and Merchants Bank, Vermont – have rocked the region. In addition to being New Hampshire’s largest bank with a total loan portfolio of about $1.3 billion evenly split between residential and commercial loans, Mascoma has further distinguished itself as the only bank in its market with a Community Development Financial Institution (CDFI) designation. As a result, Mascoma can receive New Markets Tax Credits (NMTC) allocations from the U.S. Treasury CDFI Fund to direct capital investment into underserved communities. Since 2015, Mascoma has received two rounds of funding totaling $105 million, and has recently applied for a third round. “First and foremost, the CDFI designation allows us to fulfill our mission as a community bank, and, in particular, serve underserved communities,” Adams said. “The program is primarily for job creation. We’ve had some success in parts of our market that have not seen job growth. The program also helps us as a source of non-interest income. And competitively, it helps us distinguish ourselves.” Among the projects Mascoma has helped fund are a new state-of-the-art steel fabrication plant in Berlin, New Hampshire, a food co-op, an automotive group and has several more projects in the pipeline.

“If they all close, we will be fully subscribed,” Adams said. Mascoma was also the first mutual bank in New Hampshire and Vermont to form and fund a charitable foundation (1988). Since then, the Mascoma Community Foundation has contributed nearly $4 million to local charities and nonprofits, including $937,000 in 2016. This year, Mascoma started a volunteer time off program that gives employees two paid days off annually to volunteer in their communities. “I view it as a catalyst to get people involved in their communities, if they are not already,” Adams said. Another of Adams’ first initiatives was to hire a chief information officer – someone with a software background,

rather than banking – “We wanted that perspective,” Adams explained. “And we have the scale to do it.” He said the flip side of technology – the bank’s branch network – “will look different tomorrow than it does today, whether that means expanding in different places or finding different ways to serve customers in existing communities, it all gets back to being relevant down the road.” One of the biggest challenges facing Mascoma and other northern New England banks is demographics. Maine, New Hampshire and Vermont are among the oldest states in the country, all experiencing alarming losses of young people. “Demographic trends are affecting everything from recruitment to new business,” Adams said. “With the exception of certain markets, growth is flat or declining in most of our region.” Increased regulation is another challenge, but Adams said being new to banking gives him a different perspective. “I have nothing to compare it to. I don’t know what it was like before. My view is it’s just something we have to adapt to. “With our scale and products, New Markets program, commercial lending, retail lending and products, technology and people, we have a lot to offer customers and communities.” ■

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BACK TO PLAN A | By Christina Oâ&#x20AC;&#x2122;Neill

SBLI of MA

REVERSE-ENGINEERS

Insurance Co. Converts Back to Mutu al 12 | Banking New York

he Savings Bank Life Insurance Co. of Massachusetts has officially ended its 25-year run as a shareholderowned company, and has reclaimed the mutuallyowned status it held for 85 years since its 1907 founding. That move runs counter to the typical migration from mutual company to stockholder-owned. Regulatory approval for the conversion has been secured from the Massachusetts Division of Insurance and accepted by the Secretary of State’s office, SBLI President and CEO Jim Morgan told Banking New England. SBLI’s financial advisor, Piper Jaffray, conducted and concluded due diligence on the institutional investors that purchased the surplus notes to fund the stock buyback at the center of the remutualization, Morgan said. A remutualized SBLI gives policyholders total ownership of the company, as well as voting rights to select members of the SBLI board, which selects SBLI management. SBLI actuary Steven I. Schreiber of Milliman Inc. said in a January 2017 letter obtained by Banking New York that such ownership rights “should ensure the continued reasonable financial treatment of the SBLI policyholders.” The votes in a special meeting held June 28 and counted by all methods beginning on May 19 – in person, by phone and by proxy – amounted to 10.4 percent of the total voting contingent. Ninety-two percent voted in favor of the move, but the conversion was not without objectors. The special meeting vote on June 28 came days after a class action suit filed in Suffolk County Superior Court sought to block the remutualization. A policyholder filed a class action suit, McEvoy vs. SBLI of Massachusetts in Suffolk Superior Court, claiming that the terms of the remutualization would negatively impact the policyholders who would become SBLI’s sole owners. The plaintiff’s attorney had requested that the Suffolk Superior Court judge hearing the civil case enjoin the policyholders’ meeting, but on June 30, Suffolk Superior Court Judge Mitchell Kaplan denied the request, in part because voting on the matter had opened more than a month previously, resulting in many of the votes being cast and counted before the June 28 meeting. The plaintiff subsequently filed a second request on the day of the meeting. On July 12, SBLI filed notice for dismissal of the case; days later, the plaintiff’s attorney voluntarily withdrew the suit. At the center of McEvoy’s complaint were allegations of shortcomings in the disclosure notice of the conversion, which would result in a windfall to the 30 bank stockholders at the expense of policyholders.

The McEvoy suit’s dismissal might relegate the dispute into the realm of inside-baseball financial disputes, except for this: In today’s environment of increased financial vigilance on the part of financial clients, it represents an increased level of questioning of the quality and scope of financial disclosure materials. The plaintiff alleged that SBLI’s notice of the special meeting was “false, deceptive and misleading” because it didn’t take into account the potential loss of the tax advantage of $219 million of net operating loss carryforwards or the ultimate cost of the surplus notes to policyholders. Additionally she alleged the special notice did not include a fairness opinion from Jaffray. Judge Kaplan’s denial of the plaintiff’s request cited that the surplus notes were expected to bear 6 percent interest a year, “in excess of that which management asserts it will have to offer to sell the notes.” He added, however, that the meeting notice “could have been more clear” in offering data on costs and debt service on the notes. However, Kaplan concluded that “the issuance of the surplus notes outweighs the potential irreparable harm,” and that if the conversion results in unlawful transfer of value from policyholders to shareholders, policyholders could theoretically assert other legal claims. Joseph M. Belth, professor emeritus of insurance at Indiana University, concurred with McEvoy’s concerns about the shortcomings of SBLI’s notice to policyholders. “For example, the failure to disclose the potential loss of net loss carryforwards was a serious omission,” he told Banking New England. “Also, the Piper-Jaffray opinion should have been attached. And the Milliman opinion was tacked on to the package policyholders had to request rather than to the package automatically sent to them.” Belth added that he thinks the judge should not have dismissed McEvoy’s complaint. SBLI President and CEO Jim Morgan responded to BNE via email: “The valuation work done by Piper Jaffray was done for purposes of providing a value of what the banks’ ownership was and to provide the bank shareholders a fairness opinion. That was used for the shareholder vote (the Commissioner of Insurance recommended against inclusion of the Piper Jaffray opinion in the notice to policyholders. … The Milliman exercise valued the entire [c]ompany and provided a fairness opinion specifically for the policyholders. It was included for the policyholders and was always intended to be included.” The change in ownership status by itself does not stop continued on page 14  Third Quarter 2017 | 13

BACK TO PLAN A | continued from page 13

the $40 million in dividends paid to policyholders, William Pargeans, director of life-health ratings division at A.M. Best, told Banking New England in June before the conversion was finalized. He added that the dividend payout could change based on a number of factors including SBLI’s operating performance.

Course Reversal The remutualization runs counter to the more common transition from mutual to stock ownership. That switch allows for more liquidity – the ability to buy and sell stock – and gives shareholders a voice on the entity’s board of directors, not a perquisite of policyholders in a mutual, despite their ownership of the company’s assets. Despite the ubiquity of the SBLI acronym on banking and insurance websites, there is no legal link between those and the Savings Bank Life Insurance Co. of Massachusetts (SBLI), A.M. Best’s Pargeans said. SBLI of Massachusetts is a single legal entity headquartered in Massachusetts and is licensed to sell life and annuity products in the District of Columbia and all states except New York. In its status as a stock company, its dominant shareholders were 30 savings banks with operations in Massachusetts. Half of those banks – some of the nation’s largest among them – acquired Massachusettsbased savings banks, the original owners of SBLI’s shares. As insurance sales by bank shareholders have plunged from 100 percent prior to 1990, they account for less than 0.1 percent of insurance sales today, SBLI said in its policyholder information. Bank shares are fairly illiquid investments, and are subject to increased reserving requirements against holdings that are not listed on exchanges as mandated under Basel III rules. The information SBLI mailed to shareholders helped explain the company’s thinking. It cited the Massachusetts Division of Insurance’s assertion that shareholders owned 100 percent of SBLI and that policyholders had no equity in the company, its surplus or its residual value. SBLI also asserted that the conversion would eliminate a complex corporate structure, and would free up the board of directors to focus on policyholder interest. It predicted upward pressure on dividend payments on the part of banks – an assertion with which its actuary agreed – to the detriment of policyholders. In the runup to the June 28 meeting, the social media site Fat Wallet lit up with comments on this topic, mostly from those who said they would vote against the remu14 | Banking New York

tualization. Commenters’ concerns included how the assumption of debt to buy out the shareholders would impact policyholders’ premiums and dividends and whether the interest payments on the debt would eclipse the dividends shareholders had received and, as a result, sap the company’s residual value. Additionally, there was concern that policyholders in a mutual tend to vote their proxies with management, unlike institutional shareholders, who take a more activist role to monitor management behavior. Given the existing shareholder dividends paid by SBLI and the challenges associated with raising the dividend payout, the banks’ returns on SBLI shares were expected to be coming under pressure, A.M. Best’s Pargeans said in June. SBLI’s policyholder information included a statement that several of its bank shareholders had approached it in 2015 expressing an interest in liquidating their common stock because Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks from 100 percent to 400 percent, requiring them to quadruple the amount of capital held against their investment. A.M. Best last November downgraded SBLI’s financial strength rating from A+ (superior), a long-held designation, to A (excellent), revised from negative to stable. The SBLI actuary said that SBLI told him that the downgrade was not related to the then-proposed mutualization. The retirement of the bank shares would end their dividend payment, which was $1.8 million annually, as reported in SBLI’s statutory financial filings. While dividend payouts would end, the surplus notes will have a required interest payment, which would be known at the time of issuance, A.M. Best said. When analyzing the expected impact of paying interest on surplus notes (tax deductible) against the current stock dividend payouts to shareholders (not tax deductible), Pargeans said the opinion was that the net impact would not have a material adverse effect on the financial position of SBLI. Moreover, the interest payments are fixed over the life the surplus notes whereas the share dividend payments are subject to potential increases over time, he said. SBLI will continue using the SBLI brand for marketing but its official name will be The Savings Bank Mutual Life Insurance Co. of Massachusetts. Once the current four banking members of its nine-member board serve out their terms, they’ll be replaced with investment and technology experts. ■

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WORKING TOGETHER | By Stanley V. Ragalevsky and Robert M. Tammero Jr., K&L Gates LLP

Structuring Bank and Fintech Collaborations

ome bankers view the rapid rise of “fintech” as an existential threat to traditional banks, especially community banks. But while fintech surely is changing financial services, it is also creating new opportunities for banks. For fintech Stanley V. Ragalevsky companies, banks are potential partners with a loyal customer base, stable and inexpensive funding and extensive infrastructure to support financial transactions and Robert M. Tammero Jr. regulatory compliance. For banks, fintech companies can be partners that help provide the technology and innovation that bank customers now demand. Given these potential synergies, it is no surprise that the pace of bank and fintech collaboration is growing exponentially. Structuring a collaboration between a bank and a fintech company can be a substantial and complex undertaking. In addition to the traditional business considerations for any investment, joint venture, licensing or business combination transaction, there are significant additional legal and regulatory considerations for both the bank and the fintech company when the two decide to “partner” in some way. The business of banking is heavily regulated in order to protect the public. A fintech company cannot simply decide to go into the banking business without coming into contact with the bank regulatory system. Likewise, a bank may not establish a significant third-party relationship or invest in a business without complying with applicable banking laws and regulations. So what are the options 16 | Banking New York

for a fintech company and a bank considering a collaboration? As an initial step, the bank and the fintech company should determine what they hope to achieve from the collaboration. Relevant considerations include: What are the business objectives that each seeks to address by collaborating with the other? Is the bank merely looking to purchase a product or service from a vendor, or would it like to establish an ongoing relationship with a fintech company in which the bank has an ownership interest? Is the fintech company looking to the bank as a potential customer, investor or partner to help bring its product or service to market, or some combination of these? Will the fintech company provide products or services exclusively to the bank or to other (perhaps competing) banks as well, and is this expected to change over time? On one end of the collaboration spectrum is the traditional third-party vendor arrangement where a bank engages a fintech company to license or provide a product or service in exchange for fees. A bank’s relationship with its core processor is an example. Such arrangements are typically governed by a written contract that sets forth the respective rights and obligations of the parties. Regulatory guidance in this area focuses primarily on the bank’s due diligence, selection and ongoing oversight of the thirdparty relationship and associated risk management principles, policies and procedures. On the other end of the collaboration spectrum are situations in which a bank makes an equity investment in fintech – that is, to have some manner of economic rights or control with respect to a fintech company or its technology. The maze of legal and regulatory requirements and restrictions for this type of collaboration can be difficult to navigate. It is important

for both parties to get the structuring right - the bank due to regulatory expectations, and the fintech company due (often) to limited resources and runway. Many banks are owned by a bank holding company. Those that are may consider structuring their investment in a fintech company through a nonbank subsidiary of the bank holding company. The Bank Holding Company Act allows bank holding companies to own or control non-banking companies that are engaged in certain activities that are closely related to banking. If the fintech company is not engaged in activities that are permissible under the Bank Holding Company Act, then any investment by the bank holding company must be non-controlling. “Control” by a bank holding company over a fintech company subjects it to regulation, supervision and examination by the Board of Governors of the Federal Reserve System. Most fintech companies would want to avoid this. Furthermore, if a bank holding company makes a controlling investment, the bank holding company must monitor the activities of the fintech company to make sure they remain permissible, or it must negotiate contractual provisions that prevent the fintech company from engaging in impermissible activities (or, ideally, do both). For these and other business reasons, such investments are often structured to be non-controlling. In the case of a bank without a holding company that wishes to make an equity investment in a fintech company, generally the fintech company’s activities must be activities that would be permissible for the bank to conduct directly under applicable law. National banks have broad authority under the National Bank Act and OCC policy to engage in electronic activities that are functionally equivalent

to or a logical outgrowth of a recognized banking activity. “Wild-card” state banking statutes allow statechartered banks to engage in activities that are permissible for national banks. Under Massachusetts law, for example, Massachusetts state-chartered banks generally may engage in activities that are permissible for national banks upon notice to the Massachusetts Commissioner of Banks. As a corporate structuring matter, a bank or a bank holding company may make an investment either in a fintech company directly or in an entity created to facilitate the collaboration – either to form a joint venture or partnership with the fintech company or as a special purpose entity owned by the bank or holding company and formed to hold its investment. Legal, tax, and accounting considerations may cause the parties to favor one structure over another. The man-

ner and scope of the investment will dictate the initial regulatory requirements, such as whether a regulatory application or notice is required, as well as any ongoing regulatory requirements and restrictions. Banks may want to meet with their regulator early on in the process to discuss whether the collaboration is workable from a regulatory standpoint and any particular regulatory concerns. Collaboration structuring will also, of course, depend on the business terms of the relationship. For example, any rights of the bank to terminate its investment (for regulatory reasons or otherwise), to protect its investment through additional purchases of equity, to sell its equity in the event that the fintech company engages in an initial public offering, or even to ultimately acquire the fintech company, should be thought through and appropriately reflected in the documents

governing the relationship. Attention should also be paid to the regulatory consequences of any of these actions. The considerations discussed above are just a sampling of the many business, legal, and regulatory issues that banks and fintech companies must confront when seeking to collaborate. While these issues may seem daunting, the potential rewards of a successful collaboration - more engaged, satisfied customers doing more business with the bank through better technology - are significant. Moreover, there is a growing sense that banks which do not embrace the innovative technologies being developed by fintech companies may soon find themselves left behind by their competitors. ■ Stanley V. Ragalevsky is a partner and Robert M. Tammero Jr. is an associate in the Boston office of K&L Gates LLP.

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Third Quarter 2017 | 17

COMMUNITY CONTRIBUTION | By Bruce Paul

If Your Bank is a Strong Contributor to the Community, Do You Get Recognition For It?

any community banks and credit unions pride themselves on the contributions they make to their communities. This includes supporting local charities, funding scholarships, planting trees or otherwise helping their neighbors. While these great acts can certainly be their own reward, community banks also deserve public recognition for their great works. Other than the obvious benefits to the community, the contributions a bank makes to its community have two strong benefits for the bank itself. The first is the influence on prospects, or non-customers. Many prospects learn Bruce Paul about potential banks from advertising or from community involvement. Our studies show that advertisement is generally more effective at raising awareness among prospective customers than community works alone. Indeed, this is why many banks set aside large budgets for traditional marketing campaigns. However, our studies of bank customer behavior show that while ads are better at driving awareness, community contribution can be more effective at driving consideration. The latest results of the Q2 New York Bank Prospect Benchmark show that community contribution increases prospects’ consideration of your bank by an average of 126 percent. Not a bad side-effect! And for smaller banks with lower awareness, the increase is even higher. Anyone wishing to receive the New York Bank Prospect Benchmark results can contact Customer Experience Solutions for the specific community contribution results as rated by each bank’s own prospects. All of the data cited in this article is based on that study. Community contribution increases consideration by prospective customers by 126 percent. The second impact that community contribution has on a bank’s business in on its current customers. When current customers see their bank’s involvement in the community, it can improve the esteem they already have for their bank. Our research has shown that the positive impact can increase their loyalty to the bank, meaning they are less likely to leave and more likely to increase long-term spending with their bank. The latest New York Bank Customer Benchmark report showed that recognition of community contribution increases customers’ share of wallet significantly with their bank and their long-term loyalty goes up by 88 percent. Community contribution increases current customer loyalty by 88 percent. While it is probably not a big surprise to some that contribution to the community has an impact on the top and bot18 | Banking New York

tom lines, many banks are not actually getting the benefit they should be. Many community banks and credit unions spend a lot of money and effort contributing to the community, but their current and potential customers simply don’t know about it. This is very frustrating to marketing and community giving leaders in some banks, and a wasted opportunity for many. It is very important to know just how much recognition you are getting for your good work, and how you can improve that ROI. The challenge for banks is breaking through the clutter to ensure your customers and prospects appreciate your contribution. In our research, we saw that in one specific market, two community banks had equivalent amounts of community involvement in terms of gifts to charity, hours volunteered by their staff, sponsorships, etc. However, one of the two banks was rated 275 percent higher in terms of community contribution by their respective customers and 388 percent higher by non-customers. While each bank did similar levels of community outreach effort, one was using much more efficient channels and coopting local nonprofit partners to get the word out. Not coincidentally, the bank with the better outreach is currently achieving stronger growth in new customers, especially commercial customers. The first step to getting the maximum credit (and business impact) from your community contribution, is to understand how you currently stand with customers and prospects, in your specific market and in relation to your competition. Do your current customers see and appreciate your good work? Do your prospects? The second step would be to make reasoned adjustments and tweaks to the programs to see what the impact is. A bank may need to improve its community outreach to gain greater recognition, or it may need to emphasize different types of community involvement to broaden its exposure. Spring and summer are times of increased giving and involvement in community affairs so recognition can go up. But it can also be harder to differentiate since other institutions are increasing their involvement as well.

The third step is to measure how much the changes have moved the needle in terms of recognition of community contribution. And just as importantly is to track the impact that they recognition is having on awareness of the bank and consideration to use the bank in the future. Tracking your ratings over time will show you exactly how your community contribution, and all other marketing efforts, are truly impacting how your prospects and customers view you. This will allow you to fine tune your programs so you get the maximum benefit for the bank while doing the maximum good for the community. So as the weather grows warmer, consider your community involvement activities – what are you currently doing? Are you sure you are getting the credit you deserve? What can you do differently? And most importantly, what you can you do to make sure your current and prospective customers see what you’re doing? The New York Bank Benchmarks are based on over 75,000 unbiased consumer and business reviews in New York State, gathered in May-June 2017. ■

Community Contribution Rankings As Rated by Banked Adults in New York State

For more information and your specific bank results, email Bruce Paul, CEO of Customer Experience Solutions, at bruce@ cescx.com.

As of Q2 2017. This is the contribution that the public sees, and does not necessarily line up with the actual level of community contribution.

1. Watertown Savings Bank 2. Tompkins Trust Company 3. Glens Falls National Bank 4. Adirondack Trust Company 5. Canandaigua National Bank 6. Richmond County Savings Bank 7. Rhinebeck Bank 8. Jeff Bank 9. Ulster Savings Bank 10. Adirondack Bank 11. Solvay Bank 12. Canandaigua National Bank & Trust 13. Ballston Spa National Bank 14. Walden Savings Bank 15. Tioga State Bank 16. Bridgehampton National Bank 17. Fairport Savings Bank 18. Saratoga National Bank 19. Tompkins Bank of Castile 20. TD Bank

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Third Quarter 2017 | 19

ROBUST REGULATION | By Al Alper

First Round of Compliance Required for New Policy What You Need to Know to Be Ready

lthough Aug. 1 might typically mark the last hurrahs of summer, the advent of the new month marked five months since 23 NYCRR Part 500 went into effect. For New York state businesses that report to the Department of Financial Services (DFS), this means you have a scant four weeks before the 180-day transitional period that started March 1 ends and you are expected to meet the first round of compliance required by the new regulations. If you haven’t evaluated your business’s cybersecurity posture yet, as well as identified where you have potential exposure, now is the time to do so. Not unexpectedly, the first round of Al Alper required cybersecurity requirements is fairly robust. Specifically, by Aug. 28, businesses that report to DFS and fall under 23 NYCRR Part 500 will need to have done the following: establish and maintain a cybersecurity program, implement and maintain a cybersecurity policy, designate a qualified individual (internal or outsourced) to serve as chief information security officer (CISO) responsible for making sure private information is protected; establish an audit trail; determine access privileges; implement application security; identify cybersecurity personnel and intelligence; develop a third-party service provider security policy; devise limitations on data retention; establish training and monitoring programs; ensure the encryption of nonpublic information; ready an incident response plan and follow through on notices to the superintendent. If you have not yet buttoned up your cybersecurity requirements, there is no time to waste. Review your internal IT capabilities, and assess their vulnerabilities so that you can best determine how to move forward to safeguard your technology and become compliant. For operators of smaller companies without internal IT capabilities, your best bet may be to partner with an IT security provider who is familiar with the new requirements and can offer a turnkey solution that offers a package of services to meet all the requirements. You should also look for IT security providers with knowledge of 23 NYCRR 500 if your organization is small to mid-size with some internal or outsourced IT capability but still needs reassurance about meeting all of the requirements (especially, for example, identifying a partner that can serve as the company’s CISO), or if it’s a larger company with an established internal IT department but may be missing one or two elements that an outside IT security partner could provide a la carte. Should you be exempt from any of the cybersecurity requirements, your organization has until Sept. 27, 2017, to file a Notice of Exemption. Some limited exemption criteria include thresholds for totals number of employees, gross revenue and 20 | Banking New York

year-end total assets that, if you fall beneath, you will get relief from some of the requirement – but not all! Once the exemption deadline passes, organizations that report to New York state’s DFS have some time before the next rounds of deadlines. On Feb. 15, 2018, affected organizations will need to submit a written statement that reviews the previous calendar year to the superintendent. By March 1, 2018 (a full year after the initial adoption of the regulations), affected organizations will also need to ensure their CISO offers a report in writing to the organization’s board of directors or equivalent governing body. Additionally, penetration testing and vulnerability assessments, risk assessments and multifactor authentication must be implemented by this time. Additional transitional time periods will end on Sept. 3, 2018, and March 1, 2019. While New York state businesses and organizations that fall under the jurisdiction of the DFS must fulfill these requirements in a time-sensitive fashion, other organizations (regardless of state of operation or DFS status) would do well to review their own cybersecurity situation, and augment that as needed and suggested. In fact, most of the cybersecurity requirements set forth in 23 NYCRR 500 are really just best practices for any organization, and aren’t that terribly expensive or difficult to employ. And while New York is the first state to require such cybersecurity regulations be met, it’s only a matter of time before other states – and other industries – follow suit. Examining your cybersecurity position now can help you stay ahead of the competition, as well as offer your clients additional protection – not to mention safeguard your business against the short- and long-term financial implications that result from a cybersecurity breach. A qualified IT or technology security company can help organizations put these strategies in place quickly and easily. Regardless of whether your organization needs to meet the August 28 deadline, effective cybersecurity just makes good business sense. But if it is a New York state organization that reports to the Department of Financial Services, be sure to quickly evaluate your current cybersecurity position, determine where your potential shortfalls are, and button up your cybersecurity efforts to ensure they are effective, complete and proactive, by Aug. 28. Use 23 NYCRR 500 to your advantage – as a tool that makes sure nothing is overlooked in terms of cybersecurity, and provides constant incentives for continued improvements. ■ Al Alper is CEO and founder of Absolute Logic, which since 1991 has been providing Fortune 500-style technical support, security services and technology consulting to businesses of up to 250 employees within Connecticut and New York. He may be reached at al.alper@absolutelogic.com or (855) 255-1550.

CYBERSECURITY REGULATION | By Steve Viuker

Talking DSF 500 with Ken Bigelow, Managing Partner at Sionic Advisors WHAT SHOULD BANKS KNOW ABOUT DFS 500? This is probably the most constrictive and restraining rule on cybersecurity. You have to classify and encrypt your data. Firms must have a risk assessment in place and need to train their employees properly. By Feb. 15, 2018, everything must be in place. Many banks are smaller branches of foreign banks and do not have that level of security and sophistication with respect to cybersecurity.

ARE CYBER BREACHES THAT MUCH OF A THREAT? Cybersecurity is a real problem that has an outside threat. It’s not the industry failing to manage itself; its the industry getting attacked from outside. Even if the current administration decides to ease regulations, this isn't something they can back off on. The technology platform of financial services is trailing the bad guys. They are losing the race. In my view, this is cultural change that the industry has to go through.

WHO TAKES THE FALL IF THERE IS A BREACH?

Ken Bigelow

s cybersecurity attacks and threats increase, the issue continues to weigh heavily on the minds of financial institutions. It is no longer enough for the IT department to manage cybersecurity – it now needs to be managed as a component of operational risk by the firm’s top management. In an effort to combat these threats and protect consumers, the New York State Department of Financial Services (NYDFS) announced DSF 500, the most rigorous cybersecurity regulation issued to date requiring both risk-based and compliance approaches to managing cybersecurity. These newly specified requirements will be challenging for regulated firms to address. Additionally, a transitional period of 180 days began on March 1, so compliance with the first set of requirements must be demonstrated by Sept. 1, 2017. Sionic Advisors, a firm that implements compliance regulations for financial services firms, announced a DFS Cybersecurity offering to perform a DFS 500 Readiness Assessment. Ken Bigelow, managing partner at Sionic Advisors, explained why DFS 500 was enacted, its impact on the banking industry and the risks if measures are not implemented properly.

In terms of responsibility, the rule states a senior board or senior officer has the ultimate responsibility. This is similar to what Sarbanes/ Oxley did for CEOs. In most of the small foreign banks in the United States, there is usually one person who is country representative. That person has to sign and certify that their firm is in compliance with the rules and regulations. If not, he or she has personal liability. It is the same as the anti-money laundering law; the person who signs is personally responsible. The DFS point of view is that you have a global platform and you are exposing the firms we regulate. So you need controls around your entire platform.

WHERE DOES A FIRM SUCH AS YOURS FIT IN? A firm such as ours will not give legal advice.. We are not a law firm. But once you understand the ramifications of the rule, a firm such as ours will help you put the process in place. A list of some of those requirements is below: • Detailed policies and procedures for 14 key coverage areas must be implemented. • Specific rules for test frequency, encryption, continuous monitoring, audit trails, authentication requirements and staff qualifications. • Annual certifications of compliance must be submitted to the regulator, the first one is due Feb. 15, 2018. • Third party security policies and due diligence requirement for all vendors. • 72-hour DFS notification requirement for a discovered cybersecurity. • Definition of data to be protected is expanded – “nonpublic information” – will require reclassification of critical data and added data management processes. ■ Third Quarter 2017 | 21

INDUSTRY NEWS

MOBILE BANKING STARTUP SUBMITS APPLICATION TO BECOME NATIONALLY-CHARTERED BANK A mobile banking startup seeks to become the first national bank in American history designed for people who want to bank first and foremost on their smartphones. Varo Money Inc., a company helping customers solve financial problems, manage money and reach financial goals, announced today that it has applied with federal regulators to become a nationally-chartered bank. The company submitted applications to the Office of the Comptroller of the Currency for a national bank charter and to the Federal Deposit Insurance Corporation for federal deposit insurance to form Varo Bank N.A. Varo believes the smartphone is the indispensable toolbox that can transform the way that people manage their finances. Last month the company launched in the Apple App Store through a partnership with The Bancorp Bank. The Varo app allows customers to manage cash flow, track spending and see all their accounts, while also handling everyday banking. With a national bank charter, Varo would be able to deliver on its promise nationwide, offering its customers access to a full range of products and solutions and the highest standards of consumer protection. “The organizers of Varo Bank N.A. bring an enormous depth of knowledge in financial services and consumer technology to their endeavor,” David Coulter, former vice chairman of JPMorgan Chase & Co. and former CEO and chairman of Bank of America Corp., in a statement. “Acquiring a national bank charter and federal deposit insurance is difficult and it takes time, but Varo is poised for success and backed by leading investors with a financial commitment to creating the bank of the future. If they succeed, they will truly be in a position to make banking better.”

KEYCORP. ACQUIRES PERSONAL FINANCE SOFTWARE PLATFORM KeyCorp. announced it has closed the acquisition of HelloWallet, a personal finance software platform, from Morningstar Inc. The acquisition will allow KeyBank to provide additional support for its clients’ financial wellness, including business clients that offer employees Key@Work, KeyBank’s comprehensive workplace program. The HelloWallet platform provides cli22 | Banking New York

ents with tools designed to help them make more confident financial decisions. The platform will also educate KeyBank with individual client’s financial circumstances and goals that drive every interaction with clients.

DIME COMMUNITY BANK’S EVP, CHIEF RETAIL OFFICER RETIRES Dime Community Bank, subsidiary of Dime Community Bancshares Inc., announced that William E. Brown resigned as executive vice president and chief retail officer of the bank, effective June 15, 2017. Brown has served as executive vice president and chief retail officer since joining the bank in 2016.

PULSE STUDY: DEBIT FRAUD LOSS RATES DECLINE AFTER CHIP CARDS INTRODUCED U.S. financial institutions substantially increased issuance of chip debit cards in 2016 and experienced reduced fraud losses, according to the 2017 Debit Issuer Study commissioned by the debit/ATM network PULSE. Since the fraud liability shift for most debit transactions took effect in 2015, an estimated 80 percent of U.S. debit cards have been converted to chip cards. The study also found that fraud loss rates dropped by approximately 28 percent in 2016 compared to 2015 levels. Nonetheless, the 12th annual Debit Issuer Study confirmed that fraud continues to challenge issuers. U.S. financial institutions lost an estimated $900 million to debit card fraud in 2016. But reducing card fraud is not a simple prospect. The study also found enrollment of debit cards into Apple Pay increased 80 percent in 2016. Key findings include: • Three out of four issuers now support debit cards being loaded into at least one mobile wallet. • Enrollment among consumers also has increased, with Apple Pay remaining the most popular mobile wallet, which includes Android Pay and Samsung Pay. • Usage, however, of debit cards in wallets remains low. Combined, Apple Pay, Android Pay and Samsung Pay account for only about one-quarter of 1 percent of U.S. debit transactions. Issuers have put chip debit cards in the hands of consumers at a faster pace than anticipated in last year’s study. “Chip-on-chip” transactions – those conducted with chipenabled cards at chip-enabled terminals – amounted to 30 percent of all debit transactions in January 2017, a 650 percent year-over-year increase. ■

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