2019
Banking trends and issues to watch in
2020
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BANKING
ROB SCHWISTER, Phoenix Metro Market president, Alerus:
By MICHAEL GOSSIE
W
e are looking at a radically transformed banking industry heading into 2020 thanks to FinTech, consolidation, digital-first banking, and continuous innovation. We even saw a credit union buy a bank in Arizona this year. Yet, despite the constant disruption, the banking industry remains almost universally optimistic, despite some lingering question marks. “We will be heading into an election year so anything can happen,” says Todd Gerber, WaFd Bank Arizona commercial manager. “Headwinds include a continued tight labor market with unemployment in Arizona at 4.9 percent; increase in minimum wage to $12 in January 2020; and trade war and increased tariffs with China causing additional uncertainty among business owners. “Conversely, tailwinds — or positive — factors include long-term interest rates remaining low (since August 2019, the 10year treasury has been below two percent); advances in technology continue to drive efficiencies for the business community; inflation remains relatively low; and domestic net migration to Arizona continues to be a positive factor due to lower cost of living,” Gerber says. So what can we expect out of the banking industry heading into 2020? Here’s a snapshot of what some of Arizona’s leading banking experts say we can look forward to in 2020: 92
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“The industry is very healthy, so I see expanded investment in new technologies that will make it easier for people to do business with us.”
DON H. GARNER, CEO, Alliance Bank of Arizona: “Based on research Alliance Bank of Arizona shared during our 2019 Economic Forum, we’re seeing strong growth heading into 2020. Positive employment figures and continued growth in Arizona’s key industries, including both commercial and residential real estate, healthcare and tourism, are also leaving our clients optimistic about 2020, which is exciting to hear as their business-banking resource.”
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s and e i r t s u nd rio i nd their a v r midd o f n r i e g mana panies itions, expa ings and /or m egion r o , c T l R AE t loca ake acquis new build elping our a N AC K e A r G g E y m M h rk wit help them ational), bu cash flow. H o w e p to “W ern peed u my job.” ntinue stic and int s o c o t l l ’ we (dome ury platform est part of s t n i r p foot treas als is the b r i e h t CANDACE HUNTER WIEST, go de upgra hieve their president and CEO, West Valley National c a s t Bank: “I continue to be concerned n clie ing, J t b a nk e k r a us le m
MIKE BROWN, president, WaFd Bank Arizona:
“Our industry’s success will continue to be tied to how we not only react, but how we anticipate and proactively put effective plans, procedures and processes in place. In general, I think all Arizonans will adapt accordingly and we will ride a wave of prosperity at least through 2020.” DAVE RALSTON, CEO, BOK Financial: “The outlook for the banking industry heading into 2020 looks promising, but not without its challenges. Bank earnings will benefit from tax reform and rising interest rates, but will be muted by rising costs of technology and regulatory compliance. These escalating costs — along with proposed regulatory reforms — could accelerate consolidation in the industry.” MICHAEL J. THORELL, president and CEO, Pinnacle Bank, which was acquired by Arizona Federal Credit Union earlier this year: “We continue to share the hope that we will see reasonable regulatory reform which will result in a positive experience for both the industry and our clients.”
about the possibility of a mild recession. Hopefully, the Fed will continue to sit pat with interest rates. The recent increases have significantly impacted some of our small businesses. And the housing market seems to have slowed in the markets we serve, which include Arizona, Southern California and Las Vegas. I do not expect any meaningful regulatory relief.”
JEFF FRIESEN, president of the Arizona Region, Enterprise Bank & Trust: “I believe the banking industry will remain healthy in 2020. However, the biggest disruption will be due to the fast growing technology space — FinTech. While expansion in technology, within the financial sector, will continue to be very creative, it creates issues within the current regulatory world, which will need to be addressed.”
JIM S. PATTERSON, president and CEO, UMB Bank Arizona: “We are fortunate enough to have experienced continuous growth in Phoenix. We are excited to continue to grow our business while supporting our clients in reaching their goals, whether that be for growth and expansion or preparing for succession.”
Dave Ralston
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BANKING ON THE FUTURE Here’s how Arizona is becoming a national leader in financial technology
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rizona’s emergence as a technology hub is no longer a secret. Our growth has been covered in The New York Times, Inc., Forbes, The Wall Street Journal and other national publications across the country. The combination of a pro-business/pro-technology state government, the low cost of living and the combination of large technology companies with a promising startup ecosystem have made Arizona the perfect place for innovation.
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One of the reasons Arizona has elevated itself in the national innovation scene is because of the emergence of financial technology, or FinTech. The primary driver occurred March 2018 with the passing of HB 2434, which made Arizona the first state to enact a regulatory FinTech “sandbox� that allows emerging companies in FinTech, including blockchain and digital assets to grow their respective innovations without stringent regulations. The program grants companies in these industries the opportunity to grow their businesses for up to two years or gain up to 10,000 customers before needing to apply for a formal license. Because Arizona was the first state to openly welcome the development of FinTech, we have a distinct competitive advantage within this space. This is important, as FinTech is among the fastest-growing technologies to date. According to a 2017 global FinTech report, AB | November - December 2019 97
BANKING 77 percent of financial service institutions expect to adopt blockchain and other FinTech applications by 2020, and FinTech adoption is projected to result in increased revenue of up to 20 percent. Leading the way Since Arizona enacted its FinTech sandbox, Utah, Wyoming and Nevada have also developed their own versions, but Arizona’s program provides the most freedom. Unlike other states, Arizona allows companies from out of state to participate. This has allowed Arizona to offer the most attractive program for successfully recruiting new companies, furthering the potential to grow this technology sector. In fact, in 2017 the BBC News reported that Arizona is even beginning to overtake New York in the financial sector. From March 2016 to March 2017, hiring for finance and insurance jobs grew faster in Arizona than any other state in the country.
To date, Arizona has welcomed eight companies into the program, including Align Income Share Funding Inc.; Enian Ltd., Verdigris Holdings Inc.; Omni Mobile Inc.; Grain Technology Inc.; Wisetack, Inc; Zona Digital Commodity, LLC, and Sweetbridge NFP Ltd. The Arizona attorney general’s office, which is responsible for oversight of the sandbox, and groups like the Arizona Bankers Association are also actively marketing the sandbox to draw more FinTech companies to the Valley. “The FinTech sandbox is still in its infancy, but we are already seeing a lot of interest from startups locally and across the nation who want to test their ideas,” said Paul Hickman, president and CEO, Arizona Bankers Association. “I believe we will see the program lead to a substantial influx of innovation in Arizona’s financial sector.” One industry that will be heavily impacted by FinTech innovation is the banking sector. Many banks around the
THE FINTECH SANDBOX Arizona’s FinTech sandbox allows participants to temporarily test-drive their products, engaging in certain financial services activities under regulatory supervision without undertaking the costly process of securing traditional licenses prior to operation. The Arizona sandbox is designed to allow innovative ideas to get to market more quickly by reducing “one-size-fits-all” regulatory requirements in exchange for more active involvement by the Attorney General’s Office. It’s not a license for participants to do whatever they want, but it is meant to provide a dynamic arrangement where the regulator and participant can observe what’s happening in the market and make adjustments as needed regarding monitoring and regulatory compliance at the state level. The Arizona Attorney General’s Office is responsible for the admission process into and oversight of the sandbox.
country are watching Arizona’s program to see which innovations can be leveraged to improve their financial services. Banking industry benefits “We believe one of the greatest opportunities that will arise for startups graduating from our sandbox program will be opportunities for investment from banks,” said Evan Daniels, FinTech Sandbox Counsel for the Attorney General’s Office. “The sandbox allows companies to put their ideas into action for investors to take notice.” Verdigris Holdings Inc., one of the program participants, is addressing the high cost of identity assurance, which prevents mainstream banks from servicing low- to moderate-income individuals by developing a low-cost, safe, efficient technology, as well as a proprietary operating process. The sandbox gives Verdigris an opportunity to test and develop its technology while simultaneously applying for a bank charter. This is a key example of how the sandbox is shaping the future of the banking industry. Outside the sandbox, Arizona’s progrowth legislation has allowed several other Arizona FinTech companies to thrive with their own innovations. BillingTree is a prime example. For more than 10 years, BillingTree has been developing FinTech applications that accompany traditional payment processes. Some of these applications include interactive voice response systems, virtual terminals and portals. Other leading Arizona FinTech companies include Nexus Earth, AmCheck, Keap and PayTech. Arizona’s FinTech industry is an excellent example of why our state is making waves in the national and international technology sector. Rather than limiting technology growth through restrictive regulations, our government has shown a willingness to open its doors to new ideas and provide companies with the tools to test them. As we continue to grow, the mindset of the government and leaders in our community will put Arizona in the right place for success. Steven G. Zylstra is president and CEO of the Arizona Technology Council.
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2020 WISH LIST
Here’s the legislation, reform, or regulatory relief banking leaders would like to see in the coming year By MICHAEL GOSSIE
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fter a period of regulatory overload, the banking industry has received some relatively good news in recent years when it comes to regulatory relief. “Dodd–Frank was expected when it was enacted in the wake of the financial crisis,” says Paul Hickman, president and CEO of the Arizona Bankers Association, “but it was an over-reaction.” The Dodd–Frank Wall Street Reform and Consumer Protection Act is a federal law that overhauled financial regulation in the aftermath of the recessions of 2007–2008. It was a sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression. Some critics argued that the law had a negative impact on economic growth and smaller community banks. Many Republicans called for the partial or total repeal of the law. “The banking industry got some regulatory relief from Senate Bill 2155, which is actually 10 times the size of Dodd-Frank,” Hickman says. Senate Bill 2155 — also known as the Economic Growth, Regulatory Relief and Consumer Protection Act — was signed into federal law by President Donald Trump on May 24, 2018. The bill eases regulations imposed by Dodd-Frank by raising the threshold to $250 billion from $50 billion under which banks are deemed too important to the financial system to fail. The bill also eliminated the Volcker Rule — which prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds — for small banks with less than $10 billion in assets. 100
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RELIEF IN HAND And that’s not the only relief the banking industry has received recently: • The Government Accountability Office found that the Federal Reserve and other regulators had influence over the behavior of banks in a way that is subject to congressional oversight. At least in theory, the agency’s decision will make it easier for Congress to relax regulations that were imposed after the 2008 financial crisis. The GAO’s opinion marked the latest victory in a campaign by Republicans and the Trump administration to ease constraints on banks. With a new law and a series of changes to capital requirements and trading restrictions, they have already made substantial progress. • The Federal Reserve recently adjusted key bank regulations put in place after the financial crisis — imposing regulations so they are more closely to bank size and reducing the necessary level of cash and government bond stockpiles at all but the largest banks. Affected banks will also be allowed to submit “living wills” — documents detailing how a bank would wind itself down in the event of failure — less frequently. Banks with $250 billion to $700 billion in total assets will now have to submit a resolution plan every three years, alternating between full and partial filings. They are currently required to submit a full report annually. But Hickman says there is still work to do in terms of easing the regulatory burden. “The Bank Secrecy Act (BSA) — also known as the Anti-Money Laundering (AML) law — has not been reformed since the 1970s,” Hickman says. “The act requires financial institutions to file reports for deposits that exceed $10,000 and report suspicious activity that may signify money laundering, tax evasion, or other criminal activities. We would like to see that threshold raised from $10,000 to $65,000. But we would be happy to see it raised to at least $35,000.” As an alternative or complement potential changes to the BSA, Hickman would like to see a program for cash-intensive businesses that would operate similarly to a “TSA Fast Lane” when it comes to banking, making it easier for those businesses to work with banks, while lowering the amount of paperwork for banks. BIG BUSINESS “One of the biggest pieces of legislation that we are cautiously optimistic will soon become law and have a major impact on the banking industry is the SAFE Act, which was recently passed by Congress,” Hickman says. The Secure And Fair Enforcement (SAFE) Banking Act aims to ensure that state-authorized and regulated cannabis businesses are not forced to operate with cash only. Under the proposed law, financial institutions would be provided with a federally approved safe harbor to serve not only retail cannabis stores, but the vendors and service providers that serve those stores — plumbers, carpenters, cleaning companies, etc. “What the law would do is tell banking agencies that if cannabis is legal under state law, it cannot penalize the bank for doing business with cannabis companies,” Hickman says. AB | November - December 2019 101
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“Right now, federal laws and regulations are a roadblock to banks in Arizona doing business with a multi-billion-dollar industry. Right now, banks cannot take deposits from cannabis businesses without strict scrutiny and the risk of those accounts being closed. The SAFE Act would end that problem.” While the SAFE Act is generally applauded by the banking industry, experts say it needs to be precise when and if it is enacted. “The SAFE Act could be a blessing or a curse,” says Candace Wiest, president and CEO of West Valley National Bank. “It should not be so vague that it assists people who have no business banking cannabis customers. And it should be so clear that the regulatory agencies know exactly how to supervise the banks that are qualified to offer this business line.” If the bill wins approval by the U.S. Senate, then President Trump, it will become law.
would allow Arizona’s businesses to continue driving the state’s economic momentum forward through expansion and reinvestment.” • Heather Higginbottom, president, JPMorgan Chase PolicyCenter: “JPMorgan Chase is advancing a public policy agenda through the new JPMorgan Chase PolicyCenter that reduces barriers to employment for people with criminal Jack Barry Don Garner backgrounds. Businesses must play a critical role in advocating for policies that unlock economic opportunity for more people in underserved communities. By working with political, business and community leaders, we will help advance public policy solutions that drive inclusive growth at all levels of government.” • Dave Howell, regional director for Arizona government relations, Wells Fargo: “Wells Fargo supports efforts at the Consumer Financial Protection Bureau to revise the Paul Hickman Heather qualified mortgage regulatory framework to Higginbottom ensure continued, equal access to mortgage EXPERT OPINION credit for consumers and to minimize any With regulatory relief on the horizon and market disruption.” optimism in the banking industry, here’s • Patrick Strieck, head of retail banking what other industry leaders would like to see for the Arizona Region, BMO Harris Bank in regards to legislative help in the coming NA: “BMO is hopeful that there will be year: meaningful changes to the current federal • Jack Barry, chairman and CEO, Enterprise anti-money laundering regime in 2020. The Bank and Trust - Arizona Region: “There current system is outdated and inhibits our are still aspects of the Dodd-Frank ability to efficiently serve our customers. legislation that was hurriedly put into place Proposed legislation in both the House and Dave Howell Patrick Strieck after the 2008-2010 downturn that has Senate would enhance our ability to identify created unintended consequences. Although there bad acts and monitor for potential AML violations, were clearly abuses that occurred in the financial while at the same time increasing the efficiency of the markets pre-downturn, the corrective measures overall framework allowing us to reallocate valuable undertaken within the consumer mortgage industry time and resources that is better spent serving our and regulatory reporting requirements has placed customers.” an undue burden on the banks and has caused some • Wiest: “A down cycle usually leads to asset quality unnecessary restrictions in credit offerings. The issues. When that happens, Congress tends to ride voluminous and often redundant mortgage disclosure in and shoot the survivors. They will cry for more and qualifying rules have made it difficult at times to rules, more regulations, etc. And in the past, the provide efficient delivery of mortgage loan products. rules did not distinguish between $50-billion banks Candace Wiest Also, the level of regulatory oversight since Doddand $500-million banks. Any new regulations Frank has substantially increased costs associated should be reviewed to make sure it is relevant to the with excessive reviews and submissions of information to the community banks. Community banks serve rural areas and small respective agencies.” businesses. We make SBA and USDA loans so people can grow • Don Garner, CEO, Alliance Bank of Arizona: “We hope that their businesses. During the last recession, we learned that small any legislation, reform or regulatory relief implemented in 2020 businesses are critical to the American economy. One-size-fits-all affecting the banking industry will help financial institutions regulations hamper the community banks’ ability to serve the bring a broader array of lending capability to customers. This small businesses in this country.”
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