Competitive intelligence for bankers
July 2015 bankingexchange.com
Tech Meister BNY Mellon CIO Suresh Kumar spearheads IT makeover
four trends change banking making use of “trid� extension 1
HAVE QUESTIONS ABOUT REAL PROPERTY VALUATIONS? Find answers at www.appraisalinstitute.org. > Use the drop-down menu at the top of the home page. > Choose your path and view a complete list of resources for bankers.
FIND AN APPRAISER
Access the ˝Find an Appraiser˝ Directory Search for real estate appraisers with the qualifications you’re seeking.
Select from a variety of additional resources: • Appraisal Institute publications and periodicals • Appraisal Institute education relevant to bankers • Information on joining the Appraisal Institute
To learn more about Appraisal Institute’s resources, visit www.appraisalinstitute.org.
/Contents July 2015
16
More tech than bank Is bank IT “too complex to change”? Not for BNY Mellon’s Suresh Kumar. His tech makeover shows what it takes to up your game By Bill Streeter, editor & publisher Cover photo: William Alatriste
22
4 trends change everything Banks and their regulators must get big data, artificial intelligence, mobility, and voice technology right By Jo Ann Barefoot, contrib. editor
July 2015
BANKING EXCHANGE
1
/ contents / 4 On the Web
8
An answer to “Why do I need you dinosaurs?”; Making “3 lines of defense” work
6 Like it or Not Dodd-Frank reform is a real possibility, but banks’ future rests on more than that
Hackers’ ROI; Online scheduling on the rise; Case for e-signatures; Life on a chip
Chairman & President Arthur J. McGinnis, Jr.
14 Seven Questions Investment banker turned community banker Trevor Burgess covers the economics of mergers and more
27 Risk Adjusted How E*Trade Financial turned a crisis black eye into solid ERM
30 Bank Tech Why banks should love Windows 10, Microsoft’s mea culpa to PC users
Character marketing by way of a mascot named “Cash.” Plus: Viral mortgage video
Two-month extension gives bankers time to address lingering TRID shortfalls
Design Consultants Sarah Vogwill, Gal Dor Designer Emily Cocheo Editorial & Sales Associate Andrea Rovira arovira@sbpub.com
Circulation Director Maureen Cooney mcooney@sbpub.com
27
Subscription Information: Banking Exchange Magazine (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published March, May, July, September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing: Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single Copies are $35 each. Subscriptions must be paid for in U.S. funds. Copyright © Simmons-Boardman Publishing Corporation 2015. All rights reserved. Contents may not be reproduced without permission. Reprints For reprint information Contact: The Reprint Outsource – Betsy White, 877-394-7350, bwhite@reprintoutsource.com For Subscriptions, & Address Changes: Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: bankingexchange@halldata.com Write to: PO Box 1172, Skokie, IL 60076-8172 Postmaster: Send address changes to Banking Exchange magazine, PO Box 1172, Skokie, IL 60076-8172 July 2015
Creative Director Wendy Williams
Production Director Mary Conyers mconyers@sbpub.com
40 Counterintuitive
BANKING EXCHANGE
Executive Editor & Digital Content Manager Steve Cocheo scocheo@sbpub.com
Director, National Sales Robert Vitriol bvitriol@sbpub.com
36 Compliance Watch
2
Editor & Publisher William Streeter bstreeter@sbpub.com
Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Steve Greene, Lucy Griffin, Ed O’Leary, Dan Rothstein, Melanie Scarborough, Lisa Valentine
34 Idea Exchange
In which our intrepid reporter’s inner control freak twitches, then succumbs
Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: bankingexchange@sbpub.com Web: www.bankingexchange.com Twitter: @BankingExchange Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: bankingexchange@halldata.com
8 Threads
14
July 2015, Vol. 1, No. 3
Marketing Manager Erica Hayes ehayes@sbpub.com Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co. Mark Erhardt, Fifth Third Bank Joshua Guttau, TS Bank Jane Haskin, First Bethany Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan O’Malley, Eastern Bank Dan Soto, Ally Bank McCall Wilson, Bank of Fayette County
ENGAGE. CONNECT. COMMUNICATE.
Setting the new standard in bank printers. IJ7200 Series prints via WiFi and can be shared by multiple users • • • •
High Speed Printing Full Length Validation Slot Automatic Form Positioning Small Footprint
IJ7200 Series Print Mechanism • WiFi Printing • Best Quality Printing • Quiet Inkjet Printing • Bank ing Software Compatib
le • Industry Leader in Connectiv ity • Gray-scale Graphics & Logo s • Customize Marketing Mess
Addmaster Corporation info@addmaster.com (626) 358-2395 www.addmaster.com
ages
/ ON THE WEB / Popular Stories on
bankingexchange.com
“Why do I need you dinosaurs?”
Making “Three Lines of Defense” work better
ALCO Beat: Watch out for that first 50 basis points
For two days at a recent conference, banking took hits from futurists, app developers, bitcoin enthusiasts, and others. When a listener asked why he needed a bank, speaker Linda Mantia of RBC had an answer. Read more at http://tinyurl.com/whyabank
Regulators have been pushing the “three lines” approach for risk management. But how do you keep all the players from overlapping and being inefficient? Lyn Farrell of Treliant Risk Advisors has suggestions. Read more at http://tinyurl.com/3lines
Asset-liability management can involve looking at many interest-rate scenarios. Before deliberations grow too exotic, Darling Consulting’s Steve Boselli suggests considering the impact of a simple 50 bp rise. Read more at http://tinyurl.com/ALCO50bps
“You are the weakest link” Do you trust everything you get via e-mail? Of course not. But say you received a LinkedIn connection request from someone who claims they met you at a conference—whom you don’t recall. Would you click? Digital security expert Mark Bell says that’s one sure way to download trouble. Read more at http://tinyurl.com/ neverclickastranger
Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters
@BankingExchange
4
BANKING EXCHANGE
July 2015
To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, scocheo@sbpub.com, 212-620-7219
Competitive intelligence for bankers
March 2015 bankingexchange.com
DON’T OPERATE LIKE A BANK
NEVER MISS AN ISSUE of
The key to dealing with disruption, says TS Bank’s Josh Guttau: Do some disrupting yourself
INSIDE EASTERN BANK’S “SKUNKWORKS” CLOUD MORE SECURE?
SUBSCRIBE NOW
bankingexchange.com/subscribe
Subscribe to continue to receive the latest banking news, trends and analysis.
/ like it or not /
Banking beyond banking
T
wo related thoughts to apply to banking’s future: 1. Former Yankees shortstop Derek Jeter, while speaking on a business-related panel last December, observed that “You have to keep your eye on your competition. If you keep your eye on your competition, it pretty much eliminates complacency.” 2. Consultant Jo Ann Barefoot, at the conclusion of her feature article this month (p. 22), offers nine suggestions for dealing w ith disruptive changes. Suggestion No. 4 is: “Have senior management attend at least one f intech conference. They are nothing like banking conferences.” (We can attest to the latter, having just been to the Exponential Finance Conference, which was provocative, to say the least. See “Counterintuitive,” p. 40.) Banking, in some ways, is still a very insular world, despite external challenges dating back decades. Clearly, however, the pace has ramped up. Barefoot, who is a long time adv isor to the industry, says a California banker recently pointed out to her that the introduction of the iPhone and the first stages of the financial crisis both occurred in 2007. “In the intervening years,” Barefoot observes, “bankers and policymakers have been consumed with disposal, survival, cleanup, and recovery, while the iPhone and many other business-changing developments have been evolving in plain sight—with arguably even bigger ultimate impacts for banks and their customers.” She also makes the point that techdriven changes will disrupt the bank regulatory system as much as they have banks. “Rules will have shrinking shelf life as product innovations morph out from under them. Their rule-making processes typically take years; technologies and markets change daily.” That is no doubt true, and we hope the regulators also read her article. The problem is, once regulatory frameworks are created, Washington only occasionally revisits them. Usually some changes are made, but it is rare that significant
6
BANKING EXCHANGE
July 2015
pieces are dismantled. Without a doubt, the recent uptick in consolidation results in part from the pressure created by ever tighter regulations. But it also results from the intensifying competitive press u r e f r om t e c h - d r i ven c h a ng e s i n customer behaviors, and from the effects of prolonged low interest rates. All of which hit the smaller end of the industry particularly hard. As Trevor Burgess, CEO of Florida’s C1 Bank, notes in Seven Questions, (p. 14), “We either need very large regulatory relief and/or a higher interest rate environment for a whole sector of community banks to thrive.” There is a real chance for reg ulatory reform from Congress this year, but whether it will be the broad-based change proposed by the Republicans, a more targeted reduction favored by Democrats, or gets locked up in political combat is an open question. The fact that there is bipartisan support for some changes to the Dodd-Frank Act is a big plus, and should be strongly supported. Also needed is comparable regulation for any business that is engaged in banking. Still, if I were a banker, I wouldn’t want to bet my future solely on the prospects for reduced regulation for banks and/or comparable regulation for the banking Ubers of the world. Nor on a quick return to higher margins. Even if all that occurred, there would still be a major challenge to adapt to the changes in customer behavior mentioned above. Many bankers firmly grasp the nature of the challenges they’re facing and are adapting in highly creative ways. The industry doesn’t lack initiative or innovation, despite being swamped by regulations. More and more signs of this are evident, some examples of which you can read about in Seven Questions and in the cover story (p. 16), which explores how BNY Mellon is changing to act more like a technology company. The speed of change can take your breath away at times. But some of what’s going on, both within and outside the industry, is truly exciting and offers great potential for those who embrace it.
BILL STREETER, Editor & Publisher bstreeter@sbpub.com
Regulatory reform should be strongly supported, but don’t bet your future solely on that
/ THREADS ONLINE AND IN PERSON
Bank use of online schedulers growing By Ashley Bray, contributing editor
T
he overwhelming inf luence of technology can’t be disputed in an age where almost everyone is connected to some kind of device. Banks are beginning to capitalize on this to improve customer service by using online appointment schedulers, which allow customers to use the internet to set up appointments with bankers. Both TimeTrade and AppointmentPlus, two companies that offer online appointment schedulers, see an upward trend in their adoption. AppointmentPlus says its company’s tracking has shown one out of five banks have online appointment schedulers, but that many other banks are considering it. “Banks are trying to cater more to online customers,” says Viktor Morozov, retail banking marketing specialist for AppointmentPlus. “They still want
to have that personal relationship, but with everything going online, they’re losing that. So they want to have an outlet where customers can reach out to them and still have one-on-one interaction.” AppointmentPlus a nd TimeTrade are third-party, cloud-based programs.
Customizable, they allow banks to access the back end of the program via a log-in to modify schedules, appointment types, etc. Another option is to create an online appointment scheduler in-house. That’s what $4.1 billion-assets Nevada State Bank, La s Vega s, did. The business
Maybe we should all be hackers We’ve all heard—or said—“I’m in the wrong business,” at one time or another. The phrase may come to mind as you cast your eye over the data presented here from Trustwave’s 2015 Global Security Report.
1,425%
Estimated ROI criminals receive for ransomware and exploit-kit schemes—two forms of cyberfraud.
8
BANKING EXCHANGE
July 2015
Where
50% of compromises investigated occurred in U.S. (down 9 percent. pts from 2013).
Who
102234
Most compromised: retail, at 43% of investigations. Finance and insurance was 7%.
intelligence group developed an online appointment scheduler over four months, and it has been in use since last July. “The goal was to give our clients more options in terms of how they tell us they want to bank and use their time,” says Craig Kirkland, executive vice-president and director of retail banking. “It’s really not to force clients into certain channels, but to give them an array of channels and let them select what fits best.” To promote the scheduling option, most banks post a link to their websites’ home pages. Others link to it through socia l media and email campaig ns. Online scheduler users typically already use online banking channels, but don’t fit any specific demographic. People who use such bank appointment schedulers are likely comfortable with other types of online scheduling, notes Eric Morse, senior vice-president, marketing and business development, for $1.7 billion-assets Needham Bank, Needham, Mass. “We haven’t sought to sell it to every single customer that we have. We just make it available, and the people who use it like it very much.” The benefit is better service and efficiency. “When people ask me about what TimeTrade does, I say it’s almost like eHarmony for our customers,” says Mike Lewis, chief marketing officer, referring to the online dating service. “We’re really smart about matching both the
49%
Percent of personally identifiable information targeted.
63%
customers and the right people at the bank based on what they need.” Needham Bank emphasizes accessibility and service, and that’s why it has been using online scheduling since December 2013. “TimeTrade has allowed us to extend what we think is a competitive advantage over other banks by offering a very different level of accessibility,” says Morse. “It’s just a higher level of service that we can provide to people.” On the back of this comes more opportunities to cross sell. Customers usually input appointment reasons into schedulers, so banks no longer have to guess at needs and can better prepare for meetings. “They’re able to convert those online inquiries into actual, high-value, personal, one-on-one interactions,” says Morozov. Nevada State Bank found it “eye-opening” how many online appointments were converted to customers. “There’s a pretty high conversion rate. So they know what they want; they come in; we’re able to do some discovery to really find out what the need is and to fill the need,” says Kirkland. “It’s not just pushing a product and cross selling for the sake of cross selling, but really understanding through the relationships that you build what their true needs are.” Relationships are key. “People still value that one-to-one relationship,” says Lewis. “If you can capitalize on that, there are a lot of other benefits that roll out of it.”
Percent of track data (mag stripe) targeted in N. American attacks.
“Password1”
86 days
Median length of time it took to detect a breach.
Still the most common password. 39% of passwords are eight characters long. Estimated time to crack them: one day. Estimated time to crack a ten-character password: 591 days.
Anatomy of a hack
“H
ackers want an easy way in, and they want to go in, get what they want, and get out,” said Chris Hauser of Travelers Investigative Services. The big insurer recently brought together a panel of experts to present a simulated breach, and to discuss how to spot vulnerabilities and how to counter the results of a breach. Many breaches occur on opensource software. “These are the snippets that make up the foundation of our internet,” said Hauser, a second vice-president at Travelers. Hackers, he added, look for errors made in programmers’ use of software to set up websites. One of the most common types of hacks is the SQL (Structured Query Language) injection attack. H au ser es t imate d t hat 97 % of data breaches arise this way, even though it’s been a known vulnerability for years. An SQL attack is an attempt to inject malicious code into a field intended as a place to put in a name or password. If a user fails to properly filter an input field, it can be used to feed invasive code into the site. “Computer attacks are not magic,” said Hauser. “They take advantage of vulnerabilities.” Hauser and “accomplice” Kurt O e s t re i c h e r, d i g i t a l f o re n s i c s specialist with Travelers, used a penetration testing toolkit to demonstrate a breach of a closedsystem version of a website. Such toolkits are used by net work administrators to test sites, and by hackers. The two men penetrated the site, and had they been crooks, could have dumped customer data. Read more, touching on cloud risk and four defenses, at http:// tinyurl.com/anatomy-BE
July 2015
BANKING EXCHANGE
9
/ THREADS /
APPRAISING THE SITUATION
Dodd-Frank’s appraisal rules’ impact hit appraisers harder than lenders, but everybody pays By Melanie Scarborough, contributing editor
R
egulation has a frequent side effect—the cure is often worse tha n the a i lment . Some say t hat ’s tr ue of Dodd-Fra n k’s Appraiser Independence Requirements (AIRs), designed to create a firewall to protect appraisers from lender pressure. The 2009 Home Valuation Code of Conduct (HVCC), which was subsumed by Dodd-Frank, requires lenders to hire appraisers through a third party, and prohibits direct communication between lenders and appraisers. Now, appraisers say they have it worse than ever, but for a different reason. Their principal complaint is that to avoid any perception of coziness with appraisers, many banks turned to the anonymity of appraisal management companies (A MCs). “ The problem is that AMCs make their money by taking their fee out of the appraiser’s fee,” says Lance Coyle, president of the Chicagobased Appraisal Institute. “So if you were a residential appraiser getting $400 for a standard appraisal in the past, when AMCs got going under Dodd-Frank, they would pay the appraiser $200.” Add to that the Dodd-Frank requirement that appraisers who do business in more than one state have to be licensed by each, all of which have varying rules. Appraisers are leaving the profession.
Lance Coyle 10
BANKING EXCHANGE
“It’s not the attractive business it used to be,” says Coyle. “A lot of our lender partners don’t understand that some of the very best appraisers have left.”
More cost, less benefit While aware of appraiser difficulties, bankers have taken less of a hit. John Brodrick, senior vice-president, consumer and home financing division, at $9.5 billion-assets Eastern Bank, Boston, says Eastern built the changes into its system two years ago and adjusted. Brodrick uses AMCs and local appraisers. His only lament about the restrictions on lenders and appraisers is that “communication channels are more difficult than they used to be.” Brodrick expects new challenges in October when the TILA-RESPA Integrated Disclosure (TRID) rule goes into effect because there will be virtually no tolerance if the appraisal fee is higher at closing than it was in the loan estimate. “You’ll have to have agreements with the appraisers for what they will charge, and they’ll need to stick with it,” he says. “Appraisers sometimes come back and say the property is unique and they can’t f ind enough comps, so they will have to do more work. [Under TRID,] there won’t be tolerance for that.” Cindy Lowman, president of United
John Brodrick July 2015
Bank Mortgage Corp., a wholly owned affiliate of $450 million-assets United Bank of Michigan, Grand Rapids, says because of the size of her bank, she gets to enjoy not using an AMC and instead draws from a roster of local appraisers. Lowman says the biggest issue is the appraisal cost. “It’s on the lender if the appraisal comes in more than what I quoted,” she says. “But other than that, Dodd-Frank did not dictate to me how I underwrite my appraisals.” Lowman notes that the law imposes new costs, like the requirement for a second appraisal—at the bank’s expense—on a property being “f lipped” (defined as a transaction where the seller owned the property for fewer than 180 days and is selling it for more than they paid). Of more long-term significance, she predicts, is the higher cost to consumers. Dodd-Frank requires AMCs to pay to register in each state where they do business; register each of their appraisers at the federal level; pay an annual fee if they appraise federally related transactions; and spend more on training and compliance—expenses passed on to homebuyers. “The cost of a mortgage was around $5,000 in 2010,” says Low man. “It’s going to about $9,000 in 2016, and appraisal cost is part of that. That’s what the industry needs to address.”
Cindy Lowman
Get real about strategic planning
M
Your life on a chip By Dan Fisher, contributing editor
W
hat does that smart phone you are surgically attached to know about your life? I a m not t a l k ing about cont a c t s, financial information, pictures, and documents on the phone. You ought to know about that already; after all, you put that stuff on your device. Here’s what I mean: It knows almost every move you make. And that is putting it mildly. The culprit? Apps. Those free or inexpensive programs—designed to make life fun and convenient and help find stuff—are data mining your day. Awake or asleep, they know what you’ve been up to. When you insta ll these apps, you answer a few innocuous questions about push notices, preferences, GPS utilization, and such, and then you acknowledge the user agreement. Before the app can send you a notice, such as a recommendation to buy a product, it needs to know a “little” about you. And how do you think the app developers obtain that information?
GPS, for one, can give them your movements even though you have not entered in a particular location. The phone can know and a retailer can know where you are. Surfing in your browser is one way to be found out. Apps can keep a record of your purchasing habits. Here’s an educational exercise. Go to the settings button on your phone, look under notices, and check out what you have agreed to. You will be surprised to find out what you have enabled. Is there a personal countermeasure to technology? Yes, there is. Take a simple self-assessment of your lifestyle habits, and ask yourself what you think should be private and what doesn’t matter to you. Then, let your fingers do the walking through the settings forest. [Excerpted from one of Dan Fisher’s Beyond the Bank blogs on BankingExchange.com.] Read the full blog at http://tinyurl. com/LifeOnAChip
any communit y banks have done no formal strategic planning. Regulators have been pressuring them to think strategically. To make this exercise work, BankingExchange.com blogger Jeff Gerrish recommends: • Do whatever you can to ensure that the bank’s directors and officers buy into the planning process. Also, strategic planning will not be very effective if the individuals in charge of implementing that strategy are not invited to the meeting. • Make it enjoyable for the participant s. All the appropriate attendees from the bank will not make a difference if none of them want to be there. Combine some fun with the work. • Do not spend significant time on mission, vision, and value statement s unless you ac tually use them. For most banks, those statements are there for the regulators’ benefit. Determine whether your bank wants to utilize its statements, and, if so, how to do so effectively. • Follow the four “Cs” of planning: Communication, Candor, Consensus, and Confidentiality. If you have something to say, say it in front of the group. If it cannot be said in front of the group? Then your bank has other issues to address. • Focus on substantive issues like long-term independence; capital needs; ownership succession; management and board succession; dividend policy; regulatory relations; and geographic expansion strategies. Read more at http:// tinyurl.com/GetRealPlanning
July 2015
BANKING EXCHANGE
11
/ THREADS /
Case for e-signatures
Banks, customers, everybody embraces it By John Ginovsky, contributing editor
T
he paperless bank, hallmarked by the use of electronic signatures, has been a goal for many years, but legacy systems, riskaverse attitudes, and simple inertia have been hard hurdles to overcome. The use of e-signatures has been legal since October 2000, when the Electronic Signatures in Global and National Commerce Act, often referred to as the e-Signature Bill, was signed into law. It specifies that in the United States, the use of a digital signature is as legally valid as a traditional signature written in ink on paper. Nevertheless, the widespread use of e-signatures has been slow to emerge. Now, with the advent of many mobile and online devices and services unknown 15 years ago, and increasing regulatory, economic, demographic, and competitive forces, the time could be ripe. Lake City Bank, a $3.4 billion-assets bank in Warsaw, Ind., took the plunge in March to deploy a comprehensive e-signature platform to support both inperson and remote signing. “We want to get down to using minimal paper in every branch location and come close to eliminating the need for courier services,” says Angie Ritchey, senior vice-president and operations/ technology manager. “More than that, we want our customers to know their time in-branch is kept at a minimum and that we understand each minute counts.” The ba n k c ont ra c t ed w it h I M M, Linden, N.J., which helps companies to electronically streamline business operations. One of its solutions is IMM eSignature, part of an electronic document presentment platform. Lake City Bank first applied eSignature to its new account desk, requiring less than an hour of customer service rep training. Since implementation, the bank has removed associated document printing as forms sent to IMM eSignature are returned and archived for later research and viewing. The bank also reduced the number of signature exceptions f lagged during new account openings. “When opening a deposit account, the client no longer needs to wait for the
12
BANKING EXCHANGE
July 2015
customer service representative to complete the data entry of information. They are able to give the necessary information to the customer service representative to open the account and complete the process from home,” says Ritchey. Lake City also incorporated eSignature into treasury management. Capturing signatures is now more easily achieved on contracts for new commercial customers, which can be up to 60 pages in length depending on the number of addenda. IMM’s platform moves signers quickly through the contract, indicating each place where a signature or set of initials is required. “Customers love it. Being able to sign documents at their convenience has been great. It has taken little to no convincing,” says Ritchey. “Leg islation and other reg ulator y guidance have increased the number of required forms and disclosures for many financial transactions,” says John Levy, IMM executive vice-president and board member of the Electronic Signature and Records Association. “Keeping these processes manual puts significant burden on an organization, and can easily disrupt or inconvenience the consumer. E-signatures can help relieve these pressures while also creating efficiencies and reducing the cost of doing business.” Adapting to the electronic collection of signatures has required some adjustment to branch operations, says Ritchey. “The
branch has had to change its approach to opening an account by collecting the account opening information earlier in the process,” she says. So far, sav ings have been realized mostly by cutting down the time clients have to spend in the branch, Ritchey says. “The cost savings will come as we implement new documents and can eliminate courier costs,” she adds. Lake City Bank plans to adapt e-signatures to consumer and commercial loan documents, and internal bank documents. Looking at the bigger picture, e-signatures greatly facilitate the transition to the “paperless bank,” which in turn is a significant step toward fundamentally reenvisioning branch strategies. Going from paper and ink to digital files in turn allows the branch to assimilate into the whole omnichannel strategy. FIS points this out in a recent white paper: “Paperless banking . . . better positions your bank to leverage digital channels that rely on seamless electronic transactions.” And Celent says in a 2014 report: “Banks are finally utilizing e-signatures across many f unctions and processes to lower costs, shorten cycle times, and improve the services they provide. The rapid momentum in e-signature adoption [is] also driven by the evolution of consumer technology. Smartphones, tablets, and touch screen computers help make e-signing more accessible.”
Does student loan debt block credit access?
Fed “water hole” attack victim?
TransUnion research indicates the contrary
T
here is a stereotype today about the recent college graduate, so mired in student loan debt that starting a post-education “normal” life seems nearly impossible. TransUnion says the common picture doesn’t jibe with reality. New resea rch conduc ted using TransUnion’s consumer credit records indicates that in spite of the common picture of former students labor ing under crippling student debt, many of these younger consumers have been gaining access to other forms of basic credit—auto loans, credit cards, and mortgages—and that they generally pay this additional debt on a timely basis. TransUnion’s study arrived at these conclusions by comparing student loan debtors to a control group whose members don’t have such debt. The groups’ behavior and opportunities don’t always track exactly, due to timing differences in employment and for other reasons, but the collegiate group typically has caught up, and sometimes even overtaken the study’s control group in opportunity, usage, and performance. Overall, the study “shows lenders that
graphFACT
rather than being concerned about student loan borrowers’ ability to manage new credit, this may actually be an attractive, marketable group, both in terms of higher credit demand as well as potentially better repayment performance,” says Charlie Wise. He is a coauthor of the study and is vice-president in TransUnion’s innovative solutions group. The company goes so far as to suggest developing marketing campaigns that target student loan borrowers for consumer credit. At the same time, TransUnion notes in its study that both the number and outstanding balances of student loan accounts have doubled since the end of the Great Recession. Just over half—52%—of U.S. consumers in the age range of 20-29 currently carry a student loan balance, and this indebtedness, up 186% since 2005 for this age group, currently represents 36.8% of their “loan wallet” (see chart, below). Only their mortgage indebtedness—42.9% of the loan wallet—exceeds this burden. Student loan balances stood at $1.1 trillion in the f irst quar ter of 2015. Read more at http://tinyurl.com/ studentLoanDebt-BE
Student loans’ share of wallet
Total loan balance composition (%) by product type – consumers, ages 20-29 100% 90%
12.9%
80%
21.1%
36.8%
Up 186% since 2005
70%
Other
60%
Student loan
50%
Credit card HELOC
40% 30%
63.2%
58.8%
20%
Auto
42.9%
10% 0%
2005
Source: TransUnion Consumer Credit Database
2009
2014
Mortgage
Down 32% since 2005
T
he Federal Reserve Bank of St. Louis repor ted that on April 24, unknown computer hackers manipulated routing settings at a domain name ser vice vendor so they could automatically redirect some of the bank’s website traffic to rogue web pages. While the bank’s website was not compromised, four resources available to the public and used primarily by economists in the public and private sector were. Legitimate users of the phony websites may have been unknowingly exposed to vulnerabilities that the hackers may have put there, the bank said, such as phishing and malware. In its only comment on the incident, the bank advised users and potential users to immediately change their passwords. Gavin Reid, vice-president for threat intelligence, Lancope, says that based on available information, this attack “fits the pattern” of a “water hole” style attack. The term is a reference to the African savannah where animals attack other animals who come to drink. In t he digi t al world, a c y ber attacker may take over a subjectrelated website. Once they take over that site and redirect it, they then have information on all the people who go there. What’s different about such an attack is the target. It’s not the bank, in this case, but the people logging into the bank. Read more at http://tinyurl.com/Fed Waterhole
© 2015 TransUnion LLC All Rights Reserved
July 2015
BANKING EXCHANGE
13
/ Seven Questions /
Do a few things very, very well Trevor Burgess took a cue from Chipotle to build a community bank that’s both traditional and entrepreneurial By Bill Streeter, editor & publisher
CEO’s space is like everyone else’s at C1 Bank. Green dog statues, bought as a toy for Trevor Burgess’s young daughter, are now in every location.
T
en years of doing IPOs at Morgan Stanley gave Trevor Burgess a desire to run his own business. It also exposed him to a wealth of innovative ideas, which, along with his own, he’s bringing to bear at a Florida bank he now runs. Burgess, now 42, left Wall Street in 2007 and joined with one of his Morgan Stanley clients, Marcelo Lima, a Brazilian entrepreneur and investment banker, to explore entrepreneurial opportunities. In 2009, in partnership with two other investors, they invested $70 million to acquire Community Bank of Manatee, a bank on Florida’s Gulf Coast with assets of $260 million. Since then, Burgess, who became the bank’s chief executive, and Lima, a director, have acquired three more banks. Now called C1 Bank, the St. Petersburgbased institution has grow n to $1.5 billion with 31 branches, most of them on Florida’s west coast, with a handful in the Miami market. It is the sixth fastestgrowing bank in the country, and had first-quarter net income of $3.2 million. The bank went public last August. 14
BANKING EXCHANGE
July 2015
Burgess and his team have fashioned C1 Bank to be the bank for entrepreneurs. One of the companies Burgess helped to take public was Chipotle. A lesson he learned from Steve Ells, founder of the restaurant chain, was to do a few things and do them very, very well. So the bank largely focuses on business loans—large and small (it is a big SBA lender)—and overall has a limited range of products. C1 Bank is a beehive of innovation, with a tech lab and a headquarters office set up like a Wall Street trading floor. Q1. On C1’s website, it emphasizes client relationships. All banks talk about relationships. What sets yours apart? The three reasons that clients choose to bank with us are speed, service, and certainty. Not being a banker before was very liberating. I got to design an entire [loan] operation where the appraisal is the longest step in the process. While big national banks can take three-plus months to close a large commercial loan, we’re trying to do that in three or four weeks. And if we need to say “no,” we do it quickly.
The nex t leg is ser v ice. Too many banks have hired ex-telco sales people to become hawkers of loans. That’s not our shtick. We hire very smart, very capable loan off icers—relationship managers who are able to actually give old-fashioned banking advice to clients. Leg three is probably most important, and that is certainty—doing what we say we’re going to do. We hear from clients all the time: “ABC Bank promised me X, but when I got to closing, it was different.” We’re not going to be as cheap as a big bank. They have a much lower cost of funds. But we can have greater certainty because when we say we can do something, we are able to actually do it. But the proof is in the pudding, right? So last year, we grew new loans by nearly half a billion dollars. A billion-five bank adding $500 million of new loans means a lot people are choosing us. Q2. With that kind of growth—plus expansion in southeast Florida—how do you retain your three attributes? The number one challenge of grow th is maintaining your culture. We are
focused on hiring the right people. So when we went into Miami, I didn’t start by opening up five branches there. I literally started by hiring one person and setting up a loan production office. After a year, I saw that we could get the type of clients that met our risk profile, and then we decided to open one branch. That went very well, so we added a second, third, and a fourth branch. Over 75% of our loans now were originated by C1 Bank as opposed to being from one of the four acquisitions. Q3. Why did your focus shift from acquisitions to organic growth? Simply because of the amount of organic g row t h oppor t u n it ie s we have. My whole infrastructure exists already. If I go and buy a bank that has $300 million to $400 million of loans, I’ve got all their branches and all their people, plus all of their problems and contracts and their costs. As long as you have your own growth, the economics of doing an acquisition doesn’t work when people want a premium to book value. In a slower growth market, though, acquisitions may be the best way to grow. Sometimes you need acquisitions to get to the right scale. One of the reasons we did four acquisitions was to get to the scale where we could make money and have all the compliance people we needed and be able to afford a high-quality chief credit officer and others like that.
Jeremy Scott Photography
Q4. As a former investment banker— and a bank investor—are you surprised that nobody is starting up banks? I’m not surprised. The prospects are limited by several factors. One is the level of regulations. Dodd-Frank and CFPB didn’t exist ten years ago. Number two, with Basel III, capital requirements and regulators’ expectations about capital are higher. Except in markets that are clearly underserved—which is hard to fathom— it’s difficult to imagine a new bank is the best investment opportunity available. If you read FDIC’s Quarterly Banking Profile, the number of institutions
is dropping by between 75 and 100 per quarter. That rate may slow down a little bit with fewer failures, but consolidation is winning out over de novo charters. We either need ver y large reg ulatory relief and/or a higher interest rate environment for a whole sector of community banks to thrive. Q5. Do the so-called neobanks—techdriven startups that offer a niche banking service—concern you? Those companies, so far, have been very focused on the large consumer market. We’re a business bank, so it hasn’t been something that’s affected my business directly. Those that do business lending are doing largely unsecured lending, and are very reliant upon the credit of the owner of the business, rather than the credit of the business itself. But I think the long-term trend is in the application of technology. The banking industry will need to innovate rapidly in order to make sure it can do business in the most productive way, and in the way that is easiest for our clients to do business with us. That’s one of the reasons why we have one of the only fintech innovation labs within a bank, which we call C1 Labs. We had an organic need for products that did not exist in the marketplace— tools we felt were required to run our bank in a first-class way—so we started building them ourselves. One, called Smart Loan Express, helps banks estimate the profitability of the next loan they’re doing. We’re now offering it to other banks. [C1 Bank partners with CenterState Bank of Florida, N.A., to distribute Smart Loan Express.] Q6. You’ve been opening branches. What’s your view of their role? I view the branch as a billboard. If you look at some of our branches—Google “C1 Bank Wynwood” or “C1 Bank Sarasota”—you’ll see they are designed to say something about who we are and something about the community we serve. So in Miami-Wynwood’s Arts District,
As long as you have growth, the economics of doing an acquisition doesn’t work when people want a premium to book we opened a branch that looks like an art gallery and has original art by Andy Warhol and Keith Haring—on loan from a client—hanging on the wall. But I think that, long term, branch profitability has fundamentally changed. When we move into Fort Lauderdale, we will open one branch, maybe two—not 20, or even five. I would rather have one very vibrant bra nch t ha n d i lut e my bra nd w it h branches on random corners. Q7. You’ve taken an unusual approach to your headquarters office—space without walls. What was behind that? My inspiration was, in part, my Wall Street experience working on a trading f loor at Morgan Stanley and, in part, technolog y companies. Meeting our speed and service and certainty requirements to our clients required a different sort of set-up at our headquarters. So we have, basically, a large trading f loor with 110 identical desks. If you’ve ever been on a trading f loor, there’s a lot of energy, a lot of information interchange. P r oblem s a r e s olve d i m me d i at ely; there’s no need to make an appointment with somebody. You just yell, and you get the answer. We do have many glass-walled conference rooms. But the main set-up is right in the middle of the f loor—and open. I can see everybody and they can see me, and we have no secretaries, and we have no offices. If you want to solve a problem, you can come talk to the CEO any time. I’m trying to do something very different—bringing an entirely new energy and enthusiasm to an industry that over the past five years has been pretty dejected. July 2015
BANKING EXCHANGE
15
Photos by William Alatriste
CIO Suresh Kumar in BNY Mellon’s N.J. Innovation Center, which has no private offices.
16
BANKING EXCHANGE
July 2015
More tech than bank BNY Mellon’s ongoing tech makeover provides a roadmap for how banks can, and must, up their game By Bill Streeter, editor & publisher
I
t’s all well and good to start a tech company in a garage and build it up into a Hewlett-Packard, Microsoft, Apple, or Facebook. It’s the stuff of American legend. By contrast, the process of recasting the culture of a 231-year-old financial institution into a nimble, lean, innovative technology company is, perhaps, a less dramatic story, but, in many ways, a more remarkable one. Banking has set its share of technological firsts, but in recent years, the rap has been that many players in the industry are encumbered by unwieldy legacy IT systems festooned with applications grafted on as needs change. Add to that the tendency for having various business and support units operating within “silos,” a situation made worse because of multiple acquisitions over the years. Taken together, you have a condition that could be described as “too complex to change.” Which makes what is being undertaken by the country’s sixth largest (and oldest) banking company quite impressive.
use what others build When Suresh Kumar rose to senior executive vice-president and chief information officer of $341-billion assets Bank of New York Mellon Corp. three years ago, he faced a well-functioning but cumbersome technology infrastructure, typical of that described above. Kumar was no stranger to the company, having been CIO of the company’s Pershing securities clearing and settlement company for ten years. Kumar, who sits on the parent company’s executive committee, was CIO of Pershing from 2002 to 2012. Before that, he spent several years with Donaldson, Luf kin and Jenrette, where, in the late 1980s, he helped create the first online brokerage service running on Prodigy, AOL, and then the internet. (That product subsequently became DLJ Direct.) At Pershing, Kumar oversaw the creation of NetX360, a widely used open-architecture wealth management platform. So he knows first hand about the “build it here” approach
commonly used in financial services. Yet he also is a keen student of technology trends. In recent years, he has seen how sweeping changes have transformed much of the technology business and has recognized that banks must adapt. “In the old days, people tried to do everything themselves. They were very vertically integrated,” says Kumar. “To some extent, Apple tries to do that even now to ensure a better experience. But most of the world is figuring out how to share and use what someone else is doing so that you don’t have to build everything yourself.” To Kumar, the development of open-source software and the ability to do things in the cloud are major innovations because they mean tech development has shifted to being a variable cost instead of a capital expenditure. Any organization’s challenge, he says, is how to manage technology investment and technological obsolescence. That’s become more of an issue because the pace at which technology is changing now outstrips long-lived systems and prevents a bank from taking advantage of new developments, or doing so efficiently. The way services are consumed—be it desktop, mobile, smartwatch, in a car, or via the “internet of things”—will constantly change, and a bank doesn’t want to have to change every time that happens, Kumar explains. That’s why he believes that one of the major shifts in the technology “ecosystem” is the ability to consume services—discrete functions or applications—somebody else built. “It moves the service to a variable-cost basis,” he says, “and allows you to consume it when you want to and give it up when you don’t need to,” which, in turn, spawns innovation.
Role of innovation centers Kumar has spent the last few years laying the groundwork to take advantage of this seismic shift—not only as a user of technology services, but as a provider. BNY Mellon has a long
July 2015
BANKING EXCHANGE
17
/ BNY MELLON / history of providing services to other financial institutions. The challenge, as Kumar describes it, is “getting all of the technology groups supporting our various businesses to work differently, to be more productive in the way we build technology and in the way we keep up with new technologies.” He sums it up: “Act more like a technology company than a bank.” One component of this strategy is the establishment of innovation centers. Four are in full operation—in Palo Alto, Calif.; Jersey City, N.J.; and one each in Chennai and Pune, India. Two more, in London and Pittsburgh, are set to open soon. Each has a somewhat different purpose
time, is a short train ride under the Hudson River from the iconic 1 Wall Street tower that is BN Y Mellon’s corporate headquarters in lower Manhattan. • The purpose of the Palo Alto center, says Kumar, is “pure and simple: attracting talent familiar with the way technology gets built in Silicon Valley.” He adds that while people can read about the Silicon Valley approach and try to emulate it, “it’s a lot easier to hire people who actually worked at PayPal, eBay, LinkedIn, or Netf lix,” who can then influence the rest of the organization. • In Chennai and Pune, says Kumar, the centers more easily allow for serv ice shar ing and adaptation of new
architecture by putting tech and operations employees in a common location. • The center in London will be focused around getting clients in Europe to “spend time with us to understand industry challenges and cocreate solutions,” says Kumar, whereas the center in Pittsburgh will collocate the bank’s technology and operations groups based there. The article below, “Messing around with blockchain and other fun stuff,” gives some examples of the centers’ work.
Valley mindset As visible an indicator of change as the innovation centers are, other initiatives Kumar has set in motion to shift the
Instead of just giving a presentation or writing a paper, we are actually showing the businesses things they can use to suit the needs not only of the company’s internal clients, but its customers, consultants, and even fintech companies. • The center in Jersey City, Kumar says, is a “bridge between business strategy and technology—to make sure whatever we do in technology as a whole is aligned to what the business strategy is.” This center, where Kumar spends much of his
Messing around with blockchain and other fun stuff
T
rying out new technology is part of what they do at BNY Mellon’s Innovation Centers. While you can’t schedule innovation, if you take groups of talented people and give them a challenge, they will respond and, in the process, discover potential for various new technologies for use within the bank and, ultimately, by bank clients. Take blockchain, for example—the underlying technology used by Bitcoin. Recognizing that it could have wide-ranging implications for financial transactions, BNY Mellon CIO Suresh Kumar earlier this year gave the green light to several Innovation Center teams to create an internal private cur-
18
BANKING EXCHANGE
July 2015
rency as a way to learn about blockchain technology and to demonstrate its potential. One team created the currency, which it called BKoins (BK is the bank’s stock symbol), using the open-source blockchain code. Another team created a digital wallet and a user interface so that BKoins could be used on the company’s intranet. Each tech employee has a wallet and can give or receive BKoins. One use is to recognize a particular employee’s achievement. Although BKoins have no value, in the future, they may be able to be exchanged for prizes through an internal rewards program.
Framed by a giant multi-panel screen, Kumar explains a new technology during a rehearsal for a board meeting.
venerable company’s culture are, perhaps, more significant. Here, he openly embraces and borrows from the modern tech scene. “Silicon Valley is a very sharing culture,” he says. “Most companies there are more than happy to present how their technology works, how they solve a specific problem, and, in more than a few cases, they open-source their technology so you can actually see the source code.” Kumar is using this approach to meet
very specific financial services needs. “That’s where we intersect—it’s almost like Wall Street meets Silicon Valley.” Is that intersection a good fit? “Actually, a lot of people here—in New Jersey—want to work like they do in Silicon Valley,” he says. Until recently, they did not have the ability to do that. Kumar explains that the usual way technology has been built in large organizations is very structured—it’s project-oriented and often takes a long time to accomplish
The bank didn’t have to invest capital or build anything new, says Kumar. It’s all done using open-source applications. A test system was running in one week. “It’s a way to see how we manage the network, and what the implications are if we want to take the concept and apply it to a different business,” says Kumar. “By doing this, we can demonstrate to the whole organization the concept of blockchain and how it’s used, so everyone can experience it themselves and see how it’s a faster way of moving funds.” That will lead to applications in corporate trust or treasury or wealth management. “Instead of just giving a presentation or writing a white paper, we are actually showing the businesses something they can use,” he says.
anything. Whereas the way Silicon Valley builds, he says, is more continuous delivery and continuous integration with a tremendous amount of reuse of services and components. They build things quickly, get client feedback, and make adjustments, Kumar continues. If a particular service or component is not working well in some new system or solution, and there is a better third-party component, they’ll just change to that, even though they may
The same is being done with other new technologies, including how banks could use the “internet of things.” Other initiatives are further along, including one called Digital Pulse. It uses big data and the cloud to give a real-time look at transactions, positions, and exposures. When rolled out, it will give traders and operations people the ability to see where potential problems are in real time. A few years ago, this capability would have been too expensive to create, says Kumar. Now, it was developed in two months using APIs (application programming interface) and other tools and standards described in the main article, without having to create anything or buy hardware. —Bill Streeter
July 2015
BANKING EXCHANGE
19
/ BNY MELLON / have built the original component. By contrast, to make such a change w ithin “the old vertically integrated approach,” says Kumar, “you had to change the whole application, which was not practical.” To him, having many services available, and being able to manage each service independently, gives the bank great flexibility to keep up with technology.
creative constraints Kumar is transitioning the company from building systems in silos to building technology platforms that enable the IT group to solve many different problems without having to reinvent. The bank’s new NEXEN technology platform is an example. It is written mainly in opensource code and uses APIs (application programming interfaces), which can be used to create banking and trading applications. It is being used internally now, but will be offered to clients at some point in the future.
Now, a developer will say, “Okay, I need to solve this problem, and it requires 20 different things. Ten of them already exist in the ecosystem, and four are very unique to the problem.” Those four, says Kumar, need to be purpose-built. For the other six, however, the developer and his team will create them in such a way that they’re reusable. As a result, the time it takes to solve a business problem gets shorter and shorter, and the cost of building something is less. “ That spurs innovation,” he says, “because if I tell somebody it’s going to cost $2 million to do something, nobody wants to take the risk” because it costs too much and takes too long. “If, on the other hand, I say, ‘Give me $100 grand, and I can build something for you,’ people will say, ‘You know what, let’s find out, let’s learn from it—it’s okay if it doesn’t work out.’ So the ability to fastfail is an ingredient to spur innovation.” To move this concept into the realm of
In technology, we feel head count is not an expense. Talent is an asset. We want to invest in that
As part of this transition, BNY Mellon has moved away from a traditional project management approach to community-based development—much the way open-source software gets built. “We’re building an ecosystem,” says Kumar, “that allows people to solve different problems by creating reusable components instead of the historical way of creating a system to solve the problem.” Prev iously, he explains, somebody would have written a requirements document; they would have done the design; they would have built it themselves; and it would have gone live. And that would likely have taken a year or two. 20
BANKING EXCHANGE
July 2015
standard operating procedure, Kumar ha s established what he ca lls “constraints.” Unlike many constraints, these are intended to motivate people, not hold them back. One constraint is money. Says Kumar, “Basically we say, ‘Last year we spent $X to accomplish something. This year we’re going to spend something less than $X, so let’s get creative in how we solve business problems with fewer dollars.’” The other constraint is time. “Instead of giving people a lot of time, now we are saying, ‘This is all the time we have. Here are all the resources we have. How quickly can you get this done?’ It’s a way
of getting people to think differently and to reuse what somebody else has done. Instead of feeling the need to build everything ground up, now you have to rely on your partners to do their thing.”
“Assume you are CEO” One-four th of BN Y Mellon’s 50,300 employees are in technology. Since taking over as CIO of the bank in 2013, Kumar has been working to move the technology group into what he calls a “service-oriented culture.” That term plays of f the IT concept of “ser v iceoriented architecture.” As part of this, he says, the IT group cataloged all the different services it offers to make sure there was clarity of ownership—to make sure the owners understand who their clients are, what service they offer them, what their unit cost is, what their risk is, and what is their strategy to improve. “We’re trying to create an entrepreneurial spirit,” says Kumar. “So we tell each service owner, ‘Assume you are the CEO of that particular service. Think like an entrepreneur—like a start-up with a team of people. Our businesses can either use your service or go get the service from somebody else. That means you need to compete with the best-inclass. So how do you do that?’” Kumar believes most people are competitive, and when they see that others have been able to accomplish something, they want to excel, too. More than that, he has been making it clear that promotions, rewards, recognition, and incentive compensation will be based on success within this service-oriented culture. “People understand that to be successful in this organization, you need to have this service orientation where you continuously improve.” Toward this end, the bank uses a metrics-based approach called CPI, for continuous process improvement. Every service owner and his team has to measure their success. “They set goals at the beginning of the year,” says Kumar, “and on a periodic basis, publish a scorecard so they can track progress instead of me sitting here on the top setting metrics.” Kumar is not relying on his thinking alone to assess the benefits of these initiatives. A group of MIT Sloan School of Management students and, separately, an MIT PhD student are studying how well these arrangements are working.
Where formerly separate tech teams commingle
B
ank of New York Mellon’s New Jersey Innovation Center occupies three floors of a modern office building. It is one of what will soon be six such centers. “Historically, we had different technology teams supporting different businesses,” explains CIO Suresh Kumar (above, in the N.J. center). “And those teams were all located separately. So there was very little leveraging and sharing.” The innovation centers bring together teams that create shared services and teams that support lines of business. All told, about 850 of the bank’s IT staff work in the New
why they insource Asked if the various changes he’s implemented have led to much tur nover, particularly among long-time employees, Kumar says that hasn’t happened. He says that BN Y Mellon’s existing tech people “have so much knowledge about the business and the technology that they’ve built over the years,” that the thought was to complement that, not replace it. “In technology, we feel head count is not an expense,” says Kumar. “Talent is an asset. We want to invest in that.”
Jersey center. For those not there, the bank implemented a secure social networking system it calls MySource Social. Kumar spends at least three days a week at the New Jersey center, where there are no private offices, and all desks are the same. He says the layout helps create a great deal of energy. In his earlier days as CIO, he would have meetings scheduled three months out. Now, in New Jersey, meetings are rarely scheduled, and he will have 20-30 a day. Most are quick conversations as he drops in on a meeting or stops by a team member’s desk to ask a question. —Bill Streeter
The bank has worked to recruit people from t wo main sources—Silicon Valley and the bank’s campus recruitment program. The interesting thing, Kumar notes, is that the company has been able to lower technology costs—infrastructure and people—year-over-year, at the same time it has increased capacity. One way it has accomplished that is to rely less on outside consultants. It still uses them for short-term needs to solve specific problems, but not for providing core services.
“Why would we want to educate consultants about our business so they can go work for our competitors when we no longer need them?” asks Kumar. “That’s why we insource, because we truly feel that employees are our assets.” All this leaves Suresh Kumar feeling positive about the overall outlook for BNY Mellon. As he says, “We are a regulated financial institution, and we have a great balance sheet, and we have a great client base. If I can leverage that by also being a great technology company, we’ll be in our sweet spot.” July 2015
BANKING EXCHANGE
21
DISRUPTION EVERYWHERE:
Ben Welsh/Corbis
HOW WILL LIFE CHANGE?
22
BANKING EXCHANGE
July 2015
/ Disruption /
4 tech trends—and changing attitudes—will transform banking and bank regulation By Jo Ann S. Barefoot
T
here’s a phone app called MeetCARROT that helps people do things we tend to shirk. I’ve listened to the app repeatedly, and I still laugh out loud every time. MeetCA R ROT ’s alarm clock tool, speaking in a stern robotic voice, says things like, “Wake up, lazy human!” The app’s exercise coach calls itself, “Your Judg ment a l Fitness O verlord,” a nd promises a “7 Minutes in Hell” workout. Welcome to the future of banking. Forget ma rble c olu m n s a nd pi nstriped suits. People are banking in new ways as technology brings changes that reach far beyond products, channels, and customer habits. Technology is changing how people interact with money. Not everyone will go, or wants to go, high tech, of course. And the market won’t transform overnight. Still, these shifts are gathering speed and power. Will they be good? Or will they be bad? They will be both—for consumers and for the industry.
Shifting landscape That is the nature of innovation. It always brings help and harm—mixed together. Innovation also tends to be underestimated, even while simultaneously being overhyped. Bankers today generally underestimate the pace and vastness of the disruption they face. One reason is that the changes are so novel—intrinsically hard to grasp. Another reason: Most of the coming change is happening outside the typical banker’s field of vision. Also, compellingly, banks—and regulators—have been kind of busy lately. Recently, Alan Lane, CEO of Silvergate Bank, in La Jolla, Calif., pointed out to me that not one, but two defining events debuted in 2007. One was the financial crisis. The other was Apple’s introduction of the iPhone. In the intervening years, bankers and
policymakers have been consumed with disposal, survival, cleanup, and recovery, while the iPhone and many other business-changing developments have been evolving in plain sight—with arguably even bigger ultimate impacts for banking institutions and their customers.
Recipe for confusion It has become commonplace to observe that financial services faces tech-driven disruption of the kind that has remade industries from publishing to taxis. What has not yet been widely recognized is that this disruption is unlike any other. Consumer financial services is the f irst industry to face disrup tion while also being vital to everyone and extremely highly regulated—with probably the most complex regulatory structure of any sector. Five federal agencies directly super vise f inancial inst it ut ions a nd about 25 reg u lat e some aspect of financial products and practices. There also is the regulatory infrastructure of 50 states and, for some banks, international law.
The intertwining of banks and regulation means that technology—and the changes in attitude and appetite that accompany its adoption—will disrupt the industry and the regulatory system. In spite of their talents and dedication, regulators and policymakers will find it impossible to avoid big problems as huge waves of change hit a system that is fragmented; designed to be deliberative; and was built to address 20th century issues with 20th century tools. Agencies will struggle to be consistent, internally and with each other, causing industry confusion. Their rules will have shrinking shelf life as product innovations morph out from under them. Their rulemaking processes typically take years; technologies and markets change daily. This will force regulators to rely more on principles-based rather than rulesbased supervision, but the principles will lack clarity as they rapidly evolve. This will bring rising subjectivity and leave banks unsure of how to comply. There also will be jurisdiction problems. If phone companies offer loans,
1. Big data is changing everything. Industry gleans information from websites, GPS locators, social media, and more
July 2015
BANKING EXCHANGE
23
/ Disruption / will the Federal Communications Commission be a financial services regulator? What will happen as new players insert themselves between banks and customers through apps or by offering services through, say, social media? How will regulators maintain the integrity of the bank charter and system? Who will be responsible for disclosures? Can regulators find and reach small startups creating apps? How will privacy, data security, and fair treatment be protected? Will banks be held to higher standards and forced to retain high cost structures? If so, will the industry lose market share due to unique regulatory burden? Disruption of the regulatory system will, in turn, force a third disruption: the industry’s compliance systems. Ba nk complia nce g rew up over decades to be highly effective at rule following. But lying ahead now are years of upheaval in which clear rules will lag far behind changing subjective regulatory “standards.” Throughout this transition, rising consumer harm will fuel aggressive enforcement based on regulatory discretion. Banks will need new compliance strategies, structures, and skills. There is an almost universal assumption that regulation and innovation live in different worlds, needing efforts by different people with different mandates and skills. I would argue that the only way to avoid doing both wrong is to integrate them. This matters because bank executives tell me that technology and regulation rank as their top challenges. They know that if they get either one wrong, their bank will be hamstrung.
Our smartphones will “nudge” us against overspending. Phone: “We’re near Starbucks, but you’ve spent $23 there this week! Shall I put the price of the latte into the college fund instead?” What most have not yet realized: If they get either one wrong, they will inevitably get both wrong. The industry needs to change how it does both.
Four trends changing all A half-century ago, Ralph Nader published his book Unsafe at Any Speed. It launched the movement that aims to protect consumers through regulation. In banking, the regulatory focus stressed mandatory disclosure. While the effort has done some good,
2. Artificial intelligence— incredibly quick and increasingly cheap—adds to the upside and downside potential of big data by leveraging it for new uses 24
BANKING EXCHANGE
July 2015
we can’t say it was a success. Policymakers built a massive edifice of financial consumer protection rules, and the industry, a colossal compliance machine. Years were spent fostering financial literacy. Yet we are still cleaning up the aftermath of the mortgage crisis, and millions of people are routinely harmed by money choices they don’t understand. Millions cannot access mainstream services. These problems have been apparent for years. Instead of a vigorous debate over what the goal should have been, things calcified into arguments over quantity— less regulation or more regulation. Technology is breaking that impasse and forcing a new debate. Innovation is making it possible—and necessary—to rethink how best to protect people amid new options, opportunities, and risks. For a moment, imagine this future: Consumer: “I need a new credit card.” Consumer’s phone: “Since you pay your full balance every month, interest rates won’t matter. But you occasionally pay late, so I’ll check penalty terms, and I know you want travel rewards. I’ll also exclude anything with hidden fees or bad terms. Okay. I suggest these two cards. The first has better customer ratings and complaint scores. Let’s discuss them.” Questions prompted by this exchange could fill an article. Bankers should be
Meanwhile, government records are being digitized and shared with API (application program interface) formats, making them easy to access and use in new ways. CFPB’s complaint portal and Home Mortgage Disclosure Act repository—and its coming database on small business lending—are a few examples. Big data carries huge upside potential and also risks for consumers. Industry can use data-driven insights to customize offerings and widen services for consumers lacking conventional credit profiles. The same technology empowers consumers to find and evaluate good options. These trends raise concerns about privacy, data security, and fairness of data use. Big data is notoriously inaccurate and hard to manage. Much is collected for purposes that don’t require accuracy—until information is put to new uses, driving decisions that can harm consumers.
asking them now. Four big tech trends, while intertwined, have not converged. When they do, the impact will be explosive. The fou r trend s a re big dat a , artificial intelligence, natural voice technology, and mobile. (Just behind them, arguably, is another: cryptocurrency.)
1
Big Data
Big data is rapidly changing everything— not just banking. Industry now gleans information from social media, GPS locators, government websites, and the “internet of things.” IoT links the computers embedded in smart devices around us—not just phones, computers, and tablets, but cars, cameras, TVs, electronic keys, thermostats, baby monitors, and more. I had a health issue last year, and while my medical records have privacy protection, it would be easy to guess at my situation based on what I was Googling. Our devices increasingly “know” our tastes, locations, and routines, and, increasingly, use facial recognition technology to assess if we like what we see.
2
Artificial Intelligence
Artificial intelligence adds to the upside and downside potential of big data by leveraging it for new uses. Today, a machine can be given a question and then search all the digitized information in the world. The computer observes things; guesses at what might be useful; brings this back for feedback; and then uses this to improve—endlessly. Goldman Sachs’ Kensho can answer millions of complex investor questions
in plain language, and even predict how types of stock would perform in various scenarios. An IBM supercomputer has graduated from chess to inventing recipes that maximize flavor and nutrition. In medicine, machines not only read radiolog y repor ts, but foster cancer research by “noticing” patterns no one even told them to look for. All this is incredibly fast and increasingly cheap.
3
Natural Voice
Artificial intelligence links to the third breakthrough underway, natural voice technology. Computers already translate between voice and text, and between languages—even mimicking speaker voices. Meanwhile, phone concierges like Apple’s Siri and Microsoft’s Cortana can make reservations and handle fact queries like: “Where’s the nearest gas station” or “Who was the third U.S. president?” And Amazon’s Alexa executes action requests like turning up the thermostat as we head for home. Those services, however, have been ma inly about ha nd ling fa c t s a nd carrying out human decisions, and summoning information and translating it from and to voice. The new development is that voice technology is now using neural networks and deep learning to listen and then “think,” so that machines can converse with us in a natural dialogue. This trend is likely on a slower path
3. Voice technology is using neural networks and deep learning to listen and “think,” so machines can converse with us
July 2015
BANKING EXCHANGE
25
/ Disruption / than the first two trends, but its implications for financial services are profound. Millions of consumers who are uncomfortable reading financial material will find themselves able to get clear information and make good choices by having a conversation with their phone.
4
Mobile Services
That br ings us to the four th trend, mobi le , a nd m ay b e t he one w ho s e impacts are hardest to envision. To financial services people, mobile is a payments topic, and, of course, payments is a financial topic. That underplays what is happening. It is true that mobile payment—scanning a phone at checkout instead of using cash or cards—is growing. Apple Pay, introduced last fall, is catalyzing growing acceptance by merchants, consumers, card issuers, and banks, which is generating more competition from mobile payment providers like Google, with its new Android Pay. That trend coincides with another— the so-called “uberization” of payments. Companies are working toward the goal of making the payment process disappear into the consumer experience—just as a passenger exits an Uber car with no exchange of money or documentation, since those have already been prearranged electronically. As more payments are handled this way—and as payment technology increasingly permits skipping the checkout counter—consumers will be encouraged to spend more, a trend that will concern regulators and advocates. The same concerns will be fueled by geolocation technology, which will spur more spending by alerting us to attractive buying opportunities nearby. At the same time, though, these mobile technologies can be turned around and used to empower people to manage their financial lives more mindfully. Once the phone becomes a primary financial tool, it will start managing our money lives. Suddenly, people’s financial information will be easy to consolidate (most banking is already online), instead of coming in fragmentary forms. It also will always be current. Already, innovators are creating powerful new apps to make it easy and effortless to track 26
BANKING EXCHANGE
July 2015
spending and to save without budgeting effort. Behavioral science is learning how to connect our financial habits with our emotionally cherished life goals, and to use research-proven motivators, like lottery-style rewards, to help people save. All this will transform habits. Our phones will “nudge” us against overspending: “We’re near Starbucks, but you’ve spent $23 there this week! Shall I put the price of the latte into the college fund instead?” Our new behaviors will inspire Amazon- and Yelp-type marketplaces and product ratings as innovators tap into big data, including government complaint repositories, to create easy and automatic rankings and recommendations. Our phones will be able to sort choices and actually block out those with hidden danger. Businesses that rely on obscure fees or tricky terms will find their profit models in trouble as innovative, affordable offerings proliferate from banks, technology giants, and startups to help consumers avoid pitfalls. One more impact of mobile: It will greatly expand financial inclusiveness. Importantly, lower-income people are disproportionately high users of smartphones, including for financial tasks. This is partly because many never had good access to the more expansive online banking that uses a PC and broadband. That fact, and mobile systems’ low cost, will help expand services for the 70 million Americans struggling for access. The phone is changing how people interact with the world. Banking is just one part of the new ways to manage life.
Combining regulation and innovation is key, says consultant, author, and former regulator Jo Ann Barefoot.
Convergence is coming
The fifth big trend is digital currency, or cryptocurrency. Whatever the future of Bitcoin, the invention of the blockchain as a distributed ledger that is open, online, instant, transparent, verifiable, and cost-free will massively remake not only payments, but systems ranging from stock markets to legal records. As these trends converge, financial education will leap from the classroom to our phones, tablets, and wearable devices—when we want it and in forms that are simple, personalized, and even Continued on page 33
4. Once the phone becomes a primary financial tool, it will manage our money lives. Financial data, always current, will be easy to consolidate
/ Risk Adjusted /
GETTING, AND LIVING, RISK RELIGION E*Trade Financial turned black eye from crisis into solid ERM By Steve Cocheo, executive editor and digital content manager
E
Financial had its share *of Trade challenges arising out of the
financial crisis and its legislative and regulatory aftermath. A pr i me f i na ncia l cha l lenge wa s addressing a large holding of mortgage loans that went bad. But a longer-term, regulatory challenge concerned the company’s approach to risk management. E*Trade Bank and E*Trade Sav ings Bank had been regulated by the Office of Thrift Supervision. The 2010 DoddFrank Act killed OTS and transferred banks under its authority to the Office of the Comptroller of the Currency. Ma nagement recog nized that the OCC’s regulatory regime was stricter, and that it would have to improve its game. (The transition came in 2011 and continued into 2012.) In addition, larger financial organizations have progressively been expected to adopt a more structured and rigorous risk management program. A key area that needed beefing up at E*Trade, in light of both the financial and regulatory developments, was enterprise risk management.
Risk budget soars This has been a major company focus over the last few years, bearing such significance that it has surfaced in all recent annual letters from management. In 2013, E*Trade’s letter noted that its spending on ERM rose by $17 million in that year alone. The company’s ERM build-out ran the gamut: setting up new internal management and board committees addressing various aspects of risk, signif icantly increasing the por tion of employees devoted to risk management work—now 10% of the company’s employees—and tapping outside experts to help the organization get up to current practices. This came at a time when expectations have been a mov ing target for banking companies. For example, in mid-2014, E*Trade fell under the newly implemented requirements that publicly traded holding companies larger than $10 billion satisfy risk committee
In its 2013 annual report, E*Trade noted that ERM spending rose by $17 million in that year alone requirements under the Fed’s enhanced prudential standards. (At the end of the f irst quarter, E*Trade Bank came to $44.7 billion in assets, E*Trade Savings Bank came to $1.1 billion, and the entire holding company came to $46.8 billion.) The target has been to get the company up to a “best practices” level, according to Mike Pizzi, who became chief risk officer in early 2014, following the retirement of Paul Brandow. Brandow started the ERM rebuilding, and Pizzi succeeded him. Pizzi has been with E*Trade since 2003 and previously worked for Lehman Brothers, First Maryland Bank, and the Federal Reserve. (In mid-June, Pizzi was named chief financial officer and
Brandow came back on an acting basis while the company searches for a new CRO to take over the improved ERM program that the two put together.) While risk management issues run throughout an organization, three broad concerns governed, and continue to govern, E*Trade’s efforts, according to Pizzi: compliance and risk issues in existing regulation; weaknesses detected that require bolstering; and emerging regulatory concerns that need to be addressed. As an example of the latter, the company will have to report the results of Dodd-Frank stress testing to the Federal Reserve in 2017. E*Trade has already been through the exercise internally, July 2015
BANKING EXCHANGE
27
/ Risk Adjusted / and it reported a round of stress testing to the Comptroller’s Office in 2014. This, and falling under OCC capital requirements, ref lects a change for E*Trade, which is a sav ings and loan holding company and is now subject to Fed supervision under Dodd-Frank.
Process vs. exposures A major focus in building up E*Trade Financial’s ERM has been establishing and maintaining discussions with regulators, says Pizzi. He acknowledges that some bankers complain that regulators will not tell a bank what they expect, but will object when they don’t like what they see a bank doing. The implication is that effort is wasted when the bank finds it hasn’t been moving in the right direction. But Pizzi believes frequent communication can help here. “Yes, regulators will definitely tell you what they don’t want,” he explains. “But you can develop the right dialog with them to make sure you wind up in the right place.” P i z z i s ay s t h at m a ny r eg u l at or y requirement s focus more on r isk ma nagement process—t he int er na l machinery of risk management—rather than specif ic exposures. He says it is important that banks expanding their ERM efforts think broadly. Historically, banks focused on financial risks, but risk management has evolved past the traditional touch points. Now, Pizzi continues, a CRO must not only focus on credit risk, market risk, and rate risk, but also on additional exposures, such as financial model validation and operational risk. The E*Trade board’s risk oversight committee, which is chaired by risk consultant James Lam, author of a noted work on risk management, covers much more than financial risks. This committee is where many risks overseen by other board committees come together. Beyond issues like credit risk, the committee oversees matters like compliance and legal risks, vendor management, strategic risk, operational r isk , f unding a nd liquidit y, c apit a l issues, funds transfer, business continuity, reputation risk, cybersecurity, and trading. The board risk committee sets the company’s risk appetite level, evaluates the CRO and the chief compliance of f icer, and monitors the company’s overall risk profile. 28
BANKING EXCHANGE
July 2015
Behind each of these responsibilities lie measurement and management capabilities that the ERM build-out has required E*Trade to design and implement. All these come under the bank’s ERM committee, which is the company’s highest staff-level risk monitoring body. Setting limits in each risk area and monitoring performance against those limits is a key function. At the company, certain specific risks come under more specialized committees, such as the operational risk and control committee, asset liability committee, credit risk committee, model risk management committee, and new products review committee. Some of these functions are overseen by executives who serve as leads for areas like operational risk, market risk, and credit risk. Others come directly under the CRO—including reputation risk, strategic risk, and risk training and development. The latter includes the CRO’s role as overseer of efforts to inculcate risk culture throughout the organization.
Walls and shortstops Pizzi says that E*Trade Financial now uses a “lines of defense” approach to risk management. The concept envisions rings of risk management effort
surrounding the bank like multiple walls around a medieval city. Should one line fail to control a given risk, the concept goes, then additional layers stand between the company and the risk. Clearly, according to Pizzi, “lines of business need to own their risks. It is not the job of the risk department to own their risk. It’s risk management’s job to oversee the risk.” Risk tone comes from the board down. After the first line of defense comes staf f functions that oversee specif ic risks—compliance and legal, for example. Pizzi says these functions, as well as his own, are expected to determine the root cause of problems. Then there is the independent internal audit function, the final line of defense. Pizzi says that this structural underpinning was put in place at the beginning of the company’s ERM revamp. A key element underlying the lines of defense approach is accountability. According to Pizzi, culture goes hand in hand with that. Shifting metaphors, baseball offers a useful view. An infielder—proxy for the f irst line of defense, the business unit—may miss a grounder, and the outfielder—the second line—may scoop it up and fire the ball to first base. However,
Lines of business need to own their risks. It is not the job of the risk department to own their risk. It’s risk management’s job to oversee the risk.
the team manager isn’t going to just shrug off that missed grounder. He’s going to want to know why the infielder missed the ball. Thus, a critical function that dovetails with the lines-of-defense approach is training—teaching staff at all levels about risk management and impressing that every player must fulfill their role, i.e. accountability. The baseball manager may decide, after enough errors, that the infielder needs to spend more time with the fielding coach.
In search of root causes The CRO’s work goes up and down the company hierarchy. The CRO coordinates with the board risk committee and its chairman, and that includes an ongoing dialog, Pizzi says, though that communication also can be event driven when something significant arises. On the job, the CRO’s work of ten involves running the overall system like a ship’s chief engineer—making sure it functions properly, and that adjustments and policy development occur as events constantly change the company’s overall picture. But beyond the administration of the overall risk process and monitoring, what does a CRO do all day at E*Trade?
There are ongoing tasks like vendor management—a high priority with the regulators now—and evaluation of risk assessment and risk program validation. Pizzi says the job also entails digging into events or trends that have arisen to determine root causes of problems. “When you have an issue or event that occurs, many times, if you don’t have a risk management mindset, the response is to put a process fix in place,” Pizzi points out. This is like a doctor prescribing for a symptom, rather than for a condition or disease that causes the symptom. “If that fix doesn’t get to the root cause,” Pizzi explains, “the problem will reoccur.” Root-cause analysis directs a bank’s efforts to the underlying problem. Pizzi illustrates this by pointing to mistakes arising from manual input error. Simply requiring a manual check to prevent that error may not actually improve the matter, he says—it’s still all human. Implementing an automated check that occurs without human interaction will help ensure that the possibility of manual error is always reviewed. Finding the root causes and implementing remedies may range beyond the risk function, according to Pizzi. The company has procedures that the CRO and the risk team apply to a problem. The remedy may require working with the specific bank department to find the weak point in the process that produced the risk. Such issues are reported to the ERM committee at regular meetings, and results of the investigation are later reported there as well. Some matters would reside within the company alone, while others may require bringing vendors into the resolution. In addition, Pizzi says root-cause analysis can serve a preventative role. The same process used to f ix problems is applied when risk control assessments are performed. This helps the CRO and the risk team to maintain broad awareness. “You gain an understanding of all the company’s processes across the business,” says Pizzi.
Prep for “one bad tweet” Part of the CRO’s job is acting on issues that require immediate resolution or reaction. One such area: reputation risk. Before there is a problem, Pizzi says, it is critical that an organization understands, at a company-wide level, “what
your priorities are.” If there is zero tolerance for a particular kind of error or misbehavior, that has to be clear. Pizzi adds that any other risk category can drive reputation risk, especially when reputation attacks can be just one nasty “tweet” away. The key, according to Pizzi, is devising a series of action steps in advance of a publicity meltdown. Different scenarios must be considered and advance strategies devised. And then, says Pizzi, those outlined efforts must be capable of being made live. They can’t just be a binder gathering dust on the shelf. While risk management can, at times, seem esoteric, Pizzi notes that’s hardly the case. He explains that the ERM function grew out of the “classic” risk seats in banking—credit risk officers and market risk officers. “Operational risk has become more front and center,” says Pizzi. Ultimately, Pizzi sums up, risk management inter tw ines w ith customer service. If customers don’t get what they want from a financial provider, and can’t rely on the provider to get things right, then the rest of the risks banks watch don’t matter. Without the customer, there won’t be any business.
A key element of the chief risk officer’s role in enterprise risk management is delving into root causes of problems. E*Trade Financial’s Mike Pizzi says it’s the difference between salving a symptom and solving a problem. July 2015
BANKING EXCHANGE
29
/ BANK TECH /
Long live the start menu
Windows 10: Microsoft’s mea culpa to banking’s PC users. Bankers using Windows 7 can now jump right to 10 By Joe Dysart
B
ankers who reacted to Windows 8 with howls of incredulity can take heart: Microsoft is bending over backwards with its next Windows release to win back the mouseand-keyboard crowd. Yes, it’s true: With Windows 10 (there will be no Windows 9), due for release this summer, Microsoft will make it simple once again to navigate the operating system with a keyboard and mouse. “This move is a plus for the banking industry,” says Tommy Bradford, managing director, Jack Henry & Associates. “Microsoft received the message loud and clear from the billion-plus Enterprise Windows users—of which the banking industry is a part—that the Windows 8 modern look was interesting, but was not practical for commercial use.” The “Redmond Goliath” will bring back other features—like the start menu— that were sorely missed. “It’s a practical approach, which is customer first,” says Satya Nadella, CEO, Microsoft. Officially unveiled with great fanfare by Microsoft in January, Windows 10 is both an entirely new product and, at another level, an apology to millions of PC users, who were relegated to afterthought status when Microsoft rolled out Windows 8 a few years ago. Back then, Microsoft bet big that it could abandon traditional Windows computing. Its plan: literally strongarm Windows users into adopting a completely reconfigured user interface driven by touch-screen controls. Microsoft lost big on that bet. Users rejected Windows 8 in droves. Chastened, the company has responded with a completely reconfigured operating system that brings back many of the cherished features of earlier versions—pre-touch screen—while incorporating some tasty new additions. So far, Jeremy Lamb, chief technology officer at Bank of the West, is impressed: “I’ve been using a preview version of Windows 10 for some months now. It is an improvement over the much-maligned Windows 8.1. I expect Bank of the West 30
BANKING EXCHANGE
July 2015
will move most users from Windows 7 to Windows 10—bypassing Windows 8.1.”
Windows 10 features Microsoft spent two hours at its Windows 10 rollout to describe the program’s features. Here are some of the most significant changes that bankers should know about: • T h e W i n d o w s s t a r t m e nu h a s returned to the left side of the PC screen. Once again, you are able to call up an ordered list of programs on your desktop that you can click on with your mouse and open instantly. Three- qua r ters of the desktop to the right still offers the touch screentile access to programs that Microsoft w a nt e d e ver yone t o embr a c e w it h
Windows 8. But you can simply ignore those—or slowly integrate those tiles into your work style at your leisure. • Your PC boots straight to the desktop. Perhaps most infuriating about Windows 8 was Microsoft’s insistence that a PC boot directly to a touch screen-tile interface that, initially, no one understood. Not so with Windows 10. Once again, your PC now starts with the familiar desktop interface made popular in perv ious, keyboard and mouse-friendly versions of the operating system. • Your tablet automatically senses your preference for traditional or touch screen controls. With Windows 10, tablets will be auto-programmed to sense when a keyboard is plugged in and then automatically sw itch to the desktop
mode—the mode that’s optimized for use with a keyboard and mouse. If you disconnect your keyboard, Windows 10 will politely ask you if you’d like to switch to touch screen control. “For someone who’s a mobile task worker, it works like a tablet while you’re out and about, and then it works exactly like a PC when you bring it back and dock it,” says Joe Belfiore, vice-president, operating systems group, Microsoft. Pravin Vazirani, assistant vice-president of software company Chetu, sees the new feature as a great perk for bankers: “ This w ill be a def inite plus for [the] banking industry that uses both desktop-based workstations and smartphones or tablets for mobile assistance on the floor.” • Many users get to upgrade to Windows 10 for free. Microsoft is offering the new operating system as a free upgrade for the first year—for the most part— for users of Windows 7 and Windows 8.1. One exception: Windows Enterprise users of 7 and 8.1 will still have to pay to upgrade to Windows 10, which could apply to some bank users, but not all. Says Michael Matuszak, a senior vicepresident and technology director at First Niagara Financial Group: “This move by Microsoft will lower the impact on banks looking to replace Windows 7 or 8.1.” • Windows 10 of fers an attractive alternative for the “you’ll have to pry it from my cold, dead hands” Windows XP diehards. Sure, Windows XP was a great operating system. But its time—and ability to give banks a secure operating environment—has passed. “I would advise any of my peers to move as fast as they can away from Windows XP for security and support reasons,” says Bank of the West’s Lamb. If that isn’t strong enough, Dan Larlee, chief technology officer for D+H, says, “No financial institution should still be using Windows XP for anything if it is connected to a network.” In addition, Jack Henry’s Bradford says: “Windows 7 is more secure than XP; Windows 8 is more secure than
Windows 7; and Windows 10 is more secure than Windows 8. At a minimum, banks should move to Windows 7.”
Talk to me, Cortana Besides bringing back most of the features that made earlier incarnations of Windows so popular, Microsoft also is sprinkling in some cool new additions that could make Windows 10 an even bigger hit. Windows 10, for example, comes with a search engine-powered, new voice assistant, Cortana. Already available on Windows phones, Cortana will sit atop the Windows 10 interface and answer your queries with the help of Microsoft’s Bing search engine. You can ask Cortana—using natural language or your keyboard—what the weather will be like tomorrow; where that elusive document f ile you lost is stored; how long until your next meeting; and similar queries. Like many things computer these days, Cortana is turbocharged with advanced analytics. So theoretically, Cortana will get to know you better over time as it chews over questions you’ve already asked, and provides you with evermore accurate answers the more you consult with “her.” Another useful Cortana feature: You’ll be able to dictate emails or texts to her, and have her send those communications to the person or people of your choice. Windows 10 also will come equipped w ith a new browser named Spartan, which is modeled after leaner browsers like Firefox. Microsoft says this browser will run faster than Internet Explorer, which also will come with Windows 10. Another bonus with Spartan is that it comes equipped with a clipping tool that enables you to clip and save portions of websites to OneNote, Microsoft’s free, content-archiving program. Plus you also will be able to use Spartan to save web content that you can read offline at your leisure. A major change with the new Windows is that it’s being built on the promise that
After months previewing Windows 10, Bank of the West CTO Jeremy Lamb calls it “an improvement over the muchmaligned Windows 8.1,” and expects employees to bypass 8.1 and move to 10.
“No financial institution should still be using Windows XP for anything if it is connected to a network,” says Dan Larlee, chief technology officer for bank technology provider D+H. July 2015
BANKING EXCHANGE
31
/ Bank Tech /
Many users will get to upgrade to Windows 10 for free, which could lower the impact on banks looking to replace versions 7 or 8.1
all Microsoft-friendly products will share the same, common Windows 10 operating system—desktops, laptops, tablets, phones, and even Xbox. If it works out as promised, this will make it easier for you to make simultaneous changes that will pop up on all devices. Update a contact in Outlook, for example, and that contact will be updated on all your Windows 10 devices. Upload your music to Microsoft cloud service OneDrive and that music will play on all your Windows devices (not that you would listen at the bank, of course). “Windows 10 represents the culmination of Microsoft’s platform convergence journey, with Windows now running on a single, unif ied Windows core,” says D+H’s Larlee. “This convergence enables a universal Windows app to run on every Windows device—phone, tablet, laptop, or desktop PC. “As more and more of these universal Windows apps begin to appear,” Larlee continues, “financial institutions will want to be ready to capitalize on them without changing the user’s overall experience with their existing applications on their existing laptops and desktops.” Scott Hess, vice-president, user exper ience, dig ita l channels, for Fiser v, agrees, and adds: “The ability for fintech vendors and banks to write one app to run across users’ desktops, smartphones, and tablets universally is a huge time and cost savings.”
New update options Equally ground shifting with Windows 10 is Microsoft’s decision to repackage the operating system as a “service”—as 32
BANKING EXCHANGE
July 2015
opposed to a static product. This means t hat inst ea d of relea sing W indow s updates every few years, Microsoft plans to continually update the program with enhancements that automatically download from the Web to your PC. “Once a device is updated to Windows 10, we will be keeping it current for the supported lifetime of the device,” says Terry Myerson, executive vice-president, operating systems group, at Microsoft. Soon, the question, “What version are you running?” will no longer apply to Windows, Myerson says. One exception: Windows business Enterprise users will be able to opt for a “go slow” update approach to Windows 10, enabling them to delay quick, across-the-board, automatic updates to Windows. Instead, these users will be able to opt for automatic updates involving security or other critical changes, and get time to test and evaluate the impact of other updates, according to Jim Alkove, director of program management, enterprise group, at Microsoft. Probably the sexiest new addition to Windows will be its built-in ability to play three-dimensional/holographic content created by a new software product Microsoft promises to roll out later this year: Microsoft HoloStudio. Users who buy HoloStudio software will be able to create three-dimensional/ holographic images, which can then be viewed with a new three-dimensional visor Microsoft also is promising to bring to market later this year called Microsoft HoloLens. It’s an interesting take on three-dimensional/holographic viewing, in that you’ll be able to don a Microsoft visor. Obviously, it has potential for
game playing, but like so many things in today’s tech space, business applications will likely develop just as quickly. Essentially, w ith this approach to three-dimensional/holographic imaging, Microsof t has decided to add threedimensional/holographic images to the existing world—rather than attempt to create an entirely new three-dimensional/holographic environment. All told, Microsoft’s move with Windows 10 could, in fact, reverse the misstep it made with Windows 8. Indeed, the company is now so ostensibly committed to responding to user feedback, it has created a special Windows insider program (https://insider.windows.com) for Windows users who want a voice. People who join Windows Insider get to test beta versions of Windows 10 before the operating system’s release in a month or two. Their comments on those beta versions will help shape the final look, feel, and functionality of the operating system, according to Myerson. If you’re intensely interested in Windows 10, you also can check out the Windows 10 webcast, an informative video recording of Microsoft’s Windows 10 rollout that clocks in at two hours and 19 minutes. Check out this video (http:// news.microsoft.com/windows10story), and you’ll get an in-depth look at the new operating system in action.
Joe Dysart is a journalist with 20 years experience whose articles have appeared in more than 40 publications, including the New York Times and the Financial Times of London. joe@joedysart.com
/ Disruption / Continued from page 26 enter taining. If you don’t want your financial coach to have the personality of MeetCARROT, you can have one that is a friendly puppy or neighborhood banker. Jo sh R eic h , C E O of on l i ne ba n k Simple, points out that the automatic transmission made it possible for people to drive without really understanding how a car works. Financial services is headed to a similar democratization.
Bad, ugly accompany good Let’s not forecast a dystopic future, but let’s be realistic. Even today, myriad examples of technological abuse have been seen. Every one will bring problems as well as benefits: • Consumer confusion will rise before it falls—and it will be exploited. • Bank branches w ill decline and be repurposed, frustrating many older and lower-income customers. • People will overspend. Some consumers will rely on new phone tools that conceal f laws and bad motives. Developer “bias” may be something people will question. • Privacy, data security, and basic fairness will be constantly threatened. Should your loan cost more because you “like” certain things on Facebook or have “too many” social media friends? Such questions will test legal norms. These challenges will overwhelm traditional reg ulator y str uctures and m e th o d s , e s p e c i a lly th os e th a t are bank-centric. The new market will be less about banking and more about new consumer
tools and behaviors. In fact, banks will face extra problems because, being so highly regulated, they will likely be held to higher standards and forced to retain old methods longer, such as expensive delivery channels like branches. Nimble, efficient, “cool” new competitors, meanwhile, will snap up market share. Google, Facebook, Amazon, and Apple already offer financial products in some form. They have massive channels and consumer bases. And some of them are liked—even loved—by customers. This points to another whole realm of disruption around the roles and even the meaning of the bank charter.
What’s a bank? A regulator? Bank s, increa singly, w ill enter into relationships with nonbanks in many innovative areas. Likewise, banks will find third parties inserted between them and their customers, whether the bank is actively partnering or not. How will this impact both business and regulations? How will disclosures have to change? Who will be responsible for data security? Are the regulators—increasingly focused on vendor relationships over the past few years—worried about the right things? The new technology will f low around f rag mented agencies, including the CFPB, and lead to consequences like: • Regulators enforcing obsolete disclosure rules, while people just pull out their phones for financial guidance. • G overnment attempts to curb any harmful change will accidentally kill off good innovation.
• Countless small developers will launch new financial apps, blithely unaware that regulations even exist. The coming changes raise bedrock questions. Among them: Who among bank s, big technolog y f ir ms, star tups, independent rating entities, or government agencies reliably protects consumers? And what will happen when businesses know everything about us, but we also know everything about them? As banks tackle these challenges, they will have to combine their regulation and innovation work. Building consumer protection into every innovation decision, regardless of whether or not there is a regulatory rule to follow for it, is about to become a new survival skill. In the end, innovation and technology have set off a new contest. The stakes: Who will win consumer trust?
Jo Ann S. Barefoot, a member of the BE Editorial Advisory Board, leads Jo Ann Barefoot Group, LLC, a consulting firm. She serves on the CFPB’s Consumer Advisory Board, and for 2015-2016, is a senior fellow at Harvard’s Mossavar-Rahmani Center for Business and Government, where she is writing a book on innovation and regulation. Earlier in her career, she was Deputy Comptroller of the Currency. She recently launched a series of video briefings, with guidance for banks, called Regulation Innovation. The first is free at her website, www. jsbarefoot.com
What should Banks do now? Confused? Not sure what to do first? Start today, and follow these steps: 1. Name a chief innovation officer who will track tech trends and educate the bank. 2. Bring consumer-related technology to the center of the strategy agenda, instead of treating it as a way to implement traditional activities. 3. Hire more tech skill sets—not in IT, but in consumerfacing technology. Empower these, often junior, people to speak up and lead. 4. Have senior management attend at least one fintech conference. They are nothing like banking conferences.
5. Have bank leadership use these new technologies. 6. Have the compliance and legal team meet with the product, channel, and IT teams, and identify areas where the bank is at risk, as well as where it can leverage an advantage. Keep them working together. 7. Assess all the areas where the bank is using big data, artificial intelligence, and mobile to identify practices that will be regulatory red flags on fairness or access. 8. Work actively to make your mobile products benefit lower-income and elderly customers. Incent them to use it. 9. If you will close branches, help people adopt mobile far in advance.
July 2015
BANKING EXCHANGE
33
/ Idea Exchange /
ADD CHARACTER TO MARKETING
Iowa bank puts “Cash” behind its promotion efforts—and we’re not just talking money By Steve Cocheo, executive editor and digital content manager says Charla Schafer, marketing director. Once they got started, they had fun with it. Cash maintains an office replete with trophies and other mementoes of a storied “career” that includes character references from the Dalai Lama, Ben Bernanke, and Bono. (Read about his amazing life at https://www.fnbmusc. com/cash.html) Cash has his own business cards and a bank email address.
Bank’s “man about town”
H
e’s something of a blend of Bill Clinton, Bob’s Big Boy (of the restaurant chain), and a sunglasses-wrapped movie star. He’s become the award-winning mascot of $304.3 million-assets First National Bank of Muscatine, Iowa, and, yet, he literally came out of nowhere a year ago. “He” is “Cash.” One old saw says that money speaks louder than words—but, like Disney characters that roam around Walt Disney World, Cash doesn’t speak at all. The only exception is that Cash, or at least someone tweeting in his name, posts on Twitter for the bank, with his photo as the bank’s Twitter icon (@FNB_Muscatine). Cash appears frequently in photos on the bank’s Facebook page, and often stars in videos on its YouTube channel. Modesty is not one of Cash’s attributes. But then, he was “born” with a swelled head.
Out of the inbox Cash, in reality, is an outsize head worn at various events and in ads by one of the bank’s commercial officers, though other staffers have donned the head and clothing appropriate to the day’s occasion 34
BANKING EXCHANGE
July 2015
when necessary. (One photo on Twitter features Cash waist deep with local swimmers in a pool. He traded his standard business suit for swim trunks that day.) The thought to go with Cash originated with an earlier campaign that involved outsize caricatures of bank officials’ heads on little cartoon bodies—like banker bobbleheads. But creation of the Cash character as the bank’s mascot had been brewing for a while. First National management was looking for a friendly, light-hearted symbol that could connect its brand with everyone from children to seniors. In one video, Cash plays with several baby boys of staffers while the voice-over promotes home equity loans. The message: Borrow to add on when a baby’s arrival creates the need for more space. A similar spot promotes home equity credit when it’s “time for a minivan.” In another spot, with a bank business customer, Cash appears in a tour of a factory, Musco Lighting. He’s also seen pitching and coaching at a softball night game. Working with Maydwell Mascots, a Canadian firm, staff came up with the look of Cash. “Cash had been rattling around our inboxes for several years,”
C a sh ha s be c ome t he fa c e of F i r s t National, and in this day of social media ubiquity, he’s become a camera-magnet. “One surprise has been the ‘v iralness’ of Cash,” says Schafer. People enjoy snapping him at community events like ballgames and homecomings, and they post him on their social media pages. At one community symphony, the conductor lent Cash his baton, and Cash did his own conducting. “Our employees actually suggest places where Cash can appear now,” points out Kelsey Hodapp, marketing/graphic design specialist. Wherever he appears, Cash gives away 8”-by-10” signed glossies and Cash t-shirts. “And people like to shoot selfies with him,” adds Hodapp. Cash’s bank office includes Photoshopped grin-and-grabs with celebrities to supplement genuine appearance pictures. When the bank’s branding campaign competed in the Iowa Bankers Association Best of Iowa awards, it won both a gold in the branding category and the overall best of show award. Cash was there to accept, along with bank staffers. Schafer says Facebook seems to draw more attention for Cash than does Twitter. “Timing seems to be everything on Twitter,” she explains.
Cash, accepted everywhere Moving Cash out of the “inbox” meant the marketing staff had to convince the board to step a bit outside the traditional. “They gave us the latitude to get moving, and we did,” says Schafer. Since then, with the community warming to the outsize
character, “the board has indicated that it will support this going forward.” Many banks send off icers or other employees to appea r at communit y events, but First National finds that adding some “character” means even more. “Cash makes a bigger impact,” says Hodapp, “than simply sending staff.” Cash—as in “currency”—sometimes helps Cash make friends for the bank. Cash is the fellow behind contests the bank holds for occasions like Valentine’s Day and high school proms, as well as bank visits to present donation checks.
“MORTGAGE,” The movie The time: The f uture, w ith gadgets, screens, virtual reality, and robots galore. The scene: A small room in a small home. The players: A wife who is pregnant, and her husband, who is not buckling down to fatherhood. She wants him to get down to the business of helping to find a mortgage for their dream house. But he’s been spending his time building a “game-buddy” robot to help him score better on a mega computer game. She returns home one day, tired and exasperated. She is greeted by an enthusiastic robot dog, who sits by her and gives her a house key. The husband got it right after all. That’s just part of a faux movie trailer for the new “film”: The Mortgage: The Future is Now. The f irst clue that this video is not really a trailer for a real film comes right at the start, when the screen announces: “ The follow ing fake trailer has been approved for any audience interested in buying their first home.” The video, produced for both cinema showings and YouTube, garnered over 450,000 views in the first weeks of its posting. Larr y Jacobs, the head of marketing for RBC, predicts that the mortgage spot will have over a million viewings this year, and there’s every reason to think he’ll be right. The bank’s parody approach has already hit that kind of mark with an earlier spot.
Pick your genre
The R BC v ideo, which opens w ith a futuristic city scene—airships and rockets among tall buildings—promotes an imaginary sci-fi film featuring a Canadian couple. They, like their intended audience, are millennials facing the biggest events of their young lives: a new baby and the need to finance a home. “Jody and Chris thought they had it all—a storybook romance, great careers, close friends,” the narrator says, but what they needed was a mortgage for a bigger place. In one scene, an avatar realtor shows the couple a home completely out of their league. When that proves impossible, the avatar quickly surrounds them with their dream home. After some frustration, the scene with the dog plays out, and the happy couple embraces.
This video, produced by filmmakers Alexander Kiesl and Steffen Hacker and Engagement Labs, is the fourth movie parody created for RBC. Last year, the same couple appeared in three send-ups: a romantic comedy, a drama, and a horror story. The scripts follow a similar plotline, but show how tone, background music, lighting, and typical scenes can project an entirely different mood. Last year, the romantic comedy trailer received over a million views. (View all four videos at http://tinyurl.com/RBCfilm. The spots, designed for a Canadian
audience, are presented in English, with similar versions, with voice-overs, produced for French-speaking Canadians.)
Targeted to millennials “Millennials have grown up digital, and they consume media differently,” says Jacobs. He says the mortgage process has many facets for first timers, and he says the four spots are intended to capture them all in a movie context. Millennials are known, in some circles, for short attention spans, but the videos average an 80% watch-through rate, according to Anthony Wolch, chief creative officer for Engagement Labs. Social-listening research performed to prepare for the campaign found that first-time homebuyers are overwhelmed and scared by the home f inding and
financing process. The bank and the creative firm aimed to use the humor of the parody spots to ease viewers’ minds. “The range of emotions can be like a roller coaster,” says Jacobs. He says the bank is pleased with the exposure that the videos have created, though he says there are too many factors to point to results attributable solely to the videos. Neither Jacobs nor Wolch would discuss costs specifically. But Wolch said airing on YouTube and in theaters costs much less than telev ision time, and reached the bank’s target audience well. July 2015
BANKING EXCHANGE
35
/ Compliance Watch /
AVOID MISSTEPS ON “TRIDMILL”
Eleventh-hour advice, reminders, and cautions to help your bank avoid hefty penalties By Melanie Scarborough, contributing editor
W
it h about t h re e mont h s to go before the rev ised Oct. 1 rollout of the new TILA-RESPA Integration Disclosure Rule (TRID), experts stress that the changes entail much more than using new forms. (Today’s initial TILA disclosure and good-faith estimate will be replaced by a Loan Estimate; the second TILA disclosure and HUD-1 settlement will become the Closing Disclosure.) TRID imposes liability on lenders that will affect how banks work with settlement agents. Mandated timeframes will make closing dates unpredictable and less f lexible. Changes intended to make costs clear to consumers may yield nothing but higher-priced confusion. And despite consensus that there will be hiccups when the new process goes into effect, the Consumer Financial Protection Bureau (CFPB) has refused to grant a “hold harmless” period. Legislation—introduced in the House in May by Republican Steve Pearce of New Mexico and Democrat Brad Sherman of California—would protect lenders from private lawsuits and regulatory enforcement action through December of this year. But unless that bill passes, bankers will be
36
BANKING EXCHANGE
July 2015
subject, on day one, to fines imposed by CFPB and private lawsuits by individuals. CFPB’s June announcement of a twomonth delay—from Aug. 1 to Oct. 1—in the effective date of TRID does at least give banks a bit more time to prepare. So what steps can you take to ensure that your financial institution achieves an uneventful transition? For starters, understand that the new regulation “is much more than a forms rule; it’s a business-process rule,” according to Benjamin Olson, former deputy assistant director for the Office of Regulations at CFPB. Olson now advises clients on compliance with Dodd-Frank regulations as a partner at the Washington law firm BuckleySandler LLP. “Your ability to comply,” says Olson, is going to turn on how you handle all the information you take in over the course of a loan origination.”
Communication is critical Because banks rely on various sources for that information, experts agree that nothing is more crucial than communicating effectively with your industry partners. Chief among those partners are the settlement agents who will prepare
the closing disclosure. “[Banks] can negotiate with the settlement agency about who’s responsible for what and what indemnification should apply, but the law places liability on the creditor,” says Olson. “Since the lender is the one on the hook, they should make sure they have strong communications with settlement agents.” Some banks plan to prepare the closing disclosure in-house, but that isn’t necessarily the best approach, according to Ron Haynie, senior vice-president, mortgage finance policy, for Independent Community Bankers of America (ICBA). “Closing agents are probably the most experienced in preparing those documents and are able to focus on them, where in a community bank, people have to perform multiple tasks.” Nonetheless, he recommends that banks develop a way to collaborate with their closing agents— perhaps online. Banks also should be in regular communication with the vendors that support their document-prep procedures. Ideally, Olson says, banks have received the software that generates the new TILARESPA forms and are testing it, running through it their various loan products, and training staff on the process changes— “specifically, the fact that there are going to be limitations on what they can change and when they can change it.” Lenders should be talking as well with their more peripheral partners. “Because realtors are the ones who put estimates on closing dates, it’s important that bankers have conversations with them,” says Haynie. “If you do business with builders, give them a heads-up about the changes. Also work with your internal clients who might refer loans to the mortgage department in case they get hit with a, ‘Hey, what’s going on?’ from customers.” Customers and their potential disappointment are of great concern to Diane Evans, vice-president of Land Title Guarantee Co. in Denver and this year’s president of the American Land Title Association (ALTA). “When they
decide on the home they’re going to purchase and have already worked with the lender, they’re anticipating the transaction to move very quickly,” she says. “And I worry that they will not understand the reasons for the change.” Yet explaining to consumers how they will be affected is difficult, Evans adds, because no one knows what all the problems will be after the rollout. “That’s why a ‘hold harmless’ period is so important because it allows everyone in the industry to work with consumers to see what the issues are and [minimize] consequences to the buyers and sellers.” When she told that to CFPB Director Richard Cordray at a meeting in Washington last month, he reiterated that he was listening to industry concerns, but they have had 21 months to prepare.
Once TRID goes into effect on Oct. 1, ICBA’s Ron Haynie recommends banks have frequent debriefs with Compliance to discuss what worked and what didn’t; what closed and what didn’t
Timing is everything No amount of preparation will eliminate all problems because some are created by the new rules. For example, TRID dictates that the closing disclosure reach the buyer three days before loan consummation—and if information on the form changes within that three-day period, the closing disclosure must be reissued and the waiting period restarted. That will make all closing dates uncertain and last-minute closings a thing of the past. “Hopef ully, the ba nk s a re hav ing some conversations and outreach with realtors because—especially with the advance delivery of the closing disclosure—certain things can trigger delays,” says Lisa Zigo, senior consultant with Brode Consulting Services, Ravenna, Ohio. “Realtors are going to have to understand that just because they have a contract and a closing date, doesn’t mean it’s going to happen.” Kim Weaver, who is the product manager for Fiserv’s secure lending platform, advises banks to prepare clients for the slower pace. “Consumers assume that with the speed of the internet, they can get their loan tomorrow if they qualify and have all their information,” she says. “We’ve told our clients to make sure your
staff can explain to their customers that we have waiting periods for their protection and benefit.” Customers also should know that their sale or purchase could be lost if it’s dependent on another sale that gets delayed by the reissue of a closing disclosure. “Ofttimes, a seller is replacing his property to buy another, and unless they’re able to sell their property, they don’t have the proceeds to buy the next one,” Evans says. Kia Hekneby, senior compliance specialist with the f inancial institutions group of Doeren Mayhew, in Troy, Mich., points out that she is hearing that a lot of lenders plan to send closing disclosures by snail mail because that buys them three extra business days while documents are in transit. That could backfire, though, if the documents don’t arrive within the mandated timeframe.
Avoid potential pitfalls TRID’s timeframes aren’t its only potential trap. “If you look at the sheer volume and preamble surrounding this thing, you start to get a sense of how many nuances there are and how many ways you can get tripped up and cited for violations,” Zigo says. She and other experts
point to snares that lie deep in the weeds. • The loan consummation date, which is the pivot point for delivery of closing disclosures, is a legal term that varies from state to state. “If you’re closing mortgages in different states,” Zigo advises, “know how that date is set by state law.” • Keep in mind that appraisal fees are a zero-tolerance sum even though the bank may be unable to find an available appraiser during the three days it has to prepare the loan estimate. If the fee on the closing disclosure is higher than in the loan estimate, banks may have to bear that cost, Zigo warns. • A loan estimate must be sent no later than three days after an application is received—and the application is considered to be received once the lender obtains six specific bits of information. To keep the timing requirement from going into play before they’re ready, some banks are considering staging the application process. Hekneby warns against that. “It might be considered fraudulent and could rise to the level of a red flag.” • Lenders should focus on their postclosing quality control processes so they catch their own mistakes. “The new rules provide a correction period of 60 days July 2015
BANKING EXCHANGE
37
/ Compliance Watch / after loan consummation for the correction of tolerance violations,” says Olson, “but you don’t want to wait for someone else to point out an error, whether it’s an investor or a borrower.” • Make sure those who will be producing the closing disclosure are very clear on what would necessitate reissuance, and that they are prepared to act on the unknown. “When you’re going to closing, crazy things come up,” says ICBA’s Haynie. “You need to be prepared for someone to make the decision whether to go forward or reissue.” • Be aware that the closing disclosure inaccurately states the fees associated with title insurance premiums. “The CFPB is aware it’s wrong,” says Evans, “but they refuse to make changes.” Banks should check to see what formula is used in their state(s). About half the states calculate insurance premium rates differently from what CFPB describes. • Hekneby recommends going through the new TILA-RESPA forms with your
staff and practicing the sections that are most prone to error. One of the most difficult will be an ARM loan calculation, she notes. Make sure you know how to get the projected payment right. • Double check that your fees are set correctly to avoid curing tolerance violations. “Any fees you don’t allow borrowers to shop for come with zero tolerance,” Hekneby says. “Be very careful if you’re updating your fees in the system.” • According to Fiserv’s Weaver, some banks plan to take over preparation of the closing disclosure, but want settlement agents to deliver it. If you go that route, she points out, be sure that delivery is logged for the bank’s audit purposes with receipt confirmed by the borrower.
After Oct. 1, then what? Once TRID goes into effect, bankers must shift focus to how well it is working. Haynie recommends that for at least the f irst week after implementation, banks have daily debriefs to discuss what
worked and what didn’t, as well as what closed and what didn’t—and include the bank’s compliance officer, who needs to be deeply involved. Remember that the new rules apply on Oct. 1, even if you get no new loan applications (e.g., you can’t impose fees on a consumer unless they’ve received the loan estimate and agreed to proceed; and you must have verifying documents before providing a loan estimate). Send feedback to CFPB. Weaver suspects that the waiting periods could be the first rules rescinded. Why? Because closing delays w ill create leg ions of unhappy homebuyers. “If you can show that consumers would like to move forward in their timeframe, not under duress, the regulatory bodies may think of ways they can accommodate them,” Weaver explains. The question of whether consumers can be empowered and educated within their timeframe, according to Weaver, is an open one.
COMPLIMENTARY WHITE PAPER
RISK MANAGEMENT ENTERS THE 21ST CENTURY This complimentary white paper from CSI will explore how ERM tools can help institutions of all sizes identify, measure, monitor and control risks. Plus, it offers a comprehensive compilation of bank RISK MANAGEMENT ENTERS THE 21ST CENTURY
regulatory agency risk categories.
Download the white paper: http://bit.ly/risk21
38
BANKING EXCHANGE
July 2015
/ Ad index /
INTERACTIVE index of advertisers Welcome to Banking Exchange’s Interactive Service Center. This section has been created to allow you to interact with the advertisers who appear in this issue and to gain information on the products and services offered in the following pages of the magazine. Company Phone
Fax
e-mail address web site address
page
Addmaster Corporation
626-358-2395
626-358-2784
info@addmaster.com
www.addmaster.com
Appraisal Institute
888-7JOINAI
312-335-4400
aiservice@appraisalinstitute.org
www.appraisalinstitute.org
C2
D+H
800-815-5592
407-829-6715
stacey.leone@dh.com
www.dh.com
C4
LifeLock, Inc.
877-511-7906
partnerships@lifelock.com
www.lifelock.com/business
3
7
The Advertisers Index is an editorial feature maintained for the convenience of readers. It is not part of the advertiser contract and Banking Exchange assumes no responsibility for the correctness.
Advertising Sales
55 Broad Street, 26th Flr., New York, NY 10004
Display Advertising Robert D. Vitriol (212) 620-7242 Fax (212) 633-1165 bvitriol@sbpub.com
Classified Advertising Jeanine Acquart (212) 620-7211 Fax (212) 633-1165 jacquart@sbpub.com
COMPLIMENTARY WHITE PAPER
HOW IDENTITY THEFT PROTECTION
ADDS VALUE THAT CREDIT MONITORING CAN’T In this white paper, bankers will learn:
• Why identity theft continues to be a huge challenge to financial institutions and their customers • How meeting this challenge represents a great How
IDENTITY THEFT PROTECTION
adds value that credit monitoring can’t by Kenneth Olan
opportunity for FIs to build trust • What the key differences are between credit monitoring and identity theft protection
OFFERING THE RIGHT SOLU TION IS T H E K E Y TO BU I L DI N G C U S TOM E R T RU S T
© 2014 Kenneth Olan. All Rights Reserved. Commissioned By LifeLock.
Download the white paper: bit.ly/lifelock_id
July 2015
BANKING EXCHANGE
39
/ CounterIntuitive /
STAND-UP INNOVATION Two days of fintech and you’ll think outside the whole warehouse By Steve Cocheo, executive editor
“E
40
BANKING EXCHANGE
July 2015
“Wesley” welcomed Exponential Finance conference listeners to a session about robotics, drones, and more. both meetings on bankingexchange.com. If you’ve never been to a fintech conference—and even if you aren’t a techie—you should get to one. When you are among people for whom regulation is not holy writ, you’ll come away feeling, well, more alive. And perhaps a tad jealous. Nex tBa n k/InnoTr ibe wa s more a developer-side crowd, while Exponential Finance featured more “wow,” in the form of drones, robots, and an artificial intelligence expert speaking remotely from the screen of a quasi-robot. Exponential Finance also featured a bit more extensive discussion of fintech and disruptive trends with bankers, rather than solely about bankers. Both meetings saw a fair amount of bank bashing—sorr y, folks, but even though many of you are innovators, newcomers love to poke fun at you, your legacy systems, your fees, your branches, your interfaces, and even the best about your payment systems. (The truth is,
many would probably love to sell their operations to you—for a fat price.) Exponential Finance featured a group discussion that was so anti-bank, it was almost painful for a long-time bank writer to hear. One does develop some loyalties to the industry one serves—just as no one can insult my relatives, even when I agree. Of the bankers interviewed on stage at Exponential Finance, there were two who stand out the most. I wrote about them in “Why do I need you dinosaurs?” on our website. That headline was essentially the question that an audience member threw at JPMorganCha se’s Gavin Michael and RBC’s Linda Mantia. Both had spoken extensively about all the leading-edge things they were doing, but the listener wasn’t convinced. Mantia smiled and said, “We’ll convince you.” As even more interlopers disrupt the banking business, I think Mantia’s point will be job No. 1.
Courtesy of Singularity University
verything you see on Amazon. com is a test. If it doesn’t work today, you won’t see it there tomorrow. When you have creativity and f lexibility going on at that speed, they aren’t running things past the board of directors. I know—I worked there for six years.” I’m next to the fellow saying this during a stand-up innovation session that Wells Fargo has sponsored during Next Bank USA in New York City. The audience has split into several groups, each g rouped a round a n ea sel—ver y low tech!—to discuss the barriers to providing better financial services to small- and medium-sized businesses. My new fintech buddy is reacting to a stream of comments about barriers to innovation in banking. He has all but knifed the hallowed concept of “tone at the top.” My inner control freak is already twitching a bit. I wrote a newsletter on corporate governance and boards for over 20 years and did my share of hallowing “tone.” I don’t generally chime in on roundtable discussions at conferences because, for me, “a reporter reports.” But I broke my own rule by saying, “You’ll never see rapid innovation in most banks because they always spend six months running their ideas past the regulators before they do anything.” A f t er 36 ye a r s of w at c h i ng t h at happen—and understanding the reasons—I g uess I wa s feeling a lit t le disruptive myself. I attended NextBank— joined this year with SWIFT’s InnoTribe New York—in mid-June, and Exponential Finance, sponsored by Singularity University, CNBC, and Deloitte, in New York in early June. Funny thing is, for over a decade, this time of year, I usually attend the industry’s preeminent compliance meeting. Not this year, which freed up time for attending Nex tBank/InnoTr ibe and Exponential Finance, where the mantra definitely is: “Let’s break some barriers; let’s break some rules.” By the time you read this column, I will have posted articles about key sessions at
Competitive Intelligence for Bankers Magazine: Banking Exchange is an indispensable resource for the management of today’s bank, conveying fresh ideas, solutions, and insight from award-winning journalists. Website: BankingExchange.com offers continuous banking news coverage, analysis, and blogs.
Editors Exchange: Our e-newsletter Editors Exchange covers business and regulatory issues from a management perspective. Tech Exchange: Our e-newsletter Tech Exchange focuses on bank technology trends, innovations, and product news.
White Papers: Explore extensive information online from industry thought leaders on banking solutions, issues, and trends.
Roundtables: Five to seven bankers and other industry experts delve into critical banking issues in special 10-page sections in our magazine.
Webinars: Our webinars cover a range of pressing banking issues and feature interactive Q&As.
Twitter: Join 8,700 bankers and industry experts on Twitter as they follow @bankingexchange for the latest banking news.
To find out how your company can partner with Banking Exchange, please contact: DIRECTOR - NATIONAL SALES Robert D. Vitriol • bvitriol@sbpub.com • 212-620-7242
dh.com
FINANCIAL TECHNOLOGY SOLUTIONS THAT FIT. CORE SOLUTIONS
Want to reduce costs, and streamline front and backend processes? At D+H we’ll work with you to innovate complete core solutions that integrate with third-party systems so you can remain focused on your true core business—satisfying your customers. What can we do today to move your world forward? Find out at dh.com
©2015 D+H USA Corporation. All rights reserved. D+H is a trademark of D+H Limited Partnership.