3 Trends (and 3 Issues) Every Bank’s Board Needs To Consider

Quickly:

  • The challenges faced by financial institutions today are as numerous as they are nuanced. Be it data security, emerging technology, fraud, crisis management and/or the effectiveness of internal controls, I opened the 12th annual Bank Audit & Risk Committees Conference by laying out a number of key governance, risk and compliance issues and trends.

CHICAGO — While a sophomore at Washington & Lee University, a professor loudly (and unexpectedly) chastised a close friend of mine for stating the obvious. With a wry laugh, he thanked my classmate “for crashing through an open door.” Snark aside, his criticism became a rallying cry for me to pause and dive deeper into apparently simple questions or issues.

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I shared this anecdote with some 400 attendees earlier today; indeed, I teed up Bank Director’s annual program by reminding everyone from the main stage that:

  1. We’re late in the economic cycle;
  2. Rates are rising; and
  3. Pressure on lending spreads remains intense.

Given the composition of this year’s audience, I acknowledged the obvious nature of these three points. I did so, however, in order to surface three trends we felt all here should have on their radar.  I followed that up with three emerging issues to make note of.

TREND #1:
Big banks continue to roll-out exceptional customer-facing technology.

Wells Fargo has been kicked around a lot in the press this year, but to see how big banks continue to pile up retail banking wins, take a look at Greenhouse by Wells Fargo, their app designed to attract younger customers to banking.

TREND #2:
Traditional core IT providers — Fiserv, Jack Henry & FIS — are under fire.

As traditional players move towards digital businesses, new players continue to emerge to help traditional banks become more nimble, flexible and competitive.  Here, FinXact and Nymbus provide two good examples of legitimate challengers to legacy cores.

TREND #3:
Amazon lurks as the game changer.

Community banker’s fear Amazon’s potential entry into this market; according to Promontory Interfinancial Network’s recent business outlook, it is their greatest threat.

In addition to these trends, I surfaced three immediate issues that banks must tackle

ISSUE #1:
Big banks attract new deposits at a much faster pace than banks with less than $1 billion assets.

If small banks can’t easily and efficiently attract deposits, they basically have no future. ‘Nuf said.

ISSUE #2: 
Bank boards need to know if they want to buy, sell or grow independently.

In a recent newsletter, Tom Brown of Second Curve Capital opined that “if you have less than $5 billion in assets, an efficiency ratio north of 65%, deposit costs above 60 basis points, and earn a return on equity in the single digits, this really is time to give some thought to selling.”  As I shared on LinkedIn yesterday, the 3 biggest bank M&A deals of the year took place in May: Fifth Third Bancorp’s $4.6 billion purchase of MB Financial, Cadence Bancorp’s $1.3 billion acquisition of State Bank Financial and Independent Bank Group’s $1 billion agreement to buy Guaranty Bancorp. 
 I don’t see the pace of consolidation slowing any time soon — and know that banks need to ask if they want (and can) be buyers or sellers.

ISSUE #3:
The risk of data breaches across industries continues to increase.

Be it risk management, internal control or third-party security considerations, every aspect of an institution is susceptible to a data breach — and managing these threats and identifying appropriate solutions takes a village that includes the most senior leaders of an organization.

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Just as banks need to develop their audit and risk capabilities, skills and talents, so too do officers and directors have both an opportunity and the responsibility to stay abreast of various trends and topics.  Bank Director’s event continues tomorrow with some fascinating presentations. To see what’s been shared already, take a look at Twitter, where I’m tweeting using @aldominick and #BDAudit18.

3 Key RegTech Themes

Quickly:

  • Machine learning, advanced analytics and natural language processors dominated conversations at yesterday’s RegTech program at NASDAQ’s MarketSite.

NEW YORK — Where will technology take us next?  As many banks embrace digital tools and strategies, they inevitably grapple with regulatory uncertainty.  This naturally creates friction in terms of staffing levels, operational expenses and investment horizons.  With so many regional and national banks continuing to grow in size and complexity, the responsibility to provide appropriate oversight and management escalates in kind.

Likewise, as more and more community banks rely on technology partners to transform how they offer banking products and services, management teams and boards of directors grapple to assess how such relationships impact compliance programs and regulatory expectations.  Can technology truly deliver on its promise of efficiency, risk mitigation and greater insight into customer behavior?

To address questions and observations like these, my team hosted the Reality of RegTech at NASDAQ’s MarketSite on April 18.  Entering the MarketSite, we aspired to surface ideas for banks to better detect compliance and regulatory risks, assess risk exposure and anticipate future threats by engaging with technology partners.

Over the years, our annual one trek to NASDAQ’s New York home afforded us opportunities to:

  • Learn how BNY Mellon encourages innovation on a global scale;
  • Identify where early-stage technology firms realistically collaborate with financial services providers; and
  • Explore lending strategies and solutions for community banks.

This year, we focused on the intersection of technology with regulation, noting that banks can and should expect an overall increase in regulatory constraints on topics including supervision, systemic risk (such as stress tests), data protection and customer protection.

For Forward-Thinking Banks

At Bank Director, we see the emergence of regulatory-focused technology companies helping leadership teams to bridge the need for efficiency and security with growth aspirations. However, understanding how and when to leverage such technologies confounds many executives.  As our Emily McCormick wrote in advance of the event, forward-thinking banks are looking within their own organizations to figure out how the deployment of regtech fits into the institution’s overall strategic goals while matching up with culture, policies, processes and talent.

Key Takeaways

  1. RegTech is, by its very nature, constantly evolving.  Current solutions focus on one of two things: reducing the cost of compliance via automation or leveraging technology to deliver more effective compliance.
  2. The flip side to the promise of these solutions is a skepticism and concern by both regulators and banks that RegTechs really are in this for the long-haul, are reliable and “safe” to work with.
  3. A first step for banks not already using RegTech?  Develop an implementation road map for one specific need (e.g. BSA / AML) which aligns to the overall strategic vision of the organization (in this case, a desire to grow through acquisition).

Interesting Reads on RegTech

Multiple presentations touched on how and where banks can maximize the potential benefits of their RegTech endeavors by addressing key risks; for instance: uncertain development paths, provider reliability, increased regulatory scrutiny, limited judgment and privacy concerns.  For those looking to go deeper on these issues:

  1. PwC authored a Regulatory Brief that discusses (a) how banks are using RegTechs, (b) the current RegTech landscape, and (c) what banks should do to prepare for RegTech.
  2. Continuity offers an e-book along with a step-by-step system for predictable, repeatable compliance results.
  3. Ascent blogs about the impact of artificial intelligence on regulatory compliance in its Top 5 Ways AI in Compliance Will Affect You in 2017.

Multiple members of the team shared insight and inspiration with #RegTech18 on Twitter (usually tying into our @Fin_X_Tech and @BankDirector handles).  Finally, be sure to check out BankDirector.com (no subscription required) as our editorial team offers up a number of perspectives on RegTech and this year’s event.

5 Trending Topics at the Acquire or Be Acquired Conference

Quickly:

  • Large buyers are not in the bank M&A game right now; indeed, banks $25Bn and below continue to drive M&A activity. Case-in-point, 95% of total M&A deals since 2011 have buyer assets less than $25Bn. Might this change in 2018?

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech.

PHOENIX, AZ — Michael Porter, the noted economist, researcher and teacher, once said, “strategy is about making choices, trade-offs; it’s about deliberately choosing to be different. The essence of strategy is choosing what not to do. No one can tell you which rules to break, but you can acquire more skill in determining which rules to break given your talents and circumstances right now.”

Porter’s perspectives came back to me while listening to KBW’s CEO, Tom Michaud. Yesterday morning, Tom talked about the strategic paths that a bank’s CEO might consider in the years to come. As he shared, pressure from investors to deploy capital stimulated M&A discussions in 2017 — and will continue to impact deals in 2018. He also noted that pressure placed on deposit costs, as interest rates rise, contributes to the potential acceleration of bank consolidation. These were just two of the many notes I jotted down during the first day of our annual event. Broadly speaking, what I heard fell into five categories:

1. Economic trends
2. Regulatory trends
3. Small business lending trends
4. Management succession trends
5. Technological innovation trends

Many banks enter 2018 with steady, albeit slow loan growth — while recognizing modest margin improvement as they continue to focus on controlling expenses. Accordingly, I thought to elaborate on the issues I found interesting and/or compelling. Feel free to comment below if other points caught your eye or ear.

Economic Trends

FJ Capital authored a piece in late October that noted how, as the Fed progresses further into the tightening phase of the interest rate cycle, banks will find it more difficult to fund loan growth by raising new low‐cost deposits. Their view, which I heard echoed here, is banks with low‐cost core deposits will become more valuable over the next few years as banks wrestle with increased funding costs. In addition to this idea, I made note that banks with a strong deposit base could be more attractive to buyers as interest rates rise. However, a remark I’ve heard at past events re-emerged here. Namely, making a small bank profitable is hard; exiting, even harder.

Regulatory Trends

Given the audience here, I wasn’t surprised by the continued talk of removing the synthetic $10Bn designation. If the Fed, FDIC and OCC raise the $50Bn threshold as spelled out in Dodd Frank, we could see more banks in the $20Bn – $40Bn range come together. Given that large regional banks usually can pay high prices for smaller targets, unleashing this capacity could reignite more M&A and boost community bank valuations. In addition, the Community Reinvestment Act remains a major headwind in bank mergers. Many here want improvements in the CRA process, which in turn could reduce regulatory risk for bank M&A.

Small business lending

When it comes to the lifeblood of most banks — small business lending — a recurring question has been where and how community banks can take market share from larger banks. My two cents: closing loans faster is key, as is structuring loans to fit specific borrower profiles while being supremely responsive to the customer. Oh, and credit is a big theme right now — and the best clients typically have the best credit.

Management succession

An inescapable comment / observation: aging management teams and board members has been a primary driver of bank consolidation of late. I noted that the average age of a public bank CEO and Chairman is 60 and 66, respectively. It was suggested that this demographic alone plays a key factor in the next few year’s consolidation activity.

Technological trends

When it comes to bank mergers, one of the big drivers of deals is the rise in technology-driven competition (*along with regulatory costs and executive-succession concerns). I sense that most traditional banks haven’t really figured out the digital migration process we’ve embraced as a world. Finally, it appears that the biggest banks are winning the war for retail deposits.  This is an issue that many management teams and boards should be discussing…

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For those of you interested in following the conference conversations via our social channels, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector and our @Fin_X_Tech platform, and search & follow #AOBA18 to see what is being shared with (and by) our attendees.

The Changing Nature of Financial Regulation

Last Friday, right before I keynoted the University of Maryland’s Robert H. Smith School of Business’ Marketing & Finance SuperDay, I received an alert from the Wall Street Journal that the Office of the Comptroller of the Currency (OCC) will start issuing bank charters for fintech firms. This move doesn’t come as a surprise; indeed, there have been numerous on-the-record remarks about how and where the fintech sector can benefit smaller “legacy providers” in terms of innovation and scalability.

Until Friday, Thomas Curry, head of the OCC, had taken a firm stance toward FinTechs, making it clear that he would hold them to the standards and regulations written for incumbent financial services institutions. So as the OCC considers the benefits such firms might provide, I’m not surprised the agency will, for the first time, “start granting banking licenses to fintech firms, giving them greater freedom to operate across the country without seeking state-by-state permission or joining with brick-and-mortar banks.”

Now, FinTech is just one area of regulation that is a-changin’. As our Editor-in-Chief, Jack Milligan, recently wrote on BankDirector.com, “one of the more intriguing story lines of the banking industry’s consolidation since the financial crisis is the persistent belief that federal regulators privately want a more concentrated industry with fewer banks because it would be easier for them to supervise, and they signal their support for this laissez-faire policy every time they approve an acquisition.”

Against this backdrop, I am looking forward to hearing Vice President Joe Biden speak at Georgetown’s McDonough School of Business this afternoon. I have a lot of respect for the Vice President, and find his remarks on “The Importance of Sound Financial Sector Regulation” to fit the timely and relevant standards that we prize at Bank Director and FinXTech. Thanks to the business school’s Center for Financial Markets and Policy for inviting me. As appropriate, I will share my takeaways from this presentation via twitter – @aldominick — and with a follow up post on this blog ASAP.

Whether They Want To or Not, Banks Need to Open Up

Apart from interest rates, the two biggest issues that bank executives seem to wrestle with are regulatory and compliance costs.  I sense another emerging challenge coming to shore; specifically, how to “open up” one’s business structure in terms of developing partnerships and permitting others to leverage their customer data and/or capabilities.

For bankers, this challenge comes with significant reputation and customer risk.

Now, it is hard to truly disrupt the concept of banking — and I shared this opinion from the stage at Bank Director’s annual Bank Executive & Board Compensation Conference this morning.  However, I did adjust some of my welcoming remarks based on the Consumer Finance Protection Bureau’s position that consumers can control their own financial data, including to let third parties help them manage their finances.  As I learned from Jo Ann Barefoot’s Fireside Chat with CFPB Director Richard Cordray at Money 2020, the CFPB “is not content to sit passively by as mere spectators watching these technologies develop.”  According to his prepared remarks:

Many exciting products we see… depend on consumers permitting companies to access their financial data from financial providers with whom the consumer does business. We recognize that such access can raise various issues, but we are gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure.

Since reading the CFPB’s position, Ms. Barefoot’s recap and the Wall Street Journal’s synopsis, I decided to talk with various bank executives and board members that are here with us at the Ritz-Carlton in Amelia Island about this stance.  As I note in this video, I sense both an ongoing struggle — and a sincere interest — to truly understand the role of technology.  For those I talked with, this is as much about “becoming sticky” to their customers as it is about embracing or defending themselves against “the new.”

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For more about this year’s conference, I invite you to take a look at BankDirector.com.  Also, a virtual high-five to the team here for a great first day.  You all rock!

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3 Key Takeaways from Bank Director’s Audit & Risk Conference

A quick check-in from the Swissotel in Chicago, where we just wrapped up the main day of Bank Director’s 10th annual Bank Audit & Risk Committees Conference.  This is a fascinating event, one focused on key accounting, risk and regulatory issues aligned with the information needs of a bank’s Chairman, CEO, Bank Audit Committee, Bank Risk Committee, CFO, CRO and internal auditor.  Risk + strategy go hand in hand; today, we spent considerable time debating risk in the context of growing the bank.

By Al Dominick, President & CEO of Bank Director

Earlier today, while moderating a panel discussion, I referenced a KPMG report that suggests “good risk management and governance can be compared to the brakes of a car. The better the brakes, the faster the car can drive.”  With anecdotes like this ringing in my head, allow me to share three key takeaways:

  1. A company’s culture & code of conduct are critical factors in creating an environment that encourages compliance with laws and regulations.
  2. Risk appetite is a widely accepted concept that remains difficult, in practice, to apply.
  3. As a member of the board, do not lose sight of the need to maintain your skepticism.

This year’s program brings together 150+ financial institutions and more then 300 attendees. The demographics reflect the audience we serve, so I thought to share three additional trends.  Clearly, boards of directors are under pressure to evolve.  Financial institutions need the right expertise and experience and benefit greatly when their directors have diverse backgrounds.

Further, as more regulatory rules are written, board members need to understand what they mean and how they can affect their bank’s business.  Finally, technology strategies and risks are inextricably linked to corporate strategy; as such, the level of board engagement needs to increase.

Given the many issues — both known and unknown — a bank faces as our industry evolves, today made clear how challenging it can be for an audit or risk committee member to get comfortable addressing risk and issues.  Staying compliant requires a solid defense and appreciation for what’s now.  Staying competitive?  This requires a sharper focus given near constant pressures to reduce costs while dealing with increasing competition and regulation.

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To see what we’re sharing on our social networks, I encourage you to follow @bankdirector @fin_x_tech and @aldominick.  Questions or comment?  Feel free to leave me a note below.

Early Takeaways from Bank Director’s Growing the Bank Conference

With continuous pressure on bankers to grow earnings, developing clear strategies, repeatable practices and incorporating exceptional user-experience technologies has to be high on almost every executives to-do list.

How do you bank?

By taking a pause before answering this question, you will appreciate how, regardless of age, we all expect greater pricing transparency, ease of use and always-on access to personal information as part of an integrated banking experience.  The challenge for most bankers?  What many consider state-of-the-art today — in terms of features and services — quickly becomes part of the norm that will be expected and insisted upon in the coming years.

At this morning’s Growing the Bank Conference, I jotted down a few thoughts that builds on this “how do you bank” query.

  • When it comes to the classic build or buy technology decision, partnerships are now de rigueur — with 87% of our 240+ person audience indicating they see technology as presenting opportunities to banks (and not threats).
  • Historically, banks organize themselves along a line of products; however, many have suggested re-orienting operations around customer needs and expectations.
  • To retain deposits, banks should ramp up their customer relationship programs, increase cross-selling efforts and invest in product lines that attract stable deposits.

While we haven’t gotten deep into the payments space (yet), I do encourage bank executives to think about the dramatic growth in that area of banking  — which continues to transform how efficiently banks connect with their customers.  Likewise, I wasn’t kidding when I suggested attendees spend some time reading the OCC’s “Supporting Responsible Innovation” white paper.

Finally, a “did-you-know” that I meant to share from the stage during my conversation with Brian Read, Executive Vice President, Retail Banking, Umpqua Holdings Corp. and Umpqua Bank.  According to the Federal Reserve, 85% of mobile banking users — a bank’s “most advanced” clients — still use branches from time to time. So as he shared with us, there really is a place for a physical presence in banking today.

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*FWIW, we’re in Dallas at the Four Seasons Resort and Club Las Colinas in Dallas, Texas where the annual Byron Nelson golf tournament wrapped up yesterday evening.  The picture above is of Jordan Spieth — the former number one player in the Official World Golf Ranking and two-time major winner — a gift to some of my team who were intent on getting a photo of him.  As a former student of St. Marks, I will not hold it against him that he went to Jesuit, a rival high school.

Five Reasons Why Banks Might Consider Selling in 2016

You might think every bank CEO I meet wants to talk about buying another institution; truth-be-told, some recognize that tying up with another makes a lot of sense.  So this post looks at why now may be the right time for a bank’s CEO and board to consider a sale.  It plays off the idea that in many markets, organic growth options are limited and times are tough for banks, especially those under $1Bn in asset size.

By Al Dominick, President & CEO, Bank Director

Over the past three years, a number of bank executives and board members have struggled with whether to buy or sell their bank — or pursue growth independently.  Over the same time, Bank Director has welcomed more than 1,300 bankers — from more than 500 financial institutions — to our annual M&A conference to explore their short- and long-term options.

This year, those numbers go up in a BIG way. Indeed, we have 600 bankers from 300+ banks joining us at the Arizona Biltmore for “AOBA” this upcoming Sunday through Tuesday.  To me, this signals that more potential buyers & sellers are getting off the sidelines and into the bank merger and acquisition game.  So in advance of Bank Director’s 22nd annual conference, here are five challenges that a bank’s CEO and board might want to consider.

  • Peer-to-peer lenders, credit unions and some — not all — FinTech startups either are (or will be) fierce competitors to community banks.  In addition, non-bank giants in technology, retail, media, entertainment and telecom are making noise about entering banking.
  • When margins decline, bankers try to compensate by improving operational efficiencies.  While slow growth + strong cost controls may allow for short term survival, such an equation doesn’t bode well for the long-term viability of many institutions where investors expect more significant gains.
  • The pressures prompting larger banks to innovate — sluggish loan demand, depressed revenue, higher compliance costs — are the same ones that will continue to force smaller banks to pursue a sale.
  • Let’s face it: the typical bond between a bank and a customer is is not personal nor very strong and the absence of real customer loyalty undermines the traditional business model most banks operate from (*and yes, I know that banks with dedicated customer bases enjoy significant advantages over any potential competitors. But let’s be honest about how dedicated such customers really are).
  • Finally, at many community banks, older management teams and a dearth of local talent mean there may be no one to hand over the reins to in the coming years.

Now, it has been said that business is not about longevity, it is about relevance.  So as Bank Director’s team continues to gear up for this year’s Acquire or Be Acquired conference, these five questions merit serious conversation and consideration both leading up to, and at, our 22nd annual event. For those not able to join us — but interested in following conversations such as these — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA16 to see what is being shared by (and with) our attendees.

Seeking Size and Scale

With Wednesday’s announcement that BB&T has a deal in place to acquire Susquehanna Bancshares in a $2.5 billion deal, I felt inspired to focus on the mergers & acquisitions space today.  You see, if 2013 was the year of the merger-of-equals (MOEs), it seems that 2014 has become the year of “seeking size and scale.”

As I’ve shared in past posts, 2013 was characterized by a series of well-structured mergers which produced a dramatic improvement in shareholder reaction to bank M&A.  For example, Umpqua & Sterling,  United Financial Bancorp & Rockville Financial and Bank of Houston & Independent Bank.  Over the past few weeks, we’ve seen some pretty interesting transactions announced that are not MOEs; specifically, Sterling Bancorp buying Hudson Valley Holding in New York, Banner picking up AmericanWest Bank in the Pacific Northwest and the afore-mentioned BB&T deal.

Don’t Be Fooled, Size Matters

As evidenced by the Sterling and Banner acquisitions, the desire for scale and efficiencies is prompting certain institutions to expand.  While regulatory costs and concerns have been cited in previous years as deterents to a transaction, isn’t it interesting that both of these deals position the acquiring institution near the $10Bn threshold (*important as crossing this asset threshold invites new levels of scrutiny and expense).  But like John Thain suggested earlier this year, “the key is being big enough so that you can support all of the costs of regulation.”  Still, comments made by Richard Davis, chairman and chief executive of U.S. Bancorp, about the BB&T agreement should temper some enthusiasm about the biggest players jumping in to the M&A space a la the $185 Bn-in-size BB&T. “This is not a deal you’d ever see us do,” he said at conference in New York hosted by Bank of America Merrill Lynch, adding “it’s both out-of-market and it’s fairly expensive.”

I’m Serious, It Matters?!?

Earlier this year, Deloitte published The Top Ten Issues for Bank M&A.  In light of the BB&T deal, it is worth revisiting.  To open, the authors opine “size matters when it comes to regulatory constraints on the banking sector: The bigger the players, the more restrictions on banking activities, including M&A. Banks with less than $10 billion in total assets face the least restriction, while the very largest Systemically Important Financial Institutions (SIFIs) experience the highest level of constraints. Among the major regulatory actions that are expected to hold considerable sway over bank M&A in 2014 are the Volcker Rule, Basel III capital requirements, global liquidity rules, stress testing, and anti-money laundering (AML) and Bank Secrecy Act (BSA) compliance laws.”

Who I’m Taking to Buy a Lottery Ticket

Finally, a tip of the hat to Frank Cicero, the Global Head of Financial Institutions Group at
Jefferies. He reminded me on Wednesday that every prediction he made in a piece he wrote for BankDirector.com at the beginning of the year has come to pass…fewer MOE’s, bigger premiums, regional banks returning to bank M&A.  Personally, I’m wondering if he wants to walk into the lotto store with me this weekend?

Aloha Friday!

Is Walmart the Next Big Bank

Part four of a five piece series on emerging threats to banks from non-financial companies. To read parts one through three, click on “For Banks, the Sky IS Falling,” “PayPal is Eating Your Bank’s Lunch” and “The Bank of Facebook.”

At the risk of crashing through an open door, did you know that the retail juggernaut Wal-Mart Stores Inc. launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks?  Yes, customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments.  So does this position Wal-Mart as the next SIFI (*no disrespect to CIT following their announced acquisition of OneWest in a $3.4Bn stock & cash deal earlier this week)?

Walmart bank logo.001

Cue Robin Thicke

According to Wal-Mart, 95% of Americans live within 15 miles of one of its stores.  So I think its fair to say that Wal-Mart continues to blur lines between banking and shopping as it added yet another financial service to its stores across the country.  Indeed, the retailer announced this spring that customers can transfer money to and from any of its 4,000 stores in the U.S. and Puerto Rico.  As this article in Forbes highlighted, low income workers who don’t have traditional bank accounts are turning to prepaid cards and alternatives to checking accounts.  Banks like JPMorgan Chase and Wells Fargo are trying to fill that gap with prepaid and reload able cards — something Wal-Mart has been offering for years.

Where Is That Achilles Heel?

Unlike online competitors to a bank, Wal-Mart enjoys huge brand recognition and an established customer base that feels comfortable walking into their local “branch.”  In fact, banks that already operate inside Walmarts reap among the highest fees from customers of any banks in the nation, according to a WSJ analysis.  But the very demographic the retail company serves — one that expects and demands rock-bottom pricing — may not favor a “B of W.”

Indeed, banking at Wal-Mart is a lot more expensive than shopping there.  As noted by in the WSJ, most U.S. banks earn the bulk of income through lending.  Among the 6,766 banks in the Journal’s examination, “just 15 had fee income higher than loan income — including the five top banks operating at Wal-Mart.”  Would the company really want to race to the bottom in terms of pricing its financial products (ones that would not be federally insured) and compete with its own tenants?

If At First You Don’t Succeed…

It is worth noting that Wal-Mart has tried to get into banking since the late 1990s.  It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California — and later dropped a bid for its own banking charter in 2007.  While I’m not suggesting the new logo depicted above is anything more than a simple rendering by yours truly, it wouldn’t surprise me if the company explored even more creative ways to compete with financial institutions in the future.

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To comment on this piece, please click the white plus sign in the bottom right gray circle on this page or share your thoughts with me via Twitter (I’m @aldominick).  Next up, how crowdsourcing sites like Kiva and Kickstarter allow customers to bypass their bank to get funding for a business idea.

Guest Post: Variety is the Spice of Life

As promised, a special guest author for this Friday’s column: Bank Director magazine’s Managing Editor, Naomi Snyder.  Having shared my key takeaways from our annual Bank Audit & Risk Committees conference on Wednesday and Thursday, I invited Naomi to share her post-conference thoughts on my blog.  So this morning’s title is as much about truth in advertising as it is an invitation to learn what my friend and colleague deemed timely and relevant.

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At Al’s request, I’m going to step in and give a quick recap of Bank Director’s Audit and Risk Committees Conference in Chicago this week.  As you can tell from this picture, nearly 300 people attended our conference at The Palmer House hotel and they got a lot of frightening news about risks for their financial institutions, including cyber risk, interest rate risk, compliance and reputation risk in the age of social media.  I’m going to address three of those points today.

Interest Rate Risk

Many banks are extending credit at a fixed rate of interest for longer terms in an effort to compete and generate much-needed returns. This will be a problem for some of them when interest rates rise and low cost deposits start fleeing for higher rates elsewhere. You could assume the liability/asset equation will equal out, but will it? Steve Hovde, the president and CEO of the investment bank Hovde Group in Chicago, is worried about a bubble forming, saying he has seen credit unions offer 10- or 15-year fixed rate loans at 3.25 percent interest. “I’m seeing borrowers get better deals with good credit quality than they have ever gotten in history,” he says.

Reputation Risk

In an age of social media, anyone can and does tweet or post on Facebook any complaint against your bank. Cyber attacks, such as the one that befell Target Corp., can be devastating and cost the CEO his or her job. Rhonda Barnat, managing director of The Abernathy MacGregor Group Inc., says it’s important not to cater to TV news, such as telling a reporter that your employee’s laptop was stolen at a McDonald’s with sensitive customer information, prompting a visit by the camera crew to the McDonald’s. Not disclosing how many customer records were stolen could keep you off the front page. Focus on the people who matter most: your customers and investors and possibly, your regulators. They want to know how you are going to fix the problem that impacts them.

Compliance Risk

Regulators are increasingly breathing down the necks of bank directors, wanting evidence the board is actively engaged and challenging management. The official minutes need to reflect this demand, without necessarily going overboard with 25 pages of detailed discussion, for example. Local regulators are increasingly deferring questions to Washington, D.C., where they can get stuck in limbo. When regulators do give guidance, it is often only verbal and can cross the line into making business decisions for the bank, says Robert Fleetwood, a partner at Barack Ferrazzano in Chicago. In such an environment, it’s important to have good relations with your regulators and to keep them informed.

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About Naomi: Prior to joining our team, she spent 13 years as a business reporter for newspapers in South Carolina, Texas and Tennessee. Most recently, she was a reporter for The Tennessean, Nashville’s daily newspaper. She also was a correspondent for USA Today. Naomi has a bachelor’s degree from the University of Michigan and a master’s degree in Journalism from the University of Illinois.  To follow her wit and wisdom on Twitter, follow @naomisnyder.

The Bank Audit & Risk Committees Conference – Day Two Wrap Up

With all of the information provided at this year’s Bank Audit & Risk Committees conference(#BDAudit14 via @bankdirector), I think it is fair to write that some attendees might be heading home thinking “man, that was like taking a refreshing drink from a firehose.”  As I reflect on my time in Chicago this week, it strikes me that many of the rules and requirements being placed on the biggest banks will inevitably trickle down to smaller community banks.  Likewise, the risks and challenges being faced by the biggest of the big will also plague the smallest of the small.  Below, I share two key takeaways from yesterday’s presentations along with a short video recap that reminds bankers that competition comes in many shapes and sizes.

The Crown Fountain in Millennium Park
The Crown Fountain in Millennium Park

Trust, But Verify

To open her “New Audit Committee Playbook” breakout session, Crowe Horwath’s Jennifer Burke reinforced lessons from previous sessions that a bank’s audit committee is the first line of defense for the board of directors and shareholders.  Whether providing oversight to management’s design and implementation with respect to internal controls to consideration of fraud risks to the bank, she made clear the importance of an engaged and educated director.  Let me share three “typical pitfalls” she identified for audit committee members to steer clear of:

  1. Not addressing complex accounting issues;
  2. Lack of open lines of communication to functional managers; and
  3. Failure to respond to warning event.

To these points, let me echo her closing remarks: it is imperative that a board member understand his/her responsibility and get help from outside resources (e.g. attorneys, accountants, consultants, etc.) whenever needed.

Learn From High-profile Corporate Scandals

Many business leaders are increasingly aware of the need to create company-specific anti-fraud measures to address internal corporate fraud and misconduct.  For this reason, our final session looked at opening an investigation from the board’s point-of-view.  Arnold & Porter’s Brian McCormally kicked things off with a reminder that the high-profile cyber hacks of Neiman Marcus and Target aren’t the only high-profile corporate scandals that bankers can learn from.  The former head of enforcement at the OCC warned that regulators today increasingly expect bank directors to actively investigate operational risk management issues.  KPMG’s Director of Fraud Risk Management, Ken Jones, echoed his point.  Ken noted the challenge for bank executives and board members is “developing a comprehensive effort to (a) understand the US compliance and enforcement mandates — and how this criteria applies to them; (b) identify the types of fraud that impact the organization; (c) understand various control frameworks and the nature of controls; (d) integrate risk assessments, codes of conduct, and whistleblower mechanisms into corporate objectives; and (e) create a comprehensive anti-fraud program that manages and integrates prevention, detection, and response efforts.”

A One-Minute Video Recap

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right. If you are on twitter, I’m @aldominick.  P.S. — check back tomorrow for a special guest post on AboutThatRatio.com.