Monthly Archives: December 2019

FedNow, Though Not Quite ‘Now’

By Jim Murez

As it weighed whether to jump into building an electronic payments infrastructure, the Fed received strong encouragement from the community banking industry, which has held that a single, private-sector payments provider may not make nationwide inclusion a goal. The Fed’s real-time payments solution, announced in August, is FedNow, which gives the community banking industry what it has asked for, just not yet. FedNow isn’t expected to be completed until 2023, possibly 2024. 

The alternative to FedNow, which is available now, is the RTP network, created by The Clearing House. RTP is touted as the real-time payments solution for all depository institutions, though some still fear community banks may get shut out.

One path toward community bank inclusion has been forged by Madison, Wis.-based Bankers’ Bank, which has become a funding agent for member banks looking for real-time payments capabilities. Giving clients “easy access onto TCH’s real-time rail” is good business, said Bankers’ Bank’s Matt Sitkowski.

More critical than quick access, noted Fed Governor Lael Brainard, is safety. “Stakeholders have noted the importance of having access to more than one real-time payments service for backup purposes in order to provide resiliency through redundancy,” Brainard said in August. “In fact, many banks already take advantage of having connections to multiple operators today in check, ACH and wire.”

As to why it will take until 2023 for the Fed’s payments infrastructure to become available, Brainard said, “For us, nationwide reach is really the concept that is in line with our public mission. And the question of ‘how long will it take?’ … is a quite different question.”

While timeliness was a consideration, the ultimate goal for the Fed is nationwide reach, Brainard said.

Another Day, Another Lending App to Amp Your CX

By Justin Dullum

Community bankers suddenly have a lot of tech to choose from when it comes to lending platforms. We talked to Snehal Fulzele, senior vice president and general manager for Cloud Lending, a Q2 company based in Austin, Texas, about what makes its digital lending platform a fit for community banks, and got his take on cybersecurity challenges.

Q: What makes some tech offerings better than others for a community bank?

Snehal Fulzele: Community banks are looking for solutions that are easy to integrate with their existing physical and digital channels. For example, the ability to integrate a lending platform that can easily pull customer data from a bank’s core to streamline the approval and underwriting process for both the customer and the financial institution is critical.

Community banks are also looking for platforms that offer a more streamlined borrower experience to transform legacy processes that are too rigid, tedious and inconvenient for the end user. With the right tools, a loan decision that would typically take two or three weeks could be made in a matter of seconds. This speed allows community banks to retain more business with existing account holders.

Q: How does technology inform the borrower viewpoint?

S.F.: Today’s customer wants two things from their lender: A simple borrower experience and competitive rates and terms.

Customers who have an existing relationship with a community bank are likely to go to that institution first in a time of need, say, for a personal loan. Because they already have a relationship with that bank, they assume it’ll be easier for them to apply for and secure a loan. That’s an advantage for the financial institution, but only if they have the digital tools that can make the lending process easy and painless for the customer. Never underestimate something as seemingly simple as autofilling an existing customer’s loan application. If the borrower has to fill out 30 fields in a digital PDF, that goodwill — and potentially the customer’s business — is lost. 

Q: How does the “hands on” approach typical of a small bank jibe with a data driven approach when assessing creditworthiness?

S.F.: The best lending platforms bridge the gap between branch interactions and digital engagement, but it all comes down to how well a bank can integrate data and technology into its approach. For example, let’s say a customer is trying to take out a loan in the digital channel, but isn’t able to finish the application. The next day on his way home from work, he decides to stop into his closest branch to finish his loan request. The banker needs to have the capability to pull the application out of the digital channel and finalize the request in-person. And with the ability to better leverage customer data, bankers have more information and more context to help their customers move to the next step in their financial journey.

Q: How is CX considered in your lending platform?

S.F.: Our mission is to build stronger communities by strengthening financial institutions. To fulfill that mission, we empower community banks with the technology and tools to help them build better relationships with their customers, acquire new customers and increase profitability. If our lending solutions lead to a better experience and better outcomes for the end user, then the bank is better equipped to foster longer-lasting relationships.

Q: Your firm offers security products too. Where are community banks most vulnerable?

S.F.: People will always be the biggest security risk for banks, both customers and employees. Every bank should hold regular training sessions with employees to review the latest trends and evolutions in the threat landscape, institute content marketing and education programs that can train consumers to spot suspicious communications or fraudulent activity, and regularly review protocols for how employees report threats.

Q: What are some under-the-radar technologies currently to look out for?

S.F.: Q2 recently closed on an acquisition of PrecisionLender, which takes a data-driven approach to commercial lending, enhanced with machine learning to help structure and negotiate transactions. The commercial lending experience has historically lagged behind the consumer banking experience. We are expanding corporate banking capabilities and helping bankers improve their profitability.

The Trouble with Cash

By Jacqueline Nasseff Hilgert

The National Retail Federation has predicted a strong holiday shopping season. In its October survey, consumers said they expected to spend an average of $1,047, up 4 percent from what they had planned to spend last year. It’s the 10th consecutive year of increased consumer holiday spending — consumer confidence is one economic indicator that hasn’t yet lost its luster.

I don’t derive much gratification from shopping so the increased number of holiday shoppers at our local retail center is easy for me to ignore, except for the fact that my husband manages a hardware store. He regularly feeds me tales from the retail trenches.

There are the brazen shoplifters, of course. One thief recently walked out of the front door of his store with a $300 shop vac while an accomplice kept the cashier distracted. (There’s always an accomplice, I am told.)

Then there is the fight against counterfeiters, the rooting out of all those washed fives that have been reprinted in larger denominations. They use a UV pen to check all large bills now but a UV scanner would be better, he said.

Let’s not forget those fast-talking scammers running quick-change schemes on inexperienced cashiers. One trickster walked out with $100 in change after starting his ploy with a $20 used to pay for a not-quite-$2 gasket.

Most of my husband’s customers are loyal and law-abiding; they are consumers in the store seeking plumbing advice, a new barbeque set-up, or yard-maintenance implements designed to keep the quarter-acre lot nice and tidy. Big ticket items are bought using plastic, but his best selling item — biodegradable lawn bags — are mostly paid for with cash. 

The customers aren’t the problem here. The criminals are. But so, perhaps, is the imperative to have cash in the till. All this crime happens at a suburban retail strip mall in an area with good schools and nice parks and property values that steadily increase (presumably because everyone picks up their leaves). 

Our lead feature, “Cash or Change” examines the future of cash as more and more consumers eschew the currency in favor of plastic or payment apps that speed transaction time and increase security. One’s currency of choice depends on many variables, including what’s being purchased and where, and to which demographic group a consumer belongs. It’s a complicated discussion. 

I asked my husband if, given all the hassles he endures to keep retail losses low, he would consider going cashless at his hardware store? He gave my question serious consideration before offering a definitive “no.”

“We’d lose a lot of business,” he said, “given the age of our customers.”

Time is Right for Serious Fight Against Credit Unions

By Tom Bengtson

Now is the time for the banking industry to unite behind an effort to level the playing field with credit unions. Consider what’s going on around the industry, and it is possible to perceive a “perfect storm” of factors that make now the right time.

First, the Independent Community Bankers of America launched its Wake Up initiative on Oct. 21; the campaign encourages bankers to speak out about a $2 billion annual tax subsidy for credit unions, many of which are growing far beyond any recognizable common bond (317 have more than $1 billion in assets). The latest industry trend has the boldest credit unions growing by acquisition. Credit unions have purchased 21 banks in the last two years.

Second, the recently installed chairman of the American Bankers Association is a former credit union executive who converted her institution to a bank. Laurie Stewart, president and CEO of the $686 million Sound Financial in Seattle, joined the A.G.E. Federal Credit Union staff and quickly became its president in 1989. It was called Credit Union of the Pacific by 2003 when she converted the institution into a mutual savings bank. Five years later, she took it public. Stewart is the exemplar for credit union executives who outgrow their charters.   

And third, a member of the National Credit Union Administration is calling for stricter regulation of large credit unions. Todd Harper, a former NCUA staffer, joined the board earlier this year and is calling for the regulator to create a consumer compliance exam program for large, complex credit unions, according to the American Banker

Credit union competition was a dominant theme at the September Iowa Bankers Association annual meeting. State legislators recalled a recent failed effort to tax state chartered credit unions. More than one lawmaker noted that even if the state changed the law to tax credit unions, it is doubtful the move would do much to level the competitive landscape. “Credit unions have options,” said Lee Hein, a Republican in the Iowa House. “They can move to a federal charter.” Such a move, he said, would be an obvious way for a state credit union to avoid the impact of a new state law.

But bankers at the Des Moines assembly said there’s nothing obvious about it. The Iowa credit union law has fewer field of membership restrictions than the federal law; some credit unions, it was suggested, may be willing to pay a tax in order to continue to exercise the liberties of the state credit union charter. (Of the 88 credit unions in Iowa, only one has a federal charter.)

The credit union industry, however, continues to enjoy broad support from the public and from most elected officials. Few understand the tax differences between banks and credit unions, and many don’t care. Bankers, nonetheless, can make a compelling case that the current environment is unfair, anticompetitive and bad for taxpayers. The banking industry should continue to push methodically for change.

First and foremost, in states where the state charter is more liberal than the federal charter, banker advocacy groups should lobby for changes that put the state charter on a par with the federal charter. In an era of ubiquitous banking (via hand-held devices, computer, phone, mail and branch) there is no reason for a state charter to be more permissive than an already generous federal charter. 

Next, bankers in all states should work to level the taxation playing field for smaller institutions. But rather than working to expand the reach of taxation, the effort should be to exempt smaller banks from taxation, especially when profits come from credit extended to local business owners and residents. 

And finally, work should be done to apply taxation to income earned at the largest credit unions. Those billion-dollar-plus credit unions should pay taxes like any other large financial institution. It is pretty difficult to argue that a billion-dollar-plus credit union is about the neighborhood or any modest-sized affinity group. An entire metro area, for example, is not an affinity group; it is a market — the same kind of market served by tax-paying banks.

Credit union advocates argue that their institutions should be exempt from federal income taxes because they do not have the ability to sell stock the way banks do. Given all the credit unions that are buying banks, it doesn’t seem like they lack capital. Nonetheless, I think once a credit union reaches a certain threshold — and I’m not real picky about the size (maybe $500 million, perhaps $1 billion) — they should be allowed to sell stock like a bank. Make them pay the same taxes that every other financial institution pays and let them raise capital like any other financial institution as well.

Ag Banker Cultivates Savvy Borrowers

By Alaina Webster

“I’m always amazed — a lot of kids come out of college, and they don’t understand balance sheets, income statements, cash flows, sensitivity analyses like they should, and it’s like, you’re going to run a business that depends on that stuff.” That’s Nate Franzén, president, agri-business division, discussing why his institution, First Dakota National Bank in Yankton, S.D., has built such a robust portfolio of educational opportunities for farmers and ranchers in the region, whether they’re First Dakota customers or not.

The $1.7 billion community bank, with 19 locations throughout South Dakota and Nebraska, services “a little over $1 billion in ag loans to farmers and ranchers,” according to Franzén, who says that roughly half of those are traditional ag loans on the bank’s balance sheet and half are loans sold into the secondary market.

“We’ve always been an ag bank — it’s important to us,” Franzén says. “Certainly we cater to all types of businesses, but agriculture is a significant part of what we do, and we know we have to bring something different to the market than just the color of our money.”

Which is why First Dakota has invested so heavily in educating farmers and ranchers, both before and after they become business owners. For starters, Franzén and other bank employees work with South Dakota State University, Brookings, speaking in classrooms to reach agriculture students before they return to the farm. It’s part marketing tool, part recruitment initiative and part effort to create better, more informed potential clients.

“I go out and talk to ag students so as they get out of school and get back to their farm or ranch, we’re a familiar name,” Franzén says. “They know who First Dakota is, and we’ve maybe stood out because we provided some value and some things for them to think about during their educational experience.

“I try to talk about what I do during the day and what our team does during the day, and how rewarding it is and how we’re highly respected people in our communities most of the time because we’re out there every day trying to help people with something that’s very important to them — their financial wherewithal and their financial growth over time.”

Franzén points out commonalities among farms that are performing well and asks students to consider why a particular organization might be doing better than peer businesses. He encourages future farmers and ranchers to embrace communication and change.

“Farmers and ranchers are generally independent people,” he says, “that’s a strength in many ways, but where it tends to be a weakness for them is that they’re so independent they’re not always the best communicators.”

Creating a system in which communication flows freely among all stakeholders is important, Franzén believes, because decisions need to be made with all available input. “You owe it to your employees or your family members to share what’s on your mind every once in a while and not just keep it in your head.”

As for change, “Technology is changing fast,” Franzén says. “Our ability to do things is changing fast, and you really need to keep up and implement those things that make sense in your operation to keep you competitive.”

Franzén is put on high alert when he hears customers say: “Hey, this is what Grandpa did, this is what Dad did, this is how we’re going to do it.” So does learning that business owners seem to be changing just to change.

“Make sure the change is going to improve your business and not just be change because ‘I like it; it’s cool technology,’” he tells students. “With technology, there’s a cool factor sometimes, and we get lost in that cool factor, and it really doesn’t make as much financial sense as it should.”

Beyond the classroom, Franzén and First Dakota have created a bi-yearly beginning farmer program that accepts 22 to 25 young producers, their spouses and families. The group convenes for multiple-day meetings four times a year, with First Dakota arranging for nationally recognized speakers to address attendees.

“We don’t get into agronomy or animal science,” says Franzén. “Those things they learn on their own on the farm or in colleges or universities. We focus on what we see as real differentiators from a management standpoint … financial management, marketing and risk management, strategic planning, succession planning, family business dynamics, communication, behavioral styles, strengths finder-type stuff … things that we think really separate high-producing, high-performing farms and ranches from the others.”

While the bank pours $70,000 to $80,000 into the program by Franzén’s estimate, attendees are only required to submit a $1,000 security deposit. For each session they attend, farmers and ranchers are refunded $250, provided they participate and engage throughout the session.

“It’s our way of making sure they have skin in the game but trying to keep the financial barrier to entry really low,” Franzén shares. “We have young producers who maybe aren’t in the financial position today to pay what the value of the program is, but to have access to it really makes them better prepared for the future.”

Because of Franzén’s certainty that farming and ranching are two of the toughest careers a person can commit to, he’s committed to ensuring ag professionals associated with First Dakota are positioned to take their best shot at the game.

“Not only do you have to know your business, you have to have the financial skills and marketing skills, risk management skills,” he says. “And it’s not just selling a certain type of product, it’s about agronomy, being a mechanic with machinery and equipment. It’s about livestock husbandry and [being a] veterinarian and nutrition … it’s complex.”

Franzén believes banks should step in and invest in educating their ag production customers because “a lot of them have grown up on farms and ranches, but they’ve grown up doing chores, right? They’ve grown up driving a tractor. They’ve grown up doing some of the work, but in most cases, they haven’t been as involved in the decision making and the analysis and the record keeping and studying the markets to make the best marketing decisions. They haven’t been involved in enough of that to realize just how complex and how challenging it is to be a really well run farm or ranch.”

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