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Banking in Castro Country

Is your bank ready and willing to do business in Cuba? For most community banks in the United States, the answer would be a resounding: “No, gracias!” President Barack Obama announced in December of 2014 that he would revise sanctions against the communist regime located less than 100 miles from Key West, Florida.

“There was a lot of enthusiasm when President Obama made the announcement back in December,” says David Schwartz, president and chief executive officer of the Florida International Bankers Association. “What we were waiting to see, as an industry, was what would be the actual changes to the rules, to the regulations, and what we’ve seen is basically a relaxation of the rules.”

The Cuban embargo hasn’t been lifted, and the changes introduced in January by the Department of the Treasury are limited. But some of these changes do impact banks. Travelers to Cuba can now use U.S.-issued debit and credit cards, provided, of course, that their financial institution allows it. U.S. banks can now open correspondent accounts at banks in Cuba, but Cuban banks cannot do the same here in the U.S. Additionally, remittances by U.S. citizens to Cuba have been raised, to $2,000 per quarter or up to $10,000 per trip, provided that the travel was authorized by the Treasury.

Yet, Cuba still retains its spot on the Department of State’s list of state sponsors of terrorism*, which, due to the Bank Secrecy Act (BSA), is likely enough to keep any bank away. Not complying with BSA can have costly implications. Within the past three years, international banks including HSBC Holdings, Standard Chartered plc, ING Group and Bank of Tokyo-Mitsubishi were all fined for doing business with countries under U.S. sanctions. BNP Paribas was hit with a record $8.9 billion fine in July 2014, for processing $190 billion in transactions on behalf of Cuban, Sudanese and Iranian clients. Cuba’s designation as a state sponsor of terror is currently under review by the State Department.

BSA consequences are a very real concern, and are just one of many red flags when it comes to Cuba, says Alex Sanchez, president and chief executive officer of the Florida Bankers Association, who says one simply has to look at the country’s history to understand the hesitation many banks and businesses would have in working in the communist country. The Castro regime-led by Raul Castro since 2006, and most famously by his brother, Fidel, for almost half a century-confiscated private property in the country, including that held by U.S. citizens and businesses, following the 1959 revolution.

As long as Cuba remains under control of the Castro brothers, opportunities for American financial institutions will likely be few. Private business, while growing, still employs a small part of the economy-just 20 percent of the workforce, according to The Brookings Institution. In September, 9,000 small restaurants, formerly run by the state, were privatized.

While the privatization of these businesses could be seen as an encouraging step, they are still very small, without access to capital to grow in a country that doesn’t really encourage private growth. While the U.S. government allows American travelers to use a credit card in Cuba, Sanchez questions whether these types of businesses will be ready to accept them.

Restrictions on who can travel to Cuba have eased greatly, says University of Miami Law School Professor Stanley Langbein. Before, travel required a specific license from the Treasury. The department has since designated 12 categories of individuals who are now authorized to travel to Cuba without a license, including those with family in the country, professional researchers, journalists, or those participating in religious, educational or humanitarian activities. “You can’t be a tourist, but it seems to me, almost anyone who wants to go can fit into one of the 12 categories,” says Langbein. He believes that slowly, more and more Americans will travel to Cuba. “I think Cubans want it, and they’ll accommodate it, but it may be slow at first. There’s going to be travel, and there’s going to be commerce, eventually.”

Customers will drive any opportunities to be found by U.S. banks in Cuba, says Schwartz. “If [a bank’s] customers begin to see opportunities and invest in Cuba, then obviously the banks will follow, as long as there is clarification on compliance issues. But at the present, I don’t see the businesses rushing into it either,” due to the lack of legal protections and infrastructure within Cuba, he says. Changes depend not only on decisions made by the State Department, but also those of the Cuban government.

*After this article was written, The White House announced that Cuba would be removed from the list of state sponsors of terrorism.

– Emily McCormick is director of research and a writer for Bank Director magazine.

Will Fraudsters Target Facebook’s New P2P Service?

Facebook shocked almost no one recently in announcing it will launch person-to-person payments on its Messenger app. Facebook users soon will be able to log a Mastercard or Visa debit card number issued by a U.S. bank into the Facebook app to transfer money to their Facebook friends for free.

Other social media companies are becoming players in the payments space as well. Snapchat has partnered with Square to offer a similar service. But Facebook obviously has an advantage with 1.4 billion users worldwide as of the end of 2014, and about 500 million current users of its Messenger app. Once a user’s debit card information is stored in the Messenger app, it will be fairly easy to pay for other shopping items from advertisers as well, giving the social media giant even more ways to monetize its network. But what sort of security exists, and can banks expect card fraud to escalate as technology giants enter the payments business? Anecdotal news stories suggest that’s exactly what’s happening with Apple Pay’s new mobile payment app.

Facebook says its payment systems are kept in a secure environment separate from other parts of the Facebook network, and it has a team of anti-fraud specialists to monitor for suspicious activity. (The company hired David Marcus, who formerly served as president of PayPal, a company with a lot of experience dealing with fraudsters.) Users will be able to opt in for additional protection, such as a unique password that must be used on Facebook anytime someone uses their debit card there.

“With any payment system, the first demographic to use it would be fraudsters,” says Cherian Abraham, a mobile payment and fraud analyst at Experian Decision Analytics. Criminals likely will exploit social media, which are designed for ease of consumer use, until the companies figure out a way to protect the cards and the banks that hold the liability.

– Naomi Snyder is managing editor for Bank Director.

Asset Quality Continues to Improve

Asset quality is nearing levels not seen since before the financial crisis rocked the banking industry, yet another sign that banks that survived those dark days are stronger and healthier for it. Nonperforming assets (NPA) declined by 20 percent in 2014, according to data released by SNL Financial in February 2015.

Residential real estate loans continue to make up the bulk of delinquent real estate loans. This class of NPAs peaked at $269 billion among all commercial banks and thrifts, in first quarter 2010, and dropped by 40 percent, to $157 billion in delinquent loans as of fourth quarter 2014. Delinquent real estate loans haven’t been this low since the dawn of the financial crisis in 2007.

Among all banks with more than $1 billion in assets, First National Bank of Santa Fe, the $1.7 billion asset subsidiary of Strategic Growth Bancorp, based in El Paso, Texas, saw the greatest decline in its NPA ratiou20137.12 percentage points, ending 2014 with a NPA ratio of 1.55.

TCF National Bank, a subsidiary of TCF Financial Corp., based in Wayzata, Minnesota, with $19 billion in assets, also greatly improved its NPA ratio, finishing out 2014 at 2.4-a considerable drop from 5.18 in fourth quarter 2013. TCF sold off $406 million in restructured residential mortgage loans in December.

According to Dan Werner, a senior equity analyst at investment research firm Morningstar Inc., credit quality has continued to improve as banks have grown more careful about underwriting loans. “A lot of the earnings improvements that we’ve seen from banks have been a result of lower provisions for credit losses over the last couple of years. Now that well has run dry here, and the banks, I think, will struggle with trying to grow revenue here, unless they grow loans.”

A stronger economy, with improved unemployment and wages that finally seem to be on the rise, also plays an important role.

– Emily McCormick is director of research at Bank Director.

The Community Bank Product Gap

When it comes to choosing a bank, breadth of product seems to trump service-and that could be bad news for many community banks. The 2015 Consumer Insights Study, conducted by Harris Poll and sponsored by Austin, Texas-based BancVue, found that 71 percent of U.S adults believe that having access to a broad retail product offering-including free checking and ATM fee refunds-is more important than the institution that provides them. The survey polled 1,002 U.S. adults online.

Community banks would seem to have a clear service advantage. Sixty-four percent of the survey respondents say that smaller institutions provide better service than their larger competitors, and 66 percent say they would prefer to do business with a community bank or credit union than one of the large brand name banks. And yet 31 percent of those consumers who currently do business with a large bank would be reluctant to switch to a community bank or credit union because they don’t think that smaller financial institutions would have the products they want.

“Consumers are voting for product first,” says Gabe Krajicek, BancVue’s chief executive officer. As for the community bank service advantage, “consumers already know that,” he adds. “They’re not banking with you because they don’t know that you have good products.”

Krajicek believes that the biggest challenge for smaller institutions isn’t dealing with a product gap, since many of them do offer the same retail products as the larger banks, but instead overcoming the perception that they can’t meet their customers’ needs. Part of the problem is that the marketing efforts of local institutions often get overwhelmed by the national brands that can outspend them on advertising. The survey also noted that 86 percent of adults would prefer to do at least some of their banking in person instead of using a variety of remote access channels, and the preference is even higher-at 88 percent-for millennials. Forty-two percent of millennials also want to receive financial advice in person rather than over the phone or online. These findings would seem to favor all traditional banks regardless of size that still rely on branches as their major distribution network.

However, millennials do present at least one significant challenge to community banks, which as a group tend to be slower to adopt new capabilities like mobile banking or remote deposit capture than the national banks. “Millennials really want to bank locally, but they really want you to have great technology,” Krajicek says.

– Jack Milligan is editor for Bank Director.

Bank Director Staff Writer

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