Breaking Down Deregulation Based On Asset Size


deregulation-9-5-18.pngIn May, President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law, clearing the last hurdle for an expansive roll-back of U.S. banking regulations. The bill will relieve many of the nation’s banks from compliance and regulatory obligations imposed by the 2010 Dodd-Frank Act, adopted in the aftermath of the 2008 financial crisis.

The legislation benefitted from significant support from the banking industry, and in particular from the Independent Community Bankers of America and other representatives of community banks. Proponents of the bill assert that the oversight and compliance obligations imposed by Dodd-Frank disproportionately burdened community banks with the costs and organizational challenges associated with compliance, even though these institutions do not pose the same level of risk to the domestic or global financial systems as their larger national bank counterparts.

To address these concerns, the new law adjusts existing regulatory requirements to create a more tiered regulatory framework based on institution asset size, primarily by (i) removing certain compliance obligations to which community banks are subject, and (ii) increasing the threshold triggering application of some of the most stringent oversight and compliance requirements.

The most significant regulatory changes for community and regional banks resulting from the law include:

Under $3 Billion:
Raises the qualification threshold from $1 billion in assets to $3 billion in assets for: (i) an 18-month exam cycle for well-managed, well-capitalized banks, and (ii) the Federal Reserve’s Small Bank Holding Company Policy Statement.

Under $10 Billion:
No longer subject to the Volcker Rule enacted as part of Dodd-Frank. The Volker Rule restricts proprietary trading by FDIC-insured institutions, and imposes related reporting and compliance obligations on these institutions as a result. These reporting and compliance obligations reflected regulators’ belief that proprietary trading poses high systemic risk. But because it is typically only large national institutions that engage in proprietary trading, the community banking industry argued that smaller banks should not be subject to the Volcker Rule.

Deems certain mortgages originated and retained in portfolio as Qualified Mortgages if: (i) they comply with requirements regarding prepayment penalties, (ii) they do not have negative amortization or interest-only features, and (iii) the financial institution considers and documents the debt, income and financial resources of the customer. Qualified Mortgages are legally presumed to comply with Dodd-Frank’s Ability to Repay requirements.

Truth In Lending Act escrow requirement exemption for depository institutions that originated no more than 1,000 first lien mortgages on principal dwellings in the previous year.

Directs federal banking regulators to develop a Community Bank Leverage Ratio (equity capital to consolidated assets) between 8 and 10 percent. Banks exceeding this ratio will be deemed well capitalized and in compliance with risk-based capital and leverage requirements. Federal banking agencies may consider a bank’s risk profile when evaluating whether it qualifies as a community bank for purposes of the ratio requirement.

$10 Billion – $50 Billion:
No longer subject to mandatory stress testing or required to maintain risk management committees.

$50 Billion – $250 Billion:
No longer designated as “Systemically Important Financial Institutions” under Dodd-Frank. This designation triggers application of “enhanced prudential standards” under existing law, such as stress-testing and maintenance of risk management committees.

Institutions holding between $50 billion and $100 billion in assets will are exempt as of May 24, 2018, and institutions holding between $100 billion and $250 billion in assets will become exempt as of November 24, 2019.

Under $250 Billion:
Changes the application of High Volatility Commercial Real Estate (HVCRE) rules, which will now only apply to the 12 largest domestic institutions. Existing HVCRE rules apply broadly to loans made for the acquisition or construction of commercial real estate, unless one of a few exemptions applies. Loans categorized as HVCRE receive a higher risk-weighting under capital adequacy regulations, requiring the bank to hold more capital than for non-HVCRE loans. The banking industry argued the HVCRE definition was unnecessarily broad and the related guidance was redundant.

All Banks:
Exempts certain rural real estate transactions of less than $400,000 from appraisal requirements if no certified appraiser is available. Community banks argued that finding appraisers in rural areas can be difficult or expensive.

Depository institutions that originate fewer than 500 closed-end mortgages or open-end lines of credit will be exempt from certain disclosures under the Home Mortgage Disclosure Act.

The expansiveness of these reforms means a significant easing of U.S. bank regulations applicable to community and regional banks. Legislators have indicated that the Act may soon be followed by further regulatory changes. Regardless of future congressional action, the newly modified regulatory landscape will be new and very different for many banking institutions, especially those far from Wall Street and doing business on Main Street.

The Big Future of Small Business Banking


fintech-8-28-18.pngAccording to the U.S. Small Business Administration Office of Advocacy, there are currently 29.6 million micro and small businesses in the United States. Of those, 80 percent are one-person businesses, and 22 percent are made up of 10 employees or fewer. Businesses that fall within these parameters span every industry from freelancers and bloggers, to designers, developers, and start-up entrepreneurs. All are seeing a boom in sales and dependency from consumers due to the so-called “gig economy.”

A lot has been done by banks and alternative lenders when it comes to providing financing for these micro and small businesses, but given this data, it begs the question: how do they all bank?
Traditionally, banking for micro and small businesses has been limited at best and inadequate at worst. In most cases, small business owners have had no other option but to visit a physical bank branch, fill out endless paperwork, provide documentation, and then transfer items back and forth to the bank through the mail or by email. The technology is typically clunky, out of date, and inconvenient – all adjectives a far cry from how these businesses would describe themselves, and how they need to operate. In addition, these owners are, at their core, consumers. They experience cutting-edge products and technology with their own personal banking accounts, but that same innovation is not replicated on the business side.

To alleviate this burden, the banking industry has a lot of soul searching to do. Some banks have spent a lot of time and energy discussing digital banking disruption in the consumer world. The time has come for the next frontier in the small business market, which has inspired and driven forward-thinking banks to develop customized solutions for small business customers.

For banks considering entering—or reimagining their approach to—the small business segment, it begins with a solid strategic plan. Understanding the demographics and banking needs of your target market will help guide the product development and customer experience process. This covers everything from developing a product suite that will be appealing to both the market and your bottom line, to thinking through the journey as a business going from being a prospect to a customer.

At Radius, we took some learnings from our experience in the digital consumer banking space and used it to build the framework for our small business offering. While small business owners may need a little more complexity with their money management tools than consumers, designing something that was simple and straightforward was the key. The result for us was the Tailored Checking Account, which any small business can now apply for online and get opened in minutes thanks to a partnership we established with Treasury Prime, a San Francisco-based fintech.

Radius isn’t alone in its quest to help business owners better manage their finances. In addition to our offering, we’ve noticed several other fintechs focused and working to fill the void that many small business owners are experiencing. For example, Autobooks helps small businesses manage their receivables, payables, payments and accounting entirely online. Brex creates business debit cards that operate like credit cards without the need for a personal guaranty. And Rocket Dollar helps individuals unlock their retirement savings for things like funding a startup or making a small business loan.

Overall, the sheer amount of micro and small businesses requires the banking industry’s attention. Consumers are increasingly turning to shopping local and supporting small businesses, only hastening the need for small business owners to manage their money on their terms—a trend that won’t decline anytime soon. This is a market that all banking professionals should be paying attention to, as the market only continues to grow. I look forward to seeing the outcome over the next year and am eager to see what the future holds for us and the rest of the small business banking industry.

Aligning Risk With Strategic Growth



The banking industry is experiencing change like it never has before. Digital delivery channels will have a profound effect on the typical bank’s business model, and further change is coming through regulatory relief. Both can offer new opportunities and new risks. KPMG’s David Reavy details what you need to know about these changes and how boards should focus on today’s risks.

  • The Future Bank Business Model
  • Regulation and Industry Change
  • Expectations for Boards

What Banks Need to Know About Fintech Partnerships


The idea that banks and fintechs need to compete with each other is unfounded and restrictive to both parties.

Both fintechs and banks have a lot to gain by collaborating, and very little to lose. For fintechs, the most widely cited reasons for partnering with banks, according to Capgemini, include enhanced visibility by partnering with established brand names, achieving economies of scale and gaining customer trust.

fintech-reasons.png

For banks, the benefits are much more tangible, and their impact on the bottom line can be immediate.

The European Business Review explained it well: “By tapping into expertise, traditional banks stand to move much more swiftly and effectively than they otherwise could to introduce new products, streamline processes, enhance customer experience, and increase revenues.”

Looking at increased revenues, Accenture claims banks can potentially gain three to five percent by partnering with fintechs, with gains coming from enhanced customer acquisition, more fee-based revenue, better pricing accuracy, and a lower cost of risk.

When approaching a partnership with a fintech, there are a few things banks should be cognizant of in order to ensure success:

1.  Serve your customers first
First and foremost, your customers should be at the center of everything you do, including your partnerships with fintechs. How well you are serving your customers dictates your success more than anything else, and every fintech partnership represents an opportunity to further build and solidify customer loyalty.

For this reason, it’s important to partner with fintechs that will address customer pain points the most effectively. There are a lot of fintechs for banks to choose from in the process of finding partners, and the degree to which a partnership with a fintech will improve the life of customers should weigh in heaviest in your decision making.

2.  Think holistically about your partnership
If you want your partnership with a fintech to be a success, you need to think deeper than your initial partnership agreement. Especially in sell-through partner channels, setting time aside to have your sales and support teams familiarize themselves with the typical FAQs and support procedures will ensure your go-to-market strategies are aligned, and you are promoting the product or service as effectively as possible in the smallest amount of time.

3.  Ongoing collaboration is necessary for success
The nature of your fintech partner’s business is bound to change and evolve. For this reason, it is essential to keep up with the best ways to sell their product or service to your customers.

Many fintechs host training and workshops for the banks they partner with, and offer marketing resources to help banks promote the value of their service. Take advantage of these things to ensure you are getting the most out of your partnerships.

Accounts Payable (AP) Automation is one example of a way a fintech partnership can become a strategic advantage for a bank.

MineralTree has seen banks build customer loyalty while simultaneously driving interchange revenue due to a few core changes, which include:

  1. The private-labeled solution streamlines a workflow for bank customers that has traditionally been very manual, paper-based, and filled with frustration.
  2. The updated workflow simplifies the process for bank customers to pay vendors through the commercial card program run by their banks.
  3. Banks are able to integrate with their customer’s business at a deeper level by addressing pain within the operations of their customers’ businesses.

Also, with AP Automation still approaching a tipping point in adoption, banks have an opportunity to drastically differentiate themselves by offering a solution that is truly disruptive.

Regardless of which types of services or products you believe can bring value to your customers, the opportunity to partner with fintechs makes the process of introducing them and quickly realizing their benefits much easier.

Why Management and Directors Need to Consider Blockchain in Overall Digital Strategy


blockchain-8-15-18.pngIf we think back to what we were doing in 1994, we would say we were using a gigantic cell phone, just hearing about the internet, addicted to the fax machine, and just starting to use email. Fast forward, and we are with blockchain where we were with the internet and email in 1994.

After the sale of Mechanics Bank in 2015 and subsequently leaving my role as CEO, I embarked upon a journey that has forever changed how I think; how I problem solve; how I view the boardroom; the secret society of the c-suite and most importantly, how I view technology, people and process.

There is a convergence of social media, digital retail, robotics, artificial intelligence, wearables, blockchain, Internet of Things, big data and advanced analytics. We must think about the big picture and how all of these pieces fit together in overall corporate and organizational digital strategy.

Forbes recently reported the top 20 largest businesses in the world, including top financial institutions, are all now exploring blockchain. These same companies are simultaneously evaluating and implementing the use of big data, predictive analytics, artificial intelligence and machine learning.

Since 90 percent of goods in global trade are transported through the shipping industry supply chain, let’s use the announced partnership of Maersk and IBM as our first example.

As you may know, Maersk is the largest shipping container company in the world, transporting 15 percent of the world GDP each year.

The shipping industry supply chain consists of:

  • Land transportation brokers
  • Customs brokers
  • Ports
  • Freight forwarders
  • Governments
  • Ocean carriers

Like many bank functions in the U.S., global trade functions are antiquated. The industry is still largely paper intensive with organizational silos and a heavy reliance on Excel. A typical transaction can take up to 30 people and more than 200 communications to complete. Maersk is not immune to these same challenges, but recently embarked on its own digital transformation through two partnerships:

  • Microsoft Enterprise Services to move five regional datacenters to the cloud, improve IT performance, bolster customer services, and reduce operational risk;
  • IBM to improve transparency and efficiency, with complete visibility of tracking millions of container shipments each year.

Each participant in a supply chain ecosystem can view the progress through the supply chain. They can also see the status of customs documents, view bills of lading and other data. This will all be done using blockchain technology and smart contracts.

So, what does all of this mean? Let’s take a look at how this all ties in to what I call “the digital innovation melting pot” and why we as bankers must pay attention:

In this video, the bank is partnered with the shipping, wearable device, driverless car, identity, virtual agent/chatbot, social media, social media influencers, predictive analytics, retailer, airline, and hotel industries. These 11 industries are working together to offer products, complete transactions and improve the customer experience with little in-person human interaction.

My view of blockchain, innovation and its place in the new digital world is from my role as a CEO who’s been accountable to shareholders, responsible for the bottom line. Though the top banks in the country have caught on to this trend, many banks are still in the dark ages, plagued by denial, lack of innovation knowledge and the right talent.
Many institutions still have bricked-up infrastructure, engrained in the mentality that “this is the way it’s always been done,” with a lot of outdated, dysfunctional and inefficient processes, policies and procedures.

The disregard of digital technology disruption and innovation is like a termite infestation that destroys the structure if you don’t pay attention to warnings and maintain the property.

Key Takeaways
Partnerships are the way of the future. A bank can no longer rely solely on its own infrastructure and core vendor relationships. The new digital world converges industries, so make sure you pick the right partners. To do so, understand existing infrastructure and look through the lens of generational age groups with a customer focus.

  • Does the customer want simple to use technology services and want it now?
  • Do they prefer more traditional services, and are they less trusting of new market entrants? Do they still value human advice?
  • Do they value high-quality service and view “trust as a must,” but are interested in innovation and want to be educated?
  • Is there forward-thinking leadership in the boardroom and C-suite?
  • How does the board get refreshed with new perspective?
  • Would board members be willing to give up their board seat to allow fresh perspective?
  • Has there been evaluation about current state and future growth?
  • Is there understanding about existing system capabilities, shortfalls, what works, what doesn’t?

Determine your game plan:

  • Does the front end need digitization?
  • Fix front end while gradually replacing legacy infrastructure and integrating middle and back office?
  • Go digital native – full overhaul?
  • Evaluate whether systems, processes, procedures and policies are still relevant?

Don’t forget impact on your people. Make sure new offerings do not cannibalize existing product offering and pricing. Remember that a digital expert is unnecessary in the boardroom. Instead find a digital technology translator; someone who understands the cause and effect of decisions made at the macro level. Lastly, and most importantly, figure out how to disrupt your business model before it becomes disrupted.

Five Qualities It Takes to be an Effective Director


governance-7-20-18.pngI’ve always thought that corporate governance looks deceptively easy. While some are more hands-on than others, a bank’s board of directors does not (and should not) play a direct operating role. It is there to advise and oversee the company’s senior management team, but not run the company. I also believe that governance is critically important, and the board and its individual directors can have a material impact—either positively or negatively—on the fortunes of their companies. The attributes of an effective director are an interesting combination of knowledge, personality and social skills. Not everyone is good at it. Intelligence and experience are the minimum characteristics for any director, but they alone won’t guarantee success. While this is not an all-inclusive list, here are five attributes that I think define what it means to be an effective director.

Be independently minded. There are legal definitions that the major stock exchanges and regulators use when they refer to independence, mostly centering around conflicts of interest, but I’m referring to something different. Is a director willing to exercise their own judgment, with the courage to follow through on their convictions, even if that brings them into conflict with other board members? It can be uncomfortable to be the only director who objects to a particular course of action, or who raises a sensitive issue others are afraid to address. Effective directors are willing to engage in a level of constructive conflict when they believe there is an important principle at stake.

Actively engage in the business of the board. How thoroughly does a director prepare for every board or committee meeting? Do they ask questions? Do they participate in meetings or simply observe? Is their head in the game? Most of the really good directors I know find banking to be intellectually stimulating and believe banks are important. And they enjoy the opportunity to work with a group of smart and successful people who all want the same thing, which is to build a great bank.

Understand banks and banking. The mechanics of corporate governance are pretty straightforward, and a smart person can pick them up quickly enough. But banking is a complex business, in part because it is so heavily regulated, but also because the economics are different than most other industries. Most outside directors do not come from the banking industry, but to be effective and fulfill their fiduciary duties, a director must know enough about the business of banking to have a meaningful dialogue with management. This requires a commitment to learning and continuing education that lasts for as long as a director serves on the board. It’s also important that a director have an intimate understanding of their own bank, its strategies, its major risks and the things that drive its economic value.

Pay attention to the world around you. The business of banking is changing, and banks need to adapt. Much of this change is driven by the growth of a digital economy and evolving preferences in how consumers want to transact with their merchants and service providers, including their banks. Customer demographics is a factor in this shift. Most bank directors today are baby boomers, while the fastest growing customer segment is the millennial generation, and they want to bank differently. The digital economy isn’t the only external development that directors need to pay attention to. For example, the recent tariffs imposed by President Donald Trump’s administration on imported steel could have a negative impact on small and medium-sized manufacturers that rely on cheap steel from Mexico. How changes in the larger economy affect a bank’s corporate and business customers should always be a top concern for the board.

Know when it’s time to leave the board. Everyone has a freshness date that reflects their own unique combination of physical and mental capabilities, and life circumstances. While some boards have a mandatory retirement age policy, the argument against them is they can force a highly competent director to leave simply because they age out. Unfortunately, some directors remain on the board too long, just as some professional athletes play beyond their prime. If the board doesn’t have a mandatory retirement age, every director should have enough respect for the importance of corporate governance to acknowledge and step out gracefully if they feel they can no longer meet the demands of board service. Those who do will gain the lasting respect of their colleagues, because that’s a message no one else on the board wants to deliver—that it’s time to go.

A New View for Deposit Strategies



As rates continue to rise, now is the time for bank boards and management teams to consider deposit strategies for the future. In this video, Barbara Rehm of Promontory Interfinancial Network sits down with H.D. Barkett, senior managing director at Promontory Interfinancial Network, who shares his thoughts on what banks should consider in today’s environment.

Barkett discusses:

  • Balance Sheet Advice for Today’s Banks
  • Impact of Regulatory Relief on Reciprocal Deposits

For more information about the reciprocal deposits provision in the Economic Growth, Regulatory Relief and Consumer Protection Act, please visit Promontory Interfinancial Network by clicking here.

How to Recruit Younger Directors


recruirment-6-22-18.pngA stagnant board is an ineffective one. While some directors can serve long tenures and continue to be actively engaged in the affairs of the bank, some directors grow less effective. What’s more, a board composed of directors who have served together for a number of years, or even decades, can grow complacent in their approach to bank strategy and oversight. This isn’t in the best interest of shareholders, employees or customers.

So how can boards fight complacency? Bring on some new blood. “That’s the attraction of bringing a young person in,” says Ben Wynd, a 40-year-old director at Franklin Financial Network, a $4.1 billion asset bank holding company headquartered in Franklin, Tennessee. He joined the board in 2015 and is an accountant with public company reporting expertise. “I have a desire to grow my practice. I have a desire to grow and become successful individually. I have energy, and I ask a lot of questions.”

It is rare for a bank to bring on a director aged 40 or younger as Franklin Financial has done. The 2018 Compensation Survey, conducted in March and April, finds that a whopping 84 percent report their board lacks any directors in this age group.

But boards like that of Franklin Financial, as well as $1.8 billion asset ESSA Bancorp in Stroudsburg, Pennsylvania, and $2.4 billion asset Sierra Bancorp in Porterville, California, are finding a way to attract young professionals to their board. Here’s how.

Actively seek prospective younger directors.
Your board can’t count on a skilled, young professional just falling out of the sky, so at least one director on the board should be advocating for the addition of younger perspectives and identifying potential board members. The more directors serving as advocates, the better.

Wynd says Paul Pratt Jr., a director who served on the Franklin Financial board since its 2007 founding, was just that sort of advocate. (Pratt’s term expired in 2018, but he continues to serve on the bank board.) “Any time I see a great talented young person, I try to engage them” and understand their goals, Pratt says. “There’s a lot of supreme young talent out there that needs to be on bank boards helping make critical decisions on how the bank grows.”

Board members can also leverage friends and family to identify prospective board members.

“A member of the board lived in my community and is friendly with my parents,” says Christine Gordon, 42, a director at ESSA since 2016, who has a background as a lawyer and experience as the deputy chief compliance officer at Olympus Corp. of the Americas, as well as deep connections in the community. “He approached me and asked whether I’d be interested in joining the board and talked to me a bit about what it would entail.”

Similarly, Vonn Christenson, a 38-year-old attorney who was appointed to Sierra Bancorp’s board in 2016, says he was approached by a Sierra director who was his parents’ friend and neighbor. “The bank had been expanding, had been acquiring other banks and was looking to expand more. Their board members were aging, so they were looking to add some members.”

Communicate the benefits of serving on a bank board.
Prospective younger directors with the skill sets that bank boards need are in demand, and not just within the banking industry. “In all honesty, I probably have more opportunities [to serve on boards] than I have time and than my wife is willing to allow me to, so I’ve had to be selective in what I am involved in,” says Christenson. Make sure that the busy young professionals you seek as board members understand the benefits of serving on the board, as well as the bank’s growth trajectory.

And as much as long-term bank directors say that serving on a board is not about the money—just 14 percent of survey respondents indicate that offering a competitive director compensation package is a top challenge relative to their board’s composition—it could be the factor that leads an in-demand professional to pick your board over another.

Christenson says he had the opportunity to serve on the board of a local hospital but turned it down in favor of the bank. The bank “is a local success story in many ways, so there’s some more prestige that goes with it,” he says. Christenson also knew more members of the bank’s board, and “there’s compensation on the bank board, whereas it was voluntary on the hospital board.”

Ease the time burden.
Juggling the professional demands of younger directors may necessitate rethinking how the board approaches meetings. Gordon has found web conferencing to be effective in allowing her to participate in ESSA’s board meetings when she’s traveling for work. And using technology like a board portal can help streamline board materials, making them easier to digest. “They’ve got a real nice platform to produce materials and keep them organized for future reference,” says Gordon. The board provided tablets to directors, so they can easily access the board portal.

Invest in creating a successful board.
New directors, particularly younger ones, won’t be up to speed about the issues facing the banking industry, or even the fundamentals. “Educating new board members is very important. You join a bank board where folks have been there for years and years,” says Gordon. “I’ve been a board director for a couple of years, and I’m still learning.”

New directors should also meet with key members of the executive team, as well as one-on-one with board members. At ESSA, the management team teaches new directors about the bank and its primary areas of focus, says Gordon. The board also brings in speakers about specific topics, which can be vital to director education for old and new board members.

Investing in external training can be beneficial as well. But also expect to field a lot of questions from engaged new directors. And remember, those questions can benefit the board as a whole by leading if they lead to an examination of the bank’s practices and strategy. That’s the benefit of a fresh perspective, after all.

Ensure there’s a process to make room for new board members.
Age diversity goes both ways—the board benefits from the views of young professionals as well as older, established directors who better understand the banking industry and have a historic perspective of their markets.

Establishing a mandatory retirement age can help cycle ineffective directors off the board, but some banks are uncomfortable with the possibility of losing engaged older directors. Providing exceptions for particularly skilled and effective board members, coupled with a mandatory retirement age, can be effective, as can term limits for banks uncomfortable with designating an age cap.

Conducting a board evaluation with individual director assessments and using a board matrix to identify knowledge gaps can be useful tools to create space on the board regardless of age. To be effective, a strong governance chair or similar director should be empowered to have conversations with board members who aren’t pulling their weight.

In the survey, 44 percent of respondents reveal concern about recruiting tech-savvy directors. While youth is no substitute for technology expertise, and technology expertise isn’t limited to the young, it’s important to remember that younger directors are more likely to have an intuitive handle on technology trends, particularly as relates to the bank’s retail and commercial customers.

But youth isn’t synonymous with engagement. New directors should “bring a vision and new ideas to help bring the bank into the future,” says Christenson.

Bank Director’s 2018 Compensation Survey was sponsored by Compensation Advisors, a member of Meyer-Chatfield Group. Click here to view the full results to the survey.

Rethinking the FICO Score


FICO-6-20-18.pngFor decades, pre-dating many banking careers today, the tried and true method to evaluate credit applications from individual consumers was their FICO score. More than 10 billion credit scores were purchased in 2013 alone, a clear indicator of how important they are to lenders. But is it time for the banking industry to reconsider its use of this metric?

The FICO score, produced by Fair Isaac Corp. using information from the three major credit bureaus—Equifax, TransUnion and Experian—has been considered the gold standard for evaluating consumer credit worthiness. It focuses squarely on the concentration of credit, payment history and the timeliness of those payments. FICO scores have generally proven to be a reliable indicator for banks and other lenders, but in an age operating at light speed, in which many purchases can be made in seconds, a score that can fluctuate in a matter of days might be heading toward obsolescence.

Some believe a person’s credit score should be considered only in parity with other, more current indicators of consumer behavior. A study released in April by the National Bureau of Economic Research says even whether people choose an Apple or Samsung phone “is equivalent to the difference in default rates between a median FICO score and the 80th percentile of the FICO score.”

Consider the following example. A consumer pays off an auto loan, resulting in a reduction in their FICO score. This is largely due to the reduced amount of credit extended. That reduced score could become a deciding factor if the customer has applied for, but not yet closed, a mortgage 60 or so days before paying off the vehicle and could affect the interest rate of the applicant.

That leaves a bitter taste for anyone with average or above average credit who has demonstrated financial responsibility and, it could be reasonably argued, would be a much better candidate for credit extension than someone with the same score who doesn’t give two flips about the regular ebbs and flows in their credit.

For all its inherent benefits to the industry, the traditional credit score isn’t perfect. Banks could be using their own troves of customer data to evaluate their credit applications more accurately, more fairly or more often. This could be a boon for institutions hoping to grow their deposit base or enhance their loan portfolios. Some regulators have indicated their attention to this approach as well. The Federal Deposit Insurance Corp.’s Winter 2017 Supervisory Insights suggests data could be a helpful indicator of risk and encouraged member institutions to be more “forward-thinking” in their credit risk management.

“As new risks emerge, an effective credit [management information system] program is sufficiently flexible to expand or develop new reporting to assess the effect those risks may have on the institution’s operations,” the agency said.

That suggests the FICO score banks are currently using might not tell the full story about how responsible credit applicants might be.

“My personal opinion is that among most people, if you have someone who thinks about [their digital footprint and credit], you’re already talking about people who are financially quite sophisticated,” Tobias Berg, the lead author of the NBER study and an associate professor at Frankfurt School of Finance & Management, told Wired Magazine recently. The study examined a number of data points that go far beyond what is incorporated in a FICO score.

That certainly has value for banks. The data they already collect about their customers could be used to determine credit worthiness, but there’s a counter argument to be made. Digital footprints are much easier to manipulate more quickly over time by changing usernames, search history, devices and the like. Using an Android over a more expensive iPhone could be a negative in the study’s findings, for example, which might not reflect the customer’s true credit profile.

But FICO scores are not reviewed as regularly as they could be, and a swing of a couple dozen points from one moment to another can significantly sway some credit applications.

For now, fully abandoning the FICO score isn’t a likely or manageable option for banks, nor one that’s favored by regulators, but the inclusion of digital data in credit applications is something that could be adapted and be beneficial to both the bank and customers eager to expand that relationship with their institution.

Advice for New Bank Directors


governance-8-30-17.pngIf you have recently been appointed to a bank board, chances are you’re like most new directors in that you came from outside the industry and have little knowledge of banking other than what you might have learned as a customer. If, for example, you’re the owner of a local business that relies heavily on its banking relationships to keep the enterprise going (as most small businesses do), you will certainly have an opinion about what constitutes good customer service. And also you bring your own judgment and life experience outside of banking to the task, which will no doubt be very valuable to the board. But to be an effective bank director, you’re going to have broaden your knowledge base considerably when it comes to banking. Good judgment isn’t enough. There are certain things that you will need to know.

Learning is a life-long exercise, and for as long as you serve on a bank board there will always be new things to learn. But here are four areas that I think new directors should give extra attention to:

Learn About Regulation.
Banking is a complicated and highly regulated industry, and banks can pay a steep price for their compliance sins. Take the time to understand the industry’s regulatory structure and the expectations of your bank’s primary regulators, which will vary depending on the size of your institution and whether it has a state or national charter. Also, zero in on the regulations that can have the greatest impact on your bank (for example, the Bank Secrecy Act and the various consumer protection rules). The regulators will hold your board accountable for any serious compliance violations, so it’s not a responsibility to be taken lightly.

Learn How Your Bank Works.
Banking is very different from most other businesses like, say, manufacturing and retailing, or professional services like accounting and lawyering. Yours is a governance rather than an operating role, but you should still learn how your bank works inside and out so you can engage fruitfully with management. Learn how your bank makes most of its money and where its greatest risks lie. Service on the board’s audit committee would provide a very powerful introduction to the workings of your bank, because there’s very little that the audit committee doesn’t get involved in.

Learn About Technology and Try to Embrace It.
Technology tends to be a black hole for most boards. Most people in their 60s and 70s, which fits the profile of many directors who serve on bank boards, don’t understand or use technology as comfortably as those who are 20 or 30 years younger. The problem is that banking is undergoing a technological revolution that goes well beyond mobile (which gets most of the attention these days) and touches almost every area of the bank. Directors need to understand how these trends are likely to impact their institution. Some banks try to recruit at least one tech-savvy director to their board, but these people are hard to find—and even if you find one, you can’t delegate the responsibility to understand technology to that person. Regular board-level briefings from your bank’s chief technology officer, attendance at industry conferences and a commitment to read up on the topic can all help educate you. Also, experiment with some of the consumer technology that has come into financial services in recent years. If you have an iPhone, activate its wallet feature. Open a Venmo account and use it. And if you don’t use your own bank’s mobile banking app, shame on you!

Learn About Cybersecurity.
As banks become more digital, their cyber risk profile will increase ipso facto. Trying to lessen the risk by resisting the push toward digital banking isn’t a rational strategy because your institution will be left behind. The U.S. economy and our national culture are all being profoundly impacted by the digital phenomenon, and it’s a game that all banks simply have to play. Your role as a director is to make sure your bank has a good cybersecurity program and team in place, that the program conforms to the latest industry standards and regulatory expectations, and that the board is being briefed regularly.

These are not the only critical areas that new directors need to understand, of course, but they would be on my short list of things to go to school on if I had just joined a bank board. Congratulations and good luck!