Understanding Customers’ Finances Strengthens Relationships

As the current economy shifts and evolves in response to inflationary pressures, and consumer debt increases, banks may encounter an influx of customers who are accruing late charges, overdue accounts and delinquencies for the first time in nearly a decade.

Banks have not been accustomed to seeing this level of volume in their collections and recovery departments since the Great Recession and have not worked with so many customers in financial stress. To weather these economic conditions, banks should consider automated systems that help manage their collections and recovery departments, as well as guide and advise customers on how to improve their financial health and wellbeing. Technology powered with data insights and automation positions banks to successfully identify potential weakness early and efficiently reduce loan losses, increase revenue, minimize costs and have the data insights needed to help guide customers on their financial journey.

Consumer debt increased $52.4 billion in March, up from the increase of nearly $40 billion the previous month. Financial stress and money concerns are top of mind for many households nationwide. According to a recent survey, 77% of American adults describe themselves as anxious about their financial situation. The cause of the anxiety vary and stem from a wide range of sources, including savings and retirement to affording a house or child’s education, everyday bills and expenses, paying off debt, healthcare costs and more.

While banks traditionally haven’t always played a role in the financial wellness of their customers, they are able to see patterns based on customer data and transactional history. This viewpoint enables them to serve as advisors and help their customers before they encounter a problem or accounts go into delinquency. Banks that help their customers reduce financial stress wind up strengthening the relationship, which can entice those customers into using additional banking services.

Using Data to Understand Customer’s Financial Health
By utilizing data insights, banks can easily identify transaction and deposit patterns, as well as overall expenses. This allows banks to assess their customer risk more efficiently or act on collections based on an individual’s level of risk and ability to pay; it also shows them the true financial health of the customer.

For example, banks can identify consumers in financial distress by analyzing deposit account balance trends, identifying automated deposits that have been reduced or stopped and identify deposit accounts that are closed. Banks can better understand a consumer’s financial health by collecting, analyzing and understanding patterns hidden in the data.

When banks identify potentially stressed customers in advance, it can proactively take steps to assist customers before loans go delinquent and accounts accrue late fees. Some strategies to accommodate customers facing delinquency include offering free credit counseling, short-term or long-term loan term modifications, and restructuring or providing loan payment skip offers. This type of assistance not only benefits the financial institution — it shows customers they are valued, even during tough economic times.

Data enables banks to identify these trends. But they can better understand and utilize the data when they integrate it into the workflow and apply automation, ultimately reducing costs associated with the management of delinquencies, loss mitigation and recoveries and customer relationship management. A number of banks may find that their outdated, manual systems lack the scalability and effectiveness they’ll need to remain competitive or provide the advice and counsel to strengthen customer relationships.

Banks are uniquely positioned to help consumers on their journey to improve their financial situation: They have consumer information, transaction data and trust. Banks should aim to provide encouragement and guidance through financial hardships, regardless of their customers’ situation. Augmenting data analysis with predictive technology and automated workflows better positions banks to not only save money but ensure their customers’ satisfaction.

The Community Bank Board Guide to Crossing $10 Billion

Community banks that have weathered the economic extremes of the coronavirus pandemic and a rapidly changing interest rate environment may find themselves with another important looming deadline: the $10 billion asset threshold.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (often called Dodd-Frank) created a regulatory demarcation for banks above and below $10 billion in assets. In 2018, regulatory reform lessened one of the more-stringent expectations for $10 billion banks, but failed to eliminate many of the other regulatory burdens. Experts that have worked with banks to cross the divide since the law went into effect recommend that institutions around $5 billion begin preparing for the costs and expectations of being a larger bank.

“The list of changes when going from $9.9 billion to $10 billion isn’t long. It’s the significance of those changes that can create challenges if not appropriately planned for,” writes Brandon Koeser, financial services senior analyst with RSM US LLP, in an email. “Banks need to take a thorough look at their entire institution, including people, processes and risk oversight.”

The pandemic may have delayed or complicated the work of banks who are preparing to cross the threshold. Anna Kooi, a partner and national financial services industry leader at Wipfli, says she has clients at banks whose growth accelerated over the last two years and are approaching the $10 billion asset line faster than expected.

Bank Director has assembled a guide for boards that reviews some areas that are impacted by the threshold, along with questions directors can use to kick off conversations around preparation.

Lost Income
The Dodd-Frank Act’s Durbin Amendment capped the interchange fees on debit card transactions that banks above $10 billion can charge; interchange fees are not reduced for banks under $10 billion. The capped fees have cost card issuers nearly $106 billion in interchange revenue since 2012, including an estimated $15.2 billion in 2020, according to an Electronic Payments Association analysis in August 2021 using data from the Federal Reserve.

Banks preparing to cross $10 billion should analyze how big the reduction of debit interchange revenue could be, as well as alternatives to make up for that difference, Kooi says. The interchange cap impacts banks differently depending on the depositor base: commercial banks may not miss the income, while institutions with a larger retail base that use their debit cards may experience a significant hit. Banks that have more time to consider alternatives will be better positioned when the interchange cap goes into effect, she says.

Regulatory Expectations
Banks over $10 billion in assets gain a new regulator with a new round of exams: the Consumer Financial Protection Bureau. While other banking regulators tend to focus on prudential safety and soundness, the CFPB aims to promote “transparency and consumer choice and preventing abusive and deceptive financial practices” among markets for financial services and products, according to the agency’s mission statement. This exam shift means banks may want to reach out to consultants or other external partners that have familiarity with the CFPB to prepare for these exams.

“The focus is going to be more intense in certain areas,” says Adam Maier, partner and co-chair of Stinson’s banking and financial services division. “They’re going to bring in a different regulatory approach that is very unique, and at times, can be difficult.”

Expectations from other regulators may also increase, and increased scrutiny could lead to a higher risk that examiners discover something at a bank that needs to be addressed.

“A guaranteed place of focus from regulators will be over the bank’s risk program,” Koeser writes. “Undertaking an assessment of the risk management function, including the risk program, staffing levels and quality of talent will be key. In a new world above $10 billion, the old mantra of ‘If it isn’t broke, don’t fix it,’ won’t fly.”

While banks don’t have to participate in the annual Dodd Frank Act Stress Test, or DFAST, exercise until they are $100 billion, regulators may want to see evidence that the bank has some way to measure its credit and capital risk exposure.

“What I’ve heard [from] banks is the regulators, the OCC in particular, still want to talk about stress testing, even though [the banks] don’t have to do it,” Maier says. “I would follow the lead of your primary regulator; if they want you to still demonstrate something, you still have to demonstrate it.”

And importantly, the Dodd-Frank Act mandates that bank holding companies above $10 billion have a separate board-level risk committee. The committee must have at least one risk management expert who has large-company experience.

Staffing and Systems
Heightened regulatory expectations may require a bank to bring on new talent, whether it’s for the board or the executive team. Some titles Kooi says a bank may want to consider adding include a chief risk officer, chief compliance officer and a chief technology officer — all roles that would figure into a robust enterprise risk management framework. These specialty skill sets may be difficult to recruit locally; Kooi says that many community banks preparing for the threshold retain a recruiter and assemble relocation packages to bring on the right people. Oftentimes, banks seek to poach individuals who have worked at larger institutions and are familiar with the systems, capabilities and expectations the bank will encounter.

Additionally, boards will also want to revisit how a bank monitors its internal operational systems, as well as how those systems communicate with each other. Maier says that banks may need to bulk up their compliance staff, given the addition of the CFPB as a regulator.

M&A Opportunities
A number of banks have chosen to cross $10 billion through a transaction that immediately offsets the lost revenue and higher compliance expenses while adding earnings power and operational efficiency, writes Koeser. M&A should fit within the bank’s strategic and long-term plans, and shouldn’t just be a way to jump over an asset line.

Banks that are thinking about M&A, whether it’s a larger bank acquiring a smaller one or a merger of equals, need to balance a number of priorities: due diligence on appropriate partners and internal preparations for heightened regulatory expectations. They also need to make sure that their prospective target’s internal systems and compliance won’t set them back during integration.

Additionally, these banks may need to do this work earlier than peers that want to cross the threshold organically, without a deal. But the early investments could pay off: An $8 billion institution that is prepared to be an $11 billion bank after a deal may find it easier to secure regulatory approvals or address concerns about operations. The institution would also avoid what Maier calls “a fire drill” of resource allocation and staffing after the acquisition closes.

Questions Boards Should Ask

  • Do we have a strategy that helps us get up to, and sufficiently over, $10 billion? What is our timeline for crossing, based on current growth plans? What would accelerate or slow that timeline?
  • Will the bank need to gain scale to offset regulatory and compliance costs, once it’s over $10 billion?
  • What do we need to do between now and when we cross to be ready?
  • What role could mergers and acquisitions play in crossing $10 billion? Can this bank handle the demands of due diligence for a deal while it prepares to cross $10 billion?
  • Are there any C-level roles the bank should consider adding ahead of crossing? Where will we find that talent?
  • Do we have adequate staffing and training in our compliance areas? Are our current systems, processes, procedures and documentation practices adequate?
  • How often should the board check in with management about preparations to cross?
  • Have we reached out to banks we know that have crossed $10 billion since the Dodd-Frank Act? What can we learn from them?

FinXTech’s Need to Know: Accounts Payable

When I think of bookkeeping, the first thing that comes to mind is a scene out of “Peaky Blinders:” a sharply dressed man pacing the floor with a heavy leather book, frantically crunching the numbers to figure out which accounts have an overdue balance and of how much.

Today, accounting software digitizes the majority of this reconciliation process. The problem with this? There are hundreds of software solutions a business can choose from — but more poignantly, software offered by a business’ bank seldom falls at the top of that list.

Many banks have historically been slow to service their small business customers. Account opening, applying for a loan or even getting business cards has traditionally forced business owners to head to a branch. The crucial need for bookkeeping software has turned businesses onto disruptors in the space: Intuit’s Quickbooks, Block’s Square software system, PayPal Holdings, etc. These incumbents, and others, are ready to pounce on a market that’s estimated to grow as big as $45.3 billion.

But banks have the chance to claim some of that market.

The Paycheck Protection Program showed small businesses that there were gaps fintechs couldn’t fill — ones that financial institutions could. Bank leaders looking to strengthen the relationship between their institution and their small business customers may want to start with accounts payable (AP) technology.

 If your bank doesn’t already offer small business customers an integrated AP software as a benefit of having a business account, it’s time to seriously consider it.

Some larger banks — U.S. Bancorp, Fifth Third Bancorp — have built in-house AP offerings for their commercial customers. Others, like my $4 billion bank in southeast Iowa, do not — and probably can’t even afford to consider building. Detroit-based Autobooks provides those in-between banks with a platform to help service the AP and invoicing needs of small businesses.

Autobooks lets banks offer its white-labeled software to their small-business customers to manage accounting, bill pay and invoicing from within the institution’s existing online banking system. This eliminates the need for businesses to go anywhere else to handle their AP, and keeps invoicing and payment data within the bank’s ecosystem. More data can lead to better insights, campaigns and products that generate revenue for the bank.

Autobooks receives payments via credit card, Automated Clearing House (ACH) transfers and lockbox transactions. Because small businesses are already working within the bank’s online system, received funds are automatically deposited directly into the business’ bank account.

Paymode-X from Bottomline Technologies is another solution that banks could use. Paymode-X is an electronic, business-to-business payments network that integrates with the existing cash management systems of a bank’s business customers. It eliminates manual initiation and tracking of electronic and ACH payments; its bi-directional connection to accounting systems helps automate reconciliation. Constant electronic monitoring of payments also better traces and tracks payments for banks.

Bottomline Technologies handles vendor outreach and enrollment into the system, and also helps banks identify opportunities to earn additional revenue through the rebates and discounts a vendor may offer to encourage paying electronically, paying early or buying in high volumes.

In addition to offering it to commercial customers, banks can also use Paymode-X for their internal AP needs.

Bill.com has also marked itself as a notable fintech partner. Bill.com Connect is an end-to-end payments management platform that commercial clients access through a bank’s online portal or mobile app. Platform features include a payments inbox to receive, manage and process invoices digitally, automatic forwarding of invoices to the appropriate party, digital signatures and customizable workflows to enable automated approvals.

Bill.com also touts a network of over three million businesses, which could be an attractive benefit for commercial clients looking to expand, partner and more simply get paid.

There is still time and space for banks to plant their flag in the small business space; fintech partners could be an attractive way to break that ground.

Autobooks, Bottomline Technologies and Bill.com are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email finxtech@bankdirector.com.

What to Look for in New Cash and Check Automation Technology

Today’s financial institutions are tasked with providing quality customer experiences across a myriad of banking channels. With the increased focus on digital and mobile banking, bankers are looking for ways to automate branch processes for greater cost and time savings.

This need should lead financial institution leaders exploring and implementing cash and check automation solutions. These solutions can improve accuracy, reduce handling time and labor, lower cost, deliver better forecasting and offer better visibility, establish enhanced control with custom reporting and provide greater security and compliance across all locations, making transactions seamless and streamlining the branch experience. However, as bank leaders begin to implement a cash and check automation solution, they must remember how a well-done integration should operate and support the bank in its reporting and measurement functions.

Ask Yourself: Is This the Right Solution?
When a bank installs a new cash or check automation solution, the question that should immediately come to mind for a savvy operations manager is: “How well is this integrated with my current teller software?” Regardless of what the solution is designed to do, the one thing that will make or break its effectiveness is whether it was programmed to leverage all the available functionality and to work seamlessly with the banks’ existing systems.

For some financial institutions, the question might be as simple as: “Is this device and its functionality supported by my software provider?” If not, the bank might be left to choose from a predetermined selection of similar products, which may or may not have the same capabilities and feature sets that they had in mind.

The Difference Between True Automation and Not
A well-supported and properly integrated cash automation solution communicates directly with the teller system. For example, consider a typical $100 request from a teller transaction to a cash recycler, a device responsible for accepting and dispensing cash. Perhaps the default is for the recycler to fulfill that request by dispensing five $20 notes. However, this particular transaction needs $50 bills instead. If your cash automation solution does not directly integrate with the teller system, the teller might have to re-enter the whole transaction manually, including all the different denominations. With a direct integration, the teller system and the recycler can communicate with each other and adjust the rest of the transaction dynamically. If the automation software is performing correctly, there is no separate keying process alongside the teller system into a module; the process is part of the normal routine workflow within the teller environment. This is a subtle improvement emblematic of the countless other things that can be done better when communication is a two-way street.

Automation Fueling Better Reporting and Monitoring
A proper and robust solution must be comprehensive: not just controlling equipment but having the ability to deliver on-demand auditing, from any level of the organization. Whether it is a branch manager checking on a particular teller workstation, or an operations manager looking for macro insights at the regional or enterprise level, that functionality needs to be easily accessible in real time.

The auditing and general visibility requirements denote why a true automation solution adds value. Without seamless native support for different types of recyclers, it’s not uncommon to have to close and relaunch the program any time you need to access a different set of machines. A less polished interface tends to lead to more manual interactions to bridge the gaps, which in turn causes delays or even mistakes.

Cash and check automation are key to streamlining operations in the branch environment. As more resources are expanding to digital and mobile channels, keeping the branch operating more efficiently so that resources can focus on the customer experience, upselling premium services, or so that resources can be moved elsewhere is vital. Thankfully, with the proper cash and check automation solutions, bank leaders can execute on this ideal and continue to improve both the customer experience and employee satisfaction.

7 Indicators of a Successful Digital Account Opening Strategy

How good is your bank’s online account opening process?

Many banks don’t know where to begin looking for the answer to that question and struggle to make impactful investments to improve their digital growth. Assessing the robustness of the bank’s online account opening strategy and reporting capabilities is a crucial first step toward improving and strengthening the experience. To get a pulse on the institution’s ability to effectively open accounts digitally, we suggest starting with a simple checklist of questions.

These key indicators can provide better transparency into the health of the online account opening process, clarity around where the bank is excelling, and insight into the areas that need development.

Signs of healthy digital account opening:

1. Visitor-to-Applicant Conversion
The ratio of visits to applications started measures the bank’s ability to make a good first impression with customers. If your bank experiences a high volume of traffic but a low rate of applications, something is making your institution unappealing.

Your focus should shift to conversion. Look at the account opening site through the eyes of a potential new customer to identify areas that are confusing or distract from starting an application. Counting the number of clicks it takes to start an online application is a quick way to evaluate your marketing site’s ability to convert visitors.

2. Application Start-to-Completion
On average, 51% of all online applications for deposit accounts are abandoned before completion. It’s key to have a frictionless digital account opening process and ensure that the mobile option is as equally accessible and intuitive as its web counterpart.

If your institution is seeing high abandonment rates, something is happening to turn enthusiasm into discouragement. Identifying pain points will reveal necessary user flow improvements that can make the overall experience faster and more satisfying, which should translate into a greater percentage of completed applications.

3. Resume Rate on Abandoned Applications
The probability that a customer will restart an online application they’ve abandoned drastically decreases as more time passes. You can assess potential customers’ excitement about opening accounts by measuring how many resume where they left off, and the amount of time they take between sessions.

Providing a quick and intuitive experience that eliminates the friction that causes applicants to leave an application means less effort trying to get them to come back. Consider implementing automated reminders similar to the approach e-commerce brands take with abandoned shopping carts in cases where applications are left unfinished.

4. Total Time to Completion
The more time a person has to take to open an account, the more likely they’ll give up. This is something many banks still struggle with: 80% of banks say it takes longer than five minutes to open an account online, and nearly 30% take longer than 10 minutes. At these lengths, the potential for abandonment is very high.

A simple way to see how customers experience your digital application process is to measure the amount of time it takes, including multi-session openings, to open an account, and then working to reduce that time by streamlining the process.

5. Percent of Funded Accounts
A key predictive factor for how active a new customer will be when opening their new account is whether they choose to initially fund their account or not. It’s imperative that financial institutions offer initial funding options that are stress-free and take minimal steps.

For example, requiring that customers verify accounts through trial deposits to link external accounts is a time-consuming process involving multiple steps that are likely to deter people from funding their accounts. Offering fast and secure methods of funding, like instant account authentication, improves the funding experience and the likelihood that new users will stay active.

6. Percent of Auto-Opened Accounts
Manual intervention from a customer service rep to verify and open accounts is time-consuming and expensive. Even with some automation, an overzealous flagging process can create bottlenecks that forces applicants wait longer and bogs down back-office teams with manual review.

Financial institutions should look at the amount of manual review their accounts need, how much time is spent on flagged applications, and the number of bad actor accounts actually being filtered out. Ideally, new online accounts should be automatically opened on the core without any manual intervention—something that banks can accomplish using powerful non-document based verification methods.

7. Fraud Rate Over Time
A high percentage of opened accounts displaying alarming behavior means there may be a weakness in your account opening process that fraudsters are exploiting. To assess your bank’s ability to catch fraud, measure how many approved accounts turn out to be fraudulent and how long it takes for those accounts to start behaving badly.

The most important thing for financial institutions to do is to make sure they can detect fraudulent activity early. Using multiple verification processes is a great way to filter out fraudulent account applications at the outset and avoid headaches and losses later.

Tips for Banks to Navigate Top Risks in 2022

Banks continue to meet unprecedented challenges of the Covid-19 pandemic, geopolitical cyberthreats and increasing public awareness of environment, social and governance (ESG) issues.

With the current landscape posing ever-evolving risks for banks, Moss Adams collaborated with Bank Director to conduct the 2022 Risk Survey and explore what areas are front of mind for bank industry leaders. Top insights from Bank Director’s 2022 Risk Survey include that the vast majority of survey respondents reported that cybersecurity and interest rate risks pose increasing concerns, and they expect these challenges to persist in the second half of the year, due to turbulent economic and geopolitical conditions. The survey also identified that banks increasingly focus on issues related to compliance and regulatory risks.

Cybersecurity Oversight
Concerns about cybersecurity topped the survey responses: 93% of respondents stated that a need for increased cybersecurity grew significantly or somewhat. Bank executives and board members submitted survey responses in January, prior to heightened federal government warnings of increased Russian cyberattacks. Banks’ concerns will likely continue to increase as a result.

Data Breach Rates and Precautions
While only 5% of respondents reported experiencing a data breach or ransomware attack at their own institution in the years 2020 and 2021, 65% reported data breaches at their bank’s vendors. In response, 60% stated they updated their institution’s third-party vendor management policies, processes, or risk oversight.

As a critical U.S. industry, banks follow stringent regulatory requirements for data security. The Federal Financial Institutions Examination Council (FFIEC) cybersecurity assessment tool provides a maturity model for banks to assess their cybersecurity maturity as baseline, evolving, intermediate, advanced or innovative. Ninety percent of respondents completed a cybersecurity assessment over the past 12 months; 61% used the FFIEC’s tool in combination with other methodologies, and another 19% only used the FFIEC’s tool. And 83% of respondents said that the maturity of their bank’s cybersecurity program increased in 2021, compared to previous assessments.

Room for Improvement
Banks noted several areas of improvement for their cybersecurity programs, including training for bank staff (83%), technology to better detect and deter cyberthreats and intrusions (64%) and internal controls (43%). Thirty-nine percent believe they need to better attract and retain quality cybersecurity personnel. Banks’ investments in cybersecurity programs remained flat compared to the 2021 survey, with a median budget of $200,000.

As cybersecurity risks increase, banks should focus on researching and making appropriate investments, as well as implementing comprehensive planning for staff training, technology and governance. At the board level, respondents noted several activities as part of that body’s oversight of the cybersecurity risk management program. Key among these is board-level training (79%), ensuring continual improvements by management of their cybersecurity programs (75%) and being aware of any deficiencies in the bank’s cybersecurity program (71%).

Interest Rate Risk Concerns
The prospect of rising interest rates fueled anxiety for our respondents: 71% noted increased concern. As the Federal Open Market Committee combats higher inflation by hiking interest rates, 74% reported hoping that they wouldn’t raise rates by more than one percentage point by the end of 2022 — which is currently below what’s projected.

Faced with likely rate hikes, banks are looking to their own business models to navigate a potential decrease in overall lending volume and potential pressure on profit margins. Respondents also noted that they were increased their focus in sectors such as commercial and industrial, commercial real estate and construction, or with the Small Business Administration or obtaining other small business loans.

ESG Initiatives
Banks are under increasing pressure to adopt ESG initiatives. More than half of respondents don’t yet focus on ESG issues in a comprehensive manner, and regulators have yet to impose ESG requirements for banks. However, more than half of survey respondents say they have set goals and objectives in a variety of ESG-related areas, primarily in the social and governance verticals — employee development and community needs in particular topped the list.

Only 6% said that investors or other company stakeholders currently look for more disclosure around ESG initiatives, with diversity, equity and inclusion topping the list at 88%. Banks that haven’t established ESG strategies could first identify their top priority areas. These priorities may vary for each organization and will need to consider the values of investors, customers and local community.

Effective Oversight of Fintech Partnerships

For today’s banks, the shift to digital and embracing financial technology is no longer an option but a requirement in order to compete.

Fintechs enable banks to deploy, originate and service customers more effectively than traditional methods; now, many customers prefer these channels. But banks are often held back from jumping into fintech and digital spaces by what they view as insurmountable hurdles for their risk, compliance and operational teams. They see this shift as requiring multiple new hires and requiring extensive capital and technology resources. In reality, many smaller institutions are wading into these spaces methodically and effectively.

Bank oversight and management must be tailored to the specific products and services and related risks. These opportunities can range in sophistication from relatively simple referral programs between a bank and a fintech firm, which require far less oversight to banking as a service (often called BaaS) which requires extensive oversight.

A bank’s customized third-party oversight program, or TPO, is the cornerstone of a successful fintech partnership from a risk and compliance perspective, and should be accorded appropriate attention and commitment by leadership.

What qualifies as an existing best-in-class TPO program at a traditional community bank may not meet evolving regulatory expectations of a TPO that governs an institution offering core products and services through various fintech and digital partners. Most banks already have the hallmarks of a traditional TPO program, such as reviewing all associated compliance controls of their partner/vendor and monitoring the performance on a recurring basis. But for some banks with more exposure to fintech partners, their TPO need to address other risks prior to onboarding. Common unaccounted-for risks we see at banks embarking on more extensive fintech strategies include:

  • Reviewing and documenting partners’ money transmission processes to ensure they are not acting as unlicensed money transmitters.
  • Reviewing fintech deposit account’s set up procedures.
  • Assessing fintech partner marketing of services and/or products.
  • Ensuring that agreements provide for sufficient partner oversight to satisfy regulators.
  • Procedures to effectively perform required protocols that are required under the Bank Secrecy Act, anti-money laundering and Know Your Customer regulations, and capture information within the bank’s systems of record. If the bank relies on the fintech partner to do so, implementing the assessment and oversight process of the fintech’s program.
  • Assessing the compliance and credit risks associated with fintech partner underwriting criteria such as artificial intelligence, alternative data and machine learning.
  • Assessing the impact of the fintech strategy on the bank’s fair lending program and/or Community Reinvestment Act footprint.
  • The potential risk of unfair, deceptive or abusive acts or practices through the fintech partner’s activities.
  • True lender risks and documenting the institution’s understanding of the regulations surrounding the true lender doctrine.
  • Assessing customer risk profile changes resulting from the expansion of the bank’s services and or products and incorporating these changes into the compliance management system.
  • Revising your overall enterprise risk management program to account for the risks associated with any shift in products and services.

Finally, regulators expect this shift to more fintech partnerships to become the norm rather than the exception. They view it as an opportunity for banks to provide greater access to products and services to the underbanked, unbanked and credit invisible. Over the last couple of years, we have seen a number of resources deployed by bank regulators in this space, including:

  • Regulators creating various offices to address how banks can best utilize data and technology to meet consumer demands while maintaining safety, soundness, and consumer protection. The Federal Deposit Insurance Corp. has built FDITECH, the Office of the Comptroller of the Currency has an Office of Innovation, as does the Federal Reserve Board. The CFPB has aggregated their efforts to deploy sandboxes and issue “No-Action Letters” through its own Innovation Office.
  • The Federal Reserve issued a guide for community banks on conducting due diligence on financial technology firms in August 2021.
  • OCC Acting Comptroller Michael Hsu gave remarks at the Fintech Policy Summit 2021 in November 2021.
  • In November 2021, the OCC issued a release clarifying bank authority to engage in certain cryptocurrency activities, as well as the regulator’s authority to charter national trust banks.

Adopting best practices like the ones we listed above, as well as early communication with regulators, will place your bank in a great position to start successfully working with fintechs to expand and improve your bank’s products and services and compete in today’s market.

Bank Compensation Survey Results: Findings Released

NASHVILLE, TENN., June 21, 2022 – Bank Director, the leading information resource for directors and officers of financial institutions nationwide, today released the results of its 2022 Compensation Survey, sponsored by Newcleus Compensation Advisors. The findings confirm that intensifying competition for talent is forcing banks to pay up for both new hires and existing employees.

The 2022 Compensation Survey finds that 78% of responding directors, human resources officers, CEOs and other senior executives of U.S. banks say that it was harder in 2021 to attract and keep talent compared to past years. In response to this increased pressure, 98% say their organization raised non-executive pay in 2021, and 85% increased executive compensation. Overall, compensation increased by a median 5%, according to participants.

“Banks are challenged to find specialized talent like commercial lenders and technology personnel, but they’re also struggling to hire branch staff and fill entry-level roles,” says Emily McCormick, Bank Director’s vice president of research. “In this quest for talent, community banks are competing with big banks like Bank of America Corp., which recently raised its minimum wage to $22 an hour. But community banks are also competing against other industries that have been raising pay. How can financial institutions stand out as employers of choice in their markets?”

Asked about specific challenges in attracting talent, respondents cite an insufficient number of qualified applicants (76%) and unwillingness among candidates to commute for at least some of their schedule (28%), in addition to rising wages. Three-quarters indicate that remote or hybrid work options are offered to at least some staff.

“It is obvious from the survey results that talent is the primary focus for community banks,” says Flynt Gallagher, president of Newcleus Compensation Advisors. “Recruiting and retaining talent has become a key focus for most community banks, surpassing other concerns that occupied the top spot in prior surveys — namely tying compensation to performance. It is paramount for community banks to step up their game when it comes to understanding what their employees value and improving their reputation and presence on social media. Otherwise, financial institutions will continue to struggle finding and keeping the people they need to succeed.”

Key Findings Also Include:

Banks Pay Up
Banks almost universally report increased pay for employees and executives. Of these, almost half believe that increased compensation expense has had an overall positive effect on their company’s profitability and performance. Forty-three percent say the impact has been neutral.

Commercial Bankers in Demand
Seventy-one percent expect to add commercial bankers in 2022. Over half of respondents say their bank did not adjust its incentive plan for commercial lenders in 2022, but 34% have adjusted it in anticipation of more demand.

Additional Talent Needs
Banks also plan to add technology talent (39%), risk and compliance personnel (29%) and branch staff (25%) in 2022. Respondents also indicate that commercial lenders, branch and entry-level staff, and technology professionals were the most difficult positions to fill in 2020-21.

Strengthening Reputations as Employers
Forty percent of respondents say their organization monitors its reputation on job-posting platforms such as Indeed or Glassdoor. Further, 59% say they promote their company and brand across social media to build a reputation as an employer of choice, while just 20% use Glassdoor, Indeed or similar platforms in this manner. Banks are more likely to let dollars build their reputation: Almost three-quarters have raised starting pay for entry-level roles.

Low Concerns About CEO Turnover
Sixty-one percent of respondents indicate that they’re not worried about their CEO leaving for a competing financial institution, while a third report low to moderate levels of concern. More than half say their CEO is under the age of 60. Respondents report a median total compensation spend for the CEO at just over $600,000.

Remote Work Persists
Three quarters of respondents say they continue to offer remote work options for at least some of their staff, and the same percentage also believe that remote work options help to retain employees. Thirty-eight percent of respondents believe that remote work hasn’t changed their company’s culture, while 31% each say it has had either a positive or negative impact.

The survey includes the views of 307 independent directors, CEOs, HROs and other senior executives of U.S. banks below $100 billion in assets. Compensation data for directors, non-executive chairs and CEOs was also collected from the proxy statements of 96 publicly traded banks. Full survey results are now available online at BankDirector.com.

About Bank Director
Bank Director reaches the leaders of the institutions that comprise America’s banking industry. Since 1991, Bank Director has provided board-level research, peer-insights and in-depth executive and board services. Built for banks, Bank Director extends into and beyond the boardroom by providing timely and relevant information through Bank Director magazine, board training services and the financial industry’s premier event, Acquire or Be Acquired. For more information, please visit www.BankDirector.com.

About Newcleus
Newcleus powers organizations as the leading designer and administrator of compensation, benefit, investment and finance strategies. The personalized product selections, carrier solutions and talent retention programs are curated to optimize benefits and improve ROI. www.newcleus.com.

Source:
For more information, please contact Bank Director’s Director of Marketing, Deahna Welcher, at dwelcher@bankdirector.com.

Advice to Bank Directors: Don’t Be Reactive on Credit Quality

With credit quality metrics at generationally stellar levels, concern about credit risk in 2022 may seem unwarranted, making any deployed defensive strategies appear premature.

For decades, banking has evolved into an orientation that takes most of its risk management cues from external stakeholders, including investors, trusted vendors, market conditions — and regulators in particular. Undoubtedly, becoming defensive prematurely can add challenges for management teams at a time when loan growth is still a main strategic objective. But waiting until credit metrics pivot is sure to add risk and potential pain. Banks have four key reasons to be more vigilant in 2022 and the next couple of years. These, and the suggested steps that prudent management teams should take in their wake, are below.

1. The Covid-19 sugar high has turned sour.
All of the government largesse and regulatory respites in response to Covid-19 helped unleash 40-year-high inflation levels. In response, the Federal Reserve has begun ramping up interest rates at potential intervals not experienced in decades. These factors are proven to precede higher credit stress. Continuing supply chain disruptions further contribute and strengthen the insidious inflation psychology that weighs on the economy.

Recommendation: Bankers must be more proactive in identifying borrowers who are particularly vulnerable to growing marketplace pressures by using portfolio analytics to identify credit hotspots, increased stress testing and more robust loan reviews.

2. Post-booking credit servicing is struggling across the industry.
From IntelliCredit’s perspective, garnered through conducting current loan reviews and merger and acquisition due diligence, the post-booking credit servicing area is where most portfolio management deficiencies occur. Reasons include borrowers who lag behind in providing current financials or — even worse — banks experiencing depletions in the credit administration staff that normally performs annual reviews. These talent shortages reflect broader recruitment and retention challenges, and are exacerbated by growing salary inflation.

Recommendation: A new storefront concept may be emerging in community banking. Customer-facing services and products are handled by the bank, and back-shop operational and risk assessment responsibilities are supported in a co-opt style by correspondent banking groups or vendors that are specifically equipped to deliver this type of administrative support.

3. Chasing needed loan growth during a credit cycle shift is risky.
Coming out of the pandemic, community banks have lagged behind larger institutions with regards to robust organic loan growth, net of Paycheck Protection Program loans. Even at the Bank Director 2022 Acquire or Be Acquired Conference, investment bankers reminded commercial bankers of the critical link between sustainable loan growth and their profitability and valuation models. However, the risk-management axiom of “Loans made late in a benign credit cycle are the most toxic” has become a valuable lesson on loan vintages — especially after the credit quality issues that banks experienced during the Great Recession.

Recommendation: Lending, not unlike banking itself, is a balancing game. This should be the time when management teams and boards rededicate themselves to concurrent growth and risk management credit strategies, ensuring that any growth initiatives the bank undertakes are complemented by appropriate risk due diligence.

4. Stakeholders may overreact to any uptick in credit stress.
Given the current risk quality metrics, banker complacency is predictable and understandable. But regulators know, and bankers should understand, that these metrics are trailing indicators, and do not reflect the future impact of emerging, post-pandemic red flags that suggest heightened economic challenges ahead. A second, unexpected consequence resulting from more than a decade of good credit quality is the potential for unwarranted overreactions to a bank’s first signs of credit degradation, no matter how incremental.

Recommendation: It would be better for investors, peers and certainly regulators to temper their instincts to overreact — particularly given the banking industry’s substantial cushion of post Dodd-Frank capital and reserves.

In summary, no one knows the extent of credit challenges to come. Still, respected industry leaders are uttering the word “recession” with increasing frequency. Regarding its two mandates to manage employment and inflation, the Fed right now is clearly biased towards the latter. In the meantime, this strategy could sacrifice banks’ credit quality. With that possibility in mind, my advice is for directors and management teams to position your bank ahead of the curve, and be prepared to write your own credit risk management scripts — before outside stakeholders do it for you.

How to Attract Consumers in the Face of a Recession

Fears of a recession in the United States have been growing.

For the first time since 2020, gross domestic product shrank in the first quarter according to the advance estimate released by the Bureau of Economic Analysis. Ongoing supply chain issues have caused shortages of retail goods and basic necessities. According to a recent CNBC survey, 81% of Americans believe a recession is coming this year, with 76% worrying that continuous price hikes will force them to “rethink their financial choices.”

With a potential recession looming over the country’s shoulders, a shift in consumer psychology may be in play. U.S. consumer confidence edged lower in April, which could signal a dip in purchasing intention.

Bank leaders should proactively work with their marketing teams now to address and minimize the effect a recession could have on customers. Even in times of economic uncertainty, it’s possible to retain and build consumer confidence. Below are three questions that bank leaders should be asking themselves.

1. Do our current customers rate us highly?
Customers may be less optimistic about their financial situations during a recession. Whether and how much a bank can help them during this time may parlay into the institution’s Net Promoter Score (NPS).

NPS surveys help banks understand the sentiment behind their most meaningful customer experiences, such as opening new accounts or resolving problems with customer service. Marketing teams can use NPS to inform future customer retention strategies.

NPS surveys can also help banks identify potential brand advocates. Customers that rate banks highly may be more likely to refer family and friends, acting as a potential acquisition channel.

To get ahead of an economic slowdown, banks should act in response to results of NPS surveys. They can minimize attrition by having customer service teams reach out to those that rated 0 to 6. Respondents that scored higher (9 to 10) may be more suited for a customer referral program that rewards them when family and friends sign up.

2. Are we building brand equity from our customer satisfaction?
Banks must protect the brand equity they’ve built over the years. A two-pronged brand advocacy strategy can build customer confidence by rewarding customers with high-rated NPS response when they refer individual family and friends, as well as influencers who refer followers at a massive scale.

Satisfied customers and influencer partners can be mobilized through:

Customer reviews: Because nearly 50% of people trust reviews as much as recommendations from family, these can serve as a tipping point that turns window-shoppers into customers.

Trackable customer referrals: Banks can leverage unique affiliate tracking codes to track new applications by source, which helps identify their most effective brand advocates.

3. What problems could our customers face in a recession?
Banks vying to attract new customers during a recession must ensure their offerings address unique customer needs. Economic downturn affects customers in a variety of ways; banks that anticipate those problems can proactively address them before they turn into financial difficulties.

Insights from brand advocates can be especially helpful. For instance, a mommy blogger’s high referral rate may suggest that marketing should focus on millennials with kids. If affiliate links from the short video platform TikTok are a leading source of new customers, marketing teams should ramp up campaigns to reach Gen Z. Below are examples of how banks can act on insights about their unique customer cohorts.

Address Gen Z’s fear of making incorrect financial decisions: According to a Deloitte study, Gen Z fears committing to purchases and losing out on more competitive options. Bank marketers can encourage their influencer partners to create objective product comparison video content about their products.

Offer realistic home-buying advice to millennials: Millennials that were previously held back by student debt may be at the point in their lives where their greatest barrier to home ownership is easing. Banks can address their prospects for being approved for a mortgage, and how the federal interest rate hikes intersect with loan eligibility as well.

Engage Gen X and baby boomer customers about nest eggs:
Talks of recession may reignite fears from the financial crisis of 2007, where many saw their primary nest eggs – their homes — collapse in value. Banks can run campaigns to address these concerns and provide financial advice that protects these customers.

Banks executives watching for signs of a recession must not forget how the economic downturn impacts customer confidence. To minimize attrition, they should proactively focus on building up their brand integrity and leveraging advocacy from satisfied customers to grow customer confidence in their offerings.