Handling One of the Biggest Headaches in Acquisitions: Data Integration


knot.jpgWe have seen more than 400 bank and thrift closures since the beginning of 2008. We have also seen an increase in the number of “good bank” acquisitions. These acquisitions have presented healthy banks with a significant opportunity to expand their banking footprint and their asset base.

Unfortunately, it is easy to underestimate the data integration challenges involved in a bank acquisition, even if both institutions are sound.

Fortunately, however, there is a better alternative—an approach that allows acquiring institutions to take advantage of the benefits offered through acquisitions. By employing a systematic, methodical approach to data integration and reporting challenges, the complexity of any type of merger or acquisition can be greatly reduced. For its part, the board should ask for an overall data integration plan for each department’s main systems prior to agreeing to an acquisition. The board should receive an inventory of all applicable systems being acquired and the corresponding system needed for integration within the acquiring bank.

Loans acquired as part of any transaction are subject to various additional recordkeeping and reporting requirements, including:

Internal loan accounting. Each loan must be accounted for, rated for risk, and tracked for regular servicing and transactions. Although the acquiring institution will have its own systems for handling these tasks, the historical loan accounting data must be left intact in order to support loss recognition and accurate reporting.

GAAP accounting. Loan data must be structured in accordance with U.S. generally accepted accounting principles (GAAP), as spelled out in the Financial Accounting Standards Board’s Accounting Standards Codification. Verifying the fair valuation of loans and other assets often entails significant data requirements and complex cash flow estimates, which might not be included with the original loan contract and documentation.

Tax accounting. Acquired loans are handled differently for tax purposes and GAAP accounting. Examples include accounting for charge-offs, other real estate owned (OREO), appraisals, expenses and taxes. Despite the differences, however, the two accounting approaches must rely on standardized and consistent data to satisfy auditors’ and regulators’ tracking and accounting requirements.

Complicating Factors: What Acquiring Banks Need to Address

Institutions also face a number of broader data integration and reporting issues when acquiring a bank or a bank’s loan portfolio. Following are some of the most common concerns they encounter:

As banks have grown, so has the number of information systems they rely on to manage their assets. Even before an acquisition, most institutions already are struggling with loan data being stored in several different systems that do not adequately talk to each other. Integrating systems from an acquired institution only adds to the challenge.

An acquiring bank also needs to understand the acquired bank’s credit and risk review rating structure and identify where that information is kept. It then needs to incorporate the acquired loan portfolio into its own internal reporting systems for credit risk, financial and operational reporting. This step requires gathering data from new systems and transforming it into a normalized form that the organization can use.

In the case of older loans, some important data elements might be stored in paper files and not reflected in any electronic storage systems. Often, banks attempt to retrieve this information manually and store it in a spreadsheet format, only to encounter even more demands on their resources as they attempt to integrate this information with the rest of their data. In some instances, data also might be stored on outsourced systems.

Customer retention is always a critical concern. As such, the data used for managing customer interactions must be accurate and timely to demonstrate strong customer service and establish acquired customers’ confidence with the new bank.

Transparency is a critical requirement in all acquisition reporting. After several years of controversy, regulators are especially sensitive about verifying the institutions they monitor have systems with auditable processes. Those systems have to aggregate data from multiple sources and present reports quickly, cleanly and on demand.

One of the first criteria for a healthy bank considering acquisitions is to become a great steward of its own data. Doing so requires the bank to implement projects in six strategic information management areas.

  • Inventory and assessment. What information do we have? What is the true source of the information? How was it created?
  • Consolidation. What mechanisms will we need to get all of the disparate data normalized and consistent?
  • Quality. How will we facilitate accuracy, integrity and trust in the data? How will we improve data quality over time?
  • Speed and responsiveness. How will we deliver required information in a timely fashion?
  • Integration. In the long term, how will we establish smooth integration between legacy systems and new systems in the event of another acquisition?
  • Adaptability. How will we respond to a very dynamic environment in which data reporting requirements are certain to change over the five- or 10-year duration of a typical loss-sharing agreement?

Boards and executive management should keep a close eye on the system and data integration that will be driven by an acquisition. Systems and data integration issues can create spiraling costs in an acquisition. A solid review of all data integration plans should be in place prior to the actual acquisition. This would include an overall data integration plan agreed to by all IT management. Although the challenges can be considerable, the potential upside—including the opportunity to gain a foothold in new markets and establish new customer relationships—can make the effort worthwhile.

How Can Retail Branches Become More Profitable?


fishbowl.jpgI have two grown children, 25 and 28 years old, who have checking accounts, but have never been in a bank office.  Yet, despite all the evidence that branch usage is in decline over the past decade, the industry continues to build new offices.  As a director of 10 different FDIC-insured banks during my 25 years as a consultant/investor for the financial services industry, I do not envy the job of current bank directors preparing for the future.  With a large amount of capital tied up in single-purpose real estate and fees on accounts restricted by regulators, where can bank management and directors turn to make the branch profitable again?  The answer to this problem may lie in the historical study of how we got where we are today.  

In the first 10 years of my banking career at Trust Company of Georgia (now SunTrust), I held responsibilities in both management and internal consulting of operations and technology.  I remember going to our Fulton Industrial Boulevard branch on a payday Friday and hearing the branch manager ask, “What can we do to get all these people out of our branches?”  Well, mission accomplished!  These days the long lines on payday are more frequent at a Walmart financial center than at a bank branch.  What will draw these people away from Walmart, check cashers, payday lenders and title pawn shops and turn them back into profitable bank customers? Evolutions in technology, social media and product offerings now provide the solution.

Asset quality disasters, regulatory concerns and other survival issues have consumed the lives of many bankers as of late, leaving little time to pursue the five-year plan.  Banks now must begin to reshape business plans to reflect the evolution in technology and consumer behavior or become the next victim of obsolescence, much like such industries as home entertainment, photography, telecommunications and specialty retail.  Can a full function ATM machine replace a branch the way that a Blockbuster Express self-service movie rental kiosk replaces a store?  Never has the role of a bank director been more important than today; financial institutions must proactively chart a new course for retail banking.  Personal interaction with successful retailers in other industries can provide directors with the needed experience to guide their own companies.  Think of the experience of renting a movie from a kiosk instead of going into a store and compare it with using a full-function ATM instead of visiting a branch.

Now is the time to begin the evaluation of which branches are crucial to the customers in an area, provided all of the other ways that are now available to meet their banking needs.  Given the unlikely event that margins will grow, replacing fee income lost as a result of regulatory changes for most banks is critical to future earnings growth.  Directors need to be proactive in encouraging management to recruit customers that the bank lost to alternative financial services providers, such as check cashers and payday lenders.  To get these customers back, banks must offer a new suite of products and services, which includes cashing checks, money transfer, money orders, prepaid cards, reloadable cards, and fees to guarantee funds. In the future, perhaps a cash advance fee at a bank can replace payday lending.  These services can be highly profitable, as evidence by the large number of alternative financial services providers in the market place. 

An argument usually brought up by bankers is that no other bank is doing this. That’s not true. Regions Bank recently announced Regions Now Banking in all 1,700 branches.  The products mentioned earlier are all included in this offering.  Early results are extremely pleasing to Regions’ management team, which expects the new fee income will replace revenue lost as a result of regulatory changes.

When an industry must react to changes in technology and consumer behavior, the first thing to ponder is if the consumer still needs the product.  Does the public still need financial services?  The answer is yes.  So, how can banks use new technology?  The answer is still evolving, but every bank director who  has purchased something on Amazon, rented a movie from a kiosk, or used the self-service checkout at the grocery store has a personal experience that can be valuable in shaping the future retail bank customer experience.

For Banks, Maximizing The Small to Medium Business Opportunity Starts With Remote Deposit Capture


challenge.jpgThe nation’s 27 million small-business owners are busy people, dealing with countless tasks every day to make a go of it. That’s why many consider their trek each business day to the bank to deposit checks and other customer payments to be a hassle. That time adds up. A technology solution, remote deposit capture (RDC), exists that lets businesses transmit checks electronically to the bank for posting and clearing. It saves them time and money.

Here’s the rub: While a majority of banks provide such technology, just 5 percent of small businesses are using it, even though nearly half of them say they would prefer using the remote route (Aite Group report, Nov. 3, 2011).  

This offers large and small financial institutions alike an opportunity. By executing remote-deposit strategies expertly, they can reap some of the estimated $700 million in revenues being lost now because businesses with less than $10 million in annual revenues aren’t employing these services, according to Aite Group

Banks realize they have an opportunity they haven’t tapped. Fifty-one percent of banks surveyed acknowledge they haven’t been effective in educating their business about remote deposit.  Further, one-third of surveyed SMBs say such a service is important/very important to them (Aite Group, August 2011)

What’s sparking the disconnect?  Banks cite:

  • A lack of resources to enroll and support all interested customers, primarily because they’re using manual systems for such enrollment. Banks say it’s expensive to roll out remote deposit for SMBs.
  • Inadequate training resources to educate potential SMB customers about remote deposit as well as training required to educate internal associates allowing them to sell the solution.  According to Aite, nearly three-quarters of all small business either have not heard of RDC or have heard of it, but aren’t familiar with the details.
  • Poor marketing as the technology isn’t often packaged for SMB needs, which means small businesses aren’t even aware of it. Insufficient understanding and evaluation of the risk associated with the SMB market and difficulty managing risk and monitoring an account once an SMB has enrolled.  

One other obstacle exists. Providing technology that allows small businesses to just automate checks only addresses a segment of their needs. They need a turnkey solution that lets them process checks as well as electronic forms of payment, including one-time and recurring ACH, debit and credit transactions.

As for the SMB community, not all of them are prime candidates for remote capture. Five segments, though, comprise half of the SMB deposit opportunity: professional-services firms, construction, property management, medical and education services.  

For banks and SMBs, help has arrived. Recent turnkey solution offerings promise to remedy many of the headaches for banks with remote capture. They include quick, easy online enrollment forms for banks to use that automatically set up new SMB customers. Also, such turnkey solutions are available that provide marketing materials, return-on-investment calculators, automated setup, hands-off training for users, scanner sales, delivery and support.  These systems accept checks and ACH, and the captured payments can be viewed via a single online portal. 

Risk-monitoring capabilities also are available to allow financial institutions to set up queues to manage and monitor deposit behaviors. Automated setup based on underwriting results speeds up the onboarding process.  In addition, systems now can help to handle changes to existing customer profiles, eliminating the need to manually modify a customer and reducing costs. 

Such turnkey solutions will do much to clear up the problems plaguing banks from enlisting customers and small businesses from using remote deposit capture. And just how lucrative could this prove for banks?  One major financial institution is actively pursuing the SMB market.  It figures that its more than 1,000 branches can add thousands of new small-business customers in total each year for the next three years. 

Financial institutions recognize the demand for remote check deposit among small businesses, but limited resources and management tools have kept them at bay.  With the new turn-key solutions available, financial institutions can capitalize on the significant growth opportunities this huge market segment presents. 

Face-to-Face Still Trumps Technology

cornerstone.jpgUpon reading the news and listening to industry experts, you may think bank branches are going the way of the buggy whip.  News reports claim: “For the first time in 15 years, banks across the United States are closing branches faster than they are opening them,” and “Bank Branches Are Closing; People Using Nearby ATMs Don’t Notice”(time.com).

In November 2010, analyst Meredith Whitney predicted 5,000 branches would close in the next 18 months (fortune.cnn.com) and according to author and consultant Brett King, “The current network of branches for most retail behemoths has absolutely no chance of survival in the near future. I’m not talking 10 years out here… I’m talking in the next 2-3 years,” (banking4tomorrow.com).  To paraphrase a quote from Mark Twain, reports of the death of the branch have been greatly exaggerated.

As part of the 2011 Bank and Credit Union Satisfaction Survey, Prime Performance surveyed more than 12,000 retail bank customers.  The findings from this survey show that the branch continues to play a vital role in the customer experience. 

4 Reasons Why the Branch Remains the Cornerstone
of the Retail Banking Relationship

1. 59 percent of customers performed a teller transaction at a branch within the last two weeks
Even though branch transactions are declining, branches continue to be highly visited. In 2011, 59 percent of customers performed a teller transaction at a branch within the last two weeks. While younger customers make more use of self-service channels, they still frequently visit the branch.  Among Gen Y customers, 56 percent performed a teller transaction at a branch within the last two weeks.

2. 74 percent of bank customers said they opened their most recent account in a branch
Most customers still choose to open their bank accounts in a branch.  Almost 3 out of 4 (74 percent) bank customers said they opened their most recent account in a branch.  This compares to 19 percent opened on-line and 6 percent by phone.  As expected, older customers (born before 1965) were more likely to open their account in a branch, and 81 percent did so.  Among Gen X, 69 percent opened their account in a branch, and surprisingly 74 percent of Gen Y did so as well.

3. 52 percent say branch location is the top reason why they selected a bank
Customers claim convenient branch locations is the primary factor in selecting a bank.  Fifty-two percent of new customers who opened their account in a branch rated convenient branch locations as the number one reason for selecting the bank and 74 percent said it was one of the top three reasons. New customers who opened their most recent account online also rated convenient branch locations as the number one reason why they selected the bank, even though they chose not to open the account in a branch.  Twenty-seven percent of customers who opened their account online rated branch locations as the number one reason why they selected the bank and 43 percent ranked it in the top three reasons (35 percent and 49 percent among Gen Y).

4. Live interactions continue to drive customer satisfaction and loyalty
While self service channels can play an important role in the customer experience, interactions with bank representatives are, by far, the primary drivers of customer satisfaction.  Regression analysis on over 12,000 customer surveys showed that customer satisfaction with the branch had the greatest influence on their overall satisfaction with the bank, how likely they are to recommend the bank and how likely they are to return to the bank first for future financial needs.  Still in its infancy, at this point in time, mobile banking is showing virtually no impact on customers’ overall satisfaction.  The branch has over three times the influence on overall satisfaction than both the internet and ATM channels.  Customers value self-service channels, but don’t see them as significant differentiators between banks. Ultimately, their interaction with humans has the greatest affect on how they feel about their bank, for good or ill.

Ron Johnson, who left Target to build the Apple Store from scratch and now is the CEO of J.C. Penney Co.,  said in a recent Harvard Business Review interview, “The only way to really build a relationship is face-to-face.  That’s human nature (hbr.org).”  As long as customers continue to place significant value on the locations of branches and the interactions they have with representatives in branches, banks needs to continue to make the branch the cornerstone of their retail strategy.

Banks must recognize that strong customer relationships are the key differentiator that will drive long-term growth and the branch is the key to developing and nurturing those relationships. Successful banks listen to their customers and use that feedback to energize behavior change and create a shared vision of consistent service excellence, and then deliver on that vision on each and every customer interaction.

Internet Banking: what it means for your institution


FirstData-WhitePape4.pngThe way we bank is changing. What used to happen at a branch now happens just about anywhere. Internet banking services have fast become a banking reality. And in today’s changing technology landscape, financial institutions must keep up with customer demands. So what does this mean for your institution? First Data created a white paper to help you understand the consumer technology expectations and trends in banking. We outline what a complete internet banking solution should look like, how to choose the right one, and best practices for a successful conversion program. We’ll cover topics such as:

  • Features and capabilities that an internet banking solution should have
  • A mini case study of a bank that utilized First Data’s Internet Banking Suite
  • Nine best practices for a successful conversion process

 To read the white paper, download it now.

Seven Ways Financial Institutions Can Maximize Profitability


FirstData-WhitePaper3.pngIn the past, financial institutions didn’t need to rethink the way they did business. But times have changed. Between today’s unpredictable global economy and new banking regulations recently enacted, it has never been more challenging to grow revenue, maintain profits and satisfy customers.

Today, banks and credit unions need strategic solutions to replace lost revenue, reduce costs and maximize profitability. First Data has created this white paper to help you explore new ways to effectively evolve your business in today’s world.

Our white paper addresses today’s big issues and critical areas, including:

  • The Durbin Amendment: Can you maintain checking profitability, despite lost DDA revenue? 
  • Debit Strategy: How can you rethink your debit programs in order to increase the profitability of your offerings?
  • New Technology: What do consumers expect when it comes to technology? How important is mobile banking? 
  • Fraud Prevention: Can centralizing fraud management help your institution reduce fraud?

To read the white paper, download it now.

Consumer Adoption and Usage of Banking Technology


FD-WhitePaper2.jpgToday’s consumers, especially those known as Millennials and Gen Y, are used to having technology integrated into most aspects of their work and personal lives. Banking is no exception. To respond to changing customer expectations, banks, credit unions and other financial institutions have incorporated online and mobile technology into consumers’ banking experiences. However, financial institutions still need to answer several questions pertaining to banking technology:

  • How well are financial institutions meeting the needs of consumers when it comes to offering high-tech products and services?
  • Whom do consumers view as the trusted provider of the mobile wallet?
  • How does adoption of banking technology vary for different consumer groups?

This white paper answers these and other questions that are critical to the ongoing success of financial institutions in a rapidly evolving marketplace. The paper is based upon the findings of a recent online research study of 2,000 U.S. consumers conducted jointly by First Data and Market Strategies International. The “New Consumer and Financial Behavior” study assessed consumers’ attitudes, behaviors, desires and technology adoption. This white paper is the third in a series of four based on results of the study and focuses on consumers’ attitudes and behaviors related to technology in banking.

Topics include:

  • Consumers’ attitudes about, and adoption of, banking-related technology.
  • Usage of mobile banking.
  • Perceptions of the mobile wallet by different consumer groups.
  • Usage of online banking and bill payment.
  • Steps that financial institutions can take to appeal to various types of consumers.

New Guidance Raises the Bar for Bank Internet Security


it-security-article.pngOn the morning of January 22, 2009, an employee of Experi-Metal in Macomb County, Michigan, a manufacturer for the auto industry, received an email forwarded from a colleague. It appeared to come from the company’s financial institution, Dallas-based Comerica Bank, and said: “Comerica Business Connect Customer Form.”  The employee followed the link to another web site, where he complied with instructions to type in his secure login for the company’s bank account and other identifying information.

Sometime between the hours of 7:30 a.m. and 2:02 p.m. that day, 93 fraudulent payment orders totaling $1.9 million were executed on the company’s account.

Comerica eventually recovered all but $561,399. Experi-Metal sued the bank for its loss and won the case last month, putting Comerica on the hook for the fraud.

A Comerica spokesman, Wayne Mielke, said the company is considering alternatives, including a possible appeal.

U.S. District Court Judge Patrick Duggan wrote in his opinion that he considered multiple factors as to whether the bank acted in “good faith,” using “commercially reasonable” security measures. Among clues that something was going wrong at Experi-Metal: The sheer volume and frequency of the fraudulent transactions; a $5 million overdraft executed on an account with normally a zero balance; a history of limited wire activity on the part of the company; and the destinations and beneficiaries of those funds (banks in places such as Russia or Estonia, long known as hubs for such fraud).

That case emphasizes the importance of looking for anomalies in accounts—missing those could make a bank liable for fraud. There are other reasons why providing customers with a log in and password is not enough.

Michael Dunne, an attorney with Day Pitney in Parsippany, New Jersey, thinks the new guidance issued last month from federal regulators—the Federal Financial Institutions Examination Council—raises the bar much higher in terms of what’s “commercially reasonable,” the legal standard for what a bank is supposed to provide in terms of Internet security for customers.

No longer can banks rely on dual-factor security, typically a log in, password, plus something like a security token that recognizes a computer or other device that is logging in. That dual-factor security was OK in the 2005 guidance on Internet security, Dunne says. Now, banks will have to introduce even more layers of security on top of that, which many of them already are doing.

An example of an extra layer would be email notifications to the customer every time payments are requested on the account.

At a minimum, banks will now be required to have a process that detects anomalies and responds to them, such as a customer suddenly initiating 93 payment orders for $1.9 million in one day, where few such transactions occurred before.

Banks also must have controls for system administrators on business accounts. Such a person could have the ability to approve all transactions on a commercial account when multiple employees have access to the account.

The guidance goes into effect in January for bank examinations, but Dunne thinks it could have an impact much earlier, in terms of the lawyers bringing up the new standard in court cases where banks get sued by victims of fraud.

Meeting the Needs of the New Financial Consumer: A Snapshot of Six Customer Segments


FD-WhitePaper1.jpgConsumers have a lot of options when choosing a bank or credit union. To be successful in today’s highly competitive environment, financial institutions must creatively and innovatively meet their customers’ needs and expectations. However, consumers are not a homogenous group—and attitudes, behaviors and expectations related to desired products, communication tools and service vary dramatically.

Even more challenging for financial institutions, consumers are rapidly evolving in their use of technology. As consumers increasingly use technology in their day-to-day lives, many expect the convenience of high-tech tools from their banks and other financial institutions. At the same time, a persistently weak economy, the widespread erosion of savings and investments, and the lending crisis have fundamentally altered many consumers’ mindsets. Especially among baby boomers—the backbone of financial industry growth over the last 25 years—confidence in financial institutions and a willingness to engage in carefree spending appear to be things of the past.

So, how can financial institutions best meet the needs of a diverse and evolving consumer base? To find out, First Data and Market Strategies International jointly conducted an online survey of 2,000 U.S. consumers. The “New Consumer and Financial Behavior” study looked at consumers’ attitudes, behaviors, desires and technology adoption. The results revealed six distinct consumer segments, providing financial institutions with valuable insights into opportunities and challenges associated with different types of customers.

By understanding the needs and expectations of different consumers, financial institutions can:

  • Determine which types of consumers are most valuable.
  • Target products, technology and tools at specific customer groups.
  • Improve customer retention through targeted customer loyalty programs.
  • Better service customers by meeting their needs and expectations for products, services, communication and technology.

This white paper is the first in a series of four based on results of the “New Consumer and Financial Behavior” study.

About the Study
The “New Consumer and Financial Behavior” study was conducted jointly by First Data and Market Strategies International, a market research consultancy. During March 2011, 2,000 banked consumers (who have at least one account at a financial institution) completed an online survey of their attitudes, behaviors and expectations pertaining to their primary financial institution, as well as their adoption of related technology. All respondents were individual or household financial decision-makers recruited from the uSamp opt-in online panel of U.S. adults. For purposes of analysis, respondents were grouped into six consumer segments using a sophisticated and robust segmentation approach that combines demographics, attitudes, behaviors and values to create comprehensive, instructive consumer profiles. A full description of the research methodology is included on p. 13.