With the passage of Dodd-Frank Act in 2010, the battle over regulatory reform was supposed to be over.
But a funny thing happened in 2011: Nobody told banks that. Instead, they spent the vast majority of the year attempting to reopen fights they lost during the legislative debate a year earlier.
In some cases, like the war over interchange limits, their attempts were largely futile. But bankers had more success convincing regulators to delay or rework other major provisions that are still being developed.
Still, the biggest battle of the year was definitely over the Durbin amendment. Banks were apoplectic when Sen. Richard Durbin, D-Ill., successfully convinced Congress to add a provision to Dodd-Frank capping interchange fees on debit cards. But with so many issues distracting them, they were unable to put up much of a fight.
That changed in 2011, when the Durbin measure became banks' top priority. Several large banks raised the stakes by declaring that they would end popular debit card reward programs if Durbin was not delayed or scrapped altogether. Bankers also rallied around a bill from Sen. Jon Tester, D-Mont., which would delay implementation of the Durbin provision.
Community bankers, who technically were exempt from the interchange limit, joined the fray, arguing they would still be affected when the fee cap went into effect for large banks. They were supported by Federal Reserve Board Chairman Ben Bernanke, who told Congress the provision may cause some small banks to fail.
But bankers had more than met their match against the retailers, who vigorously set out to defend their victory. Ultimately, banks were able to gain traction, even persuading several lawmakers to switch votes from supporting Durbin in 2010 to voting for a delay — but it wasn't enough. In June, the Tester bill won 54 votes in the Senate, six shy of the 60 necessary to overcome a filibuster threat.
The Fed followed up that month by finalizing the Durbin rule. Although it raised a proposed cap from 12 cents to 21 cents, while allowing some extra room to take into account fraud prevention, bankers remain furious about the rule.
That wasn't the only battle banks kept fighting this year. Many institutions had appeared to resign themselves to the creation of the Consumer Financial Protection Bureau, one of the chief parts of Dodd-Frank. Yet President Obama made a significant error when he declined to immediately nominate Elizabeth Warren or another candidate to head the agency.
Instead, the administration inexplicably left the job vacant while newly empowered House Republicans stepped up attacks against the agency's structure. The GOP sought to replace the agency's director with a commission, put the bureau on the appropriations process and give other regulators greater power to override its decisions.
By the time Obama finally made a nomination just ahead of the agency officially opening its doors on July 21, it was too late. Forty-four Senate Republicans vowed to block any nominee if changes to the agency's structure weren't made, leaving former Ohio Attorney General Richard Cordray in limbo for the foreseeable future.
Ironically, the biggest losers in this fight may be the banks themselves. While the CFPB is free to pursue rules and enforcement actions against bankers, it has no power over nonbanks until a director is confirmed. Regulators spent most of their time, meanwhile, trying to implement the massive reform law. Dodd-Frank entailed the writing of about 400 new rules, more than 300 of which remain to be written.
This year saw the release of several major proposals, however, including plans to implement the Volcker Rule — a ban on banks' proprietary trading — and a proposal to force large institutions to deliver "living wills" detailing how they could be taken apart.
Bankers were particularly focused on the risk-retention proposal, which details how regulators plan to require lenders to retain 5% of the risk of loans they securitize. Most focused on the exception to the proposal — called "qualifying residential mortgages" — which regulators said must include a 20% down payment and comply with certain debt-to-income requirements.
After regulators released the plan in March, the industry swiftly condemned the QRM criteria as too narrow, and enlisted lawmakers from both parties to press for regulators to loosen the standard. With the departure of Federal Deposit Insurance Corp. Chairman Sheila Bair in July, most observers think regulators will give in to such demands. Some have even suggested the entire plan will be re-proposed, given other technical issues the industry has objected to.
The largest mortgage servicers spent most of their year discussing a potential deal with the state attorneys general to resolve problems with the foreclosure process, including charges of robo-signing. But the situation started to fall apart in March after American Banker published a draft deal under which the banks would agree to principal reductions. The banks, Republican lawmakers and even other state AGs objected to such terms, arguing they went too far.
Negotiations dragged on through September, only to have the New York and California AGs pull out of talks. Although Iowa Attorney General Tom Miller insists a deal can still happen, no agreement had been reached as of mid-November. The banks are unwilling to agree to a multibillion-dollar settlement without assurances they won't still be sued by other states, while state AGs have their own fears of a political backlash if an insufficient agreement is reached.
Finally, 2011 was also a year in which Basel went global. Bankers have talked for decades about the international capital standards, but they've never won much attention outside of American Banker and a few other media outlets. But a June proposal to charge systemically important firms 1% to 2.5% of additional common equity sparked plenty of public debate. Jamie Dimon, the chief executive of JPMorgan Chase & Co., was the most vocal, declaring the surcharge "anti-American" in an interview with Financial Times. Dimon suggested the U.S. should withdraw from the accord.
Dimon and others said the surcharge — added on top of a 7% common equity requirement — would inhibit economic growth. Many lawmakers agree.
But at the most recent Group of 20 meeting this fall, international regulators staunchly defended the surcharge as necessary, arguing it will make the system safer without compromising the world economy.
It seems that banks — particularly the largest banks — are facing new threats almost daily.
No bank has had a tougher year than Bank of America Corp. The Charlotte, N.C., company began the year with a promising $2.8 billion settlement with Fannie Mae and Freddie Mac, but hopes that B of A was on a path to putting its Countrywide woes behind it proved hugely optimistic.
Not only did the company continue to see GSE putback requests roll in, it also faced heightened pressure from investors in private mortgage-backed securities. After agreeing to a more than $8.5 billion settlement with an exclusive consortium of heavyweight bond investors — the company took a $14 billion mortgage writedown in the second quarter — B of A and the securitization trustee Bank of New York Mellon encountered heavy opposition from other investors and New York Attorney General Eric Schneiderman. Now the matter will be settled in court.
The legal challenges were only some of many woes facing the increasingly struggling company, which in October formally ceded its title of largest U.S. bank to rival JPMorgan Chase. In August, B of A's chief executive, Brian Moynihan, resorted to taking a $5 billion infusion from legendary investor Warren Buffett, at terms that were widely considered much more favorable to Buffett than to B of A.
In September, Moynihan reorganized Bank of America's senior leadership, ousting prominent top executives Sallie Krawcheck and Joe Price. He also said the company would cut an additional 30,000 jobs as part of its efforts to cut costs.
But litigation wasn't the only thing that kept risk managers up at night. Over the course of the year, European sovereign debt jitters repeatedly came close to becoming a panic, with money market fund pullouts of European banks and fears of contagion to the U.S. While all agree that the debt load of Europe's troubled economies is unsustainable, the path to their ultimate resolution still isn't clear.
MERGERS & ACQUISITIONS
A good story has to have a catchy title, grab you early on and leave a tinge of mystery.
The book on the disappointing level of bank merger-and-acquisition activity in 2011 — call it "The M&A Wave Fit in My Bathtub" — fits the bill. It was a tale of economic intrigue, heated debate and unmet expectations. Three deals involving buyers Comerica Inc., Capital One Financial Corp. and First Niagara Financial Group Inc. offered compelling subplots.
Above all, this was the year that the great consolidation was supposed to begin. You know, the one that everyone says is "inevitable," in which the 7,500 U.S. banks get whittled down by thousands.
It did not happen. Persistent woes in the housing and employment markets, the threat of a double dip, scary headlines out of Europe, rocky stock markets and concerns about the implementation of Dodd-Frank made sure of that.
Get ready for more of the same in 2012. A spurt of deals could occur early on, but election year uncertainties will make bankers and other business executives adopt a wait-and-see approach, predicted Paul Schaus, the president of CCG Catalyst, a bank consulting firm in Phoenix.
"When we get into 2012, things will slow to a crawl," Schaus said.
It would be wrong to say there was no M&A activity this year, but it was pretty flat. There were 120 bank and thrift deals (excluding failures) announced through Sept. 30, down from 124 in the same nine-month period a year earlier, according to Keefe, Bruyette & Woods.
That was relatively strong compared with the "standstill" in the previous two years, but acquisition multiples have been "remaining well below historical levels," KBW said in a Nov. 2 report. Activity in the third quarter — right when investors were reaching for the Pepto-Bismol — fell 21% from a year earlier in number of deals and 89% in deal value.
The hot themes of the year in bank M&A were broached right away.
When Comerica of Dallas announced in January that it had agreed to pay $1.03 billion for Sterling Bancshares Inc. of Houston, or 2.3 times tangible book value, skeptics immediately questioned whether it was overpaying. Most banks had been fetching one to two times book value since the crisis.
Questions about the valuation dominated M&A chatter. The negative reaction is said to have influenced pricing since then and maybe have contributed, along with the weakened economic recovery, to the dearth of bank deals this year relative to the aggressive forecasts.
Many prospective buyers complained throughout the year that sellers had unrealistic expectations.
"There are banks out there that are worth more than book value or book and a quarter … but there ain't none, in my opinion, worth two times book," Rusty Cloutier, the president and chief executive of MidSouth Bancorp in Lafayette, La., said in June. "There is still a Red Sea gap in the market between the buyers and sellers."
Comerica's CEO, Ralph Babb, argued several times throughout the year that the price for Sterling was worth it, that the deal was a rare opportunity. In July he called it a "strategically compelling transaction" that triples Comerica's market share in Houston and gives it entry into San Antonio.
"There aren't other opportunities that really fit our model like Sterling did," he said in an interview later that month right after the deal closed.
Concerns ebbed later in the year, in part because the horrid performance of bank stocks made the deal seem more affordable. The KBW Bank Index had dropped 10.5% by late July. Taking into account the decline in Comerica's stock, the acquisition price dropped to around $800 million — or about 1.8 times Sterling's tangible book value.
Another deal, Capital One's agreement to buy ING Direct USA, raised major policy issues. The $9 billion deal would not catapult it in size ($300 billion of assets and 1.5% of the nation's deposits) nor make it terribly complex, but the negative reaction by community activists and small banks showed that big-bank M&A will not be the same in the Dodd-Frank era.
With anxiety about the faltering recovery high and emotions about the bailout still raw, many complained that the deal would create another "too big to fail" bank. Community activists, like the National Community Reinvestment Coalition's CEO, John Taylor, questioned Capital One's track record in community investment and its true motives.
"The model is to acquire banks to do more credit card business," Taylor said in an interview in September. "If people are fine with that, OK, go ahead. But I am not fine with that."
The Fed signaled the sensitivity of the issue by scheduling three public hearings on a deal that many had seen as relatively routine when it was first announced.
Activists urged regulators to block the deal. "Capital One's acquisition of ING is precisely the type of merger that imperils our economic health," Charles Harris, executive director of Housing Education and Economic Development, said in a written statement at the first hearing, in Washington.
"While our economic recovery from this crisis is still uncertain, Capital One wants to aggressively expand its subprime credit card business by acquiring ING's deposits and HSBC's subprime credit card portfolio."
Most surprising was a new ally they found — community banks.
The Independent Community Bankers of America opposed the deal, saying it would add to systemic risk.
"Not only are the large banks getting larger, their funding advantage over community banks, which has been estimated to be approximately 50 basis points, appears to be getting even larger," Christopher Cole, senior vice president and senior regulatory counsel for the ICBA, testified.
The ICBA called for a moratorium on acquisitions of institutions with assets of more than $100 billion until regulatory uncertainties surrounding systemically important financial institutions — including the submission of living wills and other changes required by Dodd-Frank — are finalized.
Capital One officials argued repeatedly that the deal would not make it more complex or put it anywhere near the national cap on deposits, and that it was a better alternative than other large, more high-risk buyers.
Regulators are expected to approve the deal because sending the message that big bank mergers are impossible would only protect the current small club of giant banks, experts say. However, the hubbub it stirred and any requirements regulators might impose are making potential dealmakers think twice.
"The outcome will determine whether people are willing to do transactions," Jonathan Pruzan, co-head of Morgan Stanley's global financial institutions group, said in an interview in late September.
"If they feel like there is a regulatory framework and an understanding of how to get a deal approved, and they have a real good strategic opportunity, then I think they would obviously try and pursue that. If there is a view that deals of this nature are unapprovable, that will obviously put a significant damper on consolidation."
First Niagara, of Buffalo, is known as successful consolidator, but several forces that affected all banks this year — volatile stock markets and regulatory uncertainties — were prompting tough questions about whether or not it bit off more than it could chew when it announced a deal in July to buy 195 branches in New York and Connecticut from HSBC Holdings PLC.
It planned a hefty capital raise and to close or divest as many as 100 of the HSBC branches because of antitrust and other concerns. First Niagara was in the middle of another big integration, having closed its purchase of NewAlliance Bancshares Inc. of New Haven, Conn., in April.
First Niagara agreed to pay $1 billion, or a 6.67% premium for $15 billion of deposits, and analysts are concerned that the deal could significantly dilute its tangible book value.
Stock markets plunged soon after the deal was announced on fears about the European crisis, and they remained volatile into early November. Some said First Niagara did not get the same level of buyer protections as HSBC gave Capital One, which has agreed to buy a large credit card portfolio from HSBC.
(Buyer protections would become more common in smaller deals the rest of the year as the stock markets continued their roller-coaster ride.)
The Justice Department said Nov. 10 it would not challenge the deal provided First Niagara sells 26 branches in the Buffalo area. First Niagara said it has begun marketing the 26 branches and others it wants to sell. Agreements are expected to be in place by yearend, and completed in the second quarter.
Meanwhile, First Niagara reported third-quarter earnings that were weighed down by more than $16 million in costs from closing former Harleysville National Corp. branches in Pennsylvania.
Schaus said that many in the industry saw First Niagara's challenges as even more of a cautionary tale than the Comerica deal.
Its HSBC deal was unexpected and First Niagara may have overpaid. "The market has changed on them," he says.
Heading into 2012, all eyes will be on the outcome and integration of these three major deals, plus others like PNC Financial Corp.'s deal to buy Royal Bank of Canada's U.S. unit and M&T Financial Corp.'s purchase of Wilmington Trust.
Experts still consider a major consolidation of banks a certainty. It's all in the when. As of this writing, the economic outlook was slightly improved from recent weeks but the Occupy Wall Street movement was exposing the level of popular angst. Stocks remained volatile and the European situation was chaotic.
"Until the uncertainty lifts and valuations firm up a little bit, I think we're in for a slow period of domestic consolidation," Pruzan said.
COMMUNITY BANKING
For community banks, 2011 was a challenging year that largely divided companies into three camps. One group consisted of banks struggling to find capital to purge lingering loan issues. Another wanted capital, but mostly to escape the clutches of the Troubled Asset Relief Program. The final group included banks that had managed to navigate through the financial crisis with some semblance of strength only to find growth opportunities limited at best on the other side.
The nexus connecting many of those banks was the Small Business Lending Fund. Widely derided for taking too long to get off the ground and for its cryptic application requirements, the $30-billion fund nevertheless played a critical role this year for a number of community banks.
Established last year when President Obama signed the Small Business Jobs and Credit Act into law, the SBLF instead distributed far less than its projected capacity. In the end, it distributed roughly $4 billion to 332 small banks. Demand was also limited; only 933 institutions applied for $11.8 billion in funds.
For a large number of community banks, the main reason they applied to the SBLF was to repay Tarp, not to make loans to small businesses. Many community banks have struggled to repay Tarp because it's difficult for them to raise capital.
"The long answer, the middle answer and the short answer is they don't have sufficient capital," Neil Barofsky, the former inspector general of Tarp, told American Banker on Sept. 29.
Still, the SBLF's name does hold some truth. Even if the funds were used to repay Tarp, recipients nevertheless had a big incentive to deploy the capital by lending to small businesses. If minimum thresholds for small-business loans were met, the rates and terms of the SBLF investments improved for banks.
Banks that used SBLF money this year to exit the Tarp included Heartland Financial USA Inc. in Dubuque, Iowa, which accepted $81.7 million in SBLF funds.
Outside the SBLF, a number of community banks tapped the public markets for common equity. Through Sept. 20, banks and thrifts raised $9.32 billion in common equity, according to SNL Financial in Charlottesville, Va. It ranged from big banks like Capital One, which raised $2 billion; and the $170 million-asset Liberty Bell Bank of Marlton, N.J., which raised just $691,000.
While some banks jumped at the opportunity to participate in the SBLF, others expressed concerns that they wouldn't be able to originate enough loans to really see the benefit of participating in the program.
Dwight Utz, the president and CEO of ECB Bancorp Inc. in Englehard, N.C., said he was worried that the SBLF's interest rate scale that drops with the amount of small-business loans could cause some lenders to reach. "I think this could create lending that is not prudent just so those banks can hit their targets," he said in September. "That's why we chose not to do it."
The fear of irrational pricing was pervasive in the hardscrabble loan market in 2011. Analysts have said that banks haven't lost the lessons of the downturn quite yet, but pricing is getting ultracompetitive and could be tiptoeing toward imprudence.
"The pitch hasn't become anymore shrill since earlier this year, but we are still hearing just how extraordinarily tough pricing is," said Scott Siefers, an analyst at Sandler O'Neill & Partners LP. "There is just a finite amount of demand out there that is being chased by an enormous pool of capital. We hope it isn't irrational, but it is probably a temptation."
Siefers added that commercial and industrial loans were the solitary glimmer of light in an otherwise dismal year of loan demand. And as lenders struggled to find loans, most remained flush with liquidity as deposits continued to flow in. While that leaves bank executives scrambling with a way to deploy that cash now, Siefers said it ultimately benefits them.
"In the long term, all of these deposits should boost the value of the franchise. That's what's important," he said. "I would be surprised if anyone started turning down deposits. That would just alienate their customer base."
This was also a year in which activist investors became vocal again. Though overall engagement is nowhere near the peaks seen before 2007, low bank valuations have enticed more investors to infuse capital into certain banks they believe are poised for a turnaround. Some investors are trying to fund banks they believe will become industry consolidators, while a growing handful are using their shareholder clout to try and force banks to sell.
"We're looking for banks that have walked past the shadow of death … that are trading at material discounts to their intrinsic value and we are looking to be the catalyst in realizing that value," said Joseph Stilwell, an activist investor in New York who had stakes in at least 19 banks and thrifts
"We're the bringers of reality" in that "there is a lot of right-sizing that needs to occur in the industry," Stilwell said, adding that banks with less than $1 billion of assets have the greatest value as sellers. "Loan growth isn't coming back for a long time."
Aside from lower valuations, activism has picked up because of the regulatory environment and many companies have been "hoarding cash" since 2008 so their balance sheets are stronger, said Damien Park, a managing partner at Hedge Fund Solutions LLC, a research and consulting firm on shareholder activism.
At Oct. 14, activist investors had made waves, including buying up shares and petitioning for board seats, at 36 banks, compared with just eight banks a year earlier. Such involvement is "the busiest we've seen since 2006, when activism was really at its peak," Park said. "Now, were seeing not only new activist funds but a resurgence of old activist funds and additional capital."
More private-equity groups have also placed their funds with ailing banks this year versus the shelf-charter strategy to buy up failed banks in previous years. A few examples include First BanCorp in Puerto Rico, which gained $525 million in capital from Thomas H. Lee Partners LP and Oaktree Capital Management LP; and United Community Banks Inc. in Blairsville, Ga., which completed a $380 million recapitalization led by Corsair Capital LLC in March.
Those stories remain few and far between as scores of other community banks seek capital. And most raises are still being priced at or below book value.
"We're a couple years away from seeing even a consistent basis of 1.5 times book," said Derek Cunningham, a managing director of the bank development group at Commerce Street Capital LLC. "The closings are larger and they're getting done faster, but it hasn't changed that much in terms of offering range" compared with 2010.
Among the seven community bank capital raises that the firm closed by October, five were at book value and the highest was 1.25 times tangible book, Cunningham said. Seven more raises were expected to close by yearend.
"It's been a difficult year for capital formation," said Frank Bonaventure, a principal at Ober, Kaler, Grimes & Shriver in Baltimore and chair of the law firm's financial institutions practice. "It's a tough sell for an investor to put money into a bank and know the money is not going toward future growth but to fund allowance for old loans on the books."
Because of this, Bonaventure said the capital raises coming from private funds will more so be structural raises, tied to an acquisition for growth. Such was the case for FNB United Corp. in Asheboro, N.C., which is using $155 million from Carlyle Group and Oak Hill Capital to merge two struggling banks, CommunityOne Bank and Bank of Granite.
"You will see a lot more banks seeking to raise capital over the next year so that they can grow through acquisitions," Bonaventure said.
CONSUMER FINANCE
The industry's lost battle against debit card regulations was the dominant issue of 2011. As Oct. 1 approached and banks prepared to lose billions of dollars in debit card revenue, many in the industry scrambled for ways to offset that loss.
Free checking all but disappeared at big banks, as institutions added or raised the fees on basic accounts. But then a handful of big banks went a step further, and tried to charge customers for using their debit cards. Bank of America was not the first bank to tell customers it would soon charge them $5 per month for debit cards, but it was the biggest. And its plan backfired, badly.
Amid mounting displays of rage from consumers and protesters including Occupy Wall Street, Bank of America's debit card fee plans exploded. Politicians up to and including President Obama criticized B of A. Angry bank customers organized a "Bank Transfer Day" campaign, encouraging customers to close their accounts at big banks in favor of credit unions and community banks.
B of A and the other banks that had tested or introduced debit card fees bowed to the pressure and canceled those fees — but the damage was already done. By the time Bank Transfer Day came around in early November, the Credit Union National Association was claiming that 650,000 people had already abandoned the big banks in favor of credit unions.
Credit cards were a much quieter story for most banks in 2011, as losses continued to diminish and banks continued to struggle with weak consumer demand for new loans. But the long-moribund credit card M&A market started to revive, especially with Capital One's deal to buy a $30 billion credit card portfolio from HSBC.
Around the same time Citigroup formally abandoned its efforts to try to sell a similar credit card portfolio. The third-largest bank had tried to shed its portfolio of store cards in the midst of the financial crisis, but was unable to find a buyer willing to pay a high enough price.
In mortgages, 2011 will be remembered for the continued depressed housing market and massive litigation stemming from reckless mortgage lending and servicing practices.
Banks' mortgage servicing operations, once obscure backwaters known for bill collecting, entered the spotlight.
Lawsuits came from all sides — investors, government agencies, defaulted homeowners and even the cities of Los Angeles and Chicago, which proclaimed bank servicers (and trustees) the new slumlords.
The drumbeat of news about shoddy servicing practices forced the Fed and the Office of the Comptroller of the Currency to issue cease-and-desist orders in April against the 14 largest bank servicers and two major vendors. By November, banks began mailing letters to foreclosed borrowers, part of a massive review process that will drag out next year to determine if any homeowners suffered financial harm.
There were also plenty of settlements — and likely more to come.
H&R Block Inc. agreed to pay $125 million to settle a lawsuit by Massachusetts against its former subprime lending unit Option One Mortgage Corp. Bank of America agreed to pay $20 million for improperly foreclosing on members of the military — some of whom were on active duty in Iraq and Afghanistan. B of A also settled with the Department of Housing and Urban Development for failing to adequately provide alternatives to foreclosure on 57,000 delinquent government-insured mortgages.
Because of all the fallout from the housing bubble, some large banks chose to scale back their mortgage lending, while others threw in the towel altogether.
Wells Fargo & Co. decided to exit reverse mortgages in July after government officials insisted it foreclose on elderly customers who failed to pay property taxes and insurance. MetLife Inc. put its $16 billion-asset depository, one of the top 15 mortgage lenders, on the block in October, citing too much regulation. And Ally Financial Inc. said in November it will pull back from correspondent lending, joining other banks that have opted out of the channel.
High unemployment and tight underwriting guidelines kept cautious homebuyers on the sidelines, and as lending volumes plummeted to new lows, some large banks laid off mortgage lenders in the first quarter.
The mortgage meltdown also claimed plenty of top executive jobs.
In 2011, nearly every major bank announced a shake-up of its management ranks that was somehow related to the mishandling of loan modification and foreclosure programs, or to past mortgage origination practices that ended in buyback requests.
On the regulatory front, the Federal Housing Finance Agency, which oversees Fannie and Freddie, filed a massive lawsuit in September against 17 banks claiming they misrepresented the quality of mortgages in nearly $200 billion of bonds bought by the agencies between 2005 and 2007.
Banks are still fighting such suits on all fronts, claiming investors and agencies were sophisticated investors who knew the risks.
Meanwhile, the Obama administration's main housing fix, the Home Affordable Modification Program, was declared a failure for helping too few borrowers. It is too soon to tell if changes to the Home Affordable Refinancing Program, which allows refinancing of underwater loans through Fannie and Freddie, will help more borrowers.
Ed DeMarco, the acting director of the FHFA, also has come under attack from California's attorney general, Kamala Harris, for failing to make principal writedowns on underwater mortgages. Any such writedowns would require legislation since they would be shouldered by taxpayers.
Four years after the housing market bust, the glut of mortgage losses and related legal liabilities shows no signs of abating. In their third-quarter earnings presentations and conference calls, the top four banks complained about yet another round of buyback requests from Fannie and Freddie.
There are a few silver linings. Ultra-low interest rates sparked a refinancing wave that began in late summer, and decreased competition for mortgage loans has helped to boost profit margins for the lenders that remain committed to the business.
TECHNOLOGY
How to assess the year in bank information technology?
Bank technology vendors had a great 2011, with an overall 10% increase in revenue among the FinTech 100 vendors, the American Banker/Bank Technology News/IDC ranking of the top 100 companies in financial services technology. These companies introduced myriad new products, including person-to-person payments, new online banking features and single-slot ATMs. New regulations and consumer demand for more convenient mobile and online banking technology kept banks buying.
Mobile payments made great leaps — but also suffered a few setbacks.
The industry is still waiting for Apple Inc. to publicly disclose any plans it has for mobile payments, but its smartphone rival Google Inc. entered the race with one of the most cohesive mobile wallet designs offered to date, which was quickly adopted by Citi, MasterCard Inc. and a slew of merchants. Isis, the mobile payment venture founded last year by the telecom giants, has struggled to make its business case clear to the masses. Google, by contrast, launched its mobile payment offering with a clear explanation of the roles the technology companies, phone companies and banks would play.
This was also the year that Bling Nation Ltd., an early contender in the mobile payments arena, shut down to redesign its business model. Bling Nation's original approach was to add payments to any phone by distributing a payment-capable sticker to bank customers. But when it made an aggressive push into the loyalty space, it found it was pushing away many merchants that preferred to stick with the loyalty programs they already used.
Wells Fargo, JPMorgan Chase and Bank of America banded together to form clearXchange, a bank-led mobile payments consortium that's still in development mode.
Methods for paying for goods and services online also evolved this year. Amazon.com Inc. put technology in place to allow credit card users to spend their reward points directly on the site without first redeeming them for cash or gift certificates. American Express Co., JPMorgan Chase and Discover Financial Services have all linked their cards to this system.
Discover and PayPal Inc., a unit of eBay Inc., are also creating a new online currency: airline miles. Discover lets its cardholders spend their miles through Amazon.com's reward-spending system and PayPal is putting a system in place that converts miles to cash for any online purchase.
Fiserv Inc. strengthened its position in online payments with its September purchase of CashEdge Inc., the New York company behind Popmoney, a product that competed with Fiserv's own ZashPay. Both products are offered through banks to allow easy account-to-account and P-to-P payments.
ING Direct demonstrated that there is always opportunity for innovation in even long-established products. In August, it rewrote the book on paper checks by implementing a system that requires consumers to "activate" their checkbooks before use, much like consumers must activate credit cards. In May, ING developed limited-access passwords for its customers to use with personal financial management sites. Most other banks allow consumers to use their regular online banking passwords which, if stolen, would allow full access to their finances. ING's limited-access passwords allow PFM providers to see transactions but do not allow payments.
This was a bad year for bank IT outages and it tested the patience of consumers. Bank of America had a six-day Web server outage in September that intermittently affected both online and mobile banking customers. In the end, the bank said the system failure was because of an upgrade of its online banking system, but this did not stop angry customers from railing against the bank on social media sites. BlackBerry suffered a multiday outage in October that also severely damaged its reputation.
Cloud computing groups moved forward with frameworks and standards and large banks such as JPMorgan Chase, State Street Corp. and ING expanded their private cloud initiatives. But regional and small banks remained hesitant about going to the cloud for anything relating to customer data.
Steve Jobs' passing was deeply felt by banks that had Apple-inspired retail channel technology strategies. The iPhone was the first device whose owners gravitated easily to mobile banking. Many banks introduced iPad apps this year that took advantage of the graphics display capabilities and navigational superiority of the tablet.
Heading into this year, peer-to-peer lending had moved forward. Prosper Marketplace Inc., the first peer-to-peer loan facilitator to launch in the U.S., dumped its original business model to instead adopt one that resembles that of its closest rival, Lending Club Corp. Prosper, which was founded in 2006, long used an auction system to set loan rates, but found that this process needlessly drew out the length of time it took for loans to get funded. Today, it sets loan rates itself.
The year ahead is likely to bring an increased focus on IT efficiency, ongoing improvement in online and mobile banking channels and an enhanced interest in cloud computing where it can bring cost savings and reduce the workload for IT staff.
This was the year chip cards finally gained momentum in the U.S., which had long resisted the switch from magnetic stripes to embedded chips in credit and debit cards, despite the clear security benefits of using chips to allow encryption and dynamic data at the point of sale.
So many other countries have embraced the EMV standard for chip cards that the shift began to cause problems for U.S. travelers, whose magnetic stripe cards were being rejected by merchants abroad.
Last year, United Nations Federal Credit Union in New York began offering EMV cards to people who qualify for membership and Travelex Currency Services Inc. began offering EMV prepaid cards.
Those were just the pebbles, not the full avalanche, which began in April of this year, when both Wells Fargo and JPMorgan Chase announced plans to offer EMV cards to travelers. U.S. Bancorp, Citigroup and others soon followed.
Soon issuers may not have a choice. In August, Visa Inc. announced a migration plan for merchants to accept chip cards over the next few years. Its biggest incentive for merchants is a liability shift — if merchants do not accept EMV cards by October 2015, they may be liable for any fraudulent purchases.
MasterCard soon followed with its own EMV incentive plan for automated teller machines connected to its Maestro network.
This year, the Federal Financial Institutions Examination Council updated its 2005 authentication guidelines to improve security. The earlier guidance, which stressed that passwords are not sufficient security to protect bank accounts, reshaped the way banks handle authentication.
The 2011 update's effect may be more subtle. When the earlier guidance came out, many ideas were pitched to banks — expensive ones, such as distributing a passcode-generating token to every customer; and unconventional ones, such as requiring consumers to pick faces from a Brady Bunch-style grid before being given access to their accounts. (The company behind the latter idea, Passfaces Corp., says its product has been most successful among medical companies.)
Most banks ultimately favored less blatant security measures. For example, many use device identification to invisibly recognize customers' computers at each login. The new guidance requires layered security, which means banks should not put all of their focus on evaluating customers only when they log in.
So far, banks seem less inclined to entertain unconventional ideas. Instead, they are likely to build upon the methods that are commonplace today, strengthening them and expanding their use as needed.
— Rob Blackwell, Dean Anason, Paul Davis, Robert Barba, Jeff Horwitz, Daniel Wolfe, Kate Berry, Maria Aspan and Penny Crosman
