Slideshow 10 Big Ideas to Improve Your Bank in 2015

Published
  • December 29 2014, 9:39am EST
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From the brain drain to cyber threats, the revenue squeeze to regulatory pressure, the challenges banks face are absolutely daunting. But we're here to help with some interesting ideas for thwarting hackers, winning new customers and making more money. Get ready for a busy year.

(For a headline index of all Big Idea articles, click here.)


Get Radical in Looking for Revenue

This isn't about making risky loans; it's about being willing to try a whole new strategy. Be proactive about the business transformation ahead. (Get the full story here or see below.)


For two decades, TCF Financial's business was built on attracting deposits with free checking and then raking in fees from those accounts. It worked well until the Durbin Amendment's clampdown on overdraft charges and interchange fees.

Needing to replace lost revenue, CEO William Cooper abruptly shifted strategies in 2012, and built out national indirect auto-lending and equipment finance businesses.

It was calculated risk, but today TCF is once again outperforming the industry. Its third-quarter earnings jumped nearly 30% from a year earlier, while its return on equity grew by 120 basis points, to 10.5%.

As the effects of the financial crisis fade, stagnant profitability has become the elephant in the living room. The 9.19% return on equity the industry earned in the first three quarters of 2014 was down slightly from the year-earlier period and remain far below the double-digit averages of a decade ago.

"Most banks are hunting for about four points of additional return on equity to get back to the wonder days," says Jim McCormick, president of First Manhattan Consulting Group. "But they're having a tough time finding it."

Do more banks need to take Cooper's lead and overhaul their strategies? Or can they be content with smaller steps — adopting the latest mobile app or closing down a branch — while waiting for loan demand and rates to rebound?

Extreme makeovers might work on reality TV shows, but it's a tough sell for an industry that always has been slow to change and, moreover, got burned so badly the last time it chased returns. "I'm not sure what 'radical change' would even look like in the banking industry," says Kenny Smith, leader of Deloitte's banking and securities practice. "What we're seeing is much more evolutionary than revolutionary."

To date, much of the post-crisis response at banks has been retrenchment. The industry's cost-to-asset ratio, at 0.81%, is about half of where it was in 2007, according to Deloitte.

The bigger problem lies in a revenue-to-assets figure that has fallen by 80 basis points over the same period. Banking's core lending and payments franchises are under attack by everyone from Walmart and Apple to crowdsourcing.

Even so, some banks are seeing less of a revenue drain than the industry overall, and their experience is instructive. McKinsey & Co., which has argued that U.S. banks need a new business model, has identified five "value-creating strategies," including "back-to-basics banking," "growth-market leader," and "balance sheet-light investment specialist," whose adherents have outperformed peers in recent years.

Fee-rich wealth management offerings have helped the likes of Bank of America and Wells Fargo boost wallet share. Others are capitalizing on vertical lending niches, such as technology, health care or energy. Strong performers like Signature Bank and First Republic Bank have built compensation systems processes to attract the top 20% of bankers who McCormick says are worth more than they're paid.

Technology can be an important enabler. Already, more banks are streamlining lending and other processes to improve service. "Giving a wealth advisor the ability to meet an affluent client with an iPad and get a financial plan approved electronically is radically different from a few years ago," says Fritz Nauck, a senior partner in McKinsey's banking practice.

Behind the scenes, many are investing in solutions to track and measure the customer experience — important in a world where customers lack loyalty, can change banking relationships easily and are influenced by social media sentiments. "It's hard to make basic banking products look sexier, but you can make the customer experience a whole lot better," says Deloitte's Smith.

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Increase Fee Income by Serving Small Businesses Holistically

Tailoring services to meet small-business owners' needs — from bookkeeping to strategic planning — can pay off in increased fee income now and new loans later. (Get the full story here or see below.)


Lead Bank in Garden City, Mo., is a survivor. The bank was founded in 1928, yet made it through the stock market crash of 1929 and the Depression that followed. A local family bought it in 2005, just in time to help it struggle through the 2008 financial crisis and the Great Recession.

But merely surviving isn't enough. Staying relevant is a constant challenge for a $132 million-asset bank, and now Lead aims to differentiate itself with a bold new approach to small-business banking. It is offering an unusual array of fee-based services — strategic planning, capital raising, even bookkeeping — along with the typical loan and deposit services.

Serving small-business customers more holistically is a goal that many community banks aspire to. But few are truly making a transition from the lender role to an adviser one, and there is a lot of revenue upside for those who do, according to a recent McKinsey & Co. study.

Josh Rowland, the vice chairman and a member of the family that owns the privately held Lead, says he had to act fast following the financial crisis. The bank had some "huge problems" in the form of a lot of nonperforming loans, and was being poorly managed.

"We had $25 million in negative retained earnings in 2009," he recalls. "As a newbie to banking, I looked at this and said, 'What is the reason for acquiring a bank? It's to serve the community. And right now the community that needs us is the small businesses of Kansas City.' So we sat down and figured out how we could serve that community, and how we could do that without creating more risks."

Rowland admits that not all of the advisory services are profitable yet, but says that the services are helping the bank build loyalty with existing customers and attract new ones. "We see this business banking services strategy as a long-term project."

One of its new services is a private "angel" fund, Lead Ventures, which buys equity stakes in promising local companies. Lead Business Advisors, another subsidiary of the bank, is providing business services to a rapidly growing number of local companies, ranging from mom-and-pop enterprises to an energy company that has $20 million in revenue.

Brian Higgins, first vice president for products and ebanking at First Financial Bank in Cincinnati, says that Lead Bank and others offering advisory services are on to something. "There's a mindset out there that banks are just about lending, and that small-business customers don't like to talk about being charged for services. But we've found that actually, what small-business owners really value is their time, and if they can get help from a bank with things like cash management, they're happy to pay for it," he says.

His own bank also is courting small-business customers with services. One example is a minimalist cash management service, which moves a company's cash to a higher-return investment whenever its account reaches a certain trigger level. It's a small firm's version of the daily or weekly automated sweep system used by larger firms.

Higgins says while the front-end costs of offering such services are not too serious, refocusing the bank on an effort to market business services, and getting loan officers to look beyond just growing assets, can be a challenge.

"You need to view meetings with a small-business owner or executive not just as a transactional occasion but as a consulting visit," he says. "Use them to find out what services they need, and then figure out how you can provide it." He suggests coming back with a proposal, not a bunch of options, "because small business people appreciate not having to spend time analyzing which option to go with."

The benefits to the bank, in terms of new fee income while interest rates and spreads are low, will become apparent, and the deeper relationships will pay off when rates eventually start to rise and banks need to start lending more again, he adds.

A new McKinsey study suggests that even regional banks could be missing out too, by not doing more to offer services to small to midsize businesses. According to Nils Hoffmann, partner in the corporate and investment banking practice at McKinsey, there is a "significant performance gap" between top regional banks and the rest, with the high performers outperforming other banks by a factor of two in terms of fee revenue versus lending.

the failure of many banks to engage in cross-selling of services, "especially services like cash management." These services, he says, can bring in significant fees from business customers. "Lending is, of course, the entry point for a relationship," he says, "but banks are looking for more from a bank's relationship manager now. They want a sparring partner, someone who can be more of a business advisor, and not just a lender."

Offering these services will mean spending some money, Hoffmann says. A bank needs a product platform in place, for example, and a typical investment in cash management software can run into the tens of millions of dollars or more. But he says the evidence is that the expenditure and retraining of staff will be worth it in the longer run, not just in terms of higher fee revenue, but increased lending business too.


Embrace the New R&D

The research and development process needs to undergo radical change. To remain relevant in the digital age, banks large and small are creating innovation labs, conducting quick beta tests of products early in the development stage and partnering with fintech startups. (Get the full story here or see below.)


The next big thing in financial services may not come from a financial institution. The possibility rattles some bankers, but others are embracing it. Rather than hunker down in endless brainstorming sessions, they've been hunting for ideas far outside bank cubicles.

The growing emphasis on research and development, and on the outreach beyond the banking sector, is something of a new paradigm for banks. Rolling out products and channels had been an internal process traditionally, with perhaps a vendor being part of it. The process tended to be long and involved.

Today, however, banks confront rapidly evolving mobile technology and a millennial generation that does not reflexively equate money with tellers and ATMs.

"We're in a space where, if we don't continue to evolve, we're not going to be relevant," says Karl Johnson, chief innovation officer at Pioneer Bank in Troy, New York.

To keep up, bankers are borrowing from the lexicon of Silicon Valley, sponsoring hackathons, creating innovation labs, conducting quick beta tests of products early in the development stage and partnering with tech-oriented startups. The ways to do so are myriad, with banks tailoring approaches based on their size and circumstances.

BBVA Compass has been working with several fintech companies, including one called Kasisto, which is developing voice-recognition technology. "We just can't do it ourselves," says Dave Kucera, director of business innovation. "We really have to partner with the outside community in an open way to be able to develop."

Though some might think such an approach is only for large banks, Johnson argues otherwise. Pioneer is testing an online bill-management tool developed by a local entrepreneur. If all goes smoothly, small-business customers will be able to use the tool for securing discounts on supplies and services. "We're trying it ourselves, and it's working out quite well," Johnson says. He expects to roll it out to bank customers in February.

Some banks are turning to universities. Savings Bank of Danbury has been collaborating with Fiserv and business students at the University of Connecticut. Last spring, the students came up with ideas for apps geared to millennials. One was selected for further development and testing. The ultimate goal is to add it to Fiserv's app store.

"We are getting in before a product's developed," says Kathleen Romagnano, president and CEO of the Savings Bank.

Union First Market Bank also is hoping for an early look at new ideas. Under a broader partnership with Virginia Polytechnic Institute that includes signage at football games, the bank plans on sponsoring semiannual business-plan competitions. Some are likely to focus on finance and banking, says Bill Cimino, a bank spokesman.

"We think this is a way to test and learn, but also get ideas from the outside, which we potentially think can be disruptive ideas," Cimino says. Innovation in serving rural customers is of particular interest.

Banks are trying to spark new ideas internally too. At U.S. Bancorp, an innovation team has been plugging away since 2007 and is now developing and testing products on its own, says Dominic Venturo, the chief innovation officer there.

First National Bank of Omaha sponsors annual hackathons for local techies — and hired two software developers who took part in the inaugural event in 2013. And in December, the bank invited its IT staffers to a two-and-a-half-day event and charged them with working on concepts for new and improved products, says Angela Garrett, its vice president of innovation. "We'd love to do a companywide event in 2015," Garrett says. "The ultimate value is when you have technology people working side by side with business people working side by side with marketing people."

Wherever ideas come from, most banks still face challenges in putting something new in front of customers. Among the steepest hurdles is the industry's aversion to risk, says JP Nicols, founder of the Bank Innovators Council. New products may not always work as expected the first time.

Larger banks have embraced experimentation, but smaller ones need to join in. The wait-and-see approach is hard to justify when technology is moving fast enough to wipe out laggards. Let Blockbuster be an example of how customers are voting with their feet. "The fact is, people are gravitating toward companies that give them more choices," Nicols says. "And that comes from innovation."


Build Financial Education Into Your Business Plan

A commitment to financial literacy training can help turn unbanked, cash-strapped consumers into profitable, bankable customers. (Get the full story here or see below.)


BankPlus CEO William Ray has seen firsthand how financial literacy training can transform unbanked, middle-class consumers into bankable ones. Since 2008, the Ridgeland, Miss.-based BankPlus has been offering low-interest loans of up $1,000 to cash-strapped, largely unbanked consumers who agree to open accounts at the bank and enroll in a three-hour seminar on money management. In all, more than 19,000 Mississippians have gone through BankPlus' financial education program; roughly 14,500 have received one or two consumer loans from the bank; and perhaps, most important, roughly 80% of those borrowers still have savings or checking accounts at the bank. Some have even raised their credit scores enough to qualify for home loans.

Ray had expected that most of the borrowers would be in low-wage jobs, so he's been surprised to find that many of them are police officers, school teachers or employed in other middle-class occupations. The so-called CreditPlus loans helped them get out of short-term debt, but it's been the financial education that has taught these formerly unbanked consumers the importance of saving, paying bills on time and raising their credit scores.

CreditPlus "is not so much a low-income product as it is a moderate one," says Ray. Many of the borrowers, he adds, "just never had any financial literacy training and got caught up in the payday lending habit."

Of course, banks have long supported financial literacy programs like those offered through Junior Achievement, Operation Hope, and countless community orgaizations, partly to gain Community Reinvestment Act credit but also on the vague hope that the newly literate would become bank customers.

The success of BankPlus' initiative confirms that committing to financial education can be good for business at a time when all banks are struggling to generate more revenue. Ray points out that CreditPlus clients have more than $4 million on deposit at the bank and several dozen have accounts with balances of more than $5,000.

Other banks, too, are ramping up financial education initiatives in hopes of bringing more unbanked or underbanked consumers into the mainstream. Bank of America has teamed up with the Khan Academy to develop a series of free online videos offering tips on things like how to get out of debt and building credit. Meanwhile, SunTrust Banks, First Horizon and Regions Financial are among more than a dozen banks that have opened or agreed to open financial education centers within their branches. The centers are run by the nonprofit Operation Hope and, according to its chairman, John Hope Bryant, they provide banks with a fresh opportunity to win over the unbanked.

Under its old model, Operation Hope offered financial education at a dozen stand-alone centers in low-income neighborhoods. Its new model is to put centers inside bank branches in all types of communities. The aim is to expand beyond the low-income consumers it had historically targeted, and reach out to those with moderate incomes who crave financial guidance but might be reluctant to seek it. "Nobody who is middle class wants to come to a Hope Center because that's where poor people go," says Bryant.

First Horizon recently opened a Hope center inside a branch in Memphis, Tenn., and CEO Bryan Jordan says it plans to add several more across the state. While the bank has long supported financial education, Jordan says the business case for setting up Hope centers in its branches is compelling. "If you take someone who is struggling and turn them into a business owner, whether they are a customer of ours or not, they are likely to be employing customers of ours," Jordan says. "Or if it's someone who now qualifies for a home loan, they will need to do some repairs, they'll likely be [contracting] with a customer of ours. It all has a trickle-on effect."

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Look Into Renewable Energy

New York's state-funded Green Bank is helping to finance solar farms and other alternative energy projects that traditional lenders aren't quite ready or willing to fund on their own. Commercial banks can get not only enhanced credit support from the Green Bank, but also help developing the expertise needed to get into this new lending niche, which is growing fast. Other states also have green banks in the works. (Get the full story here or see below.)


Until the New York Green Bank came along, lenders at M&T Bank wouldn't have given much thought to financing a photovoltaic power plant — also known as a solar farm — on a contaminated industrial site in Buffalo. But with the Green Bank offering credit enhancement in the form of a guarantee, M&T felt comfortable enough to help with the construction project. That's exactly the outcome New York Gov. Andrew Cuomo had hoped for when he established the state-funded Green Bank through an executive order. The bank's goal is to accelerate the state's green economy by helping lenders finance alternative energy projects that they aren't yet ready or willing to finance on their own.

The bank, headed by longtime Citigroup executive Alfred Griffin, opened for business in February and announced its first round of transactions in October. They include supporting the loan for that four-megawatt solar farm; providing construction funding to a firm that builds and operates cogeneration facilities in large commercial buildings like hospitals and hotels; and establishing a $100 million warehouse facility that will be used to put more solar panels on residential rooftops. Its partners in the various projects include M&T, First Niagara Bank, Citigroup, Bank of America and Deutsche Bank.

Though New York and Connecticut are the only states that have publicly funded green banks, more are expected soon. The Coalition for Green Capital, an industry group that supports creation of green banks, points out that six states recently voted in governors who back green banks. Those looking to diversify into new types of lending should take note.

Bankers say that deals involving renewable energy projects often require public support to get done. Among the issues that can keep banks from making these loans on their own is a lack of operational history on the type of equipment involved.

"We have various tools we can use to finance projects — debt, equity, securitizations — but often there's a piece of the puzzle that [a bank] can't do because we don't have years and years of data," says Marshal Salant, global head of alternative energy finance at Citi. "There are things that are difficult for us to do as a regulated bank that a green bank can do."

The Green Bank's Griffin says many community and regional banks aren't comfortable financing alternative energy projects because they don't have the expertise to thoroughly evaluate them. Larger banks might have that expertise, but sometimes view projects as too small to be worthwhile.

No matter a bank's reason for trepidation, the Green Bank can help. It is staffed by many ex-bankers with experience in alternative energy financing who can vet projects properly. "They provided us not only with financial support, but also with technical support," says Jeff Wellington, an M&T regional president. "M&T is not necessarily an expert in this type of financing, so that level of expertise was critical."

Part of the Green Bank's mission is to help lenders become experts. "Some of these projects are right in their backyards so they have an interest in supporting those things and developing that experience," Griffin says.

But in some cases, projects of interest to the Green Bank, like financing installation of solar panels on homes, aren't very appealing to large banks. So the Green Bank is helping to facilitate the warehousing of these small loans, which the banks then could buy and package for sale to investors.

New York expects the $800 million invested in the first round of Green Bank projects to result in an annual reduction of 575,000 tons of carbon dioxide — the equivalent of taking 120,000 cars off the road per year.

The Green Bank's success in finding bank partners for its energy projects bodes well for the six states — California, Colorado, Hawaii, Minnesota, Rhode Island and Vermont — that elected green-bank-friendly governors, says Reed Hundt, CEO of the Coalition for Green Capital. Hundt, a former head of the Federal Communications Commission, sees the need to support clean energy as an imperative. "If in 10 years the country has not moved to a clean energy platform, then we'll be spending money on building dikes and walls around Miami and New York City," he says.


Deal with the Brain Drain

With the mass exit of Baby Boomers looming, make sure succession planning goes far deeper than the C-suite. (Get the full story here or see below.)


When Eric Conner joined Univest Corp. as its chief technology officer, he immediately noticed a problem.

The IT veterans who ran the $2.2 billion asset bank's technology operations — each with 30 years of experience or more — were nearing retirement. All eight would be gone by the end of 2015.

Finding other people with the same skills would not resolve the issue for long, because they, too, would be close to retirement. "These are people that knew what I'll call the older school languages like COBOL and RPG and things like that," Conner says.

"In some ways, it really is a lesson in succession planning, but it's not an easy one, because technology changes and the kids graduating college today aren't studying the same things that these people studied." Conner says. "You have that gap that you have to bridge somewhere."

Univest's predicament is an example of what banks everywhere are facing, and it's not confined to IT departments. There is a shortage of highly skilled talent to replace an overload of retiring Baby Boomers.

"We have a missing generation in banking," says Rod Taylor, founding partner of the management consulting firm Taylor & Co. in Atlanta. "This is becoming increasingly critical by the day."

The causes span decades, starting as far back as the financial crisis of the early 1980s. "Banks cut costs, eliminated training, stopped hiring people," Taylor says.

By the 1990s, "very few people who came into the industry got trained across multiple functions, and those who did left for a dot-com or the energy sector," he says.

Compounding that challenge is what Taylor characterizes as a pervasive obsolescence plaguing small and midsized banks in particular — "obsolescence in their antiquated paradigms, the obsolescence of old technology, the obsolescence of branches that are no longer profitable."

All of this is creating a need for an emphasis on succession planning, of the kind that goes far beyond finding the next CEO. These days especially, succession planning can and should be an opportunity for serious soul-searching on where a bank is headed, what it needs to do differently to thrive, and who the best people are to help. "In effect, you're conducting a strategy project, because you're taking a look at what your organizational strengths and weaknesses are from the wheelhouse down," Taylor says.

He is helping three banks find chief financial officers, and in each case, the banks are seeking a level of experience and skill that play to a particular strategy, such as being able to lead an initial public offering, a merger or a divestiture.

Another area hurt by the Baby Boomer retirement wave is, ironically, the IRA department, which Kevin Boyles, vice president of business development for the retirement services provider Ascensus, describes as "the redheaded stepchild" at many community banks.

Because IRAs are not moneymakers, "most banks really wish they didn't even have to offer them," Boyles says, "but they often do because the customers want them."

Community banks with up to $500 million in assets generally have one individual overseeing their IRA program, he says. And those individuals are often in their late 50s to early 60s and have been handling the program for as long as anybody can remember.

The conventional approach would be to hire someone new.

But as with Univest's IT staff, "these people have built up significant knowledge over a fair number of years in those roles, and, in our estimation, they really are not replaceable," Boyles says.

One option is changing the role to suit a younger generation of bank employees. Rather than a long-term career, the job of IRA department manager could become similar to other branch roles, where workers rotate in for a few years and then get promoted, Boyles says.

"As a general rule, those people are not going to stay in a role for 20 years like Sam and Sandy Baby Boomer, so they'll never accumulate knowledge they need to be proficient," Boyles says. "So the bank needs to have a strategy for how to deal with that, whether that's just changing how that person gets training and support, or potentially looking at outsourcing the program."

Ascensus, too, anticipates it will have to adjust, perhaps enhancing its hotline support as the retirements hit, since the newbies likely will need more frequent clarifications about retirement products on behalf of their customers.

Boyles says most banks are aware that they need to think about succession plans to fill the considerable void ahead, whether in IT, retirement services or the C-suite. But he doesn't think they realize that the brain drain is already happening, or that it is an issue a few new hires can't solve.

"Because of that generational paradigm shift, they can't just plug and play somebody new into that role," Boyles says. "They're going to always be playing catch-up and they're going to end up with potential exposures from a compliance perspective, because they'll never be able to replace the knowledge they have sitting in the chair right now."

The opportunity, though, is to go beyond traditional human resources tactics and seek ways to improve the operation through larger initiatives tied to succession planning.

In the case of Univest, figuring out what to do about its retiring IT veterans prompted an evaluation of its entire tech strategy. Rather than continue relying on internal staff to maintain antiquated hardware and software, the bank chose to outsource its processing with Jack Henry & Associates, a technology vendor that was running some of its systems already.

"A lot of the newer tools, like data reporting tools, that's something this previous staff did not have experience in, so we sort of have this gap," Univest's Conner says. "We were going to lose all of this experience and knowledge and information at one time and then bringing in people that, say, knew the newer tools, but didn't know the bank data and bank operations as well."

Going the outsourcing route not only solved the staff issue, it also improved the quality of operations, enabling the bank to upgrade its disaster recovery program, for example, Conner says.

For its part, Jack Henry says the decision to outsource processing is on the rise for a variety of reasons, with 25 of its bank customers doing so within the past year. That compares to the same number to outsource the previous four years combined.

Timothy Chrisman, CEO of the executive search firm Chrisman & Co. in Los Angeles, says the industry's talent gap is exacerbated because fintech companies are scooping up bankers and the financial crisis shrunk the pool of highly experienced executives.

He says, in the past, banks often worked on succession planning from a "disaster recovery" point of view, a way to answer the question, "What happens 'if?'" But now more are using it to explore new directions related to what they want to achieve.

In that vein, one aspect of succession planning Chrisman says banks would do well to enhance is identifying promising young individuals and devising a plan to expose them to training for bigger roles. "That's where it gets kind of fun, dealing with the preparation for something," he says.


Create a Single Office to Manage Regulatory Risk

Centralizing reporting and response functions can help banks better spot compliance shortcomings. It's also a good way to foster trust with regulators. (Get the full story here or see below.)


It's an idea that seems long overdue — the creation of a single regulatory management office designed to centralize how a bank responds to the different data and supervisory mandates issued by federal and state regulators.

Few banks have one now, but Joni Swedlund, a principal at Deloitte Consulting, expects more and more to start gravitating to such a model once they recognize its benefits.

Right now, Swedlund says, many banks are suffering from common problems, including a patchwork of data management systems caused after rapid M&A activity and a fractured approach to meeting regulatory requirements. Many banks continue to operate in silos, even when regulators are asking similar requirements of different business lines.

"The responsibilities for a regulatory office typically span multiple officers," handling everything from Sarbanes-Oxley mandates to stress-testing requirements, Swedlund says.

But it doesn't have to be that way. Banks are beginning to contemplate a more centralized system where regulatory reporting and response is housed in a single office that has a broader view of what's happening at the institution. Some banks have already moved in this direction. Fifth Third Bancorp last year shifted former regional president and chief risk officer Mary Tuuk into the newly created role of executive vice president of corporate services. In practice, Tuuk functions like a chief regulatory officer, trying to stay on top of the multiple supervisory and compliance issues facing the company and providing guidance on how to deal with them.

Creating a central regulatory management office "will help streamline decision-making, minimize redundancies and empower more of the strategic thinking at the business level," Swedlund says.

Part of the issue comes down to inefficient management systems. Conceivably, a regulator could ask the same question of two different departments in the same bank and the two might respond with different, conflicting responses, Swedlund says. As a result, regulators become increasingly distrustful of a bank's information, leading to more scrutiny.

Assembling a team dedicated to coordinating a regulatory response — rather than relying on a single person in charge of more traditional "compliance" — allows banks to better spot flaws in their own organizations and fosters trust with regulators. This approach also facilitates an improved sense of a bank's data and better handling of various regulators' data requests. So, getting a handle on Big Data can improve not just a bank's business lines, but its regulatory response.

"Over time, as banks continue to enhance and enrich that regulatory data warehouse, I believe that will benefit the entire organization," says Swedlund. "That regulatory data could be repurposed for a whole host of reasons. You could use that data for know-your-customer or anti-money-laundering purposes, and to do strategic thinking around customers, and to conduct mock examinations."

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Share Data to Thwart Hackers and Address Other Big Challenges

Call it the year of co-opetition. By better sharing data with one another, banks can fine-tune their analysis of credit risk, track money laundering threats and strengthen defenses against cyberattacks. (Get the full story here or see below.)


In his recent book "The Social Life of Money," Nigel Dodd, a professor at the London School of Economics, describes the work of Georg Simmel, the 19th-century German philosopher who sought to explain what makes money possible.

Simmel observed that value results from a synthesis that takes place through exchange. "We enter into exchanges because we want things," Dodd explains. "This desire is demand." In Simmelian terms, banks in 2015 will swap information and develop processes with one another on a scale that may be without precedent. They'll remain fierce competitors, but by better sharing data with one another they also hope to fine-tune their analysis of credit risk, track and thwart money laundering threats and strengthen defenses against cyberattacks. Call it the year of co-opetition.

This trend toward better information sharing is being facilitated by third parties like Credit Benchmark, a U.K. startup that pools banks' assessments of the creditworthiness of institutional borrowers. Lenders hand over to Credit Benchmark their internal estimates of probabilities of default and potential losses. Credit Benchmark averages the opinions to calculate a consensus view that the company sends back to lenders.

Credit Benchmark aims to complement, if not disrupt, the cartel in credit ratings presided over by Moody's, Standard & Poor's and Fitch. "The fundamental difference is that when you're taking in a Credit Benchmark consensus you're taking in data from other players with skin in the game," says Elly Hardwick, its CEO.

With banks throughout North America, Europe and Asia all supplying information — at least a dozen have signed up so far — Credit Benchmark calculates the riskiness of debt issued by governments, hedge funds, businesses and other borrowers, including those that lack a credit rating from one of the big agencies. "There are huge areas of the market that banks care very deeply about where they have nothing to compare their rating to," adds Hardwick. "That's frightening for banks."

The inclination to share also is accelerating in compliance. In November, Markit and Genpact Limited announced that more than 600 hedge funds, pension firms and other institutions have registered for the companies' know-your-customer service, which assembles information about the identities of customers that banks must verify before opening accounts.

KYC Services, as the venture is known, relies on a standard developed in tandem with Citigroup, Morgan Stanley, HSBC and Deutsche Bank that defines what goes into a customer profile for public companies, hedge funds and other entities. The process promises to speed the opening of accounts and save banks money, while easing burdens on counterparties by homogenizing demands for information they must provide.

"We build a profile once and reuse it again across banks, says Rampi Kandadai, who manages the service for Genpact."

Though compliance officers have shared information about trends since anti-money laundering laws emerged 30 years ago, the ability to sift through and share the avalanche of data now available has become increasingly important, says John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists.

"The data is an important component of making account opening decisions, but [it] also becomes important on an ongoing basis for monitoring transactions," Byrne says. "Some of it is slicing and dicing at the institution, but it's that plus outside data that gives banks a more holistic view of who you are."

KYC Services mirrors efforts across the industry, where firms such as Thomson Reuters, KYC Exchange and others are racing to sign up banks for compliance-related registries. In September, Swift, which offers a KYC registry backed by JPMorgan Chase, Citigroup and others, said it would provide access to the service without charge in 2015 to banks that contribute data.

Nowhere is the need for sharing greater than in the area of cybersecurity. JPMorgan CEO Jamie Dimon, whose bank in August disclosed that hackers had accessed data on 83 million customers, wrote last spring to shareholders of "intelligence fusion" that the bank uses to share information about threats.

In the year ahead such synthesis promises to occur across the industry as banks become better at tapping data at their collective disposal to harden defenses against digital intrusions. Part of the push includes the development of Soltra Edge, a program created by the Financial Services Information Sharing and Analysis Center and the Depository Trust & Clearing Corp., that converts information about suspect websites, email addresses and malware into a format that allows threats to be routed automatically to banks' security systems.

Soltra Edge, which launched in December, is being tested by about 45 financial institutions and promises to make it easier for banks to sift through all the information about digital threats that floods their firewalls.

"The standardization is the most powerful benefit," says Al Pascual, a security analyst with Javelin. "It's almost a way to speed intelligence sharing and improve security postures."

Soltra Edge also has the potential to become a standard for retailers and other businesses outside banking that scan for cyber threats yet lack banks' prowess in cybersecurity. That matters because sharing of threats within the financial industry may not suffice, notes Steven Chabinsky, the chief risk officer at CrowdStrike, a digital security firm. "The main point is that information exists across all industries," says Chabinsky, a former deputy assistant director at the FBI's cyber division.

As Chabinsky sees it, banks and others benefit when they collect information from as large a network as possible. "The power of the crowd are the computers that have all the information and that are really good at processing and sharing it quickly," he adds.


Get the Customer Behavior You Want

A new round of experimentation is applying findings from behavioral economics to the financial lives of poor Americans. (Get the full story here or see below.)


The 2008 book "Nudge," coauthored by the scholars Cass Sunstein and Richard Thaler, made a splash by applying insights from behavioral economics to the realm of personal finance.

The main idea is that if individuals are given the right incentives, they'll make smarter choices with their money. One frequently cited example involves 401(k) enrollment. Lots of people never sign up for a retirement savings plan, even though it's in their own interest to do so. "Nudge" proposed a simple tweak — offer 401(k)s on an opt-out basis, rather than opt-in — in order to boost enrollment.

That change makes sense. But there are millions of Americans, mostly on the lower end of the income scale, who aren't eligible for a 401(k), and don't even have the cash they need to get to their next payday.

Today, a new round of experimentation — call it Nudge 2.0 — is applying findings from behavioral economics to the financial lives of poor Americans.

Spring Bank in New York City launched its Borrow-and-Save loan in September. The product requires borrowers to put 25% of the loan amount into a savings account that can only be accessed at the end of the loan term. A customer who borrows $500 to pay an emergency bill would receive $375; the other $125 would be set aside as savings, and later could be used to pay for the next surprise expense.

Although payday lending is illegal in New York, Spring Bank officials say their product offers a better alternative to pawn shops and rent-to-own stores. A $500, six-month loan carries an annual percentage rate of 18%. "If we come out with a sustainable, responsible product, we're going to cut the legs out from under some other products," says Brian Blake, vice president at Spring Bank.

Related innovation is also happening in the credit card industry. FS Card, a Washington, D.C.-based firm started by several former executives at Capital One Financial, recently announced plans for a subprime credit card that will offer incentives and rewards when customers habitually make on time payments in excess of the minimum amount due. So customers will still be borrowing, but they'll be accumulating rewards for borrowing less than they're allowed to.

Though tight-lipped about the product's specific features. Marla Blow, FS Card's CEO, notes that when customers perennially hover near the credit limit, it's actually disadvantageous to them, because then they can't use that card very often.

It used to be that subprime card issuers relied on hefty fees for late payments and exceeding one's credit limit. But in a post-crisis environment where those fees are tightly restricted, there may be a closer alignment between the interests of the card issuers and those of their low-credit-score customers.

Another application of behavioral economics to the financial lives of poor people involves the use of raffles or lotteries to incentivize savings. The notion of harnessing people's urge to gamble to a more productive end, known as prize-linked savings, is employed in more than 20 countries. And there's evidence suggesting that it works; a paper published in October by University of Maryland economists found what its authors called "strong evidence" that prize-linked savings leads participants to set aside more cash than traditional savings accounts.

Until quite recently, prize-linked savings accounts were illegal in most states, but the wind seems to be blowing in favor of looser rules. Several states have changed their laws in recent years, and in December, President Obama signed a law that allows banks to create such accounts.


Rethink Identity So Personal Data Can Stay Personal

Here's one idea for minimizing the damage from major data breaches: let consumers, not banks or retailers, manage their personal information. (Get the full story here or see below.)


The Internet term "doxing" refers to the leaking of sensitive personal information, typically by hackers. But in reality, the way commerce is conducted today requires consumers to dox themselves, constantly. To prove we are who we say we are, we share our names, addresses, Social Security and phone numbers, payment or banking credentials or other "private" details with countless strangers. We have to trust these third parties to not abuse the data and to protect it from others who would. They often fail at that task, as the massive data breaches of the last year underscored.

In addition to compromising individuals' data, the system places a huge burden on retailers and other businesses that lack cybersecurity expertise. Meanwhile, customers must provide the same information over and over again each time they start a relationship with a different business. Identity is fragmented in one sense and bundled in another, resulting in the worst of both worlds — redundant paperwork and endless targets for hackers.

"The flow of information is backwards in a way," says Stan Stalnaker, founder and CEO of Hub Culture, a London-based social network and digital currency company. "I have to go to all these different websites and log in and they store my data, instead of me having data I own and I can take with me."

Stalnacker's firm is among a handful of organizations, mostly in the tech and digital-currency fields, that are calling for an overhaul of the way identity is managed. In their vision, outlined this year in a manifesto known as the Windhover Principles, personal data would be under the consumer's control. It would be held in fewer and more secure places and portable from one business to another rather than constantly reconstructed.

Here's one way it might work: a young person opening her first financial account — say, with PayPal — would create an identity file, stored in a secure digital vault. She would need to provide certain information for PayPal to validate her identity, but that information would reside in the file, not with PayPal.

Later on, if this consumer wanted to apply for a car loan or a mortgage, she might need to add more information to the file to prove her creditworthiness, but she wouldn't have to start from scratch. She would give the lender a passcode temporarily authorizing it to view only the parts of the file it needed to evaluate her application. (Think of a car key that allows the parking valet to open the door and start the ignition, but can't access the glove compartment or trunk.)

The customer "wouldn't need to go around revealing [personal details] to everyone," says Karen Gifford, the chief compliance officer at Ripple Labs, a digital-money startup that, like Hub Culture, endorses the Windhover Principles.

In this scenario, "not everyone needs your Social Security number. They just need a username that shows you were validated by someone else." Importantly, "the people securing your details would be in that business," Gifford adds. "You wouldn't be forcing a lot of vendors who aren't in information security to be providing information security to you."

One potential objection to the concept is that the keepers of the vaults would have to excel at information security, and would themselves be popular targets for hackers.

Similar proposals in the past contemplated placing banks in that data-custodian role. But Gifford, a former counsel to the Federal Reserve Bank of New York, mused that banks might be as eager as big-box stores to avoid that chore. "Think of the burden they would get out from under," she says. While anti-money-laundering laws require banks to know who their customers are, "you can imagine a day when they simply validated information and did not hold it themselves and... weren't sitting ducks for hackers."

Another problem with unbundling identity is that taking banks and other companies out of the information storage business might prevent them from mining data for insights such as sales leads. If you really think that's a problem.

"The reality is all these large companies, whether you're a Walmart or an Apple or anyone, they all believe right now they're aggregating data and they can monetize it," said Stuart Lacey, founder and CEO of Trunomi, an identity-management startup based in Bermuda. "Well, I would posit, who's the right person to monetize your data? You."

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