Federal regulations have long been the top concern of banking leaders, but what will the election of Donald Trump mean for the regulatory environment? Our panel of industry execs weighs in on this topic, as well as consolidation among community banks and the rise of FinTech firms.
Jim Balderson, JLL
Richard Beard, People’s Utah Bancorp
Chris Christiansen, Bank of America
Lew Goodwin, Green Dot Bank
Ram Halteh, Key Bank
Scott Irwin, Holland & Hart, LLP
Edward Leary, Utah Department of Financial Institutions
Frank Pignanelli, National Association of Industrial Bankers
Scott Rice, Wells Fargo
Rex Rollo, America First Credit Union
Edward Sanches, Central Bank
Roger Shumway, Bank of Utah
John Stillings, Zions Bank
A special thank you to Juliette Tennert, director of economic and policy research at the Kem C. Gardner Policy Institute at the University of Utah David Eccles School of Business, for moderating the discussion.
What do the 2016 election results mean for the banking industry?
BEARD: There is a sense in our country of being overregulated. And it’s dramatically impacting the community banks. You see the large banks growing in numbers, and community banks disappearing. A lot of that has to do with regulation that trickles down for some misdeeds at the top with these larger banks—it has trickled down and had a direct impact on the community banks.
I did not vote for Donald Trump, but I am hopeful that he may be the hand grenade that goes off and brings people to reality—that you just can’t continue this kind of regulation and not have some dire consequences.
PIGNANELLI: Dodd-Frank is a cancer that is killing the country and financial services system. Hopefully members of Congress and the banking community will have greater strength in standing up and saying, “We’ve got to change or eliminate Dodd-Frank, because it is killing us.” Hopefully this election change will be that.
Everything that’s wrong with the so-called rebounding economy you can tie back to Dodd-Frank. I am hoping the banking community stands up for itself more, because we’ve been blemished with somehow causing the economic recession, and if anything is causing the turmoil that led to the election results, the frustration in this country, it is planted at the feet of Dodd-Frank.
Utah is still the fourth-largest center of financial services in the country. Hopefully this will also send the signal to the FDIC that they need to get off their butts, start approving insurance not just for state-chartered institution applicants in Utah, but across the country, and also for existing charters that want to change their bank plans to reflect 21st century dynamics. The FDIC has strangulated that. The belief is that because of the election, maybe the signal will go to the FDIC.
The industrial banks that I represent believe we can leverage the election results to possibly get some changes through on a regulatory basis. It could be the beginning of a major change in financial services.
SHUMWAY: There is a misunderstanding across the country of the definition of banks, and it’s hurt us all. And Senator Warren has an opinion, and some people appreciate it, but it’s straining the banks. For the smaller banks—the term “trickle down,” I don’t think it’s trickling, it’s rushing. For small community banks, regulatory relief is greatly needed. And maybe with the new control, hopefully there will be some changes that will relieve this.
SANCHES: We’re probably one of the smallest community banks at this table, and there’s a lot more in Utah that are smaller than us. And to be able to put our arms around the current regulation and what we have going forward is huge. What it means to the consumer is it just takes longer to do a loan and it just costs them more money. That’s just the plain, simple truth of it. Business regulation isn’t just hurting the banks, it’s hurting our customers and making it more difficult. They are making regular consumer loans as difficult to understand as a complex mortgage.
PIGNANELLI: The banking industry has got to step up and stop letting this revisionist history happen, because they are getting the blame for oftentimes natural cycles in the economy. They need to step up and start talking about how crucial large, small, medium-size banks are to the economy and to families and businesses.
RICE: Back to your original question about the Trump presidency—I don’t think we really know. He hasn’t been very forthcoming with details. He has represented that he’ll likely repeal Dodd-Frank, but we don’t really have the details around what that will look like.
STILLINGS: At Zions, we just had a survey conducted for us in our markets, Utah and Idaho. On a scale of one to five, trustworthiness, your local bank scored right at the top. Wall Street Bank scored right at the bottom. But your local bank, your bank, was right at the top of the scale. So Main Street banking still has the public’s trust.
Let’s talk about how your industry is faring. The number of jobs in the financial activity sector grew almost 8 percent over the past 12 months. That was the fastest-growing sector over that time period. Why do you think this is? And what can Utah policymakers do to support this trend into the future?
BEARD: One of the biggest problems we have in banking is company succession and people coming into the banking industry. It’s become, particularly in a tight economy, very difficult to find bankers.
The state could help promote the financial institutions by not bashing it as a mafia-type enterprise but, really, as a legitimate capital formation enterprise that offers good jobs, a sense of satisfaction as you help to build the economy and an honorable profession for people to be involved in. If people understood what banking really is—which, in its simplest, maybe idealistic form, is to have capital channeled to the development of the community—it would draw a lot of students and young people to that if they understood that’s what it’s about, not some evil empire.
GOODWIN: Banks have always been looked at as innovative in the past, coming up with products that met the needs of the consumer, but it’s very difficult in this environment to be overly innovative. The regulators are working hard and they’re trying do their job, but it is not something that encourages innovation. It is something that centers around compliance—and we have to be compliant, and we have to make sure the customer always understands what the product is and that we put out a fair product. But we also have to be able to be innovative.
People coming out of school today don’t want to be an insurance agent or a banker or something that isn’t on the cutting edge. That’s why FinTech has taken such a huge role. We need to get back to the point where we are putting the innovative products out and we have enough flexibility within the regulatory environment to try things and be successful or not be successful. But encourage the competitive nature to put out products that are valuable to consumers, not something that was built 60 years ago for people that don’t come into banks anymore.
HALTEH: When you look the impact technology has had on banking, it has been to shrink the workforce, because now you’ve got technology giving you the ability to do more work with fewer people. You see it out in the retail branches. Banks have spent so much time and so much energy in technology, and they kind of pushed the clients out of the branches, and then they’ve discovered that they really can’t give them advice if they’re doing things over the internet.
So now the challenge is how do you get them back and how do you have that discussion and that dialogue? Because, at the end of the day, we have to become advice-driven. If we’re not advice-driven and if we’re product-driven, it’s not going to work.
RICE: Utah has a growing, well-educated workforce that typically is willing to work for less money than the national average. Utah has been designated the Wall Street of the West because of the rapid growth we’ve seen in the financial services industry. Goldman’s growth here, along with Fidelity Investments and others has led to growth in financial services employment here.
ROLLO: Growth is coming not only with technology, but consumers want answers, they want call centers, they want mobile phones, they want laptops, they want iPads. All of those things are now a convenience to them, and they’re not going to give them up. Cell phone usage in the credit union venue is amazing. Everybody looks at their balance two to three times a day. You’ve got to have that convenience for the member.
I agree, when they have a problem, they’ll call somebody to address the issue. But it’s the fact that we have to provide so many more services for the same checking account or the same loan. They want to see it three or four different ways, and that costs us in manpower and technology, which causes labor increases.
Let’s talk a little bit about FinTech. How is the industry’s proliferation impacting your business?
GOODWIN: Green Dot—we are a FinTech company that happens to be a bank. We have discussions with other FinTech companies every day that are trying to understand how they can see and get to our customer base. We have four-plus-million active customers across the country that have credit needs. A lot of those FinTech areas are around lending, especially to the small consumers. I think it’s imperative that we find ways to partner with FinTech companies and give them some avenues to reach our customers.
But on the other side of that, as you grow as an entrepreneurial company, you don’t necessarily have all of the disciplines that it takes to be a bank. When we became a bank, we had to develop strong disciplines, because you can’t go haphazardly to serve consumers and then go away. You have to be able to have a capital structure to have a liquidity to have the compliance. Compliance is extremely important, because if you walk away from your obligations to consumers or you mistreat them, that’s why we get into the places we do.
So we have to find that intersection and the way to marry FinTech with regulated financial institutions. We will struggle as an industry if we don’t find ways to help them help our customers to become better financially.
HALTEH: There was a lot of hype about FinTech really eating into banking margins and also taking clients. If you look at companies like Kabbage, if you start digging into the numbers, a lot of our small business clients use them for convenience. They’re paying high interest rates. By the time you add them up, some of them had 20, 30 percent.
If you go talk to the Goldman Sachs 10,000 Small Businesses, many of the folks have used FinTech to a certain extent. I think it’s wonderful this type of Wild West is around, because it creates innovation. It’s an opportunity for us as really regulated, maybe a little bit boring, bankers to take advantage of these technologies.
Our philosophy at Key Bank is, “if we can’t build it, let’s go buy it.” So we recently invested in a FinTech accounts payable company that helps us. We’re currently utilizing HelloWallet on the residential side. I know that others are doing the same thing. So it’s an opportunity for banks to begin working and utilizing some of these innovative technologies and adapt those to banking.
PIGNANELLI: There was a gentleman who was president of a very prominent industrial bank for a number of years, and he would say, “If I had a good idea, I’d wake up, I’d put this idea to paper. It might take months, probably years to get approved by the FDIC, if at all.” He says, “Now I wake up as president of a FinTech company, I put my idea to paper and it’s approved by the end of the day in order to respond to 21st century dynamics and provide better customer service.” That’s the difference.
LEARY: It’s very interesting as you look at an industry that’s noted for being stale, as banking is, to see innovation try to break through that door, particularly caused by regulators, more on the federal side than the state side. But the desire is to try and innovate the product to meet the demands. But the regulator is expected to know what the pitfalls would be in advance, before you start down that road. So as a conservative regulator you would always say, “We’re willing to let you do it, but only to a small degree.” It’s very much a case of walk before you run.
But what I appreciate from a number of the companies is the decision was, “Well, we view ourselves as a FinTech company. We believe the best way to protect and serve the consumer is through a regulated bank environment.” And so where FinTech’s trying to marry with banks and banks are trying to partner with FinTech, that’s hopefully a profitable course for both industries to take to be able to create the credibility that both demand. Banking, that we’re innovative; FinTech, that we are going to be around and we do care about our customers. It’s a huge challenge for the regulatory side, but it’s also a huge challenge for FinTech and for banking to figure out how to help each other.
HALTEH: Back to Kabbage’s case. In no way do banks charge those kinds of interest rates, and it’s pretty scary to see clients paying that without knowing that’s what they are paying. They found that 50 percent of folks using it were doctors. They want the convenience. These are clients that we want, that can hop on the computer at night and get an equipment loan for $50,000 in a matter of 48 hours. Maybe that goes back to regulation, it goes back to technology, it goes back to risk assessment. And, really, how do we adopt the technology without taking the undue risk and burdens of that FinTech company? Because they are taking a risk, they are charging the higher rate. And how do we take care of our clients by providing them with good, efficient service?
STILLINGS: A year ago I opened an account at prosper.com and invested $250, the minimum amount. I put $25 in several notes—I wanted to look and see the type of person that was utilizing this. They give you a profile, credit scores, etc. I’m amazed at the quality of credit that is there, that people are willing to pay the rates that they do because they don’t have to go in and justify anything to anybody. All they have to do is say, “I want to borrow $12,000 to take a big vacation,” and in a matter of two or three weeks or days they have their money. They don’t have to go in and have anybody say, “Are you sure you want to blow $12,000 on an around-the-world vacation?” It’s amazing what they are willing to pay just to get that done and no questions asked. That’s what we’re competing with.
HALTEH: There’s just so much money chasing yield. Interest rates have been so low for so long, and the Fed pumped so much money into the economy and it’s trickled down. So it’s looking for avenues for yield, whether it’s through FinTech or whatever the case may be, and it’s been a challenge for banks.
The Fed raised short-term interest rates in December. And there may be more fed rate hikes next year, but now there’s a bit of uncertainty. Uncertainty also creates doubt. We just don’t know what that will look like next year. But banks, we’ve gotten leaner, we’ve gotten more efficient, and we’ve had to be, because interest rates have not given us the flexibility to allow us to operate the old way. We just have to become much more efficient.
BEARD: Capitalism is ruthlessly efficient, and so we’ve got a bubble that could be building because of this low interest rate. Nobody likes to talk about risk, but what happened in this last downturn is it got overheated and we saw “irrational exuberance.” And it hurts everybody when we go through that.
So one of the functions of good banking regulation and good banks is to recognize risk and not remove all of the impediments to risk allocation. What I mean by that is that good underwriting is critical to the whole banking system. People that understand that, they are not just salespeople, they understand there is a credit. Good regulations understand that in banking we’re really allocating risk. We’re in the business of risk management, and that risk management has to be done by people who are thinking carefully about it.
And I question even in FinTech that every algorithm in the world can take the place of good, solid human understanding of what a market looks like, and how do you program in some of the sense of where this business is going. My own view is that the cheap money will come home to haunt us if we don’t do something about it.
We’ve seen major banking consolidations. How can small banks survive in the environment? Is there going to be a continued place for community banks?
BEARD: People’s Utah Bancorp is a holding company. We have two franchises that we operate, Bank of American Fork and Lewiston State Bank, both over a hundred years old. Both have a good reputation, and have for many years.
What we see is that community banking, the way it has run, probably won’t survive. We’ve gone from 19,000 down to about 6,000 banks now. And it’s continuing to consolidate. So by taking a lot of the back office cost and the regulatory cost, and spreading it across more banks, the intent is to continue to bring community banks. The name of the bank remains the same, the people remain the same, they still deliver the same service to the community, but we strip out a lot of this thing that’s choking the community banks and share it across more banks.
I believe that it’s worth trying to preserve community banking. This is a little different way to go about it, but it seems to be a positive thing. There is a place for community banking. But I think the days of the 60-million-asset community banks are probably limited.
SHUMWAY: The OCC put out a memorandum a couple of years ago inviting banks to collaborate. It’s hard for community banks to collaborate. The credit unions call them CUSOs, where they have synergies and share some costs. It’s very difficult for a bank to share its compliance, but maybe there’s an area that it could. It may be a time will come where we’ll have to share maybe spreading or different functions. That’s going to be a challenge for community banks, because they’re usually families, they’re usually smaller, and it’s hard for them to do.
But to go forward, to get the efficiencies so that we can get more into technology, community banks are going to have to find a way to get synergies and to get costs down.
LEARY: A community bank used to be anybody under $100 million. Somewhere along the way it went to anybody under $250 million in total assets. Then to $500 million. Now the threshold seems to have survived and have an opportunity for community banking to be at least a billion. A lot of the regulations today envision a community bank being under $10 billion. The migration of where that’s gone to survive is astounding in a relatively short period of time.
SANCHES: Consolidation is going to continue. It’s not going to stop. It’s unfortunate. Because as you look around our communities, the majority of all small businesses, where did they get their financing from? Community banks. And as those community banks continue to shrink, it becomes more difficult for those small business owners to find someone that cares enough to sit down with them and talk to them about a loan that some of these larger regional banks just won’t look at. They’re just not interested in making a loan for $30,000.
STILLINGS: We’re a regional bank and we’re a SIFI, a Significantly Important Financial Institution. We’re the smallest of the SIFI; we call ourselves an itty-bitty SIFI. But what that means is we’re subject to the same regulatory issues as Wells, Bank of America, Chase, you name it, and so we feel your pain, because we have all of those costs and we have a lower asset base to spread that. So it impacts all of us, the community bank, but also a regional bank, such as Zions Bank, in the space that we claim. So we have the same issues that you’re having as community banks, only on a larger level. Everything you are talking about, it all goes back to regulation and compliance and the costs of that on whether you can survive or not. It impacts all of us.
HALTEH: During the recession we had good clients come to us that wanted to borrow money. And at the time banks were not lending overall. What we had to do as bankers is call our friends at other banks and say, “We’ve got this client with this risk profile; would you lend to them?” And this has carried on. We continue to compete fiercely within the marketplace for clients, yet it’s been more of a cooperative environment amongst banks. It’s all client-driven. How can we help these clients? How can we not say no? We can at least understand what other banks’ risk profiles are and what their niche is. Different banks play different roles within the market and they tend to gravitate to a specific industry or a specific risk profile that they know and they understand better than maybe we do.
How can we work better together to help our clients find credit solutions? We are doing that more and more. And it’s really come from the ground, up. It’s been bankers calling other bankers saying, “I’ve got a client; would you please help them,” because there’s trust.