Bankers: Don't Buy the Hype. Let Fintech Equity Investors Bear the Cost of Experimentation.

When JPMorgan Chase released its 2016 annual report, in which the celluloid CEO Jamie Dimon proudly acknowledged spending nearly $10 billion on technology, the talking heads erupted. Ten billion! Must be good. Jamie does it.

And from that moment the conventional wisdom was and is: community banks can't compete. I just heard it on Friday. A team of investment bankers told a community bank board, "how do you compete with that?" 

I have ideas. Watch/listen to my most recent vlog.

Who should bear the cost of experimentation?

~ Jeff

Are You a Bank With Benefits?

The American Bankers Association (ABA) recently announced a new benefit to assist its employees with repaying student debt. Beginning next month, ABA will provide each eligible employee up to $1,200 per year toward the payment of student debt, in addition to their current compensation. According to the Society for Human Resource Management, only four percent of employers nationwide offer this benefit. 

Is this an altruistic statement regarding the $1.4 trillion of student debt in America, or a prudent employee benefit targeting recent college graduates that each average $30,000 in student debt?

I recently proposed this topic for my firm's podcast, This Month In Banking, which is released on the last Wednesday of every month. Shot down. Too boring. But hey, I have a blog too! And I think it is an extremely important topic in talent acquisition and retention.

According to the Bureau of Labor Statistics June 2016 report, salaries, commissions and bonus accounted for 68.6% of total compensation, and benefits accounted for the remaining 31.4%. This is an increase from 29.9% in 2013. So benefits is a large, and increasing proportion of total compensation.

What makes the ABA announcement interesting is: 1) it is a benefit specific for those that carry student debt, meaning mostly millennials, and 2) that they felt they should announce it.

I don't think it is a mystery that bank employees seem to be getting older. And that succession planning in our industry is an issue. Since the financial crisis our industry's brand as a go-to employer has been hurt. And hurt badly. 

How do we attract quality, younger people and then retain them to be the future leaders of our industry? 

What employees value is in the eye of the beholder. Younger workers, for example, value cash on the barrel-head. Less important would be insurance (health or life), and retirement benefits. Not that it is unimportant. According to the Willis Towers Watson Global Benefit Attitudes Survey (What a mouthful! Some marketing person should revisit that title.), only 42% of US respondents said they would opt for more pay/bonus as opposed to other benefits if they had the choice (see chart). So other employees have different priorities.

For younger employees, there are some startups that focus on benefits important to them, such as Gradifi, that focuses on student loan paydown. Imagine the recruitment and retention with this benefit!

But as this benefit becomes less important to employees, perhaps a migration to something more meaningful, such as a greater 401k match, a more robust health plan, or life insurance benefits. Is it practical to earmark certain benefits dollars per full-time employee, and let them select, in menu fashion, what is important to them? For example, the recent college graduate may opt for a student loan paydown benefit, and take a high-deductible HSA health insurance option, rather than the traditional plan.

I think what is clear is that benefits that are important to your employees differ over different times in their life cycle.

Can bankers devise a cost-effective benefits program that recognizes this, would help them attract the best talent, and keep them?

~ Jeff

The Sun Sets on the ABA's National Conference for Community Bankers

On February 14-17 the American Bankers Association held their National Conference for Community Bankers. I made my first trip to the conference because I was asked to moderate a CEO Exchange, where bank CEOs sat, round-table style, discussing their most pressing issues.

The format was to first ask a couple of group questions. My first regarded attendees growth strategies. Did their markets support their growth aspirations? If not, do they intend to grow by expanding, taking market share from competitors, or merging. 

I would say the answers were yes, yes, and maybe, with only a small number stating they were exploring strategic combinations with like-sized institutions. I salute banks that forge forward independently. But perhaps considering a strategic alliance with a like-sized financial institution can give the combined institution greater resources to compete, and greater liquidity and possibly trading multiples for shareholders.

In terms of taking business from others, the primary, head nodding answer as to how to do it was apple pie. The community bank takes deposits from your community, and then lends into your community, with decision makers based here, where the financial institution's employees live, work, and volunteer.

The second group question regarded capital. Where would the smaller financial institution get its next injection of capital, should it need it? Most relied on retained earnings/profits, as expected. Some rely on a relatively small group of local investors, including employees and board members. Read my post on using an ESOP here. A minority were exploring subordinated notes, that can be issued at the holding company and down-streamed as common equity into the bank, should it need it.

After group questions, the Exchange turned to round-table discussions among the CEOs. Below are some of the questions addressed, and a summary of ideas on how to attack these challenges.

If you could make one change in law or regulation that would provide you with the greatest regulatory relief, what would it be?

• The CFPB should tailor their rules for appropriately sized financial institutions.
• Eliminate the right of rescission. Nobody uses it.
• Change the CTR threshold.
• Reduce the BSA workload.
• Disband the CFPB.
• Revise HMDA so it doesn't require so much bank resources.
• QM and TRID delays closing times and disproportionately impacts rural banks (makes mistakes punitive). 

Where is the greatest competition for loans?

• Credit Unions, Insurance Companies, and 3rd parties are competing for commercial real estate loans.
• Farm Credit, particularly in rural markets, are a significant threat to community banks.

Have you experienced a trend of easing underwriting standards over the past year?

• Commercial real estate loan spreads are shrinking.
• Competitors are lengthening loan terms (10yr fixed rate)
• Attendees are being more selective on these loans that are aggressively priced or structured.
• One reaction: make better use of 504s (SBA loans) to reduce risk.

How will you attract the next generation of leaders, employees, and customers?

• Employees: Pay aggressively. Give them increasing responsibility. Identify keepers early.
• Employees: Use stronger screening processes.
• Employees: Internship programs for college students.
• Employees: Have good wellness programs.
• Employees: Use them for process improvement/special project teams.
• Employees and customers: Target bounce-back millennials/ ones that leave the area but miss home and come back. 
• Customers: Put millennials in meaningful roles to attract millennial customers.
• Customers: Use technology such as text messaging to wish happy birthday, low balances, etc.

How are you assessing and managing cyber risk?

• Professional certifications.
• More aggressive testing.
• Customer education (i.e. wire transfer vulnerability, etc.)
• Have to make the resource commitment to manage it.
• Regulators frequently drive risk mitigation.
• FFIEC testing.

The above are simply bullet points for difficult challenges. This is why the round-table discussions surrounding these issues was so important to attendees. To get the full benefit, you will have to attend. 

It's not so bad. It was in Palm Desert this year and in Orlando next year! A welcome respite from winter, and beneficial exchange between community bank senior executives!

~ Jeff

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