Open Source on the Rise the Ubiquitous Virtual Assistant Perks As a Service Blockchain Puts Peers Back in P2p Amp up Recruiting with Ai

January 2018 | americanbanker.com RETHINK COMMERCIAL REAL ESTATE THE CAR AS A WALLET THE HAZARDS OF VIRTUE SIGNALING THE AMAZON BATTLE IS ON BEHAVIORAL ECONOMICS IN ACTION MISSION 2018 OPEN SOURCE ON THE RISE THE UBIQUITOUS VIRTUAL ASSISTANT PERKS AS A SERVICE BLOCKCHAIN PUTS PEERS BACK IN P2P AMP UP RECRUITING WITH AI

001_ABM_0118 1 12/8/17 1:42 PM FIDELITY CLEARING & CUSTODY SOLUTIONS Powering transformation for banks, broker-dealers, and RIAs

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32862-AD-11_AD-AMP2.0-AmerBanker_FP.indd0C2_ABM0118 2 1 12/7/201711/29/17 11:12:49 10:28 AM AM Contents JANUARY 2018 / VOLUME 128 / NO 1

MISSION2018 5 7

10 28 32 COVER STORY Brieﬁ ngs Meet & Greet 5 Win for Public Banks 28 People to Watch 10 Mission 2018 Advocates of state-owned Synchrony’s Margaret How new developments on many fronts are banks have a champion in Keane and Square’s Jack going to impact the banking industry in the new N.J. governor Dorsey are among those year ahead and beyond — and what you can with an interesting year do to prepare 6 SBA Sparks ahead Rule change expected to boost already surging small- business lending program BackPorch 32 Quotes from U.S. Sen. 6 PNC’s National Push Richard Durbin, Terry Dolan In the works are branches of U.S. Bancorp, and more in new markets and digital lending nationwide IN EACH ISSUE BankTechnology 4 Editor’s Note 7 Put It in T-Bills Can a startup make consumers feel like their deposits are safe without FDIC insurance?

American Banker (ISSN 2162-3198) Vol. 128 No. 1, is published monthly by SourceMedia, One State 8 Unicorn Hunters Street Plaza, 27th Floor New York, NY 10004. Subscription price: $119 per year in the U.S.; $139 for all other countries. Periodical postage paid at New York, NY and additional U.S. mailing of ces. Banks see venture capital- POSTMASTER: send all address changes to American Banker, One State Street Plaza, New York, NY 10004. For subscriptions, renewals, address changes and delivery service issues contact our backed fintech startups as Customer Service department at (212) 803-8500 or email: [email protected]. Send editorial lucrative customers inquires and manuscripts to American Banker, One State Street Plaza, 27th Floor, New York, NY 10004. This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering nancial, legal, accounting, tax or other professional service. American Banker is a registered trademark used herein under license. © Copyright 2018 SourceMedia, Incorporated and American Banker. All rights reserved. www.americanbanker.com.

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001_ABM0118 1 12/8/2017 1:54:59 PM What’s going on americanbanker.com @ Keeping nancial services professionals updated on vital developments and focusing sharply on their most important concerns

MOST READ MOST SHARED BANKTHINK Trump signs resolution Banks start vendor Your customers killing arbitration rule management firm aren’t psychic With little fanfare, President Bank of America, JPMorgan Focus on ensuring that your Trump of cially struck down Chase, Wells Fargo and Amex teams know why you make a Consumer Financial launched a vendor manage- changes, and they will be Protection Bureau rule that ment rm. TruSight will assess, far more likely to make those prohibited nancial companies validate and monitor vendors changes work for you, said from including mandatory on behalf of the consortium, Dave Martin, the founder of arbitration clauses. which is expected to expand. bankmechanics, in this op-ed.

Bloomberg News Bloomberg News

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002_ABM0118 2 12/8/2017 9:22:32 AM Retail Banking is coming to Colorado! Retail Banking 2018 will focus on: PRICE PER PASS Branch evolution Customer experience EARLY BIRD TICKETS Deposit growth FinTech integration AVAILABLE New regulatory priorities Business model reinvention FDIC Insured Banks: $1,295 Identity and fraud post-Equifax Credit Unions: $1,295 The event will provide a variety of learning formats, from big Government O cials: $995 picture keynotes to targeted, deeper-dive workshops and scheduled networking for meaningful business connections. All Others: $1,845 Combine this with an audience of the industry’s thought leaders These rates expire on and it’s no surprise that consumer banking business leaders return Friday, February 9th. to American Banker’s Retail Banking event year after year!

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d35035_RetailBanking_ABMPrint_Ad.indd003_ABM0118 3 1 12/7/201711/29/17 11:12:53 11:45 AM AM Editor’s Note BY BONNIE McGEER

CDFI Aims to Transform How Lending Gets Done

Much like traditional banks, community development nancial institutions reach and impact, and traditional banks are trying to adjust to the digital revolution too. stand to be a big part of that growth, with The nonprot Excelsior Growth Fund in New York is further along in that e ort the opportunity to earn Community Re- than most, and its president, Steven Cohen, has some insight to share with others in investment Act credit in the process. the sector looking to modernize. “Forward-thinking, technoloy-driven He is a big proponent of technoloy and its potential to transform how CDFIs and CDFIs are sort of changing the way that banks work together. banks could conceivably serve their cus- Excelsior, which provides small-business loans and advisory services, focuses on tomers, retain their customers and get those that typically cannot qualify for nancing at a bank. The end goal is not to keep CRA credit all at the same time,” Cohen customers, but to help them move on to a bank eventually. said. Cohen also aims to keep small businesses away from more unscrupulous lenders. The Association for Enterprise Op- “The CDFI industry, like other segments of the nancial services industry, is going portunity, a trade group for microenter- through a process of adapting to the destruction that is going on,” Cohen said. “We’re prise loan funds, developed a platform seeing 20% of the market go to these online lenders,” which are largely unregulated it calls “myWay to Credit,” where banks and in some cases predatory. can refer loan applicants to a market- In response to that trend, Excelsior moved early on to o er its small-business loans place of community lenders that include digitally. It launched an online lending platform back in August 2015, through a part- Excelsior. nership with the ntech startup Mirador, of Portland, Ore. Cohen said Excelsior is also working Its signature product, called the EGF SmartLoan, provides exible nancing of up with the nonprot Community Reinvest- to $100,000. Prospective borrowers can apply online, be approved within a day or ment Fund, which operates the online two and be funded within a week. lending platform Connect2Capital. Two years on, the horizon is getting bigger and looking brighter. “We’re playing in these di erent sand- Excelsior has bank partners that refer loans they are unable to do themselves to boxes,” he said. its digital channel — eliminating what used to be a more manual and time-consuming He sees CDFIs as being in a movement process. to reinvent themselves. They are using The arrangement also addresses some of the hesitations that banks historically technoloy to create more integration have had with such referrals. with each other and with banks than was “When they say ‘no,’ there are concerns over the predictability of what happens,” ever possible before. Cohen said. “Banks want to avoid the double decline, and they also want to avoid go- “There are all these e orts now for CD- ing into a black hole,” where they don’t know what is happening with a loan so can’t FIs to join together to be a solution for advise their customers. banks to help keep those customers at Now Excelsior has an algorithm it can share, allowing banks to check whether the the bank and not go to the online lend- borrower meets the eligibility and credit criteria. “The bank can have absolute con- ers,” Cohen said. dence that, if they screen for those factors, we’re going to do the deal,” Cohen said. He expects these initiatives to grow “It’s the technoloy that facilitates that opportunity in a way that’s predictable and and create even more lending opportuni- transparent,” he said. ties. And he is excited to see how things Excelsior, an aliate of New York Business Development Corp., concentrates on evolve. New York, New Jersey and Pennsylvania. “It could transform the way that small- But other CDFIs nationwide also have been taking steps to increase their visibility, business lending is nanced,” he said.

4 AMERICAN BANKER JANUARY 2018

004_ABM0118 4 12/8/2017 4:23:15 PM Brieﬁ ngs PUBLIC BANKING | SMALL BUSINESS | CONSUMER LENDING

have failed in recent years, Murphy’s Public Banking Was One resounding defeat of New Jersey’s lieu- tenant governor in the fall election — in Winner in 2017 Elections a state where the legislature is already controlled by Democrats — is being seen as a much-needed boost for the broader public-bank movement. Advocates of state-owned WITH THE ELECTION OF DEMOCRAT The bank Murphy proposes would banks have a champion in Phil Murphy as its next governor, New be modeled after the Bank of North Da- New Jersey Jersey moved closer to becoming the kota, the only public bank operating in second state in the country to establish a the United States. Under his plan, tax By Laura Alix state-run, taxpayer-owned bank. and fee revenue the state collects would Murphy, a former Wall Street invest- be deposited in the bank and then used ment banker, is among a growing num- for a variety of purposes, from providing ber of progressives who support the cre- low-cost loans to small businesses and ation of more public banks to help fund college students to funding community infrastructure projects and stimulate development in areas that are under- economic development. Though e orts served by mainstream banks. A public

to create public banks in other states bank also would provide an alternative ADOBESTOCK

JANUARY 2018 AMERICAN BANKER 5

005_ABM0118 5 12/7/2017 5:55:08 PM to “costly Wall Street bond markets” for change,” Pretty said. “The baby boom- cities looking to fund infrastructure proj- This Is ‘the ers are starting to reach their retirement ects, according to Murphy’s campaign years, so we’re seeing a lot of entrepre- website. Big One’ neurs who started successful companies Murphy’s proposal, as well as simi- The timing of an SBA rule looking for transition plans.” lar eorts in other states, face myriad change could not be better A recent survey of more than 300 hurdles, the biggest being sti opposition small business owners by TD Bank found from the banking industry. LENDERS EXPECT A RULE CHANGE TO that nearly a third sought an SBA loan to The New Jersey Bankers Association is boost already surging originations in the pay for an expansion, an acquisition or concerned that many small banks would Small Business Administration’s agship partner buyout. — John Reosti lose municipal deposits that they use to 7(a) program. lend in their communities. Michael Au- Eective Jan. 1, the SBA will slash the so, the trade group’s director of govern- equity required for most change-in-own- ment relations, said that more 100 banks ership loans to 10% from 25%, a move National in the state are licensed to accept munici- that should make nancing for acquisi- pal deposits. tions more accessible. The change is part Aspirations Auso also drew a sharp contrast be- of a broader overhaul of the standard op- PNC plans digital lending tween New Jersey and American Samoa, erating procedure, or SOP, that governs initiative and new branches which is currently awaiting regulatory 7(a) and 504, the SBA’s largest lending approval for its own state-backed bank. programs. PNC FINANCIAL SERVICES GROUP American Samoa is without a bank, he While the rewrite has dozens of modi- plans to introduce a consumer lending said, but New Jersey has no dearth of cations meant to improve the SOP, the product that it will market through both options. “It’s not that we’re against com- lower equity requirement “is the big one,” its mobile wallet and in new branches. petition, but we’re against government said Gregory Caruso, a partner at Harvest The $375 billion-asset Pittsburgh com- competition,” he said. Business Advisors in Princeton, N.J. pany intends for the new loan product to Murphy has said that a public bank Caruso said the change would have be available nationwide starting some- would complement, not compete with, an immediate impact at Harvest, which time in 2018, Chairman and Chief Ex- local banks and credit unions. His gripe is provides loan valuation and brokerage ecutive Bill Demchak said. It has not at- with large out-of-state banks; he cited as services. “I have a loan right now that tempted to operate a national consumer an example one unnamed bank that had would be di¦cult to close with a 25% lending platform before. more than $1 billion of public deposits equity requirement, but it will go very PNC will open branches in select new last year but made only three loans in the well at 20%,” he said. markets, including Minneapolis, Dallas state through the federal government’s Several banks, including Live Oak and Kansas City, as part of the rollout of small-business lending program. Bancshares in Wilmington, N.C., have the national digital retail loan product. Murphy’s victory is one of several re- been trying to make more change-in- The new branches will be located in ar- cent developments that have given hope ownership loans. The SBA’s modication eas “where we have no presence in retail to advocates of public banks. California covers deals involving intangible assets in today,” but where PNC has expanded State Treasurer John Chiang recently pro- excess of $500,000. its commercial-and-industrial lending, posed a feasibility study of a public bank Even with the current, higher equity Demchak said. as one option for providing the state’s requirement, the 7(a) program has grown “We’re working right now to gure out burgeoning marijuana industry with in popularity. Overall 7(a) volume has set how to activate that through marketing,” banking options. State o¦cials there are records for three straight years, reaching he said. “It’s dierent than traditional concerned that the industry’s reliance $25.8 billion in scal 2017. marketing, but we think it, through time, on cash will make it a magnet for violent An easing on equity standards for is a much more attractive way to gather crime and are brainstorming solutions. change-in-control loans is likely to push clients, grow deposits, and augment The plight of marijuana-related busi- the numbers even higher because it what we’re doing on a national basis in nesses also motivated the Los Angeles meshes almost perfectly with forces that C&I with our retail footprint.” city council to green-light its own feasibil- are currently driving the market, said Demchak disclosed the plans at an ity study on a public bank. Serious eorts Tom Pretty, head of SBA lending at the investor conference hosted by Goldman to study the issue are underway in Santa $285.4 billion-asset TD Bank. Sachs in early December, but he did not Fe, Seattle and Oakland as well. The new requirement is “a powerful oer additional specics. — Andy Peters

6 AMERICAN BANKER JANUARY 2018

006_ABM0118 6 12/7/2017 5:55:09 PM BankTechnology

be insured by the FDIC; instead, they will A Mobile Banking Startup be used to purchase short-term Treasury bills. Skips the FDIC Insurance U.S. Treasuries are of course backed by the full faith and credit of the federal government. Though the bills that Jiko plans to buy will pay a fairly modest yield Jiko’s plan is to invest FOR DECADES, RETAIL BANKING to depositors, those yields gure to be customer deposits in customers have taken comfort from the higher than what most banks are paying short-term Treasury bills Federal Deposit Insurance Corp. guaran- on checking and savings accounts. tee on their savings. By Kevin Wack “Treasuries are a wonderful instru- Now a venture capital-backed startup ment,” said Jiko’s chief executive, Stepha- hopes to use a dierent U.S. government ne Lintner. “They’re an extremely safe guarantee to convince customers that instrument. They’re yielding.” they can collect a better return while Customers will have the ability to their funds remain safe. choose from dierent durations of Trea- Jiko, of Oakland, Calif., plans to sury bills, ranging from a week or two up launch a transaction account in the rst to a year or longer.

quarter of 2018. Customer funds will not Longer-term bills pay higher yields ABOBESTOCK

JANUARY 2018 AMERICAN BANKER 7

007_ABM0118 7 12/7/2017 6:21:24 PM but carry more interest rate risk. verticals, there’s a lot of opportunity,” The current yield on a four-week How to Herd Bubenzer-Paim said. Treasury bill is 1.27% and the yield on a In general, banks have been improv- one-year Treasury bill is 1.6%, according ‘Unicorns’ ing their tech oerings for commercial to the Treasury Department. By contrast, More banks hunt for fintech clients over the past year or so. But serv- the average rate that banks and credit startups as customers ing technolo¦y companies is dierent unions paid on retail savings and money than banking typical corporate clients or market deposit accounts was 0.07% as of A COMMON FEATURE FOR MANY small businesses, and their needs go be- Sept. 30, according to a recent report by banks now is an innovation lab. A big yond the usual accounts and loans. Fitch Ratings. part of that is an eort to woo potential It goes without saying they want digi- In addition to the yield that custom- ntech “unicorns” as banking clients. tal services — they are unlikely to want to ers will collect, the company plans to pay “It’s always been a competitive mar- deal with much paper or have to stand in cash rewards of at least 0.5% on all debit ket and now it’s becoming even more so,” a teller line. card purchases. Lintner predicted that Bob Blee, the head of corporate nance “They’re very discerning buyers of the mobile phone-based account will ap- for Silicon Valley Bank, said of marketing banking products,” Blee said. “They ex- peal to consumers who do not currently eorts aimed at startups with high esti- pect cutting-edge services that are sim- earn rewards from a credit card — partic- mated valuations. ple, secure and intuitive.” ularly younger, more tech-savvy adults. Rapid growth and ready venture capi- But more than digital services, they’re The product will look and feel much tal funding has resulted in many more really looking for their bank to play much like a mobile banking account, but with- tech companies needing banking servic- more of an advisory role. “Often they out the FDIC’s stamp of approval. “Will es than in the past. scale at a very rapid rate,” Blee said. that appeal to everyone? We don’t know,” In 2017’s second quarter alone, ven- “They want their bank to give them the Lintner said. “We think it’s an interesting ture capital owing to ntech startups right things at the right time. They want product for a certain market.” totaled $1.7 billion, over half of it to those to know: When should I hire a full-time Some observers expressed doubt that based on the West Coast, according to controller? At what point do I need to consumers will forgo the FDIC’s long- KPMG. bring on a treasurer?” established guarantee, and instead turn The same KPMG study recorded $184 That aspect is crucial since many tech over their money over to a little-known million in rst-time nancing, a record. startups are more focused on innovating, startup. “To build up trust would appear Banks increasingly see these young and not as much on the daily nancial to be a hard thing to do,” said Mike Taia- rms backed with sudden large infusions minutiae of running a business, said Pa- no, director of the nancial institutions of VC money as desirable commercial cli- tricia Hines, a senior analyst in Celent’s group at Fitch. ents with high growth potential. banking group. Lintner acknowledged the challenge, “The market is so much bigger than “The VC money some of these start- but he said that the one-year-old com- it used to be; it’s not just the hard-core ups get puts them in a very unique posi- pany plans to assuage those concerns by technolo¦y and semiconductor compa- tion,” she said. “If somebody just got $12 becoming a licensed nancial institution. nies,” Blee said. “Most industries are un- million, they might need advice on how That means obtaining both a broker-deal- dergoing disruption by new innovators in to invest that money in their business. er license and a bank charter, which the the market.” They rarely have a nancial sta until company plans to achieve by acquiring SVB, of Santa Clara, Calif., has long they get to a certain size, so it provides a an existing bank, he said. been known for its niche of banking in- nice opportunity for banks to be a trust- Another question is whether Jiko, novative technolo¦y companies. ed adviser to them.” which means “self” in Japanese, will be But others are ramping up their ef- Many banks are looking at how they able to become protable. For now, the forts in this sector, Bank of the West can partner with or acquire ntech com- company expects to collect revenue from among them. The San Francisco bank, a panies so they can access some of the the portion of debit card swipe fees that subsidiary of BNP Paribas, recently hired latest digital nancial innovations, and does not get passed along to its custom- former Bank of America and Deutsche being a good bank to a tech client means ers. Lintner said that in the future, Jiko Bank executive Andreas Bubenzer-Paim they might be more inclined to work with could generate more revenue by charg- to head up the technolo¦y division of its that bank in the future, Hines said. ing customers a monthly fee of a few dol- commercial banking team. “It’s kind of that halo eect,” she said. lars. “There may be a fee. Ideally there is “We are open to any company in the “They think, ‘This is the bank that cares not,” he said. technolo¦y space, and with so many sub- about me.’ ” — Bryan Yurcan

8 AMERICAN BANKER JANUARY 2018

008_ABM0118 8 12/7/2017 6:21:24 PM WHERE THE PREPAID PRICE PER PASS LIMITED EARLY BIRD TICKETS REMAINING INDUSTRY MEETS NBPCA Members: $1,395 (On-Site Rate: $1,795) Non-Members: $1,695 (On-Site Rate: $2,095) The NBPCA’s Power of Prepaid is the Government Officials: $495 (On-Site Rate: $695) must-attend annual event for the prepaid Nonprofits: $995 (On-Site Rate: $1,195) community attracting the attention and Early Bird Rates expire February 2, 2018 support of the industry’s most influential players. Benefit from three days of Use code Save up to cutting-edge content, discussions and EARLY 29% on your to claim your registration! enhanced networking as you engage discounted rate. directly with those leading the way in prepaid innovation, product development, TO REGISTER ▶ please contact Albert Britton at 212-803-8387 compliance, and regulation. or [email protected], or visit us online at www.PrepaidEvent.com

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009_ABM0118d35034_PoP18_ABMPrint_Ad_7.875x10.5.indd 9 1 12/7/201711/29/17 11:13:00 11:01 AM AM MISSION2018

Rethink commercial real estate

10 AMERICAN BANKER JANUARY 2018 JANUARY 2018 AMERICAN BANKER 11

010_ABM_0118 10 12/8/17 1:20 PM Rethink commercial real estate

-commerce is wreaking havoc on brick-and-mortar retail sales, and the declining foot tra c is hurting many shopping malls, strip centers and Main Streets MISSION2018 Eacross the country. The rise in empty storefronts is understandably troubling for commercial real estate owners and the banks that lend to them. But the great retail shakeout is presenting some new and interesting opportunities for commercial real estate lenders. One is in nancing the conversion of all that vacant retail space into new uses — restaurants, health clubs, medical facilities, community colleges, movie theaters and o ce space. Ford Motor Co., for example, recently moved nearly 2,000 employees to an abandoned Lord & Taylor store that had once anchored a suburban Detroit shopping mall. A six-store strip center outside of Columbus, Ohio, was recently acquired by a nonpro t ministry that converted the space into a health so they can get goods to customers within hours, not days. clinic and food pantry, in a deal nanced by Heartland Bank “If you’re a bank and you want a new business opportu- in nearby Gahanna. nity, you better focus on anything that’s industrial or ware- Norm Nichols, an executive vice president at the $137 bil- house, and you better have lenders who understand the lion-asset KeyCorp in Cleveland, said that with the increase business,” said Peter Minshall, the managing partner at Wash- in vacant retail space, it is crucial for banks to foster relation- ington Capitol Partners and longtime real estate investor in ships with developers who have experience in repurposing the Washington and Baltimore areas. commercial properties that have become obsolete. The trends are compelling. According to the commercial “Retail going forward is going to be less about new devel- real estate rm CBRE, warehouse and industrial properties opment and more about reimagining existing square footage,” have seen positive net absorption — that is more space being said Nichols, the national manager for real estate project - leased than vacated — in 29 consecutive quarters, the longest nance at Key. “We are actively looking for clients who have such streak in more than 20 years. With demand soaring, proven track records of being able to reinvent space.” warehouse vacancies are at near-record lows, rents are rising Another opportunity is nancing the acquisition or con- and building in the sector is booming. struction of industrial warehouses and distribution centers. In the Atlanta area, some 17 million square feet of new in- While the surge in e-commerce sales — expected to top $450 dustrial space is currently under construction and in Califor- billion in 2017 and reach close to $700 billion by 2022 — has nia’s Inland Empire, where the vacancy rate is a scant 1.3%, been a downer for retail real estate, it has been an absolute nearly 28 million square feet is being built, according to CBRE. boon to industrial real estate. Industrial is not always an easy space for banks to play in, Simply put, the likes of Amazon, Zappos and W.B. Mason however. need massive amounts of space to store their goods, and they Bo Cashman, a Baltimore-based senior vice president at

want properties to be very close to major population centers CBRE, said that institutional buyers are so hungry for indus- GETTYIMAGES.COM FROM IMAGE

10 AMERICAN BANKER JANUARY 2018 JANUARY 2018 AMERICAN BANKER 11

011_ABM_0118 11 12/8/17 12:42 PM MISSION2018

trial properties and are so ush with cash that they don’t even need bank nancing to acquire them. Tap into behavioral On the construction side, the biggest warehouse user of all, Amazon, is building facilities that are so big and have such economics for better speci c needs that only the largest banks and investment banks can participate in the nancing — if Amazon needs - customer insight nancing at all. “We have no shot at banking Amazon,” said Scott McComb, the chairman, president and chief executive of the $884 mil- hen a major international bank was looking to lion-asset Heartland Bank. improve the response rates for its credit card Still, there are opportunities for smaller banks that have mailers in 2017, rather than changing the graph- the expertise and relationships in industrial real estate and W ics or upgrading the paper stock, it turned to a are willing to take some measure of risk. rm that could o er guidance on how consumers make deci- Thanks to a longstanding relationship, Minshall in 2014 sions. was able to obtain a loan from a Maryland community bank to It was trying to tap into the insights of behavioral econom- acquire a warehouse property outside of Baltimore that had ics, a discipline that uses psychological observations about hu- been mostly vacant for several years. That facility, with more man behavior to analyze and predict how people will act. And than 200,000 square feet, is now fully leased to W.B. Mason, the use of such tactics is on the rise by bank and ntechs alike. By calling consumers’ attention to the elements of the o er an o ce-supplies dealer. One major selling point in the bank’s initial mailers was that that they would likely see as valuable, the new mailers gener- And while most of the big players in e-commerce want the customers had been “pre-approved,” said Wei Ke, a man- ated a response rate 40% higher than the previous version had state-of-the-art facilities, McComb said that demand for older aging partner at Simon Kucher & Partners, the global stratey a year earlier. industrial properties is increasing as well, presenting oppor- and marketing consultancy that worked on the assignment. The concept of behavioral economics is not new. Car sales- tunities for community banks like his. But terms like “pre-approved” appear on so much mail men and advertising experts have long understood the power from nancial services companies that it has ceased to have of an individual’s unconscious biases, insecurities, and occa- “If you’re a bank and you want any real meaning to consumers, Ke said. sional irrationality to in uence even major decisions. In the It’s an issue that any behavioral economist would recognize. 1960s and ’70s, it began to emerge as a eld of serious study. a new business opportunity, you People make the vast majority of decisions on any given day Since then, experts in the eld have collected two Nobel Prizes better focus on anything that’s instantly, using shortcuts known as “heuristics” — mental rules in economic sciences, the most recent going to Richard Thaler industrial or warehouse,” says real of thumb that prevent getting bogged down by constant indeci- in 2017. sion. Learning to ignore “pre-approved” o ers is simply a heu- The win has red up momentum on the topic in the nan- estate investor Peter Minshall. ristic that millions of nancial services customers have found cial services sector, though it had been gaining prominence useful in sorting through each day’s pile of mail. even before. Heartland, for example, has several clients in the micro- “People see the word ‘pre-approved’ and get tuned out,” Ke From ntech startups to large banks like USAA, BBVA and brewing business that have taken over older industrial space, said. “This is just another piece of junk mail.” CIBC, detailed analysis of consumer behavior is becoming in- McComb said. But there are ways to reinforce the bene t of what is be- creasingly important to how they see their future customer Whether its older properties or new construction, ing o ered, and thus spark interest. “We found that, if you do relationships evolving, said Aurelie L’Hostis, a London-based opportunities abound in industrial real estate and more banks a bit of research and get into the meaning of pre-approval in analyst with Forrester Research. want in. the minds of the customers, there are a couple of things that And the aim isn’t just to make consumers more likely to act Nichols said that while KeyCorp has nanced some deals come out. Pre-approval means there is a time-saving element. on a credit card o er or to open a new savings account. The involving warehouse and distribution facilities, it intends to There’s the bene t of the certainty. Customers like certainty.” idea is to use insights gained from observing a customer’s hab- allocate even more resources to the sector over the next sev- Using customer surveys, Ke’s rm developed a short list of its to provide them with “actionable recommendations based eral years. the bene ts of pre-approval, and then redesigned the o er let- on a real understanding of their economic position.” “We are in the industrial space, but we would like to be in ter. “We used checkboxes and a very simple table that lists the Where the trend was recently to focus on so-called “gami- it even more,” he said. “The fundamentals are likely to remain three or four bene ts that bubble to the top, and compare and cation” of the customer’s relationship with a nancial insti- very healthy.” —Alan Kline contrast that with a normal credit o er.” tution, L’Hostis said that cutting-edge institutions are moving

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012_ABM_0118 12 12/8/17 12:42 PM beyond that toward practices that have shown to be more Tap into behavioral e ective at in uencing customer behavior over the long term. One of the world’s foremost experts in the eld, Duke economics for better University professor Dan Ariely, is also the chief behavioral economist for Qapital, a Swedish ntech that developed an customer insight app for mobile phones to help people develop strategies to increase savings. L’Hostis said this is an area where banks can improve. Cus- hen a major international bank was looking to tomers are more likely to develop and stick to a savings strat- improve the response rates for its credit card ey if banks are able to collect data about their nancial posi- mailers in 2017, rather than changing the graph- tion and then show them how they compare with similarly W ics or upgrading the paper stock, it turned to a situated peers. And customers who see themselves success- rm that could o er guidance on how consumers make deci- fully moving toward a stronger nancial position are going to sions. value their relationship with the institution that helped them It was trying to tap into the insights of behavioral econom- get there. ics, a discipline that uses psychological observations about hu- But before banks begin planning to use the insights of be- man behavior to analyze and predict how people will act. And havioral economics to pull in more customers and increase the use of such tactics is on the rise by bank and ntechs alike. By calling consumers’ attention to the elements of the o er the engagement of those they already have, they might want One major selling point in the bank’s initial mailers was that that they would likely see as valuable, the new mailers gener- to pause for some more analysis, warned Christopher Skin- the customers had been “pre-approved,” said Wei Ke, a man- ated a response rate 40% higher than the previous version had ner, managing partner at MakeBuzz, a software rm that de- aging partner at Simon Kucher & Partners, the global stratey a year earlier. velops customer relationship management solutions. and marketing consultancy that worked on the assignment. The concept of behavioral economics is not new. Car sales- Particularly when it comes to applying new technoloy to But terms like “pre-approved” appear on so much mail men and advertising experts have long understood the power predicting and directing customer behavior, he said, there’s a from nancial services companies that it has ceased to have of an individual’s unconscious biases, insecurities, and occa- tendency “to put the technoloy cart before the psycholoy any real meaning to consumers, Ke said. sional irrationality to in uence even major decisions. In the horse.” It’s an issue that any behavioral economist would recognize. 1960s and ’70s, it began to emerge as a eld of serious study. A lot of data about customer behavior is easy to collect, People make the vast majority of decisions on any given day Since then, experts in the eld have collected two Nobel Prizes Skinner said, but “cookie data, click data, and past sales data” instantly, using shortcuts known as “heuristics” — mental rules in economic sciences, the most recent going to Richard Thaler may not be as valuable as bankers think. of thumb that prevent getting bogged down by constant indeci- in 2017. “Behaviors are temporary states,” he said. “Today I woke sion. Learning to ignore “pre-approved” o ers is simply a heu- The win has red up momentum on the topic in the nan- up happy. Tomorrow I wake up mad. How do you design ristic that millions of nancial services customers have found cial services sector, though it had been gaining prominence marketing around that? How do you design anything around useful in sorting through each day’s pile of mail. even before. that?” “People see the word ‘pre-approved’ and get tuned out,” Ke From ntech startups to large banks like USAA, BBVA and He favors data that is “harder to acquire but more reliable said. “This is just another piece of junk mail.” CIBC, detailed analysis of consumer behavior is becoming in- and more connected to protability.” This type of data, like But there are ways to reinforce the benet of what is be- creasingly important to how they see their future customer personality traits, can help a bank cultivate a long-term, mutu- ing o ered, and thus spark interest. “We found that, if you do relationships evolving, said Aurelie L’Hostis, a London-based ally benecial relationship. a bit of research and get into the meaning of pre-approval in analyst with Forrester Research. But customers should be clear about that being the ulti- the minds of the customers, there are a couple of things that And the aim isn’t just to make consumers more likely to act mate goal, because if there is any fuzziness, other heuristics come out. Pre-approval means there is a time-saving element. on a credit card o er or to open a new savings account. The could kick in, like those that give them the sense they are be- There’s the benet of the certainty. Customers like certainty.” idea is to use insights gained from observing a customer’s hab- ing manipulated or taken advantage of. Using customer surveys, Ke’s rm developed a short list of its to provide them with “actionable recommendations based “Humans have a way of detecting these things,” Skinner the benets of pre-approval, and then redesigned the o er let- on a real understanding of their economic position.” said. If a customer interaction “comes across as o -putting, ter. “We used checkboxes and a very simple table that lists the Where the trend was recently to focus on so-called “gami- and you’re dealing with something as sensitive as a loan, it three or four benets that bubble to the top, and compare and cation” of the customer’s relationship with a nancial insti- can be a very bad experience. You have to apply these things

contrast that with a normal credit o er.” tution, L’Hostis said that cutting-edge institutions are moving cautiously.” — Rob Garver GETTYIMAGES.COM FROM IMAGE

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millennial workers. hired Ford to run its internal program and now its external Turn nancial wellness After trying out the program with its own employees, First one as well. Republic bought the startup in late 2016 and began o ering “Speaking broadly, it’s been fascinating to watch this work- perks into a business the service to its corporate customers. place nancial wellness space evolve because 10 years ago, the Banks’ interest in personal nancial wellness makes sense. term ‘workplace nancial wellness’ really didn’t exist,” said The shift in consumer behavior, away from physical branches Ford. “It was slow at rst, but it’s really gained steam in the and toward self-serve digital channels, has pushed banks to last ve years. It’s pretty di cult to become a best place to take a more advisory role with customers. work or an employer of choice without having a fairly robust At the same time, increased individual responsibility for workplace nancial wellness program.” health care expenses and retirement planning means that The details of the SunTrust program vary according to a Americans’ nancial lives are more complex than ever, said company’s particular needs and the needs of its employees. Mark Schwanhausser, director of digital banking with Javelin A program tailored for Wa e House employees, who don’t Stratey and Research. sit at a desk all day, might take place entirely online, while a Against this backdrop, banks are uniquely quali ed to ll a smaller company with one central location might choose to role as nancial coaches, helping their own employees, their o er it on site. customers and their corporate customers’ employees to bet- Momentum onUp’s curriculum revolves around eight core ter navigate their own nancial lives. concepts, or pillars. These are designed to help people orga- It also makes sense that, when thinking about how to en- nize their nancial lives and establish priorities. Creating an gage customers, banks should be able to apply what they’ve emergency fund is the rst step, but the course also covers learned by o ering these services to their own employees. topics like improving credit scores and investing. “The tools that a bank develops for its employees may be Just listening to the videos and doing the exercises would the kinds of tools you can develop for your customers, or vice take a person two or three hours. But following through and versa,” Schwanhausser said. “What you’re doing inside your actually doing everything the program asks of participants HR plan probably has some relevance to your consumers be- could take one to six months. SunTrust said it encourages us- ersonal nancial wellness programs are on the rise cause it’s all about trying to use a digital channel to create a ers to think of the program as a resource they can use over and banks are no exception in o ering them to em- sense of ‘What do I do next?’ ” several years. ployees. But many could be overlooking a natural Though Gradi is expected to lose money for at least a More than 16,000 of SunTrust’s 24,000 employees have Pnext step. couple of years, First Republic wants to invest in scaling it up, participated in its nancial wellness program, and anony- Could banks turn the perks developed for their employees Chairman and Chief Executive James Herbert said in the third- mous survey results have been encouraging, Ford said. into a new type of business service? quarter earnings call. The participants reported greater progress toward their For at least two banks so far, the answer is yes. The thinking is that it can lure high-earning millennials to nancial goals and less nancial stress, he said. Importantly, A nancial wellness program popular internally at Sun- First Republic, both as employees and as customers. they reported greater con dence in their careers at SunTrust Trust Banks is proving to be a hit with its corporate customers. At the $208 billion-asset SunTrust in Atlanta, acquisition and said they felt the bank cared about them. For three years now, the program, called Momentum and retention — not pro t — are the end goals for now. Sun- SunTrust also has experienced signi cantly lower turnover onUp, has been helping SunTrust employees achieve their Trust charges participating companies only for the cost of de- among employees who have gone through the program com- nancial goals through a combination of on-site coaching livering the program, with no premium on top of that. pared with those who haven’t. sessions and online tools. Like First Republic, SunTrust came by its nancial wellness In o ering this program to corporate customers, Ford said Last January, SunTrust extended the program to corporate program through an acquisition. that SunTrust wants to give those companies a similar win. In customers, as a bene t they could o er to their own employ- Brian Ford is a nancial well-being executive at SunTrust. the end, it is also a win for the bank that introduced the com- ees. To date, 68 companies have enrolled in the program and, But before he joined, Ford was the founder of 8 Pillars, where pany to the program. of those, 50 have launched it. he developed personal nancial wellness programs for work- The gratitude that accrues to employers can be substantial, The $84.3 billion-asset First Republic took a similar ap- places. Ford said. proach with Gradi . Gradi administers student debt assis- SunTrust worked with Ford’s company to develop a nan- “We’ve had employees tell us that we’ve saved their mar- tance as an employee bene t, an increasingly popular perk cial wellness program for its employees and ultimately liked riage,” he said. “People have said this is the best class they’ve for cultivating loyalty with notoriously ckle (and debt-laden) the results so much it bought 8 Pillars in September 2015 and ever taken.” — Laura Alix

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014_ABM_0118 14 12/8/17 12:42 PM millennial workers. hired Ford to run its internal program and now its external After trying out the program with its own employees, First one as well. Use AI to amp up Republic bought the startup in late 2016 and began o ering “Speaking broadly, it’s been fascinating to watch this work- the service to its corporate customers. place nancial wellness space evolve because 10 years ago, the recruiting Banks’ interest in personal nancial wellness makes sense. term ‘workplace nancial wellness’ really didn’t exist,” said The shift in consumer behavior, away from physical branches Ford. “It was slow at rst, but it’s really gained steam in the and toward self-serve digital channels, has pushed banks to last ve years. It’s pretty di cult to become a best place to take a more advisory role with customers. work or an employer of choice without having a fairly robust At the same time, increased individual responsibility for workplace nancial wellness program.” health care expenses and retirement planning means that The details of the SunTrust program vary according to a Americans’ nancial lives are more complex than ever, said company’s particular needs and the needs of its employees. Mark Schwanhausser, director of digital banking with Javelin A program tailored for Wae House employees, who don’t Stratey and Research. sit at a desk all day, might take place entirely online, while a Against this backdrop, banks are uniquely qualied to ll a smaller company with one central location might choose to role as nancial coaches, helping their own employees, their o er it on site. customers and their corporate customers’ employees to bet- Momentum onUp’s curriculum revolves around eight core ter navigate their own nancial lives. concepts, or pillars. These are designed to help people orga- It also makes sense that, when thinking about how to en- nize their nancial lives and establish priorities. Creating an gage customers, banks should be able to apply what they’ve emergency fund is the rst step, but the course also covers learned by o ering these services to their own employees. topics like improving credit scores and investing. anks are in a war for talent, not just with each other, “The tools that a bank develops for its employees may be Just listening to the videos and doing the exercises would but also with the likes of tech rms that are seen the kinds of tools you can develop for your customers, or vice take a person two or three hours. But following through and as cooler places to work. Who wants to wear a suit versa,” Schwanhausser said. “What you’re doing inside your actually doing everything the program asks of participants Bevery day when you can wear jeans and a T-shirt? HR plan probably has some relevance to your consumers be- could take one to six months. SunTrust said it encourages us- As the economy improves, this competition for new hires cause it’s all about trying to use a digital channel to create a ers to think of the program as a resource they can use over across all job categories — whether entry-level or experienced sense of ‘What do I do next?’ ” several years. — will only intensify. Though Gradi is expected to lose money for at least a More than 16,000 of SunTrust’s 24,000 employees have So some are turning to articial intelligence to help broad- couple of years, First Republic wants to invest in scaling it up, participated in its nancial wellness program, and anony- en their applicant pools and identify the candidates who dis- Chairman and Chief Executive James Herbert said in the third- mous survey results have been encouraging, Ford said. play the passion, the aptitude and the leadership skills they quarter earnings call. The participants reported greater progress toward their are looking for. The thinking is that it can lure high-earning millennials to nancial goals and less nancial stress, he said. Importantly, Jim Edrington, chief member engagement o cer at the First Republic, both as employees and as customers. they reported greater condence in their careers at SunTrust American Bankers Association, attributes the emerging trend At the $208 billion-asset SunTrust in Atlanta, acquisition and said they felt the bank cared about them. to necessity. “Banks can’t nd the people they need anymore and retention — not prot — are the end goals for now. Sun- SunTrust also has experienced signicantly lower turnover just by looking at graduates from the top schools and at GPA Trust charges participating companies only for the cost of de- among employees who have gone through the program com- and test scores,” he said. livering the program, with no premium on top of that. pared with those who haven’t. One of the pioneers in using AI for recruiting is Citigroup, Like First Republic, SunTrust came by its nancial wellness In o ering this program to corporate customers, Ford said which is piloting this type of approach in its corporate and program through an acquisition. that SunTrust wants to give those companies a similar win. In investment banking unit. The unit has 15,000 applicants for Brian Ford is a nancial well-being executive at SunTrust. the end, it is also a win for the bank that introduced the com- its 2018 summer intern program — all students in undergradu- But before he joined, Ford was the founder of 8 Pillars, where pany to the program. ate or MBA programs — and wants to do a better job of identi- he developed personal nancial wellness programs for work- The gratitude that accrues to employers can be substantial, fying those who could be a long-term t. places. Ford said. “We’re looking at using big data and AI to enhance our abil- SunTrust worked with Ford’s company to develop a nan- “We’ve had employees tell us that we’ve saved their mar- ity to hire people who are more likely to be retained by the cial wellness program for its employees and ultimately liked riage,” he said. “People have said this is the best class they’ve bank, and to stay longer than they would traditionally stay,”

the results so much it bought 8 Pillars in September 2015 and ever taken.” — Laura Alix said Bill Fisse, a Citi managing director for global campus re- GETTYIMAGES.COM FROM IMAGES

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cruiting and program management stratey. Be a driver in tunity in transforming drivers into passengers and opening up Citi is conducting its pilot with a four-year-old Seattle start- a plethora of other actions that they can engage in on the go. up called Koru, which calls itself a “predictive hiring” rm. autonomous vehicles, The National Highway Tra c Safety Administration de nes Kristen Hamilton, co-founder and chief executive of Koru, six levels of car automation, from Level 0, where a human said the company’s process is to develop a set of 450 data not a passenger controls all the critical driving functions, to Level 5, where the points for job applicants. car drives itself from departure to destination without human Each one takes a detailed, customized “ t test” that shows intervention. how they rate in seven categories that Koru claims are pre- Research from Loup Ventures estimates that 98,000 fully dictive of workplace performance — grit, rigor, impact, team- autonomous vehicles (Levels 4 and 5) will enter the market in work, curiosity, ownership and polish. A client bank — Koru 2020, which is when the transition to self-driving will start to has several of varying sizes — would decide what weighting to take shape. put on each of those categories. Beginning in 2028 Loup forecasts the industry will see an At this point, Citibank is just using those test results in its in ux in demand for Level 4 and 5 automobiles and will go hiring process for next summer’s intern pool. But it will then from shipping 98,000 fully autonomous vehicles in 2020 to be following the lucky 200 it selects, particularly those who 96.3 million in 2040, representing a 41.2% compound annual end up working for the bank as regular employees, to help growth rate over that time frame. it develop a predictive model — called a “ ngerprint” — for achieving even better results with future hires. The car as storefront “We’ll see how people that we hire using this system are While nancial institutions may assume that they have some tracking,” said Courtney Storz, who heads global campus re- time to get their heads around this new automotive paradigm, cruitment and program management for Citi. “There will be a now is the time to act. Even without autonomous cars taking huge data set to analyze and study, and as we follow hiring and over the roads today, in-car technoloy is already adding the performance cycles, we’ll be able to look at how predictive ability to pay for tolls, parking, gas and drive-through orders, the t score is and e ectively re ne the ngerprint over time.” with voice assistants enabling drivers to multitask without tak- Hamilton said that a big bank like Citi is ideal for Koru’s ing their eyes o the road. process because the number of applicants and hires provides t may not yet be apparent, but we are on the cusp of a seis- While many of these functions can be enabled using mo- a sizable data set. However, the model can be scaled down mic change in our relationship with the automobile. bile phones and travel apps such as Waze, the smartphone- to work for companies hiring as few as 25 people, she said. This change will have signi cant implications for stake- tethered experience is not necessarily driver friendly. Auto- Where the number of job vacancies to be lled is small, a “ n- Iholders in the banking and payments landscape. The In- motive manufacturers are working to upgrade the experience, gerprint” for future hires can be developed by testing existing ternet of Things, arti cial intelligence and blockchain are al- to one that is safer and more seamless. employees instead of just new hires, she added. ready quietly making their way into the dashboard and under For example, at the CES show in Las Vegas last January, She declined to discuss the cost, other than to say that the hood. Within a decade, such technoloy is set to radically Visa announced a proof of concept for in-car payments in a smaller institution might pay in the range of $10,000 to transform driving from a singular activity in moving from conjunction with Honda, demonstrating fuel purchases (with $30,000 — “less than the cost of making one bad hire.” point A to point B, to an opportunity to safely multitask and Gilbarco Veeder-Root gas pumps) and parking payments (with Koru is just one of a growing group of companies o ering even to completely disassociate from the road itself. IPS Group smart parking meters). Once the car is parked next predictive hiring based on data analytics of one kind or an- to a pump or meter, drivers are noti ed that they can pay other. Others include Knack, Pymetrics, McFrank & Williams Going the distance from their car, facilitating the transaction via a screen on the and Talent Analytics. The average American commute took 26.4 minutes in 2015, car dash. Haig Nalbantian, senior partner at Mercer and co-lead of creeping up 24 seconds from the previous year, according to Similar types of technoloy have already launched com- Mercer’s Workforce Sciences Institute, cautioned that algo- the U.S. Census Bureau’s most recent American Community mercially — in February, Jaguar announced a U.K. initiative rithm-based predictive hiring poses a risk. “If not used cau- Survey. with Shell gas stations to enable in-car payments. The fea- tiously, you can end up hiring a bunch of clones,” he said. For those commuting by car, the activity of driving requires ture requires installation of the Shell app onto Jaguar’s in-car But, he added, “the trend is here and you’re only going to active concentration and multitasking is limited to little more touchscreen display. Once installed, payments can be made see more of it,” especially in industries like banking with a lot than changing the dial on the radio. via PayPal, Apple Pay or Android Pay. Of course, the driver of customer-facing employees. — Dave Lindor However, the automotive industry sees a signi cant oppor- still needs to leave the car to pump gas.

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016_ABM_0118 16 12/8/17 1:20 PM Be a driver in tunity in transforming drivers into passengers and opening up Where banks take the wheel a plethora of other actions that they can engage in on the go. For issuing banks, this is just one more scenario where top- autonomous vehicles, The National Highway Trac Safety Administration denes of-wallet dynamics have no relevance as the card on le is six levels of car automation, from Level 0, where a human invariably the default. In the short term, issuers need to be not a passenger controls all the critical driving functions, to Level 5, where the agnostic and open to all variants of the digital wallet to ensure car drives itself from departure to destination without human that they t whatever preference consumers have. intervention. “The play for banks is to enable their payment cards in Research from Loup Ventures estimates that 98,000 fully every available wallet,” said Thad Peterson, senior analyst at autonomous vehicles (Levels 4 and 5) will enter the market in Aite Group. “It’s going to be a card-on-le game, but the deliv- 2020, which is when the transition to self-driving will start to ery vehicle will be some form of wallet, whether proprietary take shape. such as a General Motors wallet or generic such as Apple Pay.” Beginning in 2028 Loup forecasts the industry will see an inux in demand for Level 4 and 5 automobiles and will go Automakers haven’t included from shipping 98,000 fully autonomous vehicles in 2020 to 96.3 million in 2040, representing a 41.2% compound annual expenses like tolls and parking growth rate over that time frame. in their subscription models so

The car as storefront far, but “it certainly is something While nancial institutions may assume that they have some companies of many types could time to get their heads around this new automotive paradigm, now is the time to act. Even without autonomous cars taking explore,” says Dominic Venturo. over the roads today, in-car technoloy is already adding the ability to pay for tolls, parking, gas and drive-through orders, Current generation in-car payments don’t necessarily with voice assistants enabling drivers to multitask without tak- disintermediate traditional payment players from the expe- ing their eyes o the road. rience. However, some recent developments may be more t may not yet be apparent, but we are on the cusp of a seis- While many of these functions can be enabled using mo- disruptive. A May 2017 report by Celent titled “Payments mic change in our relationship with the automobile. bile phones and travel apps such as Waze, the smartphone- and the Internet of Things” describes the ultimate stage of This change will have signicant implications for stake- tethered experience is not necessarily driver friendly. Auto- IoT commerce as “semi-autonomous economic agents” that Iholders in the banking and payments landscape. The In- motive manufacturers are working to upgrade the experience, are capable of acting independently to optimize their own, ternet of Things, articial intelligence and blockchain are al- to one that is safer and more seamless. their owners’, and their clients’ objectives. In an automotive ready quietly making their way into the dashboard and under For example, at the CES show in Las Vegas last January, scenario, this could be self-driving cars using advanced AI to the hood. Within a decade, such technoloy is set to radically Visa announced a proof of concept for in-car payments in independently transact on the behalf of the owner — fullling transform driving from a singular activity in moving from conjunction with Honda, demonstrating fuel purchases (with tasks such as negotiating with toll road services for faster pas- point A to point B, to an opportunity to safely multitask and Gilbarco Veeder-Root gas pumps) and parking payments (with sage, purchasing gas or electricity, paying for servicing and even to completely disassociate from the road itself. IPS Group smart parking meters). Once the car is parked next so on. to a pump or meter, drivers are notied that they can pay Going the distance from their car, facilitating the transaction via a screen on the Banks might need new roads for this tra c The average American commute took 26.4 minutes in 2015, car dash. This presents an opportunity for nancial institutions to is- creeping up 24 seconds from the previous year, according to Similar types of technoloy have already launched com- sue payment accounts directly to vehicles. However, the cur- the U.S. Census Bureau’s most recent American Community mercially — in February, Jaguar announced a U.K. initiative rent infrastructure for cards might not be capable of support- Survey. with Shell gas stations to enable in-car payments. The fea- ing what is likely to be a constant stream of micropayments. A For those commuting by car, the activity of driving requires ture requires installation of the Shell app onto Jaguar’s in-car more appropriate mechanism may be blockchain technoloy, active concentration and multitasking is limited to little more touchscreen display. Once installed, payments can be made which was originally designed to support bitcoin payments. than changing the dial on the radio. via PayPal, Apple Pay or Android Pay. Of course, the driver While semi-autonomous agents sound like science ction,

However, the automotive industry sees a signicant oppor- still needs to leave the car to pump gas. key stakeholders in payments, technoloy and the automo- GETTYIMAGES.COM FROM IMAGE

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tive industry are already making this a reality. UBS, ZF Group their reputations with a variety of stakeholders. (a German car parts maker) and the technoloy giant IBM an- Beware the hazards Consumers are an important target, but so are current nounced plans in September to jointly provide an open auto- and prospective employees. motive transaction platform for mobility services called “Car of virtue signaling “Imagine telling your 22-year-old, fresh-out-of-Stanford, eWallet,” based on IBM Blockchain technoloy. computer science majors, ‘We’re going to start an amaz- This makes it possible to synchronize the information of ing, disruptive ntech company, and it’s going to make a each participant in the network in a reliable and unchange- ton of money charging late fees,’ ” Max Levchin, chief ex- able data record. At the same time, it ensures that users have ecutive of A rm, the San Francisco-based online lender, access to only the information that they are permitted to see said at an industry conference in October. “Unless you are and use, making near real-time transactions possible without willing to provide an idealistic narrative, it’s actually very a trusted third party. The platform has the potential to radi- hard to disrupt Wall Street.” cally change e-commerce between manufacturers, suppliers, But there are risks for companies that embrace this sort service providers and customers, according to the companies of virtue signaling, particularly if their corporate cultures behind it. do not match the public stories they have been telling What may be reassuring about this initiative is that a ma- about themselves. jor nancial institution is still part of the value chain and it “In some cases, the rhetoric is stronger than the real- can be expected that car owners will continue to entrust their ity,” warned Stephen Hahn-Gri ths, executive partner at transactions to entities that they are familiar with. And nan- the Reputation Institute. cial institutions, while not vociferously plugging their in-car One example is Wells Fargo. The San Francisco banking initiatives, are known to be working behind the scenes. giant’s onetime tagline — “Together we’ll go far” — implied “We’ve certainly been working on pilots within the au- that its interests were aligned with those of its customers. tomobile space to enable connected car type payments,” Then came a series of revelations about widespread said Dominic Venturo, chief innovation o cer at U.S. Bank. misconduct at the $1.9 trillion-asset company. In the most “These haven’t been publicized as they are still in the lab high-pro le infraction, as many as 3.5 million accounts stage, and the details are still con dential.” were suspected of being opened without customer autho- However, the threat of disintermediation for banks is le- rization, as employees tried to hit aggressive sales targets. gitimate — most car manufacturers have their own lending In another instance, Wells agreed to refund fees to arm and extending their relationship for payments not just at ou may have spotted a trend in the marketing mortgage customers who were improperly charged to the point of vehicle purchase but throughout the entire life of campaigns of nancial institutions in recent extend the period of time in which they had locked in a the vehicle could present an attractive revenue stream. years. Advertisers seem just as eager to position speci c interest rate. And in a third case, the company “There are auto manufacturers already moving to sub- Y themselves as being virtuous as they do to tout pledged to compensate customers who were overcharged scription models where most of the operating cost is covered the bene ts of their products. They are do-gooders who for auto insurance. under one payment,” said Venturo. “While we haven’t seen aim to help not just their customers, but the broader com- In each of these scandals, Wells padded its own bottom any yet that include the variable expenses like tolls and park- munity. line by dipping into its customers’ pockets. And the public ing, it certainly is something companies of many types could “We’ll give $150 to Stand Up to Cancer and $150 to you noticed. New checking account openings tumbled in late explore.” when you open a new checking account,” promises a Fifth 2016 and early 2017, after which point Wells stopped pub- Banks and payment providers need to remain relevant Third Bank commercial that is representative of the genre. licly reporting the data. as autonomous vehicles take over the roads, and should “Our mission is to make o shore wind one of the prin- This past spring, Wells unveiled a new ad slogan, proactively consider the many opportunities that in-car pay- cipal new sources of enery,” a Citigroup banker declares “Building Better Every Day,” which hinted at the compa- ments o er in areas such as cross selling and marketing, in in another ad. ny’s problems and could be read as a promise to improve. increased data on customer behavior and in new innovations The American public’s view of the nancial sector went “We betrayed your trust, and now it’s on us to earn it such as accounts for semi-autonomous agents. into free fall after the Great Recession, and this sort of back,” Wells Chief Executive Tim Sloan said in a video mes- Start with stepping up awareness of developments in the image burnishing may help with those lingering negative sage to customers. auto sector and follow up with action. perceptions. It’s an approach being tried by banks and - Another lender that nds itself in a marketing bind is — Nick Holland nancial technoloy startups alike, as they seek to improve Social Finance, where brand-building e orts have been

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018_ABM_0118 18 12/8/17 12:43 PM their reputations with a variety of stakeholders. complicated by the circumstances surrounding the recent Beware the hazards Consumers are an important target, but so are current ouster of CEO Mike Cagney. and prospective employees. Since its inception, SoFi has tried to convey that it of virtue signaling “Imagine telling your 22-year-old, fresh-out-of-Stanford, doesn’t just oer its upwardly mobile customers — or mem - computer science majors, ‘We’re going to start an amaz - bers, as it calls them — a lower interest rate on their stu - ing, disruptive ntech company, and it’s going to make a dent loans. The company also helps borrowers nd a new ton of money charging late fees,’ ” Max Levchin, chief ex - job and maybe even a date. ecutive of Arm, the San Francisco-based online lender, SoFi organizes happy hours, community dinners and said at an industry conference in October. “Unless you are speaker series, and getting customer buy-in depends on willing to provide an idealistic narrative, it’s actually very the premise that the San Francisco-based company is look- hard to disrupt Wall Street.” ing out for their interests. But there are risks for companies that embrace this sort “Community is critical to us to make the SoFi model of virtue signaling, particularly if their corporate cultures work,” Cagney said in a 2015 interview. do not match the public stories they have been telling about themselves. “In some cases, the rhetoric is stronger than the real - Want to attract those 22-year-old, ity,” warned Stephen Hahn-Griths, executive partner at fresh-out-of-Stanford, computer the Reputation Institute. One example is Wells Fargo. The San Francisco banking science majors? Providing “an giant’s onetime tagline — “Together we’ll go far” — implied idealistic narrative” is important, that its interests were aligned with those of its customers. says Max Levchin of Affirm. Then came a series of revelations about widespread misconduct at the $1.9 trillion-asset company. In the most high-pro le infraction, as many as 3.5 million accounts But recent allegations of sexual harassment at SoFi were suspected of being opened without customer autho - could make that message a tougher sell, particularly rization, as employees tried to hit aggressive sales targets. among women. “It was a frat house,” one former employee In another instance, Wells agreed to refund fees to told the New York Times. ou may have spotted a trend in the marketing mortgage customers who were improperly charged to In a Nov. 9 letter to SoFi shareholders, interim CEO Tom campaigns of nancial institutions in recent extend the period of time in which they had locked in a Hutton vowed to make internal changes. “The executive years. Advertisers seem just as eager to position speci c interest rate. And in a third case, the company team and I have taken a hard look at SoFi’s culture since Y themselves as being virtuous as they do to tout pledged to compensate customers who were overcharged these allegations, and frankly we see a lot of room for im - the bene ts of their products. They are do-gooders who for auto insurance. provement. We are launching a companywide initiative aim to help not just their customers, but the broader com - In each of these scandals, Wells padded its own bottom called ‘One SoFi’ to work with our entire team to de ne the munity. line by dipping into its customers’ pockets. And the public culture and values we want to embrace,” Hutton wrote. “We’ll give $150 to Stand Up to Cancer and $150 to you noticed. New checking account openings tumbled in late SoFi ultimately may have an easier time rehabbing its when you open a new checking account,” promises a Fifth 2016 and early 2017, after which point Wells stopped pub - image than Wells Fargo. That is partly because the online Third Bank commercial that is representative of the genre. licly reporting the data. lender’s scandal hasn’t resulted in harm to customers. And “Our mission is to make oshore wind one of the prin - This past spring, Wells unveiled a new ad slogan, it is partly because the 6-year-old company didn’t have a cipal new sources of enery,” a Citigroup banker declares “Building Better Every Day,” which hinted at the compa- well-established mass-market brand to tarnish. in another ad. ny’s problems and could be read as a promise to improve. Still, SoFi’s image as one of the hottest companies in The American public’s view of the nancial sector went “We betrayed your trust, and now it’s on us to earn it ntech has taken a hit. into free fall after the Great Recession, and this sort of back,” Wells Chief Executive Tim Sloan said in a video mes - The lesson is one that the entire nancial services in - image burnishing may help with those lingering negative sage to customers. dustry would do well to heed. “I think to be authentic, you perceptions. It’s an approach being tried by banks and - Another lender that nds itself in a marketing bind is can’t just talk, you also have to walk,” Hahn-Griths said.

nancial technoloy startups alike, as they seek to improve Social Finance, where brand-building eorts have been — Kevin Wack GETTYIMAGES.COM FROM IMAGES

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to replacing their core systems, because “core systems are big, Think of open source complex beasts with many facets,” said Robert Sears, global head of product for new digital businesses at BBVA Compass. as the future Still, some elements that “you might think of as ‘core’” can be handled using open-source software, said Sears. He cited message processing (via Apache Ka¦ a), data analysis (via Ten- anks, long committed to keeping customer data pri- sorFlow) and even the many databases that surround the trans- vate and their own code proprietary, are now open- action-processing core. ing up to ntechs and third-party developers in new Julien Courbe, a nancial services advisory leader at PwC, Bways. said he knows of ntechs that have developed core systems Open-source projects are underway at Deutsche Bank, based on open-source technoloy, though he declined to share which made code from its Autobahn commercial banking soft- speci c names. “We haven’t seen these systems being widely ware publicly available this fall, and JPMorgan Chase, whose deployed yet,” said Courbe. “However, these could be in the Quorum blockchain software is available in the open-source future very good deposit systems or core systems for a mobile- software repository GitHub. only bank.” As nancial institutions experiment with new technologies, “With Linux, people started writing code because they Even if traditional banks choose not to undertake the Hercu- more are expected to adopt open-source software in place of wanted to; they were not even paid to do this. It’s like a bunch lean task of restructuring their systems, insiders say that in the commercial applications. Some may even explore open-source of artists collecting outside a wall and starting to paint the wall next few years open source will become more prevalent in ar- development themselves, as it o ers access to a wider pool of because they want to show o their skills,” said Suresh Rama- eas like mobile app development. “The open-source phenom- developers who can not only work out bugs at no charge but murthi, chairman and chief technoloy o cer of the tech-for- enon allows you to reach vast numbers of people at zero entry write programs that will bene t bank customers. ward CBW Bank in Weir, Kan. cost with great products,” Ramamurthi said. “Banks have to The adoption of openness in all its forms is increasingly seen Linux continued to evolve through crowdsourcing, with oth- start thinking about how banking itself can be open-sourced.” as a necessity in a digital world. ers pointing out and resolving bugs in the code as they used the A global study by Accenture found that 99 of 100 payments software. Instead of a single company having to pour money The advantages of open source executives at major banks said their bank intends to make large into research and development, followed by quality assurance, The chief advantages of open-source software are standardiza- investments in open banking initiatives by 2020. Of those at “you got the best of everything with open source,” Ramamurthi tion and security, said Markus Geiss, the former chief technol- North American banks, 63% believe that a move toward open said. “You got the best guys who were motivated to write for oy of Mifos, an open-source software project aimed at nan- banking is essential to compete with ntech startups and large the sake of writing, other guys who were using it for the sake cial inclusion. technoloy rms, while 52% of all the executives surveyed said of using it, and testing it in every possible crazy scenario that The most successful open-source projects are those that they would be forced to adopt open banking practices to keep you can think of — and out comes a platform that you, as a large manage to attract a huge community of developers, and that up with other big banks, as a wave of digital transformation enterprise, can use.” means over time the software stands a good chance of becom- overtakes the industry as a whole. ing an industry standard, as Linux has. Perhaps surprisingly, nancial institutions are “viewing this A gateway drug Having so many eyes on the code — not only those of active opening up of the walls as an opportunity rather than a threat,” Open APIs may be a gateway drug for banks to delve into open developers but of outside parties as well — means that ª aws are said Brett Goode, a managing director in the nancial services source. CBW Bank has a marketplace, YLabs.io, where develop- spotted and xed. Transparency begets security. practice at Accenture. ers can go to build banking apps using CBW’s APIs. More than “Everybody can take a look at the code and see what’s hap- But something even more radical lies ahead. 250 developers, including some from the largest U.S. banks, are pening. So there’s some built-in trust already there,” Geiss said. This embrace of openness can — and, some experts say, using it, said Ramamurthi, who is an ex-Google engineer. Alex Waters, a former bitcoin quality assurance engineer should — go beyond peripheral tools and apps, to banks using The next step, he said, will be the bank letting people pub- who has consulted for banks, said the enhanced scrutiny could open-source software for their core banking systems one day. lish their apps and algorithms in the marketplace for others help nancial rms thwart cybercriminals. “Banks are the most Tech providers can show the way, at least in part. While to use. Some of those may be open source. “That allows us to targeted industry sector for hacking and phishing — more so banks are still leery of open-source software, the tech industry bring open source into the bank” without taking undue risk, than nation-states,” he said. “Generally speaking, open source has been relying on it for years. Open-source projects like Linux Ramamurthi said. “That’s the power of the sandbox.” will prove more secure for their banking activity.” have succeeded by harnessing the creativity of lots of individu- Other banks might nd their own ways to ease into open Though that is a controversial idea today, technoloy com- als across the globe. source. They can’t rush the transition, especially when it comes panies such as Facebook and Reddit “have open-sourced large

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020_ABM_0118 20 12/8/17 12:43 PM to replacing their core systems, because “core systems are big, portions of their applications, and it has helped a great deal complex beasts with many facets,” said Robert Sears, global with their security,” said Waters. “When data systems are open head of product for new digital businesses at BBVA Compass. to public review, there’s a higher bar of quality than what we’ve Still, some elements that “you might think of as ‘core’” can seen with closed systems. Closed systems tend to have signi- be handled using open-source software, said Sears. He cited cant attacks that go unnoticed for years, and that’s a problem.” message processing (via Apache Kaa), data analysis (via Ten- Open source also could solve the need banks have for faster, sorFlow) and even the many databases that surround the trans- more agile systems. “Modern banking products need high up- action-processing core. time and low response time, both of which can be directly ad- Julien Courbe, a nancial services advisory leader at PwC, dressed using open source,” said Sears. said he knows of ntechs that have developed core systems Used in the right places, open-source software can be devel- based on open-source technolo y, though he declined to share oped more quickly and with better features and reliability than specic names. “We haven’t seen these systems being widely commercial software, he said. deployed yet,” said Courbe. “However, these could be in the Ramamurthi pointed out that Linux is already being used as future very good deposit systems or core systems for a mobile- an operating system by some banks, having been smuggled in only bank.” under the guise of a trusted application from a vendor like Red “With Linux, people started writing code because they Even if traditional banks choose not to undertake the Hercu- Hat. “There’s already open-source software in banking, only wanted to; they were not even paid to do this. It’s like a bunch lean task of restructuring their systems, insiders say that in the banks don’t know it,” he said. of artists collecting outside a wall and starting to paint the wall next few years open source will become more prevalent in ar- because they want to show o their skills,” said Suresh Rama- eas like mobile app development. “The open-source phenom- ‘A new solution’ murthi, chairman and chief technolo y ocer of the tech-for- enon allows you to reach vast numbers of people at zero entry Out of the 20 or so banking conferences Waters has attended ward CBW Bank in Weir, Kan. cost with great products,” Ramamurthi said. “Banks have to in the past three years, he said he can’t remember open source Linux continued to evolve through crowdsourcing, with oth- start thinking about how banking itself can be open-sourced.” ever being a topic. But even if most banks have yet to acknowl- ers pointing out and resolving bugs in the code as they used the edge the value of this approach to software development, the software. Instead of a single company having to pour money The advantages of open source open-source community has already begun to penetrate the into research and development, followed by quality assurance, The chief advantages of open-source software are standardiza- banking industry. “you got the best of everything with open source,” Ramamurthi tion and security, said Markus Geiss, the former chief technol- Fineract is an open-source core banking system being de- said. “You got the best guys who were motivated to write for o y of Mifos, an open-source software project aimed at nan- veloped at the Apache Software Foundation. Originally focused the sake of writing, other guys who were using it for the sake cial inclusion. on micronance when it was started at the Grameen Founda- of using it, and testing it in every possible crazy scenario that The most successful open-source projects are those that tion 10 years ago, Fineract has since evolved to oer checking, you can think of — and out comes a platform that you, as a large manage to attract a huge community of developers, and that savings, lending and a general-ledger component, as well as in- enterprise, can use.” means over time the software stands a good chance of becom- come reporting functions and Know Your Customer tools. ing an industry standard, as Linux has. Having graduated from the Apache incubator in April 2017, A gateway drug Having so many eyes on the code — not only those of active Fineract is in use at about 100 nancial institutions across 37 Open APIs may be a gateway drug for banks to delve into open developers but of outside parties as well — means that ¢aws are countries, its software serving the needs of more than 7 million source. CBW Bank has a marketplace, YLabs.io, where develop- spotted and xed. Transparency begets security. people. The list includes banks, such as BTPN Syariah, a sharia- ers can go to build banking apps using CBW’s APIs. More than “Everybody can take a look at the code and see what’s hap- compliant subsidiary of BTPN, a retail bank in Indonesia. 250 developers, including some from the largest U.S. banks, are pening. So there’s some built-in trust already there,” Geiss said. “My end goal is Deutsche Bank is using it,” joked Geiss, a using it, said Ramamurthi, who is an ex-Google engineer. Alex Waters, a former bitcoin quality assurance engineer member of Fineract’s project management committee. The next step, he said, will be the bank letting people pub- who has consulted for banks, said the enhanced scrutiny could Geiss joined Fineract in 2014 as a volunteer. He was attract- lish their apps and algorithms in the marketplace for others help nancial rms thwart cybercriminals. “Banks are the most ed to it because, he said, there are 2 billion unbanked adults in to use. Some of those may be open source. “That allows us to targeted industry sector for hacking and phishing — more so the world who need basic nancial services. “My real goal for bring open source into the bank” without taking undue risk, than nation-states,” he said. “Generally speaking, open source Fineract is to get all of those 2 billion people banked,” he said. Ramamurthi said. “That’s the power of the sandbox.” will prove more secure for their banking activity.” None of the Fineract adopters are in the United States, and Other banks might nd their own ways to ease into open Though that is a controversial idea today, technolo y com- Geiss said that a large retail bank in the West today would not

source. They can’t rush the transition, especially when it comes panies such as Facebook and Reddit “have open-sourced large be able to use Fineract as it is, largely due to regulations. In GETTYIMAGES.COM FROM IMAGE

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less developed countries, which lack infrastructure, nancial 7Eleven and Sheetz. Other tech rms, including Apple and regulations are less daunting, he said. In Indonesia, Fineract Respond as the tech Samsung, o er their own payment apps. is working with regulators to shape the law and the software. It’s not clear what tech giants have in store next, but they Regulation also presents a barrier to open source in general. giants upend banking will likely push the limits of traditional nance. It’s not hard Swapping out a core system for open-source software would (They can do it without a charter) to imagine the Bank of Alexa, enabling customers to move make U.S. regulators queasy, said Ramamurthi. “By de nition, money and pay bills just by shouting at the Amazon Echo in the deck is stacked against open-source core banking,” he said. their living rooms. Geiss agreed, but perhaps because he lives overseas, he’s The barbarians aren’t at the gate anymore. They’re inside more optimistic about how the future might play out. “In ve the walls. years, some of the big banks will use an open-source core bank- Some see a massive break looming in the banking business. ing system,” he predicted. In a report issued in late 2017, McKinsey & Co. predicted The main reason is that they feel “trapped” by their current a split between “manufacturers” of banking, the core busi- core systems, unable to add features as quickly as they would ness of nancing and lending that is hard for tech rms to re- like, he said. “They’ve now reached a point where this is not place, versus “distributors,” the origination and sales side of working anymore. They need a new solution.” the business where outside competitors have an easier time entering the system. Mandate to change If banks e ectively end up as utilities to larger tech rms, Despite technical and regulatory obstacles and the nancial in- they will lose out. McKinsey forecasts manufacturing will pro- dustry’s traditional commitment to proprietary systems, banks duce only 35% of pro ts in nance, a return on equity of 4.4%. that don’t embrace open source could be left behind. Distribution, meanwhile, will produce 65% of pro ts, with a Challenges are coming from unexpected directions. Propo- return on equity of 20%. nents of bitcoin, which runs on open-source code, are “trying “As platform companies extend their tentacles into bank- to open-source and decentralize banking,” Ramamurthi said. ing, it is the rich returns of the distribution business they are In this new landscape, vendors that supply core banking here’s been a lot of noise over the past year around targeting,” McKinsey concluded. “And in many cases, they are systems might nd it di cult to adopt a more open-source whether ntech rms — or, more seriously, Silicon better positioned for distribution than banks are.” approach themselves. For open-source projects to work, they Valley behemoths like Amazon and Google — are go- Most experts agree that banks still have three key advan- have to motivate people to write code, and coders want to work T ing to make a run at owning a bank. tages: the sheer ability to manufacture nance, which isn’t on the latest, most exciting technoloy, not put “a bunch of The O ce of the Comptroller of the Currency moved easy for tech competitors; a mound of data on customers’ Band-Aids on something from 1990,” Ramamurthi said. ahead on its plan to o er a charter for nonbank ntech rms, nancial activities; and customer trust. Asked how vendors will respond to the rise of open-source and then-acting Comptroller Keith Noreika suggested that any “When it comes to customers’ decisions about where to core banking, Geiss said, “Right now I don’t see any response. rm could theoretically apply, a break from his predecessor. place their money, research shows that banks enjoy greater Seems a little bit like they’re simply ignoring it.” Amazon and PayPal executives even had meetings with the trust than tech companies,” the McKinsey report said. He theorized that open source could put vendors out of OCC over the past year, though whether they discussed the But tech companies are putting pressure on banks in all business in the next decade. But pressed on the point, he said charter was unclear. three areas. A recent survey by Bain & Co. put Amazon and vendors also might enhance open-source core systems, build in Lost in all this was an inescapable fact: Big tech rms like PayPal nearly as high as banks in levels of customer trust. speci c functions, just as Red Hat has done with its enterprise Amazon don’t need a charter to disrupt the banking industry. Remember that theoretical Bank of Alexa? More than 25% Linux operating system, and thus o er technical support and Indeed, they are already changing it. of U.S. respondents in the Bain survey said they would consid- system maintenance to big banks. “This is a classic missing the forest for the trees, looking at er using “voice-controlled assistants for their everyday bank- Falk Rieker, global head of SAP’s international banking unit, the charters,” said Karen Shaw Petrou, managing partner of ing.” And Amazon dominates that market. On Cyber Monday said he expects open source to evolve the way cloud technol- Federal Financial Analytics. “Who needs a charter? They can 2017 — the largest single shopping day in the company’s his- oy did, with adoption by banks increasing over time. o er the structural equivalent without one.” tory — the biggest-selling item was the Echo Dot, its entry- But he said a hybrid approach, where open source comple- Amazon has done more than $1 billion in small-business level Alexa speaker. That’s a lot of voice-controlled assistants ments enterprise standard software, is likeliest to emerge. lending since it rst started o ering loans. In 2017, it launched already sitting in bank customers’ homes. Asked whether major tech vendors would ever make their Amazon Cash, which e ectively allows it to take cash depos- Amazon, Google and Facebook are sitting on their own pile code open source, Rieker said, “Why not?” — Brian Patrick Eha its from customers via ubiquitous convenience stores like of data that includes everything from what customers already

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022_ABM_0118 22 12/8/17 12:43 PM 7Eleven and Sheetz. Other tech rms, including Apple and own to what they secretly covet (via searches online). There’s Respond as the tech Samsung, oer their own payment apps. no doubt that tech companies are eager to nd ways to exploit It’s not clear what tech giants have in store next, but they that information in the nancial services arena. giants upend banking will likely push the limits of traditional nance. It’s not hard Some analysts argue that banks have squandered their (They can do it without a charter) to imagine the Bank of Alexa, enabling customers to move data advantage. money and pay bills just by shouting at the Amazon Echo in “Who owns the customer?” asked Petrou. “Who owns the their living rooms. data? Banks assume they do. They haven’t capitalized on it.” The barbarians aren’t at the gate anymore. They’re inside So what can banks do in the shadow of Amazon and oth- the walls. ers’ moves into their business? Some see a massive break looming in the banking business. In a report issued in late 2017, McKinsey & Co. predicted “Who needs a charter? They can a split between “manufacturers” of banking, the core business of nancing and lending that is hard for tech rms to re- offer the structural equivalent place, versus “distributors,” the origination and sales side of without one,” Karen Shaw Petrou the business where outside competitors have an easier time says of the competitive threat entering the system. If banks eectively end up as utilities to larger tech rms, posed by Amazon and Google. they will lose out. McKinsey forecasts manufacturing will produce only 35% of pro ts in nance, a return on equity of 4.4%. For one, they can stop focusing on distracting ghts about Distribution, meanwhile, will produce 65% of pro ts, with a bank charters. Federal regulators are unlikely to grant one to return on equity of 20%. a Silicon Valley rm in any case — and those rms don’t need “As platform companies extend their tentacles into bank- one to take away business from banks. ing, it is the rich returns of the distribution business they are More important, banks must stay in the forefront of cus- here’s been a lot of noise over the past year around targeting,” McKinsey concluded. “And in many cases, they are tomers’ minds. In consumer trust, they are still winning. And whether ntech rms — or, more seriously, Silicon better positioned for distribution than banks are.” while that advantage is eroding, it’s not gone yet. And for Valley behemoths like Amazon and Google — are go- Most experts agree that banks still have three key advan- tougher credits, it may never fade. T ing to make a run at owning a bank. tages: the sheer ability to manufacture nance, which isn’t “Small banks succeed because they are in their commu- The O§ce of the Comptroller of the Currency moved easy for tech competitors; a mound of data on customers’ nities dealing with the tough credit issues that nobody else ahead on its plan to oer a charter for nonbank ntech rms, nancial activities; and customer trust. wants to solve,” said Howard Headlee, the head of the Utah and then-acting Comptroller Keith Noreika suggested that any “When it comes to customers’ decisions about where to Bankers Association. “Amazon and Google aren’t going to do rm could theoretically apply, a break from his predecessor. place their money, research shows that banks enjoy greater that.” Amazon and PayPal executives even had meetings with the trust than tech companies,” the McKinsey report said. Banks also need to continue innovating. Customers want OCC over the past year, though whether they discussed the But tech companies are putting pressure on banks in all to go to tech rms only if they are oering something they charter was unclear. three areas. A recent survey by Bain & Co. put Amazon and can’t get at their own bank. Lost in all this was an inescapable fact: Big tech rms like PayPal nearly as high as banks in levels of customer trust. Even McKinsey said banks are making strides there. Both Amazon don’t need a charter to disrupt the banking industry. Remember that theoretical Bank of Alexa? More than 25% JPMorgan Chase and Wells Fargo recently launched mobile- Indeed, they are already changing it. of U.S. respondents in the Bain survey said they would consid- only banking apps with an emphasis on making it easier for “This is a classic missing the forest for the trees, looking at er using “voice-controlled assistants for their everyday bank- customers to interact. the charters,” said Karen Shaw Petrou, managing partner of ing.” And Amazon dominates that market. On Cyber Monday Through strategic partnerships and a focus on customer Federal Financial Analytics. “Who needs a charter? They can 2017 — the largest single shopping day in the company’s his- service, banks may not be out of the running yet — with or oer the structural equivalent without one.” tory — the biggest-selling item was the Echo Dot, its entry- without Amazon or Google trying to enter the business. Amazon has done more than $1 billion in small-business level Alexa speaker. That’s a lot of voice-controlled assistants “It is not too far-fetched to imagine a day when banks will lending since it rst started oering loans. In 2017, it launched already sitting in bank customers’ homes. oer a range of services, reach a vastly larger customer base, Amazon Cash, which eectively allows it to take cash depos- Amazon, Google and Facebook are sitting on their own pile and succeed at their digital rivals’ game,” McKinsey said in the

its from customers via ubiquitous convenience stores like of data that includes everything from what customers already report. — Rob Blackwell GETTYIMAGES.COM FROM IMAGE

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Salt Lending has built a mechanism for collateralized lending See blockchain put based on value being stored in a smart contract on a blockchain. This could be a security, a bond, a property, a title, data, or gold peers back in P2P — anything that could be used as collateral. The asset has to have been digitized and recorded on a blockchain. For instance, some gold storage houses and banks that he original premise of online peer-to-peer lending plat- store gold are representing it on a distributed ledger. The platforms was simple and democratic: a single mom from form is mostly built on a bitcoin and ethereum blockchain. Kalamazoo, Mich., could post her story explaining why Salt Lending is not currently using a peer-to-peer model. It’s T she needed $5,000 to pay o her credit card, and a re- more akin to securities-backed lending and is designed for lend- tired electrician in Illinois could read it, decide to fund her loan, ers like banks. The company’s website says it can provide fast and receive interest far exceeding what he could get on his sav- approval of loans with no credit checks. ings account. “Because we’re taking the senior position on the assets on LendingClub and others that pro ered this people-helping- behalf of the lender, if the contract is compromised in any way, people model quickly found they needed to make changes. A few startups are creating platforms to o er secured loans you don’t have to go after second forms of repayment, because They turned to large institutions to buy the loans in bulk. on a blockchain. Celsius is building a person-to-person lending we already have the primary source of repayment in posses- Is it possible that blockchain or distributed ledger technol- platform on a blockchain for people who are holding digital as- sion,” said John Allen, Salt Lending’s chief executive. oy — a mechanism through which many parties share a record sets, such as ethereum and bitcoin, for the long term. These Banks could fund loans on the network, or they could use of transactions and supporting documents — could be used to people are sometimes called “hodlers.” (Apparently this term Salt Lending’s technoloy and license the ability to manage the revive the original idea of P2P lending? was started by a Reddit post that went viral; it was titled “I am collateral through the contract with their customers. Eric Piscini, a principal in banking and technoloy at Hodling,” with a misspelling of “holding” that the writer ac- “Ultimately it’s around allowing them to service their exist- Deloitte Consulting, suggests that blockchain technoloy could knowledged.) ing borrower base or client base in a new way, where many of bring a return to the way people got funding even before banks This could be particularly appealing for millennials. In a re- their clients may have digital assets and would be interested in existed. “Blockchain is a way to go back in history, because when cent Harris Poll, 27% of millennials said they would rather own using those as collateral for dollar-denominated loans, in the you think about the way we were lending, the way we were pay- $1,000 of bitcoin than $1,000 worth of stocks. Among male mil- same way they do with stock portfolios,” said Gregg Bell, chief ing, the way we were trusting each other, it was peer-to-peer. lennials, 38% said they prefer bitcoin. operating o¦ cer at Salt Lending. Over time we added intermediaries and third parties because Through the Celsius platform, such cryptocurrency inves- Salt Lending has several bank partnerships in the works, Al- we stopped trusting each other,” he said. tors will be able to earn interest on their holdings while Celsius len said. Blockchain or distributed ledger technoloy makes it pos- uses them as collateral for consumer loans. In blockchain-based lending, the identity veri§ cation and sible to transfer ownership of an asset from one person to an- “If you really like ethereum long term, you’re willing to lend credit scoring process banks go through today could be replaced other, without the need for an intermediary. it out but you don’t want to sell it,” said David Brill, founder of with a “distributed reputation” system and a “distributed iden- “I can say, ‘Here’s the original copy of the document, and I’m Celsius. On the other side of the equation, “the borrower gets an tity” system, Sinha said. transferring ownership to you and I don’t have the original any- opportunity to get capital at a lower interest rate.” Part of a distributed reputation system would be “social in- more,’ ” said Subhankar Sinha, director and co-founder of the Celsius’s proprietary algorithm creates a credit score that’s telligence,” he said. “There are currently a lot of lenders who blockchain practice at PwC. “In the current world it’s possible presented through the platform to potential lenders. “We will are using social intelligence and other data points in addition to to do the transfer of ownership, but we require a trusted third give positive weight to someone who, for instance, is a good credit score,” Sinha said. party to record the transfer.” Amazon or eBay merchant,” Brill said. Celsius, for instance, collects data from social media sites And where today intermediaries are needed to manage The volatility of the underlying digital currencies doesn’t af- as part of its credit-scoring algorithm. Reputation information credit risk and service loans, those also could be replaced with fect the loans, Brill said. If a digital currency is worth $100 and from Yelp has been known to correlate with revenue for a small distributed ledgers. the owner agrees to lend it out at 7% interest for a year, and if business. “You can create a smart contract on a public utility block- the value of the digital currency drops during that year, the ef- “What a credit score largely ignores is social and other be- chain, and you don’t have to trust a third party for execution of fective interest rate would be higher than 7%, because the loan haviors, which also re¨ ect on a person’s creditworthiness,” that contract,” Piscini said. “That’s a very appealing low-cost, is locked in at the price and rate on the date it was made. Sinha said. “If we can combine the notion of § nancial behavior high-trust platform that you can build that you couldn’t build Celsius is testing its platform internally. “We’re being deliber- and social behavior together and attach it with a person’s iden- before.” ate about not rolling it out until it’s mature,” Brill said. tity but let individuals be in control of their data, it solves quite

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024_ABM_0118 24 12/8/17 12:44 PM Salt Lending has built a mechanism for collateralized lending a few problems.” based on value being stored in a smart contract on a blockchain. Under this model there would be less need for centralized This could be a security, a bond, a property, a title, data, or gold identity data stores such as those maintained by credit rating — anything that could be used as collateral. agencies, which are a big target for cyberattacks. The asset has to have been digitized and recorded on a block- Another startup, Bloom, is developing an identity protocol chain. For instance, some gold storage houses and banks that and credit score that runs on a blockchain. The user submits in- store gold are representing it on a distributed ledger. The plat- formation to the network, like name, address, and phone num- form is mostly built on a bitcoin and ethereum blockchain. ber. Bloom’s articial intelligence engine learns more about the Salt Lending is not currently using a peer-to-peer model. It’s person and their creditworthiness over time. more akin to securities-backed lending and is designed for lend- The many obstacles to be overcome to enable person-to-per- ers like banks. The company’s website says it can provide fast son lending on a blockchain include adherence to know- your- approval of loans with no credit checks. customer rules, establishing and verifying identities, onboard- “Because we’re taking the senior position on the assets on ing new customers, determining creditworthiness, monitoring behalf of the lender, if the contract is compromised in any way, customers and collecting on the loans. A few startups are creating platforms to o er secured loans you don’t have to go after second forms of repayment, because Lenders have strict KYC and anti-money-laundering rules to on a blockchain. Celsius is building a person-to-person lending we already have the primary source of repayment in posses- follow. How do you truly “know” a customer with whom you platform on a blockchain for people who are holding digital as- sion,” said John Allen, Salt Lending’s chief executive. only interact over a blockchain? sets, such as ethereum and bitcoin, for the long term. These Banks could fund loans on the network, or they could use Alex Mashinsky, CEO and founder of Celsius, said his com- people are sometimes called “hodlers.” (Apparently this term Salt Lending’s technoloy and license the ability to manage the pany has an extensive KYC/AML process that analyzes where a was started by a Reddit post that went viral; it was titled “I am collateral through the contract with their customers. borrower or lender is from, checks names against known lists, Hodling,” with a misspelling of “holding” that the writer ac- “Ultimately it’s around allowing them to service their exist- and veries many data points, looking for inconsistencies. knowledged.) ing borrower base or client base in a new way, where many of “If you try to transfer coins from CoinBase, our system gives This could be particularly appealing for millennials. In a re- their clients may have digital assets and would be interested in you a higher score and passes you with fewer questions than if cent Harris Poll, 27% of millennials said they would rather own using those as collateral for dollar-denominated loans, in the you are trying to transfer from an unknown source, or worse, a $1,000 of bitcoin than $1,000 worth of stocks. Among male mil- same way they do with stock portfolios,” said Gregg Bell, chief questionable one,” Mashinsky said. lennials, 38% said they prefer bitcoin. operating ocer at Salt Lending. Another tricky aspect of lending on a blockchain, if crypto- Through the Celsius platform, such cryptocurrency inves- Salt Lending has several bank partnerships in the works, Al- currency is being used as collateral (as so far it typically is), is tors will be able to earn interest on their holdings while Celsius len said. assessing its value. “If you lend against bitcoin today, bitcoin is uses them as collateral for consumer loans. In blockchain-based lending, the identity verication and so volatile, how do you do a margin call and so on?” Sinha said. “If you really like ethereum long term, you’re willing to lend credit scoring process banks go through today could be replaced “Those are the details that a lot of people on Wall Street know it out but you don’t want to sell it,” said David Brill, founder of with a “distributed reputation” system and a “distributed iden- how to handle in the current nancial system.” Celsius. On the other side of the equation, “the borrower gets an tity” system, Sinha said. Piscini predicts that blockchain technoloy alone may trigger opportunity to get capital at a lower interest rate.” Part of a distributed reputation system would be “social in- a new wave of peer-to-peer lending, minus the use of cryptocur- Celsius’s proprietary algorithm creates a credit score that’s telligence,” he said. “There are currently a lot of lenders who rency. presented through the platform to potential lenders. “We will are using social intelligence and other data points in addition to That leaves the problem LendingClub discovered — that it give positive weight to someone who, for instance, is a good credit score,” Sinha said. can be hard to do enough volume to make money with so many Amazon or eBay merchant,” Brill said. Celsius, for instance, collects data from social media sites small transactions. “LendingClub was not making a lot of mon- The volatility of the underlying digital currencies doesn’t af- as part of its credit-scoring algorithm. Reputation information ey until they started to bring in large investors and a secondary fect the loans, Brill said. If a digital currency is worth $100 and from Yelp has been known to correlate with revenue for a small market,” Piscini said. the owner agrees to lend it out at 7% interest for a year, and if business. Another challenge is collecting on loans made on a block- the value of the digital currency drops during that year, the ef- “What a credit score largely ignores is social and other be- chain. This will test the legality of smart contracts. fective interest rate would be higher than 7%, because the loan haviors, which also re¡ect on a person’s creditworthiness,” “I don’t think courts in any country are recognizing smart is locked in at the price and rate on the date it was made. Sinha said. “If we can combine the notion of nancial behavior contracts as a valid way to do business,” Piscini said. “So you Celsius is testing its platform internally. “We’re being deliber- and social behavior together and attach it with a person’s iden- still have to write something down and use documents, or you

ate about not rolling it out until it’s mature,” Brill said. tity but let individuals be in control of their data, it solves quite expose yourself to not being paid.” — Penny Crosman GETTYIMAGES.COM FROM IMAGE

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slightly di erent vision; he pictures banks o ering omnichan- Design the ultimate — nel virtual assistants in the future. Using an omnichannel nancial assistant, for instance, a customer could ask Alexa and ubiquitous — for a list of transactions that occurred in November and Alexa might respond with a summary and o er to send transactions virtual assistant to the user’s mobile app. Or a customer could inquire about a mortgage application on a mobile device during lunch hour and complete this process with a web-based assistant in the he commerce platforms that let people bank and pay evening while working on a laptop. for things with their voice get more capable every day. “Incidentally, omnichannel virtual assistants — not Face- Google Home can now do two tasks at once, such book Messenger chatbots or Alexa skills — are exactly what T as answer two questions simultaneously or turn on we get asked about by the most digitally advanced banks,” lights in two rooms. Amazon is teaching its Alexa virtual as- Gorelov said. sistant to o er personalized responses when it recognizes a There are at least two big hurdles to the idea of a ubiq- customer’s voice. uitous virtual assistant. One is, the major platform providers But the ultimate virtual assistant would be personalized (Amazon, Google, Apple, Facebook, etc.) would need to agree and work on any device, Brett King posited in a recent episode on a standard, work with each other, or work with a third par- of his “Breaking Banks” podcast. programs for the primary virtual assistant technologies that ty or abstraction layer to make their platforms interoperable. “I want to be able to call my smart assistant — say he’s exist today, with the eventual hope of providing consistent Each of the tech biggies is likely to want to own the sole named Alfred — whether I’m in my car using Siri or at home service across all devices, said Gareth Gaston, its executive operating system that interacts on any device. using Google Home or at the o ce using Alexa,” King said. “I vice president of omnichannel. “The question is, at what point is there regulation or con- want Alfred to be able to answer me and know me. He should The bank has an Alexa Skill it launched in September that trol around the platform and the providers, like we’ve got in know who I am just based on my voice pattern.” customers can use to check balances on their checking, sav- telecom and other industries,” Gibson said. “I think that’s to Some bankers have a similar vision. ings or credit card accounts; hear payment due dates and the be determined.” “We believe longer term that there will be a much higher amount due; obtain account transaction history; and make If the tech giants are able to nd common ground, it could order of connectivity across devices and forms of interaction,” payments to U.S. Bank credit cards. open up all sorts of new opportunities for consumers. Gibson Zach Gibson, the chief innovation o cer at USAA, said in an Bank of America is taking a more cautious approach. In pointed to the example of If This, Then That, a free web-based interview. early December it announced an integration with Apple’s service that can be used to create chains of simple conditional Gibson said he foresees virtual assistants extending beyond Siri virtual assistant that allows customers to say, “Hey, Siri, statements that can be used to connect actions across di er- the intelligent speakers and smartphones they run on today to what’s my checking balance?” ent devices. work across not just all devices but essentially everything, in- But for now, the bank is sharing only basic account infor- “You can say, ‘If I get this deposit, then move it here,’ or ‘If cluding countertops and walls. mation on conversational commerce platforms. my savings goes below a certain amount, turn the lights in my A user could interact with the kitchen countertop to nd “We have to study and understand the security of the data, house red,’ ” Gibson said. “Consumers will expect the devices a recipe, get the morning’s news, and check a bank balance. what’s being exchanged where,” said Michelle Moore, the to be much more connected than they are today and have it all Smart appliances and thermostats could also be connected. head of digital banking at Bank of America. be much easier to use.” “If my home is telling me I can change the thermostat or al- “To ask basic questions around what’s my checking bal- Some enterprising vendor could come up with an abstrac- ter my enery usage, and that means I can save $10 per month, ance, that’s innocuous. If you want to get into some very com- tion layer that communicates with all the di erent platforms can I then take that $10 per month and use that to pay o my plex transactions, we need you to come back to the mobile as well as the entities providing data and handling transac- credit card bill or save for retirement or save for my children’s app. So integration with Siri, Alexa, Google Home, Facebook tions. But security could be an issue. “People will hack into education?” Gibson said. “I think consumers will continue to — we’d like to let our customers bank where they want to bank anything on a Wi-Fi network,” Gibson said. expect and demand ease of use and a level of connectivity that but it only can be done if it’s done soundly.” For security reasons, USAA limits what customers can do always is two or three steps ahead of where the technoloy is.” Asked if some day, the bank’s virtual assistant, erica, will on Amazon Alexa to checking balances and inquiring about So far USAA has an Alexa Skill powered by Clinc’s voice talk to Alexa, Siri, and their ilk, Moore said, “I don’t see why spending; they can’t execute transactions. recognition and response system. not. I do see it as a multiphased journey.” Dave Orban, the managing partner at Network Society U.S. Bank has a similar view of the future. It is developing Zor Gorelov, founder and chief executive of Kasisto, has a Ventures, suggested that the platforms o ered by the tech

26 AMERICAN BANKER JANUARY 2018 JANUARY 2018 AMERICAN BANKER 27

026_ABM_0118 26 12/8/17 12:44 PM slightly dierent vision; he pictures banks oering omnichan- giants could converge the way personal computer operating nel virtual assistants in the future. Using an omnichannel systems did in the ’90s, adopting similar graphical user inter- nancial assistant, for instance, a customer could ask Alexa faces so when a user double-clicks on a button, for instance, for a list of transactions that occurred in November and Alexa the consequence is the same. might respond with a summary and oer to send transactions “It didn’t matter if you were on Microsoft Windows or Ma- to the user’s mobile app. Or a customer could inquire about cintosh. It took a bit of time but the platforms converged be- a mortgage application on a mobile device during lunch hour cause it was to their advantage not to put barriers to the users and complete this process with a web-based assistant in the moving from one to another,” Orban said. “Interoperability is evening while working on a laptop. important, but it is even more important for developers. The “Incidentally, omnichannel virtual assistants — not Face- platforms themselves would like to capture the developers book Messenger chatbots or Alexa skills — are exactly what and say, no, please only develop for Google Home or Alexa or we get asked about by the most digitally advanced banks,” Siri. But in the long run, that is an untenable position.” Gorelov said. Ron Shevlin, director of research at Cornerstone Advisors, There are at least two big hurdles to the idea of a ubiq- predicts that core software providers and other ntech rms uitous virtual assistant. One is, the major platform providers will provide that integration capability. “Banks can’t maintain (Amazon, Google, Apple, Facebook, etc.) would need to agree separate systems for each device,” he said. on a standard, work with each other, or work with a third par- Amazon said it’s making some eort toward interoperabil- programs for the primary virtual assistant technologies that ty or abstraction layer to make their platforms interoperable. ity. In its vision for the future, “there are going to be many exist today, with the eventual hope of providing consistent Each of the tech biggies is likely to want to own the sole successful AIs with access to dierent sets of data and with dif- service across all devices, said Gareth Gaston, its executive operating system that interacts on any device. ferent specialized skill areas,” said spokeswoman Dawn Brun. vice president of omnichannel. “The question is, at what point is there regulation or con- She noted Amazon recently announced that Alexa will be The bank has an Alexa Skill it launched in September that trol around the platform and the providers, like we’ve got in able to talk to Cortana, Microsoft’s virtual assistant, which customers can use to check balances on their checking, sav- telecom and other industries,” Gibson said. “I think that’s to runs on Windows 10 and Windows Phone, and that Cortana ings or credit card accounts; hear payment due dates and the be determined.” will be able to talk to Alexa. amount due; obtain account transaction history; and make If the tech giants are able to nd common ground, it could Google and Apple did not respond to interview requests. payments to U.S. Bank credit cards. open up all sorts of new opportunities for consumers. Gibson The other big integration hurdle is getting nancial institu- Bank of America is taking a more cautious approach. In pointed to the example of If This, Then That, a free web-based tions to agree on or share a platform, so that customers can early December it announced an integration with Apple’s service that can be used to create chains of simple conditional conduct transactions at dierent institutions within the one Siri virtual assistant that allows customers to say, “Hey, Siri, statements that can be used to connect actions across dier- virtual assistant. Gibson said consumers will demand this. what’s my checking balance?” ent devices. “As a consumer, I have accounts in dierent places, but ul- But for now, the bank is sharing only basic account infor- “You can say, ‘If I get this deposit, then move it here,’ or ‘If timately I want to see them all together — how I save money, mation on conversational commerce platforms. my savings goes below a certain amount, turn the lights in my spend money, how I invest money are all connected regard- “We have to study and understand the security of the data, house red,’ ” Gibson said. “Consumers will expect the devices less of which institution I choose to do that with,” he said. what’s being exchanged where,” said Michelle Moore, the to be much more connected than they are today and have it all “If I’m going to interact with my countertop in my kitchen, head of digital banking at Bank of America. be much easier to use.” I don’t care if I have an account at USAA or some other rm, “To ask basic questions around what’s my checking bal- Some enterprising vendor could come up with an abstrac- I’m going to want to see them together so I can make the best ance, that’s innocuous. If you want to get into some very com- tion layer that communicates with all the dierent platforms nancial decision.” plex transactions, we need you to come back to the mobile as well as the entities providing data and handling transac- It’s unlikely, though, that any interface will work across all app. So integration with Siri, Alexa, Google Home, Facebook tions. But security could be an issue. “People will hack into nancial institutions unless there is regulatory intervention, — we’d like to let our customers bank where they want to bank anything on a Wi-Fi network,” Gibson said. said Shevlin. but it only can be done if it’s done soundly.” For security reasons, USAA limits what customers can do Here again, an abstraction layer may need to be developed Asked if some day, the bank’s virtual assistant, erica, will on Amazon Alexa to checking balances and inquiring about that lets virtual assistants interact with multiple nancial talk to Alexa, Siri, and their ilk, Moore said, “I don’t see why spending; they can’t execute transactions. institutions. not. I do see it as a multiphased journey.” Dave Orban, the managing partner at Network Society “This space is ripe for new entrants and players, in addi-

Zor Gorelov, founder and chief executive of Kasisto, has a Ventures, suggested that the platforms oered by the tech tion to more established rms,” Gibson said. — Penny Crosman SHUTTERSTOCK.COM

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027_ABM_0118 27 12/8/17 12:44 PM MEET & GREETPEOPLE

PEOPLE MARGARET TO WATCH KEANE Keane, Synchrony Financial’s CEO, is intent on keeping up with changes in Ameri- can spending habits, and a recently announced partner- © 2017 Bloomberg Finance LP 2018 ship with PayPal’s consumer- lending arm is bound to help. Consumers use PayPal Credit MATT ZAMES When Zames stepped down this to nance big-ticket items JACK DORSEY summer as JPMorgan Chase’s they purchase online and Dorsey, the internet wunderkind who is chief operating of cer, he said that Synchrony is set to become the co-founder and chief executive of both he wanted to run his own business the exclusive issuer of PayPal Twitter and Square, is at the center of – either in traditional nance or in Credit for the next 10 years. the debate over whether tech companies ntech. He has yet to re-emerge in This gives Synchrony a new way to reach consumers at a time when store- should be allowed to become banks. If the industry, but speculation has branded credit cards — its main business — are losing appeal, particularly Square’s application to charter an indus- been that he will join the growing among younger generations. But the move comes with some risk, as trial loan company is successful — over list of former Jamie Dimon protégés nearly half of PayPal’s $6 billion of outstanding loans are to borrowers community banks’ vigorous objections who have become CEOs elsewhere. with credit scores below 680. Another reason Keane is worth watching: — other challengers from the tech sector They include Charlie Scharf, rst at HSBC is said to be looking to acquire a U.S. credit card business and one could follow. The fate of the payment pro- Visa and now at BNY Mellon, and of its rumored targets is Synchrony. cessor’s application rests with the Federal Jes Staley, at Barclays. For now, Deposit Insurance Corp., which for years Zames has taken a role in academia, has been perceived as being skeptical of as an executive in residence at his allowing new ILCs, but could be more alma mater, MIT’s Sloan School of amenable now that it has Republican- CHARLIE SCHARF AND Management. appointed leadership. MICHAEL O’GRADY Two of the three U.S. custody banks will have new CEOs in 2018 and both men will be fac- John Ciulla ing similar challenges. Charlie Scharf, who has For the rst time in its 82-year history, Webster Financial in Water- been CEO at Bank of New York Mellon since July, bury, Conn., is getting a CEO whose surname is not Smith. Ciulla, and Michael O’Grady, who becomes the CEO Webster’s president, succeeds longtime CEO James Smith as of at Northern Trust as of Jan. 1, are both tasked Jan. 1. It’s a milestone moment for the $26 billion-asset company, with determining how to best use technoloy which was founded as the First Federal Savings and Loan of Water- to increase eciency. Scharf was hired in part bury in 1935 by Smith’s dad, Harold due to his ntech background, as BNY Mellon Webster Smith, who was only 24 at aims to continue the time. He ran the bank for more Scharf former CEO Gerald than 50 years before his son took Hassell’s digitalization of its operations, over in 1987 and proceeded to grow including the use of robotic process auto- it from a local thrift to a regional com- mation. Northern Trust was one of the rst mercial bank. Ciulla joined Webster in companies to use IBM’s blockchain, but only 2004 when it was still largely a thrift, to manage private-equity transactions, a low- and among his key contributions has volume business. Perhaps Northern Trust been expanding its commercial lend- will be able to nd other uses for blockchain ing capabilities. As is the case with technoloy, like processing hundreds of many regionals trying to compete thousands of transactions. with larger rivals, keeping the mo- O’Grady

Photo by David Yellen mentum going will be a big challenge.

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028_ABM0118 28 12/8/2017 10:11:51 AM TERRY TURNER Turner, the CEO of Pinnacle Financial in Nashville, must have a deal in mind for 2018, right? Pinnacle was fairly big in Tennessee, and then in June it bought BNC Bancorp in High Point, N.C., increas- Keane, Synchrony Financial’s ing its asset size by two-thirds. That deal put the CEO, is intent on keeping now $22 billion-asset Pinnacle on a larger playing up with changes in Ameri- eld and raised questions about whether it would can spending habits, and a expand in North Carolina, Virginia (where it has a recently announced partner- small presence) or elsewhere in the Southeast. The company is eyeing “strategic © 2017 Bloomberg Finance LP ship with PayPal’s consumer- target markets” like Atlanta, Richmond and Virginia Beach for banks that have lending arm is bound to help. at least $1 billion of assets, specialize in commercial lending and meet other Consumers use PayPal Credit MATT ZAMES criteria. Turner is particularly interested in metropolitan Atlanta, but noted When Zames stepped down this to nance big-ticket items that, with the number of targets there limited, de novo expansion is possible. summer as JPMorgan Chase’s they purchase online and chief operating of cer, he said that Synchrony is set to become he wanted to run his own business the exclusive issuer of PayPal – either in traditional nance or in CRAIG DAHL Credit for the next 10 years. ntech. He has yet to re-emerge in Dahl has made some pivotal changes since succeed- This gives Synchrony a new way to reach consumers at a time when store- the industry, but speculation has ing longtime CEO Bill Cooper at TCF Financial in branded credit cards — its main business — are losing appeal, particularly been that he will join the growing Wayzata, Minn., in 2016. In May TCF said it would among younger generations. But the move comes with some risk, as list of former Jamie Dimon protégés stop selling its auto originations to minimize volatil- nearly half of PayPal’s $6 billion of outstanding loans are to borrowers who have become CEOs elsewhere. ity in fee income, and then in November it said it with credit scores below 680. Another reason Keane is worth watching: They include Charlie Scharf, rst at would exit auto lending altogether. The big ques- HSBC is said to be looking to acquire a U.S. credit card business and one Visa and now at BNY Mellon, and tion is about Dahl’s next move: Will he be able to of its rumored targets is Synchrony. Jes Staley, at Barclays. For now, replace a business that was 17% of TCF’s loan book Zames has taken a role in academia, and produced lots of noninterest income, or will he as an executive in residence at his put the $23 billion-asset company on the block? alma mater, MIT’s Sloan School of CHARLIE SCHARF AND Management. MICHAEL O’GRADY Elizabeth Two of the three U.S. custody banks will have Duke new CEOs in 2018 and both men will be fac- John Ciulla Duke’s mission as the new ing similar challenges. Charlie Scharf, who has For the rst time in its 82-year history, Webster Financial in Water- chairman of Wells Fargo is been CEO at Bank of New York Mellon since July, bury, Conn., is getting a CEO whose surname is not Smith. Ciulla, clear: Get the embattled and Michael O’Grady, who becomes the CEO Webster’s president, succeeds longtime CEO James Smith as of bank off watch lists like at Northern Trust as of Jan. 1, are both tasked Jan. 1. It’s a milestone moment for the $26 billion-asset company, this for a while. Every time with determining how to best use technoloy which was founded as the First Federal Savings and Loan of Water- things at Wells nally seem to increase eciency. Scharf was hired in part bury in 1935 by Smith’s dad, Harold to quiet down, news of a due to his ntech background, as BNY Mellon Webster Smith, who was only 24 at new problem or enforce- aims to continue the time. He ran the bank for more Scharf ment action surfaces. Duke former CEO Gerald than 50 years before his son took and the rest of the board Hassell’s digitalization of its operations, over in 1987 and proceeded to grow — as of Jan. 1, six of its 16 including the use of robotic process auto- it from a local thrift to a regional com- members will have arrived mation. Northern Trust was one of the rst mercial bank. Ciulla joined Webster in after the phony-accounts companies to use IBM’s blockchain, but only 2004 when it was still largely a thrift, scandal broke — will be under pressure to show to manage private-equity transactions, a low- and among his key contributions has tangible signs that they have reshaped corporate volume business. Perhaps Northern Trust been expanding its commercial lend- governance and made progress on rebuilding trust will be able to nd other uses for blockchain ing capabilities. As is the case with with employees and customers. But is Duke, a technoloy, like processing hundreds of many regionals trying to compete former banker and Federal Reserve Board gover- thousands of transactions. with larger rivals, keeping the mo- nor, independent enough to do what’s necessary?

Photo by David Yellen mentum going will be a big challenge.

28 AMERICAN BANKER JANUARY 2018 JANUARY 2018 AMERICAN BANKER 29

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