1: CAST SERVICE HIGHLIGHT

2: AMERICAN BANKER - After Decades Spent Building a Practice,...

...RIAs Could Get Rude Awakening

American Banker  Wednesday, June 16, 2010

By Donna Mitchell

Most registered investment advisers spend decades building a practice based on a solid reputation with a core clientele.

But principals of RIA and wealth management firms who hope to eventually sell their businesses and retire comfortably are in for a rude awakening. For despite those client relationships, the firms still lack the enterprise value to make a deal worthwhile to the owner, according to Mark Hurley, president and chief executive officer of Fiduciary Network of Dallas.

In "Creating, Measuring and Unlocking Enterprise Value in a Wealth Manager," a report released Monday, Hurley gives advisers a wake-up call about their real prospects for a payoff after years of working on their businesses.

One illustration indicates, hypothetically, what would happen if a roll-up firm did an initial public offering to monetize its investment in a wealth management practice. Out of a potential $450 million in enterprise value, the principal ends up with just $98 million from the deal.

A lot of wealth management firms are unprofitable so-called lifestyle practices, Hurley said. After covering the firm's expenses, the owner's earnings fall short of the prevailing market salary he or she would earn as an employee at a larger firm. They end up subsidizing the practice with their labor.

"In terms of finding someone to replace you and make less, they won't step into your shoes for the pleasure of doing that," he said.

Hurley, who has a reputation for generating controversy, points out what he says are specific shortcomings to the fee-based and fee-only business models dominating the industry. Many firms that collect fees nevertheless have to sell products to remain profitable. Also, there is no empirical evidence that suggests that a fee-based firm's client list is transferable to successors. Therefore, the fee-based firms have no transferable goodwill, which is the intangible asset that carries enterprise value.

But the report did highlight an area where the fee-only model could redeem itself. It generates exceptionally stable revenue streams, with relatively low annual client turnover rates, between 1% and 3%. That suggests the average tenure of client relationships will start at 33 years, so they stand to generate a "staggeringly large" fee stream over a single client relationship.

To be sustainable and transferable, firms must create a consistently high level of service that does not rely on the founder or senior partners, Hurley said. There are seven critical steps. First, recruit and retain successors, and give them clearly defined career paths. Next, institutionalize the firm's relationships so that clients associate the brand with the entire company and not just the founder. Third, build a client base that is profitable -- and demographically diverse. Next, market the firm as a brand that has evolved from the founder's reputation; this way new clients will still be attracted to the firm. Change the governance structure so that critical decisions get broader input from key stakeholders. Create a robust culture of compliance, because a damaged reputation can sink a firm. And finally, reinvest in the business.

Even a clearly defined plan does not guarantee success. The report also asserts that only a small portion of the 200 to 400 firms that could build enterprise value will succeed. The process is an emotionally wrenching one that basically asks the person who built the firm to step away from it for its own good.

Hurley said that many advisers might scoff at the report's findings, because Fiduciary Network invests in wealth management firms and has an interest in seeing them thrive. Also, he acknowledged that some advisers just want to run their practices and eventually close the business. But those who have made big investments in their firms and want a return should consider how the recent financial market correction would impact that and their retirement.

"We found that almost as a rule, the first transaction any of these guys will participate in is the sale of their business," Hurley said. "The time to learn about this is not when you sell the firm."

3: AMERICAN BANKER - Aite Survey Finds Advisers Warming to Wire Houses

American Banker Tuesday, June 22, 2010

By Aarti Maharaj

Financial advisers are starting to turn their backs on the idea of going independent and are instead favoring the benefits of working at wire houses, a survey found.

The survey, conducted by Aite Group LLC of Boston, aimed to shed light on the movement of brokers across the wealth management industry. The report, which the consulting firm released earlier this month, said the survey measures brokers' desire to leave their employers, as well as their "motivations, envisioned time frame for breaking away, desired destination, and expected challenges."

About one-third of financial advisers who plan on leaving one of the four wire houses said they would prefer to move to another wire house, said Alois Pirker, a brokerage analyst at Aite. That contrasts with just one-fourth who said they favored independence.

To be sure, independence still hold some allure for some in the industry, Pirker said.

"While there are severe risks involved, a lot of brokers wish to go independent, because they get the chance to be an entrepreneur versus being an employee," Pirker said.

But the four wire houses -- Morgan Stanley Smith Barney, Bank of America Corp.'s Merrill Lynch, Wells Fargo Advisors and UBS Wealth Management Americas -- are sweetening the pot in their efforts to hold on to financial advisers. Indeed, top-producing brokers at Merrill Lynch and Smith Barney were offered retention perks to stay with their new firm for years. "MSSB offers mortgages and loans for five to six years," Pirker said.

But if they leave sooner, they're on the hook to pay it back. "This is a way they stay tied to the company," Pirker said.

Aite says that about 7,000 brokers left the wire houses last year. However, that number constantly fluctuates because of mergers and other factors that can affect the industry over time. Pirker used Merrill Lynch as a prime example: brokers were not accounted for before the merger with Bank of America. "This number is to be taken with a grain of salt, because more movement can happen," he said.

Aite said the biggest reasons behind an adviser breakaway are uncertainty about their employer (33%); a desire for a higher payout (27%); lack of retention package (3%); and the company's damaged brand (3%). Retention packages are not a long-term solution, Pirker said. "The retention package means a lot to keep advisers, but it buys the wire houses time, not loyalty," he said.

4: AMERICAN BANKER - Assessing Winners and Losers in Final Reform Bill

American Banker - Monday, June 28, 2010

By Joe Adler and Cheyenne Hopkins

WASHINGTON -- Those looking for clear winners and losers after the conference committee struck a historic final agreement early Friday on regulatory reform legislation are bound to be frustrated.

For every agency or industry participant that appeared to gain in the bill, there was a downside, while those who arguably emerged bruised and battered after the epic deliberations narrowly avoided an even worse fate.

The Federal Reserve Board, for example, which will gain a host of new powers, now faces a task that many would consider impossible: preventing the next crisis. Meanwhile, the largest banks, which were the targets of just about every provision of the legislation including a tax added in the final hours of debate, escaped the harshest measures designed to cripple or break them up.

"You could look at the list, and even if you're included on the winner side of the column, you would find that there are issues where even a winner had a very significant loss," said Ray Gustini, a partner at Nixon Peabody.

Still, some players finished far ahead of others. The Fed began the reform process as the whipping boy for the financial crisis, and faced a serious effort to strip it of its banking supervisory authority, only to emerge at the end with systemic-risk oversight and power over interchange rates for debit cards.

The Federal Deposit Insurance Corp., too, won battles for resolution powers over large, systemically important firms and long-sought capital restrictions.

Community banks also ended mostly in the plus column, exempted from enforcement by the new consumer protection agency and many of the other restrictions in the bill, while larger banks face new curbs on trading and derivatives activities.

"The money-center banks came out perhaps the worst in this legislation," said Douglas Landy, a partner at Allen & Overy. "They have significantly higher regulatory standards, both prudential and quantitative, and their business model is really being questioned."

But everyone took their lumps, and observers said large banks avoided what could have been a more rapid transformation of their structure similar to the reforms made under the Glass-Steagall Act after the Great Depression.

"Nobody has done anything to break up the big banks," said Roberta Karmel, a former Securities and Exchange commissioner and now a professor at Brooklyn Law School. "The big banks were winners whether they know it or not. Everybody likes to say … small banks are so important for capital formation. But in the end, the big financial institutions won out."

Perhaps as a result, large bank stocks mostly traded higher on Friday despite several new restrictions added as part of the reform bill.

And even though the FDIC and community banks came out stronger, they lost crucial battles. The agency at one point seemed likely to become the federal overseer of all state-chartered banks and to gain oversight of some holding companies, yet the Fed retained authority over that sector. The FDIC did gain backup authority over holding companies, similar to its backup authority over banks.

The FDIC also failed to get lawmakers to create a resolution fund to help it unwind a systemically vital firm. The Houses passed the measure, but it was not adopted by the Senate or the conference committee.

"The elimination of a prefunded systemic resolution fund, which the industry would have to fund, to me is a huge win for the 'too big to fail' players, and a huge loss for the FDIC and taxpayers," said Arthur Wilmarth, a George Washington University law professor. "That is the first provision that the industry focused on in terms of getting it out of the House bill."

Likewise, although community banks won a permanent increase in the deposit insurance limit and two-year extension of the Transaction Account Guarantee, they lost a fight to prevent the Fed from imposing interchange restrictions on debit card issuers and the softening of federal preemption powers.

Preemption proved a mix bag for the Office of the Comptroller of the Currency as well. On the one hand, the agency helped beat back the Obama administration's initial proposal, which would have eliminated preemption entirely. On the other, the final bill makes it harder for the OCC to preempt state consumer laws and would let state attorneys general enforce some federal standards against national banks.

Still, the OCC also gained somewhat from the bill, garnering oversight of thrifts after the Office of Thrift Supervision is eliminated.

"Regulatory head count is power in many ways, but they also obviously had some losses, preemption being the big one," Gustini said of the OCC. He added that community banks also failed ultimately to remove "too big to fail" from the national vocabulary.

"Community banks won some and lost some," he said. "They will perhaps get the increased deposit insurance that they wanted. On the other hand, regardless of what people say the concept of 'too big to fail' has not been wiped out and will continue to give the big banks the funding advantage that they've enjoyed for so long.

"The relative difference between big banks and small banks perhaps hasn't changed that much."

Steve Verdier, director of congressional relations for the Independent Community Bankers of America, said the legislation "will increase the burden on community banks particularly in interchange.

"But by us being active participants, we were able to get some carve-outs and the deposit insurance changes," he said. "The community banks did a lot better than big banks, there is no question about that."

Perhaps the biggest net positive went to the Obama administration, which gets another big legislative achievement under its belt, and the Treasury Department, which gained a larger share of the type of financial oversight powers usually reserved for independent agencies.

"In contrast to health care, the administration put out a clear premise of what they wanted to get done" in financial reform "and the outcome was pretty close," said Raj Date, the chairman of the Cambridge Winter Center for Financial Institutions Policy. "Whether or not you thought the blueprint was a good one, it's a clear win for the administration. It would have been difficult to head into the midterms more than three years after the crisis began and still not have gotten anything done."

Under the bill, the Treasury will also be able to assert itself as more than just an arbiter of financial policy, chairing a new council meant to oversee systemic risk and becoming the key decision maker of whether a systemically important nonbank is placed into an FDIC receivership.

"If you're looking for one winner, I would say it's Treasury," Landy said. "If you look at the final bill as compared with what they originally proposed, it's remarkably similar. … And there's a significant amount of regulatory discretion that has been either transferred to Treasury or made subject to Treasury" approval.

"Treasury has really come to a very dominant position over what used to be a very independent set of regulatory agencies."

Of course, the biggest comeback among the players in the legislative debate was mounted by the Fed.

Blamed for being asleep at the switch as mounting risks in the system led to the crisis, the central bank ultimately has been trusted with primary oversight of the biggest financial companies, while losing virtually none of its existing powers.

"There was a point in this debate where it seemed it would just be slimmed down to just a custodian of monetary policy, and if anything the Fed's power has been enhanced in a resounding fashion," Date said.

Other observers said the Fed's victories could be bittersweet, since the central bank -- still trying to explain its perceived failings leading up to the mortgage debacle -- now faces the gargantuan task of proving that the enhanced powers over financial behemoths will work, and could ultimately be blamed if there is a future crisis.

"They don't have the same unblemished reputation they had before, and Congress is going to be emboldened to interfere more in Fed activities," Karmel said.

Landy said the outcome for the Fed in the bill is a "two-sided coin."

"They've been given authority, but they've also been given responsibility for what in essence is an incredibly difficult task," he said. "It's a situation where they will get significantly more blame than credit."

The final hours of the conference committee were dominated by efforts to water down perhaps the most dramatic new restrictions on banks to rein in their derivatives and proprietary trading activities.

The fight over derivatives focused on whether lawmakers would require banks to spin off their derivatives trading desks. In the final compromise, banks will have to conduct some of their derivatives operations in an affiliate, but arguably their most prevalent kinds of swaps, interest rate hedges, can still be conducted in the bank.

Conferees also had to find agreement on provisions of the Volcker Rule, named for former Fed Chairman Paul Volcker, aimed at reeling in proprietary trading. The 11th-hour discussions centered on how much banks could invest in private-equity and hedge funds. The outcome provided for some exceptions, but generally banks could not hold more than 3% of a fund's ownership, and the investment could not exceed 3% of the bank's Tier 1 capital.

Industry representatives were clearly not pleased with the outcome. Adding to their pain, the final negotiations included the addition of $19 billion in taxlike assessments on the largest companies to be collected by the FDIC to help pay for the bill.

"This is a very negative bill for the industry," Ed Yingling, the chief executive of the American Bankers Association, said in an interview. "The biggest loser is the economy, because there is no doubt lending is going to be chilled."

But many observers agreed it could have been worse for the industry.

Wilmarth said a legislative response like that to the Depression, in which the landmark Glass-Steagall legislation imposed severe limits on banks' size, had been a real possibility.

5: AMERICAN BANKER - BAI: Bankers, Consumers Far Apart in Views

There's a growing divide between the way bankers and consumers view the banking industry, according to the annual Bank Administration Institute Index of Bank Consumer Sentiment. Not surprisingly, bank executives have a rosier view of the economy and consumer's feelings toward banking institutions than consumers themselves reported.

The research established a baseline for banker and consumer sentiment in August 2009 and retested it again in February. While bankers' opinions of consumer sentiment rose 11 points (from 126 to 137 over the six months), the consumer sentiment index, which is a measure of how the bank customers actually feel, moved in the opposite direction, dropping 19 points (from 100 to 81) and widening the gap in August by more than 50%.

Thirty-six percent of bankers surveyed in February felt the economy was better compared with six months earlier, up moderately from August, while consumers who felt the same way was up slightly at 18%. Only 44% of consumers feel strongly that their financial situation will improve as opposed to 47% in August. The results were released late last month.

"One key takeaway is that consumer sentiment overall as it relates to the economy has improved but as it relates to industry as a whole, primary financial services, has declined," said Deborah Bianucci, the chief executive of the BAI.

The study also found that 21% of consumers, up from 17%, said that they "didn't feel as good about trusting their primary financial institution to look out for their financial interests." Consumer loyalty varied depending on the type of bank they used. Loyalty rose the most, by 37 points, at online banks and brokerages such as Charles Schwab Corp. and Fidelity Investments. Consumer loyalty toward large banks fell the most (16 points), while regional banks fell nine points and community banks fell only four points. Consumer loyalty toward credit unions rose six points and toward brokerage firms rose five points.

With looking at various aspects of loyalty measures, online banks and brokerage have had a sharp increase in loyalty measures, where large and regional banks have had a slight decline, and community banks have been flat, Bianucci said. "With regard to the banks in general, our theory is that there's been a lot of negative press about fee income and that has had a dragging-down effect."

Online banks and brokerages have the luxury of dealing with one delivery channel, pointed out Ajay Nagarkatte, managing director of research at the BAI. As such, they have been able to focus their resources on perfecting that channel more easily than banks with multiple delivery services. "In a multichannel environment, it's more complex to determine how to deliver customer service," he said. "Everything is consolidated in an online bank/brokerage. If you were to speak to executives of online banks they would tell you that many outsiders see their advantage as one of price and certainly there's price competition in the forefront, but because it's a singular channel, they have the gift of focus. They can consistently deliver to exceed the expectations of consumers. Consumers will tell you their experience online is very different than in a branch."

6: AMERICAN BANKER - Banks, Vendors Scramble to Update Overdraft Systems

With the first deadline of the Federal Reserve's new overdraft fee requirements just two weeks away, banks and technology vendors are hurriedly updating the systems they will need to keep track of consumers who have opted in for coverage.

A significant number of banks, especially small ones, will be caught unprepared when the rules kick in July 1, vendors say. And others will be forced to leave some revenue on the table because their systems won't be able to identify some payments that can still incur fees.

"I think a lot of community banks, quite honestly, have maybe been putting off the inevitable," said Mark Flamme, a director leading the Midwest banking practice for West Monroe Partners, a consulting firm. "Now that the regulation is here, the potential income losses are real. I think we're going to see institutions really kind of scrambling."

Under the changes to Regulation E, consumers must elect to receive overdraft protection if a bank plans to charge fees for covering automated teller machine and one-time debit card transactions that exceed the balance in a customer's account.

"We would estimate in an average bank, up to 40% of that overdraft revenue is at risk" because it is associated with point of sale and ATM channels, said Dan Shannon, the senior vice president and general manager of consulting services at the Jacksonville, Fla., core vendor Fidelity National Information Services Inc.

Much of the work core vendors have undertaken in response to Reg E has centered around adding new data fields to banks' core systems. Not only can this indicate whether a customer has elected for overdraft protection, but banks can also use the information to fine-tune their marketing efforts -- for example, by promoting overdraft protection to people who have used the service in the past but have not opted in now.

Banks have been notifying their customers of the changes through direct mailings, online messages and telephone calls in an effort to get people to opt in. The rules also mandate that banks send customers who opt in for the coverage a confirmation message to ensure their decision was intentional.

Open Solutions Inc., a core vendor that works with small and mid size banks, began notifying clients in February of their ability to add temporary input fields to its core programs to track customer responses, said Sue Pinsonneault, a product manager for retail delivery.

In May the company began delivering a permanent system update to clients that worked off the data they had inputted in the temporary fields created with their customer records, she said.

"We provided that opt-in field, we produce reports when that field is changed, and based on when that field is changed, we will generate a customizable notice that the institution sends to the consumer to confirm that they had opted in," Pinsonneault said. "We can identify the source of the overdraft and go out and look at whether the person has opted in."

Even for banks that did start their compliance efforts early, there are still technical issues that are not likely to be resolved before the rules take effect for new customers July 1 and existing customers Aug. 15.

For example, the rules do not cover recurring debit payments, such as an automatic utility bill payment tied to a consumer's debit card, which means banks can still assess fees for covering overdrafts that result from such transactions regardless of whether has customer opted in for protection.

However, discerning between one-time and recurring debit payments is difficult because that information often is not included in transaction data.

Core system providers say most payments networks do not pass along this data currently. An exception is the Star debit network, which "has mandated for several years that acquirers must include a 'recurring' transaction indicator," a spokeswoman for First Data Corp., which operates the network, said in by e-mail.

Banks that use Star "are therefore able to identify any Star transaction that the consumer has set up on a recurring basis."

Historically, debit transactions "were grouped together because there was no reason to have them separated," said Dennis Gorges, the director of internal audit and compliance for Jack Henry & Associates Inc.

Coding for recurring versus nonrecurring debit card payments is "kind of a huge deal because all the switches … also have to make changes," Gorges said. "We have to be certified with those switches right now."

Jack Henry and its competitors say their customer accounting programs are ready to track customers that have opted in to overdraft protection and determine when a fee can and cannot be assessed. However, there is little they can do to distinguish between recurring and nonrecurring payments until those details are incorporated into the data that is delivered to banks.

"I believe it will ultimately all be resolved but no, I do not believe it will be resolved by July 1," said Pam Phillips, the product manager for the PhoenixEFE core system sold by Harland Financial Solutions Inc. in Lake Mary, Fla.

"There is a possibility there could be a loss of fee income that could have been collected that wasn't" from recurring debit card payments, she said.

Though an important issue, it is not likely to have a huge financial impact, since most debit transactions are one-time.

Kevin Gregoire, the chief operating officer of card services at Fiserv Inc., estimated that about 2.5% of debit card transactions are recurring.

Still, Fiserv has made changes to its systems to address that aspect of the regulation.

"We've enhanced our systems so that provided the transaction includes a recurring payment indicator, we can capture that recurring payment indicator and use it both at the point of authorization as well as at the point of settlement," Gregoire said.

That capability is dependent, though, on electronic funds transfer processors providing such an indicator.

7: AMERICAN BANKER - Challenges Loom as Talk of Next Comptroller Heats Up

WASHINGTON -- With the next comptroller of the currency expected to be named within weeks, speculation is heating up over who President Obama will nominate.

Rumored candidates are well known to the banking industry, including Federal Reserve Board Gov. Dan Tarullo, New York Banking Commissioner Richard Neiman, North Carolina Banking Commissioner Joe Smith, Treasury Assistant Secretary Michael Barr and Federal Deposit Insurance Corp. Vice Chairman Marty Gruenberg.

The selection is even more significant than usual because the regulatory reform legislation on the verge of enactment will provide a series of new challenges for the next comptroller including updating preemption standards, absorbing the Office of Thrift Supervision and implementing a litany of new regulations.

"They will be looking for somebody who has a very strong regulatory background with good executive skills because it's going to require management to combine two different agencies," said Pat Doyle, a lawyer at Arnold & Porter. "They will have a lot on their plate with implementing the new regulatory reform bill."

The administration is expected to make its choice soon, with some predicting a possible recess appointment during the Fourth of July congressional break.

The reform bill is expected to be signed by then, and the House version would remove the current comptroller, John Dugan, as soon as it becomes law and direct the president to appoint an acting head. Dugan's five-year term expires on Aug. 4.

Of the potential successors, much of the current buzz surrounds Neiman, who has a broad mix of regulatory and banking experience. He previously worked at the Office of the Comptroller of the Currency as a special assistant to the chief counsel and spent 10 years working at Citigroup in various roles before eventually becoming the president and chief executive of TD Bank USA. In 2007, then-Gov. Eliot Spitzer appointed Neiman as the superintendent of New York's banking department.

In that role, he has been a vocal advocate for the dual banking system, and was a key player in helping to convince the Senate to back off a plan to slash the Fed's bank supervisory powers. He has also served as a member of the Troubled Asset Relief Program's Congressional Oversight Panel, providing a more moderate voice to Chairman Elizabeth Warren.

"His background just immensely suits him for the position," said Ernest Patrikis, a lawyer at White & Case LLP. "He worked for the comptroller of the currency's office. He worked for a private banking organization. He has experience as a bank supervisor. He has handled himself exceptionally well on Elizabeth Warren's commission. There may be people as good as him, but I don't think there are people better than him."

Although Neiman would likely take a tough line on preempting state consumer protection laws, the banking industry does not view him as a threat because of his banking experience and prior stint at the OCC.

"It would seem Neiman may be strongest of that group," said Oliver Ireland, a partner at Morrison & Foerster LLP.

Bob Serino, a partner at Buckley Sandler and former deputy chief counsel for the OCC, said Neiman would likely take a balanced view on preemption.

"He would come with a measured view, having done some on the state side and national side," Serino said. "Whomever takes the position of a national bank regulator is going to realize that preemption is needed and is not a bad thing. I think he is going to realize when he is in that seat that there are ways of evaluating state laws."

Neiman's state experience also could serve him well as state attorneys general are likely to get more power under the reform bill.

Both the House and Senate legislation would give state AGs more flexibility to enforce statutes against national banks, although the two differ on exactly how much. The legislation is expected to still allow the OCC to preempt laws on a case-by-case basis, but it will likely face a higher threshold for invoking preemption.

Smith of North Carolina would also bring a state regulatory background to the comptroller's office, but may take a tougher stance on preemption issues. Currently the chairman of the Conference of State Bank Supervisors, Smith previously was a lawyer at Thacher Proffitt & Wood in Washington. He also has banking experience, including nearly nine years as the general counsel of Centura Banks Inc. and Centura Bank in Rocky Mount, N.C.

Smith has been an outspoken opponent of preemption and a proponent of tougher consumer protections.

A February speech to the Exchequer Club provides some clues to Smith's views on banking supervision. In it, he advocated for forbearance to allow banks time to work through various issues, and called for Tarp funds to be more accessible to community banks. He also criticized the Federal Deposit Insurance Corp.'s rules on private-equity investment in banks as too strict, saying they were an important source of capital.

Bob Clarke, a former comptroller who is now a senior partner at Bracewell & Giuliani LLP, praised Smith's record.

"I have a lot of admiration for Joe Smith," Clarke said. "My experience dealing with him is he has what it takes. He's a very thoughtful, measured kind of guy. He understands what bank supervision is about."

Cathy Ghiglieri, the president of Ghiglieri & Co. and a former OCC staffer, also supported Smith as comptroller.

"It would be nice to have a banking commissioner become the comptroller because from the preemption side it's a healthy balance of understanding both sides of the fence so that would be an interesting choice," she said.

Another leading candidate is Tarullo, whose name was among the first to surface months ago.

A Fed governor since January 2009, he was previously a Georgetown University law professor and campaign adviser to President Obama. He held several positions during the Clinton administration, including assistant secretary of state for economic business affairs from 1993 to 1998 and stints on the National Economic Council.

In 2008, Tarullo wrote a book, "Banking on Basel," an issue that is likely to be central to the new comptroller as the international capital standards are revamped.

While observers view Tarullo as highly qualified, it's unclear if he wants the job. His Fed term runs to 2022, and the central bank is all but certain to take on huge new responsibilities once the reform bill is enacted.

While as comptroller Tarullo would get to head his own agency, the OCC stands to lose jurisdiction to the Fed under the reform bill. Under both versions, the Fed is expected to take a more hands-on approach to supervision of systemically important companies, which would include most of the top national banks, such as Bank of America and Citigroup.

"I don't know why Tarullo would want to go to the OCC," said Cornelius Hurley, a banking and financial law professor at the Boston University School of Law. "He would be leaving an agency that is gaining power to an agency that is losing power."

But Obama also could opt for Gruenberg or Barr, both of whom are considered more pro-consumer.

"I don't think they are very sympathetic to the banking industry," said Bert Ely, a bank consultant.

Barr has been one of the Treasury's main salesmen of its regulatory reform proposal, focusing much of his efforts on the creation of a consumer protection agency. During that push, he has been extremely critical of large banks, most of which are overseen by the OCC.

"I don't think it's a surprise that big banks and institutions that benefited from the status quo want to keep it that way," Barr told American Banker last year after unveiling the administration's blueprint for reform. "It's unacceptable to us. It's a very hard argument for a big bank to make that the status quo on consumer protection was enough, that consumers were protected enough during the financial crisis. I think that's a horrible position for them to be in."

Barr also advocated for eliminating preemption altogether. Prior to working at the Treasury, Barr taught at the University of Michigan Law School, where he advocated for stronger housing loan modification policies. He also was a Treasury deputy assistant secretary during the Clinton administration.

"From the banker's point of view, they wouldn't want someone inclined for states to override preemption," said Bill Longbrake, an executive in residence at the University of Maryland's Robert H. Smith School of Business and a former vice chairman of Washington Mutual Inc. "That will be enormous, because the next round after the financial reform is implementation."

Barr's background does fit with past comptrollers, but his previous position as a professor is consistent with other Obama picks.

"There are lots of instances the administration has looked at academia and that would go in Barr's direction," Hurley said. "Does he have the management capabilities to merge two agencies? Probably not. That would be something he'd have to overcome."

But given his background, Barr is also seen as a candidate to head the new consumer agency, which is expected to be created by the reform bill.

Gruenberg has an even longer history with the banking industry. From 1993 to 2005, he served as senior counsel to then Sen. Paul Sarbanes, D-Md., who at one point chaired the Banking Committee and was actively involved in industry issues. Since 2005, Gruenberg has been FDIC vice chairman. Although he has not been controversial in that role, he is seen as a fierce consumer advocate and a strong opponent of preemption.

"Marty has been an unabashed consumer advocate for a very long time and that goes back very far to when he was in the Senate," Longbrake said.

While the industry has concerns about his possible appointment as comptroller, Gruenberg's contacts on Capitol Hill could help his nomination. "The pro is he is well received on the Hill," said Larry Kaplan, a lawyer at Paul, Hastings, Janofsky & Walker LLP. "The con is he is coming from the FDIC and not the most bank-favored background. I don't think anyone will criticize him as too close to the industry so in some ways he may be the perfect regulator."

Yet, some sources said Gruenberg is more likely to stay at the FDIC to succeed Chairman Sheila Bair, whose term ends in June 2011.

In addition to blending in the OTS and the new preemption rules, the comptroller will be heavily involved in setting new capital and liquidity standards, among other requirements laid out in the reform legislation.

"We are entering a new world and it's very hard to see how that plays out, but it's going to be a very dynamic time the next several years," Ireland said. "It's going to present a lot of opportunities for the next comptroller."

Diane Casey-Landry, senior executive vice president of the American Bankers Association, agreed. "It's going to be a very tough job. "It has a lot of management challenges, particularly with the integration of OTS," she said. "Whoever gets the job has to be a very good manager."

8: AMERICAN BANKER - Debit Interchange Measures May Cost Banks More than $5B

American Banker  Monday, June 28, 2010

By Kate Fitzgerald



With Congress expected to approve the regulatory reform bill this week, including the much debated interchange amendment, banks are bracing for a significant hit to their debit card revenue.

Although the ink is barely dry on what is now known as the Dodd-Frank Act, and it's far from clear exactly how the Federal Reserve will adjust debit interchange fees, bankers and analysts agree that the fees are all but certain to come down -- and probably by a lot.

By some estimates, the interchange regulations will vaporize more than $5 billion of banks' annual transaction fee revenue from issuing Visa Inc. and MasterCard Inc. debit cards.

"Revenue is going to drop like a brick," said Gary Jewell, an executive vice president of Carrollton Bank.

The $400 million-asset Baltimore financial company is already expecting a sharp decline in debit overdraft fee income from new regulations that take effect in August. Losing another chunk of revenue from debit interchange will be "extremely harmful" to the bottom line, Jewell said. "That's a double hit to the bank."

Carrollton issues Visa debit cards.

Mike Moebs, the chairman of the Lake Bluff, Ill., banking consultancy Moebs Services Inc., estimates that debit interchange represents 10% to 30% of revenue from checking accounts for credit unions and community banks.

Debit has picked up sharply in recent years; consumers shifted to payment cards instead of checks, and have repeatedly shown a preference for debit over credit for day-to-day spending. Debit transaction volume surpassed credit in 2008 and has not looked back, and financial companies have become increasingly dependent on the revenue generated by each transaction.

"Mainstream institutions will be terribly hurt" by debit interchange regulation, he said.

The Dodd-Frank Act authorizes the Fed to set debit transaction fees that are "reasonable and proportional" to the cost of processing the transactions, a phrase that has yet to be converted into an actual number.

But according to data compiled by PaymentsSource, a unit of SourceMedia, which also publishes American Banker, that could likely translate into a $4.16 billion decline in annual interchange revenue for banks that issue Visa debit cards.

MasterCard cards, which make up a far smaller share of the debit market, could see revenue fall by $1.47 billion per year.

These figures are based on the total volume of both PIN and signature payments reported by the two payments companies. Visa said it handled a total of $925 billion in debit purchases in the 12-month period that ended March 31. MasterCard reported $327 billion in debit transactions in 2009.

Other companies also offer debit cards, so this equation is certainly not comprehensive, but Visa and MasterCard make up a major slice of the market.

According to the National Retail Federation, which lobbied hard for interchange regulations, merchants pay about $20 billion annually in fees for accepting debit cards.

Interchange rates vary significantly; PIN is cheaper than signature, different types of merchants pay different rates and even the type of card can affect the fee charged for each purchase.

For this calculation, PaymentsSource assumed an average, blended interchange rate of 0.09%, meaning Visa debit cards are generating $8.3 billion in annual interchange revenue, at current levels, and MasterCard cards are bringing in another $2.9 billion.

(And these are both lowball figures, since debit is growing; Visa's volume increased 11% in the year that ended March 31, and MasterCard's 2009 total was up 5.8% over the previous year.)

Observers speculate that sometime next year the Fed will announce debit interchange rates that are 25% to 75% lower than current levels. The bill requires the Fed to draft regulations within nine months after being signed into law, and the new rates would become effective 12 months after the bill is signed. The debit interchange rules specify that the Fed will not directly regulate the network transaction fees Visa and MasterCard charge banks.

Sanjay Sakhrani, an equity analyst at Keefe, Bruyette & Woods of New York, said that range is broad because the Fed must consider a host of factors, including processing expenses, fraud and other incremental costs.

"It is not clear yet how much the Fed will cut debit interchange rates, which makes it difficult to estimate the effect" on issuers, Sakhrani said. There's "a lot of wiggle room."

For this estimate, PaymentsSource assumed that debit fees would be cut by 50%, eliminating $4.15 billion in interchange fees for Visa issuers and $1.45 billion for MasterCard issuers.

Visa declined to comment for this story. MasterCard said last Tuesday that it was "disappointed" with the legislation; on Friday it said it had no further comments.

Customers may suffer along with issuers.

"Interchange is a big enough component on consumer debit accounts that it finances a lot of other bank operations," said Adil Moussa, an analyst with Aite Group. A cut of 50% or more would likely force banks to add fees for more services, possibly including charging customers for maintaining checking accounts with debit cards.

Despite the loss of revenue, it is unlikely that lower interchange rates will deter banks from promoting debit, Moussa said. "Banks are going to keep pushing debit because it's a core product. And even if they make less revenue on it, they still want that revenue stream."

William Shaw, a group vice president of First Citizens Bank, said PIN transactions accounted for about 30% of its debit mix in 2008, and about half today. First Citizens, of Raleigh, operates more than 370 branches in seven states.

Because it's cheaper, Shaw said the company breaks even on PIN debit.

Signature debit rates are as high as 1.35%, he said, and the combined costs of marketing and supporting debit rewards programs consume about 60% of signature debit revenue. Losing a substantial portion of interchange revenue is going to force the bank to rethink its debit strategy, especially for rewards.

"We're going to see a big drop-off in signature debit programs when debit interchange regulation comes through," Shaw said.

9: AMERICAN BANKER - Endgame: After 20-Hour Session, Reform Talks Yield Final Bill

American Banker  Friday, June 25, 2010

By Stacy Kaper and Rob Blackwell

10: AMERICAN BANKER - Fair Value Is Helpful, in Measured Doses, Investors Say

American Banker Tuesday, June 22, 2010

By Heather Landy

11: AMERICAN BANKER - Fed Finds Flaws in Big Banks' Pay Packages

American Banker  Tuesday, June 22, 2010

By Cheyenne Hopkins

WASHINGTON -- Even as federal regulators released final guidelines Monday establishing executive compensation restrictions, they made it clear they were already taking action to target flaws in the pay practices of the largest banking companies.

In its horizontal review of the top 25 firms, the Federal Reserve Board found multiple "deficiencies," including a failure to ensure their practices did not encourage risky behavior and to identify which employees can expose the bank to material risk.

Although it did not provide details on which banks fell short, the Fed said it sent notices to firms last month detailing areas that required prompt attention. Some observers said the review proved many firms have failed to properly update their practices.

"Boards have relied on outside consultants to tell them what they wanted to hear, and the Fed comes along and says you have to do more due diligence and they ignore that," said Con Hurley, a former Fed lawyer who is now a financial-law professor at the Boston University School of Law. "How tone deaf can you get? The Fed was giving everybody a heads-up."

Fed officials said Monday that they expect to see improvements soon. "Many large banking organizations have already implemented some changes in their incentive compensation policies, but more work clearly needs to be done," said Federal Reserve Governor Daniel K. Tarullo. "The Federal Reserve expects firms to make material progress this year on the matters identified as we work toward the ultimate goal of ensuring that incentive compensation programs are risk appropriate and are supported by strong corporate governance."

The Fed first issued proposed guidance in October on proper executive pay packages and said it would review the practices at the largest firms to find out how they stacked up. By Monday, the three other regulators had signed on to the final pay guidelines and offered the first details on what the Fed had uncovered.

Although regulators said firms are considering various methods to make incentive compensation more risk sensitive, they said many are not "fully capturing the risks involved and are not applying" new methods to employees.

The agencies also said that while some firms are using deferral arrangements to adjust for risk, they are using a "one-size-fits-all" approach that does not vary according to type and duration of risk.

Overall, the agencies said many firms lack "adequate mechanisms to evaluate whether established practices are successful in balancing risk."

The review is just the first of several that the agencies are planning. Regulators said they will conduct additional cross-firm reviews at large, complex banking organizations to target practices for employees in certain business lines, such as mortgage originators. The regulators are also prepping a report after the end of the year on trends and developments in compensation practices at banking organizations.

Although the pay guidelines finalized on Monday were largely similar to the Fed's proposal last year, their application was much broader. Instead of covering just bank holding companies and state member banks, the final guidance will now apply to all banks regardless of charter and their holding companies.

The final guidelines did make some concessions to smaller banks, who had complained in comment letters that they did not pay the exorbitant bonuses that helped lead to the financial crisis and should be shielded from the proposed regulations.

The final guidance does not exempt community banks, but more clearly defines regulators' different expectations for large and small firms.

"The final guidance makes more explicit the view that the monitoring methods and processes used by a banking organization should be commensurate with size and complexity of the organization, as well as its use of incentive compensation," the guidance says.

Community bank representatives welcomed the change.

"They seem to have followed our advice, which is to focus on the large complex banking organizations and not on the community banks," said Chris Cole, regulatory counsel for the Independent Community Bankers of America, which favored an exemption. "Community banks would find it difficult to have a compensation committee as part of their board, and most community banks don't have a compensation policy at all."

The final guidance requires large banks to follow certain additional steps. For example, large banking companies must form a compensation committee that reports to the board of directors. The board is also required to directly approve compensation arrangements of senior executives, including clawback provisions.

The guidance also directs large banks to consider how golden parachutes and similar arrangements affect risk and employee behavior. Large banks are also required to actively monitor industry, academic and regulatory developments in incentive compensation and be prepared to incorporate those into their systems.

Those requirements were not extended to smaller institutions.

All institutions, however, are required to broadly follow three guiding principles when setting executive pay: providing incentives that appropriately balance risk and financial results and discourage risk taking; matching "effective controls and risk management"; and supporting corporate governance.

As the guidelines were released, analysts were debating their potential impact.

"This guidance is really a significant change from their current practice in many different ways," said Alice Cho, a former Fed official and now a senior principal at Promontory Financial Group. "For example, they now have to define which employees are going to be covered by the guidance … and it's not just top executives. It's going to be in many instances a large number of employees that receive incentive compensation, like stock options or stock grants or bonuses, that are tied to their performances. In large institutions, they can comprise a significant percentage of the employee population."

But others suggested the guidelines would accomplish little.

"I do not believe that these regulations will do very much to change what goes on at the large New York banks," said Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland. "This is all about linking compensation to risk … Many of the risks going into this mess were not recognized by the people that would be in a position to curtail compensation."

12: AMERICAN BANKER - For Regionals, Reform Could Mean...

...Stiffer Competition in Investment Banking

13: AMERICAN BANKER - 'Free-Toaster' Strategy Isn't Toast at JPMorgan Chase

American Banker - Friday, June 25, 2010

By Jeff Horwitz and Sara Lepro

14: AMERICAN BANKER - IPO Seen Giving Banks, Advisers More Clarity on LPL

LPL Financial may be in its quiet period, but industry observers are happy to talk about the broader effects of the Boston financial services company's coming initial public offering.

LPL, which provides an integrated platform of proprietary technology, brokerage and investment advisory services to more than 12,000 financial advisers, filed its notice of the offering on June 4. The company cannot talk about itself until the stock has had a decent shot of finding its fair value on the market, a process that often takes 40 days to three months. While that's a long time to be in the dark for an LPL client bank or an adviser who works at one, industry observers don't seem at all worried.

"Principally, the IPO removes some uncertainty" for banks and advisers, said Ken Kehrer, research director of Kehrer-Limra. "The expectation is that the people who bought LPL were doing so to profit from that by selling the company one day. If it sold to another broker-dealer, there would be a disruption changing platforms and reps would leave. Now, that uncertainty has been removed."

It also has an implication for other firms, particularly Cetera, which the private-equity firm Lightyear Capital acquired last year. "Lightyear presumably is interested in doing the same thing — eventually selling it to another firm or doing an IPO," Kehrer said. "If LPL's IPO is successful, it strengthens Primevest's hand." Primevest, one of Cetera's three broker-dealer brands, works exclusively with banks and credit unions.

Dick Ayotte, CEO and founder of American Brokerage Consultants, doesn't expect either banks or advisers to notice much difference, although the IPO will make LPL easier to size up for banks shopping for a new third-party marketer. "It makes the company far more transparent than most of its competitors" because of reporting rules governing public companies, Ayotte said. "While some TPMs are subsidiaries of much larger public companies, it's hard to get their numbers because they just don't provide that data." Ayotte doesn't expect other TPMs to up their reporting standards in response, though.

If there's any potential negative for banks and advisers, it's that new pressures from analysts on LPL as a public company could cause it to cut its prices to better compete with other broker-dealers, said Gregory Smith, managing director at Novantas. "As a public company, LPL has to also meet the expectations of analysts, and its business model has to stand up to scrutiny, which might mean the price of planning and asset management fees might come down," he said. After what's being called the Lost Decade, investors are back where they started despite all the advice and asset allocation they paid for, and analysts might insist that LPL respond to those customer concerns. "Pricing pressures are broadening on what you get for what you pay a financial adviser," Smith said.

That's one small "what if" in a move everyone seems to agree is a positive for the firm and its advisers. "LPL's IPO could allow it to incentivize employees with stock and lead to more acquisitions in the coming years," said Denise Valentine, senior analyst at Aite Group, summing up general sentiment among industry observers.

"It's good news for LPL and brings a company to the forefront that already enjoys a solid reputation in its market," she said.

15: AMERICAN BANKER - Nacha ACH Rule Anticipates Widespread Use of Mobile Payments

American Banker    Monday, June 21, 2010

By Andrew Johnson

Mobile payments have yet to take off domestically, but Nacha is positioning the automated clearing house network to play a prominent role, if and when they do.

The Herndon, Va., electronic payments association said last week that in May its members had approved a new rule for classifying ACH debit transactions initiated via mobile channels.

Consumers, billers and their banks already have been performing and authorizing ACH payments using mobile devices but Nacha had not specifically addressed how such transactions should be classified.

"We wanted to try to get out in front of the use of the network with mobile devices," Mike Herd, the managing director of ACH network rules at Nacha, said in an interview Thursday.

"We know it's starting to happen, so we want there to be some guidance and some clarity and consistency of usage among all the participants."

The new rule is not a major change; it says that mobile ACH payments will use Nacha's existing WEB Standard Entry Class code, which pertains to debit to consumer accounts that are set up by a receiver over the Internet. The definition was expanded to include debits initiated or involving communication sent over a wireless network.

The rule change does not pertain to credit entries when funds are "pushed" out of a consumer's account rather than "pulled" from them; credits fall under Nacha's existing Consumer Initiated Entry, or CIE, code, according to the payments association.

The mobile rule becomes effective Jan. 1 but Nacha members can begin adhering to it now.

A Nacha Rules Work Group issued a request for comments last fall seeking industry input about the extent to which mobile devices were used to perform ACH payments and whether a separate SEC code was necessary.

The conclusion was that, at least for now, scenarios involving mobile ACH debits already were addressed by the existing WEB transaction code.

Still, "we saw a gap in the rules that just fails to acknowledge mobile payments," said Devon Marsh, a senior vice president and risk manager in Wells Fargo & Co.'s treasury management, risk and compliance group.

However, Nacha expects to "take a more thorough review" to "see if there's any other type of unique risk or management" issues that would require creating an entirely separate entry code for mobile payments at some point in the future, Herd said.

"It makes sense" to use the WEB code today, because in most mobile ACH situations a Web browser is involved in initiating the transaction, said Nancy Atkinson, a senior analyst for wholesale banking for Aite Group LLC.

"The primary advantage is there is no coding changes," Atkinson said. "None of the providers of ACH software or services for the banks have to go out and make any changes to their systems."

The downside is that there is no way to tell, which means it will be difficult to track how much ACH transaction volume mobile payments are generating, which could be valuable data for Nacha, its members and technology providers, she said.

"We looked at it as an opportunity for the ACH network to position itself for the new innovative ideas that are starting to pop up relative to mobile," said Timothy Schmidt, the vice president of electronic payments for U.S. Bancorp in Minneapolis and a member of the rules work group that addressed the mobile ACH issue.

"We've seen some stuff with mobile payments that our banks are rolling out to their consumers," Schmidt said. "Many of those solutions utilize the ACH network."

Including mobile entries in the WEB category provides a foundation upon which Nacha can build if a separate transaction category should become necessary, Schmidt said.

U.S. Bancorp this month said it planned to roll out CashEdge Inc.'s Popmoney person-to-person transfer service to customers this year.

The service will be available to U.S. Bancorp's mobile banking customers and through its mobile application called U.S. Bank Mobile Wallet.

The service will enable customers to send money to other banks' customers through the ACH network, Schmidt said.

The ACH network and industry players such as Nacha could play a larger role in ushering in mobile payments, especially person-to-person systems, if it was easier for people to find information about potential payment recipients, Liisa Kanniainen, the executive director of the Mobey Forum, an international group that promotes mobile payments.

"The only additional piece of infrastructure that would be needed is a database" linking mobile phone numbers to individuals' bank account numbers, Kanniainen said.

16: AMERICAN BANKER - Next Circuit in JPMorgan Executives' Cross-Training

American Banker    Wednesday, June 23, 2010

By Matt Monks

JPMorgan Chase & Co.'s second major executive shuffle in less than a year said as much about how well the company thinks it has recovered from the financial crisis as it does about its chief executive's management style.

CEO Jamie Dimon -- famous for periodic realignments intended to broaden his top managers' experience -- shifted three high-profile executives.

Michael J. Cavanagh, 44, chief financial officer since 2004, was named head of treasury and securities services. Heidi Miller, 57, who previously ran treasury and securities, was given the newly created job of leading the company's push into emerging markets like Brazil. Doug Braunstein, who is 49 and previously oversaw investment banking for Americas, is the new CFO.

Observers say Dimon's moves signaled that JPMorgan Chase is on sound enough footing to start focusing on the future. That effort includes not only grooming executives, but an emphasis on overseas growth.

"There are certainly several emerging markets whose financial systems are not as mature as the U.S. … [JPMorgan Chase] wants to be a part of their growth," Jason Goldberg, an analyst with Barclays Capital Inc., said of Miller's new role. "These are regions they've continued to invest in while many of their competitors have had to pull back or not invest in given the challenges they've faced at home."

Goldberg said these management changes show that Dimon feels that his company has rebounded well enough from the financial crisis of 2008 to enable him to focus more on one of his pet issues: succession. He couldn't really make any dramatic management changes in the thick of the downturn.

This is his second major management change since the banking markets started thawing earlier last year. In September he appointed company veteran Jes Staley, 53, to lead the investment bank and Mary Callahan Erdoes, 42, to run the asset management division.

Cavanagh said in an interview that he has no qualms about leaving the job he had held for five years, explaining that Dimon likes to season executives by moving them around to different jobs.

"The result is the deep talent bench we have," Cavanagh said. "It's just what this team does. We've had to do various, different jobs. It makes us all better individually and keeps us interested in what we do."

Any one of the heads of JPMorgan Chase's six business lines could have a shot at running the whole company, observers say. And even if they don't move up to the job eventually, having experienced people running things is good for the company.

It is important to "keep the faces fresh," Goldberg said. "My sense is Jamie is not going anywhere any time soon. It does lay the foundation for the future."

Dimon himself had served as a mergers specialist and finance chief for an commercial lending company, among other things, before he was 40. He also learned the importance of smooth succession planning after he was fired in 1998 from Citigroup Inc., a company he helped build and was poised to eventually run.

Thomas Watkins, a partner with the executive search firm Chartwell Partners, said there are benefits and risks to grooming a wide pool of successors. The downside is that profits, at least in the near term, could suffer as a new executive takes over an unfamiliar business line. There is also the risk that a company veteran, having built his resume by serving in a number of different roles, could take his expertise elsewhere as it soon as it becomes apparent that he doesn't have a lock on the top job.

"There are trade-offs," Watkins said. "The obvious benefit to the shareholders and the franchise is they get a well-rounded leader from elsewhere in the organization to potentially step up and run the whole organization."

In the meantime, Dimon's new top deputies have a chance to prove themselves over the next several years by delivering results. Most market watchers agree Staley is best positioned to take the reins should Dimon depart sooner rather than later, given that the investment bank is the crown jewel of the company.

But Miller, in the new role as president of international, is in a marquee slot as well, though she is the oldest of the possible heirs apparent. Still, she has an important task in coordinating JPMorgan Chase's efforts overseas, an area of growth that will become increasingly important as new consumer regulations weigh on profits in the U.S.

Miller has a long working relationship with Dimon. She was his CFO at Bank One Corp. and worked with him at Citigroup, where she had risen to CFO by the time she left in 2000.

Miller took over JPMorgan Chase's treasury and securities services unit in 2004 and US Banker named her the most powerful woman in banking for the past three years. Right now three of JPMorgan Chase's main business lines do business in other countries: Asset management, investment banking and treasury services. Miller's job will be to figure out how they should be working together and where they should be looking to drum up new business. She will also oversee an existing initiative to beef up the company's corporate bank in places like China in a direct affront to rival Citigroup Inc., which does more business overseas than any of the other large U.S. banks.

While Citigroup pretty much has the market locked up on retail banking outside of the U.S., JPMorgan Chase sees an opening go toe to toe with that company and other global banks in areas like cash management and trade finance.

"I definitely think there is room for growth for the remaining companies. You have lost some competition. Lehman's gone," said Keith Davis, an analyst with Farr Miller & Washington. "JPMorgan probably sees more opportunity to grow overseas in the capital markets arena than it does in the U.S."

17: AMERICAN BANKER - Online Banking Use Continues Rising

Four out of five U.S. households with Internet access now bank online, according to Fiserv Inc.

Not only has the use of online bill payment and electronic bills grown steadily over the years, it is also changed significantly, said Geoff Knapp, the banking technology vendor's vice president for online banking and consumer insights.

Nearly 72.5 million U.S. households with Internet access, or 80% of total households, bank online, up 4% from February 2009, when Fiserv conducted its previous trends survey. Nearly 36.4 million households pay bills online, up 11.7%.

Women have edged out men as the primary payers of bills online. In 2002, 61% of bill payers online were men, and they were the majority in 2009. This year, women made up 51% of online bill payers.

Online bill payment has moved into the mainstream and is not used just by young or tech-savvy consumers, Fiserv said. This year people 21 to 34 make up 28% of online bill payers, those 35 to 54 make up 48%, and those older than 55 make up 24%. In 2002, more than 50% of online bill payers were between 35 and 54.

Fiserv, of Brookfield, Wis., surveyed 3,029 online consumers in January for its Consumer Billing and Payment Trends study, which was released May 25.

The survey also found a decline in the use of paper checks and growth in electronic bills. Consumers now use paper checks to pay 26% of their bills; in 2000, checks represented 61% of all bill payments.

Consumers also now pay 45% of their bills online, up from 12% in 2000, according to the study. And the percentage of consumers who receive bills electronically has increased to 33% from 24% in 2009.

The evolution of online banking and bill payment also has produced deeper relationships between banks and customers because consumers who use the services tend to use more of the bank's offerings, Knapp said.

Consumers who bank and pay bills online generate more revenue for financial companies because they use more services and products, are more deeply tied to the company and are less likely to leave, according to Fiserv.

This year, 13% of consumers who use online banking are more likely than the average customer to have a savings account at the same bank, up from the 8% who were in 2005. And nearly half of respondents who pay bills online said they were less likely to switch banks because of their positive experience with the service.

Fiserv's survey also looked at the growth in such new areas as mobile banking and person-to-person payments. This year, 30% of respondents with mobile phones conducted one or more banking services by phone, up from 23% who did so in 2008. The percentage of mobile-banking users who receive or pay bills using their phones jumped to 30% this year, from 18% in 2008, primarily because more consumers have smart phones, Fiserv says.

18: AMERICAN BANKER - Once Seen as Panic, Fifth Third's Measures Now Seem Prudent

Two years after embarking on a series of wrenching financial decisions, Fifth Third turns out to have been rather prescient about how bad the crisis would get.

The $113 billion-asset company is now widely viewed as being further along in the credit cycle than many of its peers as a result of its willingness to take quick, drastic action starting in June 2008.

Granted, Fifth Third still has yet to repay $3.4 billion of capital from the Troubled Asset Relief Program. But Fitch Inc. last week upgraded its rating outlook for the Cincinnati company from negative to stable, citing solid liquidity and capital ratios and a welcome moderation in credit trends. Nearly two dozen Wall Street analysts now recommend buying or holding Fifth Third's stock, versus four who say sell.

The hiring last month of William Isaac, an outspoken former regulator, as chairman suggests the company feels it is far enough along mopping up its messes to break with the industry's defensive posture and confront the broad regulatory changes coming down the pike for banks.

"The bank's view is that they got on top of the problems faster than most," Isaac, a former Federal Deposit Insurance Corp. chairman, said in an interview last week. "They paid a price for it in the short run because they were perceived as suffering more than others. But they also feel like they are going to be rewarded for it because they're going to come out of this faster."

That was exactly the way Chief Executive Kevin Kabat had been hoping things would play out for Fifth Third, which in addition to having all the problems one would expect of a regional bank in the midst of a financial crisis also had the unfortunate distinction of being heavily exposed to the housing bust's toll on Florida and the recession's impact on Michigan.

Three months before the failures of Lehman Brothers and Washington Mutual Inc., Fifth Third began preparing for the worst, announcing a dividend cut, a $1.1 billion preferred stock sale and a plan to raise additional capital through a major asset sale.

Next came steep writedowns, and another, more dramatic dividend cut that would make Fifth Third the first of the major regional banks to slash its quarterly payout to a penny a share.

Big writedowns? Penny dividends? It sounds par for the course now. But at the time, such actions were considered alarming -- not just because they signaled big trouble, but because for a company with concentrations in at least two major trouble spots, it was unclear whether all that would be enough. Raw land loans, which the company believed were especially risky, were marked down to roughly 30 cents on the dollar.

"We literally had people on the road, looking at each of these [troubled loan] properties and trying to get as broad a perspective and as much information as we could" to decide on the appropriate writedowns, Kabat said in an interview last week.

Asset sales conducted since then have been done at prices slightly above the written-down values.

"Even though we thought we were being overly pessimistic as to the outcomes, it turns out we were about right," Kabat said. "But that was a very difficult process with a lot of debate, a lot of consternation."

Kabat described the results of the government stress tests in May as a turning point for the company, when the market began to see the upside to measures that previously had been seen as red flags.

"It's always hard to tell whether companies are being conservative or aggressive at the time," said Jennifer Thompson, an analyst at Portales Partners LLC who has a "buy" rating on Fifth Third. "But they addressed the problems early. They built reserves aggressively and where they had the opportunity, they were able to sell assets faster than some of their peers because they had marked their distressed loans as well as they did."

Other changes involved less risk. Kabat estimates that internal pieces of communication (e-mails, memos, and so on) have increased 60% since the crisis began. He now addresses the 20,000 employees in periodic videos, and the company set up an internal blog, to which executives contribute.

Fifth Third also centralized its credit-decision and underwriting process -- a big switch for a company that long prided itself on a decentralized "affiliate" model designed to keep authority in the hands of local market executives. As a former affiliate chief, Kabat said he was sensitive to the change. But he contends that service now gets delivered to clients quicker and more smoothly than before.

Kabat, 53, started his banking career at Merchants National Bank in Indianapolis and soon after joined Old Kent Bank, rising to vice chairman and president. Old Kent was acquired in 2001 by Fifth Third, which put Kabat in charge of a Michigan affiliate before bringing him to Cincinnati to oversee retail and affiliate banking. He was appointed president in June 2006 and CEO in April 2007, adding the chairman's title in June 2008.

He ceded the chairman's post last month to Isaac, now head of the financial services practice at the consulting firm LECG Corp.

Both Isaac and Kabat explained the move as a nod to corporate governance principles and to Isaac's ties with his native Ohio, his considerable regulatory experience and his familiarity with Fifth Third, an LECG client, thrown in for good measure. It was not, they said, a sign of dissatisfaction on the part of the board with Kabat's performance or the company's direction.

"We have made a ton of changes to this company. From a personal standpoint, I think the one thing that hopefully the market takes away from it is that I'm going to do everything in my power to make us best in class," Kabat said. "This [decision] was something I could participate in and demonstrate not only to the external world but to the internal world that this is how strongly I feel" about putting Fifth Third in good standing on governance issues.

As nonexecutive chairman, Isaac's main duty is to lead board meetings. But his presence also presumably gives Fifth Third a vocal advocate in a noisy political environment and could potentially make it easier for Kabat to stay focused on internal matters. (Both men said they are determined to keep the chairman post from interfering with Isaac's ability to freely criticize regulators, politicians, accounting standard setters and other frequent targets of his. "We don't expect to in essence muffle Bill from his personal opinion. I don't know if you could do that anyway," Kabat quipped.)

Instead, Kabat plans to focus on taming net chargeoffs, which remain high relative to other regional banks, and on developing a strategy for resuming growth.

On that front the company may have an advantage over rivals such as KeyCorp, which quit business lines such as boat and recreational-vehicle lending.

"None of our businesses have been fundamentally destroyed or shut or lost," Kabat said, although the company did give up 51% ownership of its processing unit last year to raise capital.

Between that sale, $1 billion of common stock issuance and other capital-stockpiling measures, Fifth Third raised about $800 million more than the $2.6 billion of additional common equity that last year's government stress test indicated the company needed. Fitch said in a June 9 report that it expects Fifth Third to repay its Tarp funds by the end of the year, though the company "will likely have to issue additional common equity in order to get regulatory approval" to do so.

The credit disaster in Florida hasn't dissuaded Fifth Third from considering opportunities to expand its footprint again, Kabat said, but it certainly persuaded him to never again allow such a large concentration of real estate loans.

Meanwhile he sees plenty of room for growth in existing markets, even in Florida, where the company has seen surprisingly strong deposit growth and now hopes to build up its commercial and industrial loan book.

The regrouping won't come without hiccups.

"We're not out of the recession yet, and there still are a lot of non-controllable, external environment things that have yet to come," Kabat said. "The market is in kind of a 'show-me' state. But I don't get overly concerned about that because you control the things you can control, and those are the things that I think eventually will be recognized."

19: AMERICAN BANKER - Viewpoint: Fatal Flaws in Personal Finance Management

American Banker    Thursday, June 24, 2010

By Jeff Maling

Picture yourself in line at Starbucks and ask yourself a simple question. How much have you spent on Starbucks this year? Last year? Coffee in general? You can figure it out … if you have a few hours and you're pretty good with Excel.

Now picture yourself at Starbucks in a more ideal world. On your mobile phone, you see that you have spent $200 against an annual coffee budget of $350, and $175 has been spent at this particular Starbucks. How might this information impact you? Would it change your purchase decision? Would the store treat you better if they knew you were a good customer? Would you feel more in control of your finances? Your life?

Now multiply that by all the financial interactions in your life. How does your health club membership impact college savings? How does eating out impact buying a new car?

Despite 30 years spent automating financial transactions, financial institutions offer consumers no more financial insight than when people used passbooks and accordion files. The first institution to buck this trend will redefine the industry. And there is no guarantee that it will be a bank … or credit card company.

Consumers hunger for ways to manage their finances. A recent Forrester study found that five of the top 10 iPhone applications are personal finance-related, including basic things like electronic check registers. Quicken remains widely popular despite having a significant learning curve. Mint.com surpassed a million users in a year with its slick view of finances yet no transactional capabilities.

If you think this problem exists only for the mass market, think again. In more than 500 interviews Roundarch conducted with high-net-worth individuals, the most requested feature was a complete financial picture. The most popular method for getting that full picture … nothing. Second-most popular … Excel. Third-most popular … Yahoo! Finance. Where does the bank rank in solving this problem? Near the bottom!

The fact is that tech-savvy consumers spend 10 times longer managing their iTunes playlists than managing their finances. Is this because they value music more than financial freedom? Doubtful.

Banks may have several fatal flaws when it comes to dealing with this problem:

Misreading consumer behavior. If customers spend 10x more time on playlists than financial management, then it is easy to assume they don't want help. However, evidence shows that customers who want to understand their finances will go to extraordinary lengths. How fast would they move institutions if someone made it easy for them?

Being product-driven instead of experience-driven. Banks drive deposits by touting products and product features. Focusing more on experience requires banks to think outside of product silos and to design experiences. It is not something that comes naturally.

Overreliance on current revenue models. Banks struggle with linking an experience to revenue. They find it much easier to link products to revenue. But when someone creates the experience, no feature will stem the tide of lost deposits.

Banking needs to look no further than the music industry in the late 1990s to understand what is at stake. Major distributors resisted digital and early MP3 companies focused on product features versus the experience of buying and consuming music. Sound familiar?

Apple did not invent the MP3 player, and the iPod had fewer features than most of its early competitors. But Apple created an experience that integrated buying, organizing and consuming music.

The challenges facing the banking industry are similar:

• Merging existing technologies. The technology has been invented. We have great mobile devices, most transactions are already electronic and websites like Mint have introduced innovation in the space.
• Creating an integrated experience. Piece solutions exist, but no one has solved the whole problem.
• Acquiring new skills. Most banks don't have the expertise or mentality required to create meaningful customer experiences. If banks don't step up, it's a matter of time before someone steps in.

Jeff Maling is the president and chief experience officer at Roundarch, which designs and implements digital experiences.

20: AMERICAN BANKER - Viewpoint: Mark to Market Isn't the Answer

Not that many years ago, in a knee-jerk response to the Enron/Tyco/WorldCom debacle, Congress passed the Sarbanes-Oxley bill.

Now, in yet another knee-jerk response, this time to the subprime mortgage disaster and the recent financial crisis, several of the same people and organizations are pushing to apply mark-to-market accounting to all financial instruments believing that will ensure asset values will not be overstated.

I'm skeptical. Catastrophes generally comprise a series of events that no one ever thought possible and for which there are rarely single solutions. Sarbox is a classic example of overreaction and lack of understanding of the problems and their root causes, and mark-to-market accounting falls into the same category. The Financial Accounting Standards Board recently proposed new rules that would require we apply mark-to-market accounting to commercial loans and core deposits as well. Now I'm worried.

I'm worried, because this is a one-size-fits-all solution and banks differ greatly in the markets they serve. In addition, doing so would likely cost our investors and commercial clients a lot of money. The loans we generate, unlike residential mortgages, are not saleable commodities and do not have a readily identifiable market. It would be difficult, if not impossible without a significant degree of judgment and expense to mark them to market. Further, because we are among a very few lenders in our rather small market, it is not clear that we could find a willing buyer quickly. Hence, they might be saleable at less than par on day one, if at all. Ironically, we have never sold a loan in our 27-year history (except for CRA loans) and always expect to hold the loan to maturity. Plus, our collection experience has been enviable, as have our returns.

If we were forced to mark them to market, and if our investors were to insist that we not generate loans that were worth less than par on day one, we would need to change our underwriting, dramatically. In doing so, the value that we bring to the clients we serve would diminish. In other words, to become a commodity would require that we ignore the expertise that we have developed in our 27 years of specialization. We would need to dumb down our underwriting to an extent that would allow enough other lenders to understand it to an extent that would enable them to become willing buyers. In short, being able to mark our loans to market without losing value would result in our no longer providing value.

And to what end? Not only have we had good credit experience with good returns over time, but we already account for any impairment through traditional accounting. That is, we risk rate our loans (well, I think, based on the assessment of both our auditors and regulators), and then reserve against them based on those ratings. This has served us and our investors well over time. What problem are we trying to solve? And at what cost?

21: AMERICAN BANKER - Why We Stand Behind...

...the Issuer-Pays Compensation Model (For Credit Rating Agencies)

American Banker   Wednesday, June 23, 2010

By Deven Sharma

Is the issuer-pays compensation model still viable for credit rating agencies?

It's a fair question, considering the market turmoil we have experienced, and many market participants -- investors, bond issuers and regulators -- have asked it. Given the disappointing performance of the ratings of some mortgage securities in recent years, it is natural for people to wonder what can be done to improve ratings, and even to ask if there might be a better compensation model than one in which issuers pay the rating agencies.

I should start by noting that we are quick to acknowledge that our ratings of mortgage securities, particularly those issued between 2005 and 2007, did not perform well, and we profoundly regret that. Although we stress-tested these ratings to withstand as much as a 20% decline in housing prices, we did not anticipate the speed and severity of the downturn, which in led to housing declines of as much as 60% in some regions. We were not alone in estimating a less severe decline.

Indeed, few in the marketplace were farsighted enough to foresee just how far housing prices would fall.

But it is also important to remember that during this same period, our ratings -- of corporate and sovereign debt; securities backed by credit cards, auto loans and equipment leases, and even mortgage-backed securities issued in Europe -- have all performed as we expected despite using the same analytical approach as U.S. mortgage securities and, of course, within the same business model.

Nevertheless, we recognize that confidence in ratings has been shaken and must be restored if the credit markets are to function efficiently. Over the past few years, we have taken a hard look at our ratings, and we have worked closely with market participants to understand their concerns and answer their questions. They include:

Wouldn't conflicts be eliminated if investors paid for credit ratings?
The question assumes that subscriber-paid compensation is free from conflicts of interest, and this is just not true. While an issuer of debt prefers to receive the highest possible rating for his bond, an investor would rather have a lower rating because it decreases the price and offers the possibility of arbitrage should the rating be upgraded in the future.

But if investors benefit the most from ratings, why shouldn't they pay for them?
Most investors are not in a position to pay subscriber fees to a rating firm. The issuer-pays model allows us to publish our ratings for free on our website, whereas the subscriber-based model creates information haves and have-nots in the marketplace. Market coverage is another significant factor. A subscriber-based firm has no incentive to develop ratings that investors have not agreed to pay for, making it potentially difficult for new issuers to get ratings and for investors to learn about new opportunities.

What about a third-party board, such as what Sen. Al Franken has proposed, that would separate rating agencies from issuers?
The policy of the U.S. government is to reduce reliance on ratings by eliminating references to nationally recognized statistical rating organizations in certain regulations. Standard & Poor's emphatically supports that policy, and the Franken amendment would run counter to it. For example, having the rating agency assigned by a third party, whether the government or its designee, could lead investors to believe the resulting ratings were endorsed by the government, thereby encouraging over-reliance on the ratings -- the opposite of what the government has said it wants to do.

Moreover, if rating engagements were assigned either by a random or a next-in-line basis, credit rating firms would have less incentive to compete with one another, pursue innovation and improve their models, criteria and methodologies. This could lead to more homogenized rating opinions and, ultimately, deprive investors of valuable, differentiated opinions on credit risk.

Then what can be done to improve ratings quality and manage conflicts?
Our approach has been to take a top-to-bottom look at our ratings and implement some transformative changes in our policies, procedures and criteria. For instance, we have made changes to our criteria for rating mortgage securities so that it will be much more difficult for such a security to receive a triple-A rating. We have greatly enhanced our already robust system of checks and balances to maintain analytical independence. In addition, our credit analysts, who generally have earned advanced degrees before joining S&P, must pass a rigorous certification program designed by New York University's Stern School of Business. We have further strengthened our firewalls that separate analysts from commercial activities. Our compliance function is one of the strongest and most comprehensive in the financial services industry. And we have embraced new levels of transparency that allow investors to see how we arrive at our ratings and to agree or disagree with our opinions and act accordingly.

We believe that issuers and investors should have a choice of firms using different compensation models, so long as potential conflicts of interest are disclosed along with the steps the firm has taken to mitigate those conflicts. We also believe that investors large and small will always have a need for independent assessments of credit risk as part of a complete examination of investment suitability.

Even as we have experienced traumatic dislocations in the global economy, we have also seen a very positive development. Investors now have a better understanding of the need to analyze all facets of risk -- not just creditworthiness -- in making investment decisions. This should help bring greater stability and fewer shocks to the system.

22: ANNOUNCEMENTS - Bank of America Begins Implementation of...

...Principal Reduction Enhancement under National Homeownership Retention Program

Qualified Homeowners Who Are Severely Underwater May Earn Forgiveness of Some Principal Over Three or Five Years

Bank of America has begun implementation of an earned principal forgiveness approach to modifying certain loans eligible for its National Homeownership Retention Program (NHRP). The plan is being offered to homeowners who owe considerably more on their loan than the current value of their home, when the loan is being considered for modification through the government’s Home Affordable Modification Program (HAMP).

23: ANNOUNCEMENTS - Citi Sells Canadian MasterCard Business

Citi today announced that it has signed a definitive agreement to sell its Canadian MasterCard business to the Canadian Imperial Bank of Commerce.

Terms of the sale were not disclosed. The sale will reduce Citi's assets in Citi Holdings by approximately $2 billion (Cdn) and is not expected to have a material impact on Citi's net income or capital ratios. The transaction is expected to close by October 31, 2010, and is subject to regulatory approvals and usual closing conditions for such sales.

24: ANNOUNCEMENTS - CitiFinancial Reorganizes its US Franchise...

...Announces Plans to Unveil New Brand Name

CitiFinancial, the consumer finance arm of Citigroup, today unveiled plans to reorganize its North American business to better serve its customers and announced plans to re-name its franchise. As part of the plan, CitiFinancial is separating its US business into two segments: CitiFinancial's Full Service Branches and CitiFinancial Servicing.

25: ANNOUNCEMENTS - J.P. Morgan Selected by State of New Mexico to...

...Provide Custody and Securities Services

NEW YORK--(BUSINESS WIRE)--J.P. Morgan Worldwide Securities Services, a leading provider of global custody and fund services, today announced that it has been selected by the State of New Mexico to provide custody and securities services for the State's more than $40 billion in assets.