The banking industry must constantly adapt to changes:
in the economy, in the interest rate environment, in regulations, in online security and in political leadership. For many bankers, it’s a never-ending balancing act, and the coming months will again challenge their adaptability and resilience.
Bankers constantly adjust their business model to account for interest rates, which affect nearly all aspects of banking. “There is tremendous uncertainty regarding the current direction of interest rates,” noted Tom Traficanti, president of Heritage Bank of Nevada, which has seven branches in northern Nevada. “Three months ago, the expectation was that the Federal Reserve would be reducing short-term interest rates seven or eight times in 2025; recently, that expectation has been reduced to two or three times. In turn, we’ve seen long-term interest rates, like mortgage rates, increase recently from around six percent to almost seven percent. Interest rates will probably remain fairly stable and drift back down this year, but there’s a lot of uncertainty about the effect of the new administration’s policies on inflation and the economy.”
Chris Swendseid, president and CEO of Meadows Bank, agreed that rates will step down in the coming months, but warned that, although inflation has come down, “It’s still a little sticky. We’re still waiting for the huge amount of monetary injection during COVID to flush out of the system,” he said. “I would agree with probably 90 percent of the bankers out there who feel that the Fed will wait and see. Long-term interest rates are a different story. The Fed may decrease rates by 50 basis points, but the bond market is concerned about inflation because of the large U.S. deficit. So, that’s going to keep long-term rates higher.”
Lower interest rates should be good news for businesses seeking loans from their banker, but Stacy Watkins, president & CEO of Lexicon Bank in Las Vegas, noted, “One thing that confuses the public is that, when the Fed drops rates, they expect business loan rates to drop. That’s not always the case because those rates are tied to treasury rates, and those may still be high. There’s often a lag with loan rate reduction. We try to educate investors. If they find a good deal, they should lock it up when it’s presented instead of waiting for the interest rate to change. We advise them to get off the sidelines, talk to their banker, and don’t pass up a good deal. They can always reprice the loan later.”
Loans Versus Deposits
The interest rate environment is one factor in determining whether a bank’s profitability will be most affected by making loans or by earning interest on deposits. “[For our bank], loans are still the primary driver of net profitability,” said Swendseid, whose bank has three branches in southern Nevada, two in Reno, and one in Phoenix. “Typically, we’re in the lending business, but we’re also in the deposit preservation business. One thing that’s changed over the last year and a half is that we now require a certain amount of deposits to come with a business loan.”
Traficanti pointed out that many businesses are facing loan rate increases on five-year loans that were originated or modified in 2020. If the business and its owners have deposits with the same bank, they may be able to get “relationship pricing” that translates to a lower interest rate on the loan.
The balance between loans and deposits can change rapidly, according to Traficanti. “Lending and deposits are more equally important now than they ever have been,” he stated. “When deposit rates were near zero, lending was more of the focus. As interest rates went up, deposits became more valuable, and – as we saw last year – they became critical, with everybody competing [for deposits]. Banks are slowly adjusting, and liquidity is pretty strong now. Deposits are still important to us so we can keep making loans.”
The Regulatory Environment
Another factor affecting banks’ bottom lines is the regulatory burden placed on them by the federal government. “We have seen a proliferation of federal agency overreach, writing regulations that go beyond congressional intent and skipping important procedural steps,” said Phyllis Gurgevich, president of the Nevada Bankers Association. “It’s given rise to industry lawsuits when other pathways to correct these wrong actions are skipped or fail. At the state level, we are seeing attempts to create state legislation that clearly ignores federal preemption.”
Complying with a host of federal and state regulations means banks often have to increase staffing. “Compliance staffing has increased exponentially,” said Swendseid. “Regulatory agencies were always looking out for the bank customers, but they felt they needed yet another agency, so they started the Consumer Financial Protection Bureau (CFPB) and took it to a whole different level. That’s been the hardest to deal with. Regulation is not all bad, but over-regulation can be really bad, and that’s the situation we’re getting into now. Instead of over-regulating banks, they should pay attention to non-bank entities and cryptocurrency. There are many pitfalls for consumers there.”
Technology: A Two-Edged Sword
Banks both large and small have had to adapt to changes in technology over the last few years, but especially since COVID, which accelerated the move toward online and mobile banking for both consumers and businesses. Gurgevich noted, “More than half of U.S. consumers now use mobile apps more often than any other method to do their banking, according to an ABA/Morning Consult survey. In addition to increasing accessibility to banking, a host of improved safety and security features have been boosted by technology.”
Larger banks, including JPMorganChase (JPMC), were among the first to make large-scale investments in technology to reduce their overhead, increase efficiency and help protect customer data. “Technology is at the heart of everything we do,” said Michael Woodfield, the company’s Nevada market executive for middle market banking and specialized industries. “Tech is key. We spend $17 billion annually on technology and operate globally on an unparalleled scale, investing in technology to make it easier to bank anytime, anywhere.”
Once sophisticated bank-related technology was developed, smaller banks quickly took advantage of this valuable resource. Fintech companies developed systems to help business clients operate more efficiently, and community banks use these systems to level the playing field with larger banks. “As a community bank, we want to adopt technology to give clients a similar experience to what’s offered by larger banks,” said Watkins. “We’re investing in technology while still protecting clients’ information, which can be costly.”
Technology can also be used by criminals to initiate sophisticated fraud schemes, especially with the advent of Artificial Intelligence (AI). “Scams are present in all forms of payment, and they target people of all ages and backgrounds,” noted Woodfield. “Fraud is the number one thing that keeps our customers up at night, and it also keeps us up at night.”
Social engineering, in which fraudsters try to convince people to reveal personal information or banking credentials, has been a problem for years. In addition to educating customers about how to avoid becoming victims, banks have developed products to help business clients protect themselves against fraud. “In Positive Pay, you get a list of checks presented against your account so you can match them up with the checks you’ve actually written,” said Traficanti. “A similar product is available for ACH transfers. We also actively educate our clients about internal procedures for fraud prevention, like dual authentication.”
Banks continually deploy the latest technologies in their efforts to fight cybercrime and financial fraud, according to Gurgevich, who stated that banks actually prevent almost $9 out of every $10 of fraud attempted. “We’re using AI to defend ourselves,” said Swendseid. “Machine learning can explore your spending habits and flag suspicious activity. So, small-time hackers have converted to old-style fraud: paper checks. Businesses especially are still writing checks and many still pay their employees by check, so there’s an opportunity to wash them and fill in the check with false information. Cyberattacks and phishing get the biggest headlines, but the biggest fraud we’ve seen lately is check fraud.”
Does technology spell the end for traditional in-branch banking? Not according to most bankers. “Even with increased use of technology, the value of a personal expert remains a huge benefit for bank customers,” said Gurgevich. “While technology simplifies routine banking like depositing checks and paying bills, both consumer and business account holders can be confident that their banker is there to help walk them through those larger or more complicated financial transactions, like qualifying to buy a home or financing expansion for a growing business.
As always, banks need to assess market conditions in deciding whether and how to modify their branch network. Swendseid stated, “Large banks may downsize their branch network to be more efficient, and they may downsize branch sizes as well. The average branch size used to be around 4,500 square feet, but you don’t need that much space anymore. It could now be less than 2,000 square feet. But brick-and-mortar will not go away, especially for community banks.”
“Face-to-face interaction is always best,” stated Woodfield. “That’s how you build trust and loyalty. Our goal is to always be in front of our clients. A lot of customers see value in in-person banking and coming into a branch. Chase continues to invest billions into its branch network and expanding our branch footprint.”
Although Lexicon Bank has only one office, Watkins said, “Clients come to us from all over southern Nevada because of the service we provide. Meeting with your banker is coming back. When clients have to deal with more complex financial planning, or they’re seeking personalized advice from a trusted banker, they want to do that in person.”
New Administration, New Changes?
The Trump administration has promised to reduce regulations and increase government efficiencies across the board, but it remains to be seen how this will affect the banking industry. On many bankers’ wish list is the reduction of the regulatory burdens placed on them by the federal government. “The new administration seems more likely to hold off and possibly repeal some of the costly regulations,” said Traficanti. “Hopefully, there will be more realistic conversations about the regulatory burden on banks, and about the cost of these regulations versus the benefits.”
Swendseid also expressed hope for some regulatory relief. “It’s very possible they will walk back some of the regulations or put a pause on them like they did with the Beneficial Ownership Registry,” he said. “Then, they might go to the regulatory boneyard and end up fizzling away. Streamlining the regulatory process would be helpful, especially if they could streamline the process for setting up de novo banks. Making it easier to establish de novo banks may get communities and investors interested in setting up new banks. Competition creates a healthier banking environment that’s better for consumers.”
Watkins expressed her doubts about major changes, saying, “I’ve been in banking for a long time, and I haven’t seen any major reduction in regulations under a new administration. The 2023 bank failures have left their mark on the federal banking agencies, and I don’t think any political party will want to risk bank runs or bankruptcies due to inefficient supervision. There will always be change, but I don’t see us going backward on any regulations.”
Gurgevich pointed out that the new administration has shown strong interest in financial services issues, such as housing, small business lending and cryptocurrency, and while that isn’t directly related to bank policy, changes there would impact the industry.
“A more business-friendly and growth-oriented national leadership is positive for banks,” said Traficanti. “If actual progress toward debt and fiscal management is achieved, we should see further reductions in inflation and interest rates.” Improving the nation’s economy by controlling inflation, reducing the deficit and putting the brakes on government spending should make things better for all business segments, including banking.
“Consumers are very much behind due to the inflation of the last couple of years,” Watkins pointed out. “In fact, a recent report showed that Nevada leads the nation in credit card delinquencies. It will be important for the new administration to watch inflation. This will give consumers the opportunity to catch up, which will in turn help businesses.”
Woodfield said JPMorganChase conducts an annual “Business Leaders Outlook Survey” among its clients and prospects across the U.S. in the middle market space. He said, “According to the most recent report, those surveyed predicted easing interest rates, reduced worries about recession, and an upbeat and enthusiastic outlook for 2025.”
