Keeping buried cash in the yard for a rainy day is a thing of the past. Today, consumers rely on banks to safely store their earnings. But what happens when banks fail? Although it seems impossible, it was not too long ago that news of the Silicone Valley Bank collapse had people panicking and wondering if grandpa had it right with cash hidden under the tomato plants. That, plus unpredictable interest rates, rising cases of fraud, and concerns surrounding AI have consumers questioning the security of their money. Recently, a group of bankers met at a roundtable sponsored by City National Bank and held in Las Vegas to discuss how the banking industry is addressing a multitude of challenges.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together different industries to discuss issues and solutions.
How Are Interest Rates Impacting Banking?
Michael Woodfield: Interest rates are really a challenge, not only for our market, but for the economy.
Bruce Ford: Our bank economists think short-term rates will come down. Rates were forecasted to come down earlier, but we keep getting strong jobs reports, and reports that say inflation is going to stay, and that is why they have not come down [yet]. But they will. I can’t prognosticate when because all of us thought there would be four rate cuts this year.
Chris Swendseid: Prognosticators a year [or] nine months ago were saying we were up for six or seven rate decreases on the short end. That certainly would have caused the yield curve to then be normally upward-sloping. But you do not fight the Fed. They are just going to react. They are very slow to react [but] sometimes they have to react to what has already happened [and it is an overreaction]. The pendulum tends to swing both ways.
Ford: Once rates come down, we can get back to business as usual. We are trying to be business as usual, but our loan demand, obviously, is down. With the higher interest rates, many of the large depositors have moved into treasuries. That is the biggest challenge in our industry right now.
James York: We are not going to see 3% prime rates again. It might drop 1%. What we are witnessing now is a normalization of interest rates. People are learning to accept this really is a fair rate. The average prime rate since they started tracking it in the 1930s is [approximately] 8%. Right now, it is in the 8% [range] so it is pretty close to a normal rate. The public has had a hard time accepting that.
David Navarro: The interest rate environment right now is prohibitive and inhibiting in several ways, from margin and seeing deposits leave, to [requiring us to get] aggressive on deposit rates to attract depositors to fund loans.
York: [Due to a historical normalization of rates] we are earning interest on the deposit side of the bank. For years we did not make any money on that side of the bank. By the time we paid FDIC insurance and everything [else required], it was costing us to hold the deposits. Now it is a money generating product for the bank, much more than it has been in the last decade, so deposits are at the forefront.
Terry Shirey: One of the big changes from two or three years ago is that we are leading now with deposits. That is really the focus and the center of the relationship. We were a wash in liquidity prior to this cycle. Loans were being issued at very low rates and it did not necessarily require a full relationship. Now, if you want to borrow from us and you want to use our balance sheet, you are going to need to also have your main operating accounts with us. I know other banks are generally looking at that the same way.
Navarro: [At some point] it started to switch as clients started to realize their deposits had value and many wanted higher rates. In order to attract new depositors, we had to often utilize higher rates to incentivize them to come over. March of 2023 was the start of this fight for deposits. And the total non-deposits decreased significantly because many went into treasuries and now we have a more limited basket. It has created a difficult dynamic.
What Should Customers Be Aware of Concerning Fraud?
Shirey: Fraud is increasing dramatically. Definitely on the cyber security front, but we are also seeing many fraudulent attempts in our branches. Check fraud, in particular, has grown over the last couple of years.
York: [Check fraud has been] out of control for the last couple of years. [Fraudsters] are capturing checks through the mail, washing the checks, [and then] paying people for their paycheck so [that the fraudster] can go make a copy of it and create counterfeit checks.
Shirey: A big [reason for the escalation of check fraud] has to do with EMV chips being added to credit cards because that used to be the easiest way for fraudsters to get quick access to money. When that went away, we expected they were going to alter course. But most of us are surprised by the level at which check fraud has come back with such force.
Swendseid: The nefarious characters have more difficulty on the electronic side and with some of the other wire fraud because there are so many [early detection systems] in place.
York: It is a huge industry-wide problem across the country. Only 9 percent of the payment systems are paper checks, yet it represents 66 percent of payment fraud.
Sandy O’Laughlin: We have gone back to the ’80s. Back in the ’80s, we would teach everybody on the onset of how to look for washed checks. I really thought it had died out. But what was old is now new again.
York: We had more in check fraud than we had in loan losses [in the last two years].
O’Laughlin: [Due to an increase in check fraud] it would be more cost-effective for [businesses to move away from paper checks], and much more beneficial for the banking institution in general to only deal electronically.
Denette Suddeth: And if [businesses] have checks, we recommend [they use] positive pay, which is another level of fraud protection for the bank and the client.
York: [The bank is] not taking losses on wires. That is locked down. But good old fashioned washed checks or forged checks [are having a significant impact]. [Fraudsters are] walking into banks and cashing [fraudulent checks], or they run them through their bank and cash it. They change the payee and they trade false IDs.
Navarro: Educating your customers [is essential to battle fraud]. That includes educating them on the products that banks typically offer [such as] positive pay to prevent fraud and making them aware of some of the common fraud tactics. [For example, if] you receive a piece of mail from your vendor that you have done business with, and it says, “direct all payments here” and there is a new phone number listed to call with questions, [first] call the number that you know works and see if [the mail is] legitimate. Little things like that go a very long way.
Suddeth: We have focused on having an alert system within our clients’ account so that they get notified of potential fraudulent transactions.
Stacy Watkins: [We must] enhance technology and innovation. We have to invest those dollars and that puts pressure on profitability. But it is a must have. We have to invest dollars in technology for the security of our clients.
Navarro: We always [tell our bankers] to know your customer. If you know your customer, you will see what activity falls outside the scope of the business they typically do. And [when they see something suspicious] that is usually a good time to call the customer. [We also discuss] best practices [with our bankers], not just fraud tactics, but internal controls. [For example], have a second approval on a wire, if it makes sense. That can alleviate a lot of the fraud that is so common and prevalent. A lot of [fraud] is not as sophisticated as you might imagine. It is the same old tricks.
York: Education is big. [Our business clients] need to be looking at their accounts daily [since] they are writing checks. It is not a consumer problem. This is a commercial banking problem. We bank almost entirely businesses, and they all still write checks.
Watkins: If you are a business holder [you need to] check your business account daily. You are not going to get your money back if you check in 30 days.
York: [Clients] have 60 days to report a fraudulent check on their account, [but] 60 days is too late for us to recover any money. If it is outside the 60 days, we either opt to refund the money, because we do not want to lose the business, or we split the loss with them. We try to get them on positive pay. [The client needs to be] educated that they have to protect their own businesses. But many do not have anybody in their office looking at the accounts every day.
Is AI Widely Used in Banking?
Swendseid: We switched from an older core system-based fraud detection software into a much more robust AI-driven fraud detection with a large vendor. It has been night and day [in terms of efficiencies] with our ability to run through transactions. As opposed to having tens of thousands of possible fraudulent transactions in a day, now it is down to a thousand, and they are meaningful. AI has really helped with that process. It makes [our fraud detection] more efficient.
Suddeth: AI is important in terms of efficiencies. But we have to balance the risk of it because the regulators also have expectations around how AI is used. We think [AI] is going to play an even bigger role [in the future]. All banks are sensitive to it, so it is not [currently] being widely used.
Swendseid: From a back-office operations [perspective], AI will help a lot.
Watkins: We use AI for some of [our marketing]. We do not input data into AI from a protection standpoint, but you still need someone to put in the request of what you are looking for. [Utilizing AI results in] shifting ever so slightly [to more jobs in] cyber security, innovation and technology.
Ford: We use some [AI] but [we do not use it] extensively. [Some of our colleagues] are using it extensively and the technology has really helped their business. But because of our regulatory burden, we can’t do everything that they do. I do think we will increase our usage [of AI] as it makes sense and gets better.
Phyllis Gurgevich: Banks are subject to such stringent regulations; across everything they do. There is the [issue of] safety and soundness, third party risk, consumer protection, status security [and so on]. As they develop or deploy something in the AI space or any new product, tool, or any new service, it is all done under that regulatory framework. [Therefore] if you can’t discriminate, you can’t discriminate using AI. Those regulations are already built in. It makes [integrating AI] a little slower and more strategic as the uses are deployed because the regulators are proactively looking to make sure that these new products, services, or uses are compliant with the existing regulatory framework.
How Did Banks Address Client Concerns Over the Silicone Valley Bank Collapse?
Shirey: [The Silicone Bank collapse was not only an issue of] unrealized losses, it was the fact they were so concentrated with a small number of depositors. [But] we do relationship banking. We have granular deposit bases. You are not subject to those bank runs that were just a very small number of people could decide to pull their money and cause your bank to fail.
York: The public did not understand why Silicon Valley Bank closed. It was a real education [opportunity]. We had to educate them [and explain] this is why that happened. [We would encourage clients] to look at their bank balance sheet and would educate them on what to look for.
Navarro: Many banks got on the phone and called their customers, because at first the fear was safety and security of deposits, especially if you had above the FDIC insured amount. We had a lot of conversations [and told] every single one of our customers here in Nevada individually what we felt our strength and security was [along with] ways in which they could further secure [their funds] beyond the standard $250,000. I think that was very helpful.
O’Laughlin: We saw a lot of money moving out [initially]. [There was] a lot of panic. Then within a couple of weeks, the money moved right back to where it came from.
With the Increase of Online Banking, Are Brick and Mortar Branches Still Necessary?
Shirey: [Physical branches] are still very important. [The environment] is much different than it was five years ago. It is now a place to find solutions for clients and to consult with clients. It has become less and less of a place for them to just purely transact.
Swendseid: The size of the branches are getting smaller. You see a lot of kiosk type branches. For us in the community banking space, [none of us] are over-branched. [We always consider] what makes sense in the digital age and we all are able to offer a robust solution for that. But [brick and mortar branches] are important.
Watkins: Many institutions changed from having [their branch] drive-thrus closed to now reopening them because they were seeing that service impact piece on the business.
Shirey: We are doing a lot more outbound [work compared to before]. Our colleagues are out in the market now more than they used to. Business is not going to just walk in the door.
York: The decrease in transaction volume in the branch traffic has really decreased, primarily due to the pandemic of 2020. When branches were shut down, people learned to bank electronically. The ones who were the dinosaurs and were resisting, had to jump on board. [But] they learned to do that and [now] they bank digitally. They can do almost all their transactions without ever coming into the bank. On a transaction basis [traffic] is less [but] they want to know you are in the neighborhood.
Shirey: [Clients] want to know they have access to a branch, even if they do not use it.
Is This Industry Overregulated?
Watkins: [There is a challenge with] balancing regulatory compliance oversight while being proactive with cyber risks and continuing to be innovative with customer-centric services, We are also trying to focus on profitability as a newer institution. It is a wide range balancing act as we are looking forward to continued unprecedented times.
Gurgevich: It is about balance. I have never heard a bank or a banker say they do not like regulations. Everybody loves the regulations. That is what keeps the industry stable and strong. That is what assures [all the banks] are delivering a high standard and a high quality. But can a regulation miss the target and cause problems for a particular product line? Absolutely.
Suddeth: Part of the issue [with regulations is questioning] where the level playing field is. Because some of the innovations and the regulation of institutions [are resulting in] a lot of transactions getting driven outside of the regulated banking industry in certain ways. It is important for the regulators to understand that impact and create a more level playing field with the nonfinancial institutions that are doing a lot of the volume today.
Gurgevich: When [a regulation misses the target], it involves a lot of back and forth in conversations with regulators. Hopefully, they are willing to listen. Unfortunately, sometimes there is litigation. That is a last resort, and we have seen that happen a couple of times in the past year and a half or two years.
Shirey: The new proposed long-term debt rule would really impact a lot of regional banks. Credit unions of that same size would not be subject to that. [It is important to have a] level playing field across financial service providers to ensure you are not creating unintended consequences by advantaging or disadvantages certain segments. [That] should be a priority.
York: [The Consumer Finance Protection Bureau] is really a consumer-generated regulatory act. That is the only place we really feel way overregulated because we are not a consumer bank or a commercial bank [although] we do offer some consumer services for our business proprietors. [In that regard] we are way overregulated. We are treated like a consumer bank and the over-reporting is ridiculous in the application processes and things.
