Competition, fraud, compliance, technology…
to say the financial services industry has its hands full would be an understatement. Both banks and credit unions are facing challenges on many fronts...
Competition Heightens
Banks have to keep score of who’s teaming with whom. Among recent merger announcements is word that Western Alliance Bancorporation and Bank of Nevada have signed an agreement whereby Bank of Nevada and Nevada First Bank will merge with and into BankWest of Nevada. Privately held Bank of Nevada had deposits of $254 million, loans of $213 million, and regulatory capital of $25 million at Sept. 30, 2005. BankWest of Nevada reported deposits of approximately $1.6 billion, loans of $1.0 billion, and regulatory capital of $140 million at the same date.
Mergers in the banking industry often benefit other banks, said Bill Oakley, president of 1st National Bank of Nevada. “Employees who have gone through mergers before get scared and jump ship. This creates opportunities for banks in a tight marketplace to pick up good employees,” he noted. However, when people do exit, banks can be left understaffed.
Kirk Clausen, Wells Fargo’s regional president for Nevada, is responsible for the more than 100 Wells Fargo banking locations in the state. Clausen contends mergers and expansions by banks are changing the complexion of banking in both Northern and Southern Nevada. Clausen is bullish on Nevada. “Competition makes us all better,” he said.
Growth in Northern Nevada seems to be much more diverse, both from a consumer and business climate, Clausen said, calling it a “constant building upon a solid base.” While Northern Nevada remains on an uptick, in Southern Nevada the growth is a bit more frenzied. “But there is a lot of stability in the state overall,” Clausen maintained. “It’s a fun place to do business.” Banks are also enjoying strong growth in the rural parts of the state. “Rural Nevada is showing positive trends, largely due to the recent expansion of mining operations and certain economic development efforts,” said Clausen. “It has proven to be a fairly stable environment, from both a business and consumer perspective.”
The Burden of Compliance
Bank compliance rules and regulations govern the industry and protect consumer confidence and the monetary system. The difficulty in maintaining compliance is that the industry is faced with constantly changing and growing rules and regulations that are not always easy to interpret or monitor – and are not always consumer-friendly. In addition, maintaining compliance calls for substantial resources in people, time and money.
“We have internal auditors who review files and processes in an effort to identify any risks, including those related to the regulatory environment in which we operate,” said Oakley. “We also pay external auditors to perform similar reviews that ensure an arm’s-length audit.” In addition, the bank regulatory agencies perform regular audits to make sure the bank does not operate in an unsafe or unsound way. “The regulatory agencies need to ensure the public’s deposits are protected and the bank is not operating in such a way as to put the bank’s assets at risk,” he added.
But many of the regulations designed to protect consumers also make it more difficult to serve them, as well as adding costs, which the institution passes on to consumers, said John Guedry, CEO of Business Bank of Nevada. “For smaller institutions it presents a cost and resource challenge and for larger institutions it presents an enormous monitoring challenge,” he said. “It costs us $500,000 [each year] in salaries to maintain internal controls and bank compliance. It’s a difficult challenge and requires a certain level of expertise.”
Clausen of Wells Fargo agreed that compliance can present a challenge. “We clearly have the infrastructure to research the newer laws and work hard to change systems and adapt to new legislation, but for smaller financial institutions, it’s a huge hardship,” he said.
Oakley added, “The regulatory environment impacts all banks and financial institutions. The bigger you get, the more scrutiny you get from regulators.”
Like banks, credit unions must conform to federal guidelines requiring financial institutions to document the identification of each new account-holder. “We have to check each and every individual who comes into our system to make sure there’s no risk of bringing in someone who’s looking to create chaos,” said Bruce Rodela, president and CEO of Frontier Financial Credit Union and also chairman of the board for the Nevada Credit Union League. “We’re no different from the banks in that regard. Due to the risk of terrorism, it’s just something we have to do.” However, he said he did not know of any credit union having to hire extra employees to process the federal paperwork, explaining that staff members have found ways to work the new procedures into their daily routines.
Fighting Fraud
Fraud, especially Internet/high-tech fraud and identity theft, is a big concern for bankers and credit union executives across the country. The number of cases prosecuted by the U.S. Department of Justice is growing, showing that the executives have reason to worry.
According to the Department of Justice, in one federal prosecution defendants allegedly obtained the names and Social Security numbers of U.S. military officers from a Web site, then used more than 100 of those names and numbers to apply via the Internet for credit cards with a Delaware bank. In another federal prosecution case, the defendant allegedly obtained personal data from a federal agency’s Web site, then used the personal data to submit 14 car loan applications online to a Florida bank. Those are only two examples of how identity theft is a growing problem.
Another cause for concern in the industry is “phishing.” Pronounced “fishing,” and also known as “brand spoofing,” it is a scam to steal valuable information such as credit card and Social Security numbers, user IDs and passwords. An official-looking e-mail is sent to potential victims pretending to be from their bank, ISP or retail establishment. E-mails can be sent to people on selected lists or on any list, expecting that some percentage of recipients will actually have an account with the real organization.
The phishing e-mail states that due to internal accounting errors or some other pretext, certain information must be updated to continue service. A link in the message directs the user to a Web page that asks for financial information. The page looks genuine, because it is easy to imitate a valid Web site, and the illegal scammers use it to collect account information.
Oakley agreed that fraud is a huge issue in the financial world, and Nevada is no exception. “We have a very good security team and a very good operations team who have prevented any major losses from fraud,” he said. “Like every other bank in the country, we are always subject to check fraud, and even low-dollar frauds can add up to huge numbers.”
Jackie DeLaney, president of Sun West Bank, said, “Fraud and identity theft are big business, including schemes in which people make fraudulent representations to get a loan.” The burden of catching the criminals who defraud financial institutions and their customers falls on agencies that are often overwhelmed with other types of crimes. “A fraud that involves a lot of money will obviously get more attention from law enforcement, as will schemes that attack a number of different banks and show an organized pattern of crime,” DeLaney said. “But, there are only so many investigators and so many hours in the day. We just have to work with the system, even when it’s slower than we might want.”
Fraud seems to be just as much a problem for credit unions as it is for banks. “At times it can be very painful. These people are diabolical and can be very clever in the ways they commit these crimes,” said Rodela. “We have a lot of controls in place to try to thwart their efforts, but there will always be someone who can work their way around any control and get away with funds. It hasn’t been real bad – we’ve protected ourselves through insurance, but we’re always on guard for it and have to constantly keep our systems updated.”
DeLaney said one way to fight fraud is to educate people on the dangers of check fraud, identity theft, phishing and other illegal Internet schemes. “We periodically print up marketing materials for our customers, either as handouts or statement stuffers, advising them what they can do to avoid being victims,” she said. Customers who use the Internet for banking will see links on Sun West’s Web site directing them to informational materials provided by the FDIC and other agencies.
The Credit Union Debate
Changes in the financial marketplace have allowed many credit unions to evolve from niche players into full-service retail depository institutions over the past 30 years. Today, credit unions have the ability to offer complex financial products and also extend their membership to virtually everyone, just like banks. From the public’s perspective, this new breed of credit unions is indistinguishable from banks, but there are some major differences, according to the American Bankers Association (ABA), in that credit unions don’t pay taxes, don’t have community reinvestment responsibilities and don’t have regulatory supervision comparable to that which governs other complex financial service providers.
Bill Uffelman, chief executive of the Nevada Bankers Association, serves as the organization’s leader and lobbyist. Uffelman takes issue with credit unions using their tax-exempt status to offer lending services like regular banks. “We do not have an issue with credit unions doing what they were chartered to do,” Uffelman said. “It’s when they go out and try to behave like banks that we have cause for concern.”
Guedry said there are several issues at play. “Competition requires us to be better at what we do, but we pay a large percentage of our profits [in taxes], and credit unions pay zero,” he said. “It gives them a price advantage in the marketplace. The bigger issue for me is that the credit unions were formed to serve their members. If they operated within the framework of how they’re supposed to operate, nobody would have a complaint. They want to be commercial banks and still have all the benefits of credit unions.”
Credit union representatives counter that what distinguishes them from banks is not the services they provide or the people they serve, but their not-for-profit structure. In addition, said Rodela, “We’re not really that big a threat to banks. For example, my credit union has been around for almost 50 years, and our assets are around $70 million. It’s taken us 50 years to build up to that number because we’re required by law to grow only through retained earnings. Most of the community banks founded in the mid-1990s have twice the assets we do, after only 10 years or so. Their main competition is not from us; it’s from the large mega-banks like Wells Fargo and Bank of America, so why do they think we’re such a threat? Credit unions have historically held around 6 percent of household financial assets, and we’ve maintained that percentage for many years.”
Rodela said the expansion of credit union services is not driven by a desire to move into banks’ territory, but is instead an effort to meet members’ requests for additional financial products. Rodela’s organization, formerly known as Washoe Credit Union, received approval from federal regulators over a year ago to expand geographically out of Washoe County. It can now serve government or healthcare workers in several Northern Nevada counties. “We didn’t want to offer our services to the general public. We wanted to stay a group credit union,” explained Rodela. “However, like any other business, credit unions need growth as an engine to carry them into the future. We need to seek out new markets.”
“We’re not here to put the bankers out of business,” he stated. “Bankers need to realize that competition is just part of doing business. We have 87 million members nationwide, and for the most part, they are willing to step up to preserve what credit unions are about. We’re not going to go away.”
Recruitment & Retention
Financial services companies join the healthcare industry and the construction trades in declaring that finding and keeping quality employees are among their top concerns. Credit unions, although facing the same low unemployment environment as banks, seem to be having fewer difficulties with recruiting and retention.
Oakley said his bank is focused on retention of both employees and customers. “The competitive forces and activity in the marketplace here make it difficult to hire good bankers,” he said. “Good bankers who have been in the market have been recognized, are highly sought after and are very well compensated.” While there are opportunities to bring new bankers in from out-of-state, bank officers must weigh these opportunities against the benefit of hiring people who know the market and have an existing network.
Banks are always vulnerable to having employees lured away for more money, said Oakley. “The lack of loyalty is especially noticeable in the younger generation,” he noted. “People in their 20s expect to be very well compensated now and don’t understand the learning curve. They say, ‘I’m worth this much, and I want to be paid.’ Many don’t even stick around for their annual review if someone offers them more money.”
DeLaney said employees at her bank are constantly targeted by other banks and by headhunting agencies with offers of higher pay or better benefits to move to a competitor. “Retention often means getting into a bidding war,” she stated. “As the price goes up, we have to decide whether it’s worth it to keep that person.” One solution DeLaney has found to the chronic shortage of trained employees is to create training opportunities for junior people, in which the bank pays for their education at professional schools, enabling them to be promoted from within the organization.
Taxing Issues
Clausen commented on the two-pronged state tax situation imposed on Nevada banks by the 2003 Legislature. One tax is based on payroll, and a special excise tax – applied only to banks – assesses $7,000 for each Nevada branch location, in excess of one, open for business on the first day of a given calendar quarter.
“The fact that banks and banks alone pay a [payroll-based] tax three times higher than the rest of the business community is not fair,” said Clausen. All businesses with the exception of banks pay a state tax based on 0.65 percent of payroll, whereas banks pay 2 percent. “In many ways, I do not feel as if that was appropriate. If a bank that has multiple locations can be taxed, why not a fast-food chain?” Yet he feels the Legislature will eventually come around. “I trust elected officials to review the tax and decide it is not appropriate,” he said.
Asked whether the credit union organization had been approached by banks to help them reverse the taxes passed by the last Legislature, Rodela laughed. “That would be very hard for me to do,” he said. “If they were to cool their jets and stop hammering on credit unions all the time, I’d consider helping them out, but I can’t see helping them in any way until that happens.”
Guedry said the legislation opens a Pandora’s box for certain industries to be targeted. “Our industry was being singled out and taxed a higher rate. If another industry is successful, will they be singled out? This is the ‘kill the golden goose principle’ and it may kill the entrepreneurial spirit,” he said. “As a bank that serves the business community, my concern is not only how much I’m paying in taxes, but that clients we serve will also be singled out because they are in a growing industry.
“As an industry and as a company, I believe we have a responsibility to pay our fair share of taxes to serve the needs of the state, as does any business that benefits from being in this rapidly growing, vibrant economy,” he added. “But it should be fair and equitable.”
According to the American Bankers Association, the high tax burden and compliance costs associated with tax laws and regulations raise the cost of financial products and services to businesses and consumers throughout the country. These costs place a heavy burden on large and small banks alike.
Uffelman pointed to other challenges for bankers in Nevada, including the payroll tax, the per-branch tax, a squeeze on interest rates and regulatory requirements. Uffelman’s primary goal when he represents bankers in the 2007 Legislature is to repeal the banking branch tax and reduce the payroll tax to the same level faced by other employers.
“There is a notion that the banking industry has parity with other businesses, but we do not,” Uffelman maintained. “Being a banker and making the kind of money the banks have made in the past is getting more challenging.”
