Credit Reporting Reform: Individual Consumers Must Take Responsibility of Their Own Data

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In September 2017, Equifax announced that the information of 143 million of Americans had been hacked. This was just one of the latest companies to be compromised, joining Yahoo’s 1 billion accounts, JPMorgan’s 83 million accounts, and Target’s 40 million accounts hacked, among others.

What made this hack very concerning was the fact that Equifax is one of the largest consumer reporting agencies that collects our very personal and actionable information, including our names, birthdates, social security numbers, addresses, personal finances, credit card numbers, student loans, insurance of choice, rent payments, and others, without us knowing or giving consent, into a centralized database. 143 million accounts (60% of all adults in US) have been compromised. Our data, which we never offered or given permission to be collected and used, has been made available to malicious strangers. This is a very important topic.

The Fair Credit Reporting Act (FCRA), a law that was last updated in 1970 currently governs Equifax and the other credit reporting agencies. Since then, there hasn’t been any changes or updates, except in 2010, when Congress created the Consumer Financial Protection Bureau (CFPB) as the first federal agency with authority to examine and regulate consumer reporting agencies. While this was a much-needed addition, it does not provide the necessary requirements to keep our data safe.

Credit bureaus are treated much more loosely than banks, as they do not have the same regulatory oversight and do not have regular security audits. In the event of data breaches, such as Equifax’s, there is no specific federal entity designated to investigate the breach.

In response this tragedy, Rep. Maxine Waters has introduced the Comprehensive Consumer Credit Reporting Reform Act of 2017, which intends to be a complete overhaul the country’s credit reporting system. Among others, it plans to change the dispute process, switching the responsibility of proving accuracy of information from consumers to credit bureaus, restore the affected credit of victims of predatory activities and unfair practices, restrict the use of credit information for employment, rehabilitate the credit standing of struggling private education loan borrowers and limit the amount of time negative information can stay on a credit report.

The proposed changes of this act could positively impact consumers, but they do not specifically address the cybersecurity problem. This act does not provide a specific solution to preventing data breaches and protecting consumers’ information from hackers.

This is a new world defined by ubiquitous, overpowering cyberattacks that render all current cybersecurity systems inadequate and lacking. For the time being, unfortunately, it seems that there isn’t a hack proof solution of storing our data. So, if we cannot control who sees our data, we must at least be able to control, and limit the use of our data.

The best bet is to provide each individual person with their own ability to monitor and control access to their credit information. Regulators must require credit reporting agencies to provide free credit freezes to all people.

A credit freeze is a process that allows you to automatically block anyone from checking your credit, making it impossible for impersonators to open any line of credit under your name. If your credit has a freeze on it, you’ll be notified if someone even attempts to open a line of credit using your information. In the same way you have a 2-factor verification system for your email or cryptocurrency accounts, credit freezes can provide added security layers that consumers can monitor and control individually.

This way, you can keep your credit info in “dark mode”, and only open access to your credit in the exact instant you are applying for a loan, or do any other activity requiring access to your credit score. As soon as you were approved/denied, you can freeze your credit again.

Currently, credit freezes cost $20 each time you initiate it. And because you most likely must initiate a credit freeze for each of the big three credit reporting agencies (Equifax, Experian, and TransUnion), this cost adds up to $60 per credit freeze. Even more, there are hundreds other smaller credit reporting agencies, so this process can get rather complicated and tedious. New legislation needs to require this credit freeze process to be available, and preferably free (or much lower cost) for the consumer across all agencies.

This is a tremendous opportunity for the private sector to provide a much-needed solution: create a platform or application which connects with all credit agencies and offers consumers instant and painless options to take control over their data. Instead of logging on to multiple credit agencies websites each time they wish to freeze/unfreeze their credit profile, there should be a simple application that communicates with all credit agencies (or separate ones – depending on the consumers’ preference) and is able to freeze/unfreeze credit profiles with the simple push of a button.

This collaboration between the government and private sector must have the chief purpose of allowing individual consumers to control their own use of their credit profile, in the hopes of enhancing security. By definition, it is much more complicated, discouraging and fruitless for hackers to try to break into 143 million individual accounts, than it is breaking into one database holding 143 million accounts. As our banking and financial system is changing to provide consumers with more freedom over their money, perhaps it is time for the credit reporting agencies to do so as well.

Since the credit bureaus and regulatory organizations cannot protect our credit data, it is time to let the private market and individual consumers provide a smarter solution.

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Nonbank Lenders: The New Risk in the U.S. Mortgage Industry

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The US housing market in the past 10 years has been characterized by unusually long-lasting low interest rates and robust government-backed mortgage programs. These market conditions have allowed nonbank lenders to boom in the last decade. In 2018 there are several proposals brought forth by regulators looking to agree on a final housing finance reform solution – the single largest piece of unfinished business 10 years after the housing crisis. The problem with these proposals is that they put too much emphasis on traditional lenders such as banks and depository institutions, and not enough on the new risk-takers of the U.S. economy: non-bank lenders.

In the aftermath of the 2008 crisis, regulators and lawmakers implemented a myriad of regulations on banks’ lending practices, in an effort to prevent toxic mortgages. As a result, over the past decade most banks decided to either completely exit the mortgage lending business, or severely limit their mortgage lending to only the worthiest borrowers with stellar credit. This created a very large gap in the lending market. Enter the nonbank lenders.

These nonbanks are usually private institutions that offer limited transparency into their lending activities, and don’t fall under the same regulations as banks. Nonbanks are regulated by state financials regulators such as the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators. However, these organizations have not yet established uniform data and reporting standards – it is very much a work in progress. Thus, for the time being, nonbanks have the liberty to provide mortgages to less financially-qualified borrowers without much oversight.

As a result, in 2016, these nonbank lenders originated over half (53%) of all mortgages in the US. However, that 53% is mostly made-up of mortgage borrowers with lower credit scores. Most non-bank borrowers have less income/wealth, are less likely to have college degrees and are more likely to be minorities. They include 85% of all FHA borrowers, 64% of all black and Hispanic borrowers, and 58% of all low-to-moderate income borrowers. These groups tend to require loans with smaller down payments and have less inherited wealth to depend on in case of an economic downturn. The risk of defaulting on their payments is considerably higher.

While these nonbank lenders are filling in the funding gap and provide financing to a very large demographic that is not being serviced by the traditional lenders, they are exposing themselves and the lending industry to huge risks.

Unlike traditional banks, which handled all three main mortgage functions (origination, servicing and funding), nonbanks only handle the origination and servicing part, while using borrowed funds from banks. Nonbank mortgage lenders depend on credit to finance their origination costs and costs of mortgages in default. Most nonbanks are required to continue making payments to investors, insurers and tax authorities even when their borrowers skip or default on their payments. Also, nonbanks’ creditors – the warehouse lenders – can decide to pull or renegotiate their lines of credit, leaving nonbanks illiquid. Declines in house prices, a rise in mortgage defaults, or sustained rises in long-term interest rates, could each prove fatal to the nonbank lending companies. These multiple points of failure make it a very risky business.

While taking most of the risk, unlike banks, non-bank lenders have extremely limited resources available to survive an economic downturn. Only six percent of their assets are cash, while seventy percent of the nonbanks’ assets are mortgages held for sale. This means that they are used as collateral for their lines of credit and cannot be used by the company to cover any losses. To make matters worse, as of end of 2017, eighty-three percent of nonbanks’ debt was in lines of credit with maturities of less than a year. When that year is over, there is a high risk the interest rates will increase. Without the resources available to banks, such as the Federal Reserve and the Federal Home Loan Banks, nonbanks have no liquidity backstop – absolutely no safety net – in the event of an economic downturn. This could prove catastrophic to the U.S. economy.

The Housing Reform Act is currently underway but most of the rules and regulations proposed are focused on the traditional bank lenders and GSEs, while all but ignoring the rapid rise of nonbank lending and the risks that come with it. If nonbanks were to fail, the U.S. government (taxpayers) would still have to financially cover the losses through FHA, VA, GSEs or Ginnie Mae. From our perspective as taxpayers, it would be a similar situation as the 2008 crisis, but instead of bailing out banks, we would have to bail out nonbanks. We cannot let this happen.

The regulators must take a more active role to address the regulations of the nonbank lending sector, similar to the traditional banking regulatory framework. Regulators must find a way to either limit the nonbank’s sector exposure to risk, or ensure nonbanks secure the resources necessary to sustain themselves in an economic downturn, or a combination of both. Regulators must finalize the state prudential minimums for nonbanks. In addition to net worth, capital and liquidity requirements, this new regulation must consider all factors that determine the nonbanks’ risk, such as maturity and capacity of their debt facilities, business model, and their hedging strategies. To do so, regulators must immediately address and correct the lack of access to data (nonbanks are mostly private) and the lack of staff and resources dedicated to the regulation of nonbanks. They pose an enormous risk on the U.S. economy – comparable to that of the 2008 mortgage crisis – and thus, must be treated accordingly.

Sources:

Forbes: Banks Are Not Lending Like They Should

Federal Reserve: The Decline in Lending to Lower Income Borrowers by the Biggest Banks

Brookings Institute: Mapping the Boom in the Nonbank Mortgage Lending

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Emerging Markets Infrastructure Project Investment: Issues and Opportunities

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Global investment in real estate and infrastructure projects are on the rise. Preqin’s 2018 Infrastructure Fund Manager Outlook notes that institutional investors have heavily invested in the infrastructure asset class for solid diversification and stable returns. Indeed, the report ascertains aggregate asset under management (AUM) quadrupled from US$99bn to US$418bn over the past decade. The industry is expected to increase exponentially over the next decade. Globally, North America and Europe present the most viable of real estate and infrastructure opportunities. However, a bundle of emerging markets economies follow a close third. Global emerging markets infrastructure investments are currently fueled by Asia Pacific’s growth as opposed to other developing regions. Total deal value for the Asia Pacific amounted to roughly US$50bn over the past five years, with more dry powder allocated to projects within Asia.

Feasible emerging market infrastructure projects usually have a Public Private Partnership (PPP) structure, especially for risk mitigation. As we had examined in US Infrastructure: A Case for Public Private Partnerships, PPPs are beneficial as the private entity internalizes life-cycle costs during the majority building phase of new projects, while the project is listed as public investments on the government balance sheet. Purely public sector projects tend to be inefficient, and have full political risk, while purely private projects may have higher returns, but would not have the accountability of check and balance which sovereign involvement brings. Even so, there are many challenges which investors, financiers, and infrastructure fund managers must take into consideration primarily for emerging markets.

Challenges Faced:

The Macquarie Group is one of the global leaders in asset management with US$356bn AUM, and is considered to be the top global infrastructure finance advisor as at 2017. The Group has dispensed significant pain points and mitigating factors with regards to project investment in emerging markets. Most issues stem from long standing bureaucracy, lack of transparency, corruption, geopolitical and cross border risks. Highlights are follows:

Bid and Post-Bid Processes:

In short, red tape from every conceivable side of the project is challenging at best. Emerging markets tend to have delays in bid preparation, unclear bid guidelines, erratic time to submit request for proposals, and restrictive bid processes which place heavy tariffs on the build-operators of the project. In addition, project ‘hand-holding’ requires higher cost of bid bonds and of additional advisors, planners, quantity surveyors and numerous government officers. In addition, deciding on the best commercial funding structure for the PPP would most likely not be as clear or timely as with developed country projects. For instance, financing default from the private side of the PPP may lead to immediate freezing of project assets, as opposed to debt coverage negotiation.

Terms of Concession Agreements:

Land Acquisition is one of the most troublesome components of the project process in emerging markets. The land surveying, land release, ground approvals and resource rights processes, especially in real estate type transactions, take an inordinate amount of time. The best PPP investment projects that may circumvent this onerous component would be public works and transport type projects, where the government already has clear ownership of the sites in question, with full government use of site resources. Also, there is a huge communication gap in terms of the types of environmental and regulatory requirements needed for all emerging markets projects. As the Macquarie Group states, most delays in their infrastructure portfolio stems from having to backtrack and fulfill regulations that were not mentioned from pre-bid inception onwards.

FOREX Challenges:

Forex issues come in second only to land acquisition challenges in emerging market PPP project fulfillment. This is by no means theoretical as I am currently battling this challenge. In many parts of LATAM & the Caribbean multi-million infrastructure developments are offered a mere US$200.00 a day by Central Banks due to paucity in supply and treasury mismanagement. From an investment perspective, Forex volatility for projects denominated in local currencies may create lower yields due to cross border risks, and hedging for many emerging markets currencies is not available.

Macroeconomic Inefficiencies:

In addition to the Macquarie Group’s points supported above, project developers and financiers know that labor supply, labor quality, labor laws, as well as tariffs on materials, material supplies and weather factors are extremely dictating of successful project fulfillment. Most emerging markets may seem to have a dearth of labor supply. However, educated construction labor may be hard to find, and to keep. Many viable emerging market infrastructure projects that have been fully funded have stalled indefinitely due to a lack of both construction and management labor. Unfortunately with PPPs government policy would require local labor to be sourced, creating a chicken and egg situation.

Solutions Presented:

Emerging market project development, financing and investment fit in with high risk, high reward appetite. Yet as we mentioned before prudent infrastructure investments give solid returns and add practical diversification to portfolios. Therefore emerging markets project financing and investments are not to be avoided, but to be mitigated. Successful project investment takes a great deal of sovereign and macroeconomic research, whether per project or via an infrastructure fund. The Macquarie Group pinpoints several requirements needed for investor comfort when it comes to infrastructure investing, and especially for emerging market conditions.

  1. Stable Political Environment:

    Note that a stable political environment will not mitigate red tape. However, mitigated political risk allows PPP projects to be safeguarded against event risks such as coups, and freezing of foreign investments.

  2. Stable Economy with Growth Potential:

    Overall a stable economy with high credit rating gives comfort of low default risk. However, it is necessary to delve further into macroeconomic variables such as labor and capital intensive predilections. Does the country have stringent union interests? Does the country’s labor have the educative capacity to cost effectively get PPP projects done? Are there punitive tariffs on capital intensive projects? It is necessary to ensure the emerging market country accounted for PPP infrastructure projects in its annual budget, broken down by sectors such as transport, seaports, utilities etc.

  3. Open and Transparent and PPP Bid Process:

    Is the country’s public procurement and bid processes in line with international standards and policy frameworks? What is the track record of successful PPP projects in terms of pre-bid to completion timeline? It is necessary to be in close contact with the country’s department of public works, transport and infrastructure to get a detailed log of such a track record before investing in any project, or in any fund.

  4. Stable Financial Market:

    This one is tricky for actual returns, especially as most emerging market projects are structured in local currencies. If investing in an infrastructure fund, the risk is mitigated. If there is direct investment in the PPP project, the risk is heightened, no matter how stable the financial market is. And don’t be fooled by oil-based emerging market countries. One would believe that such countries would have strong cross border Forex capabilities. However, if the projects are non-energy infrastructure, FX paucity and volatility can still be an issue. It’s necessary to examine the country’s central bank and its monetary policy beforehand.

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Family office growth and governance

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Family offices are powerful, a financial force to contend with. Even many in the financial world have yet to understand the family office’s sheer influence, especially when retail investing, private equity and venture capitalism have the limelight. The family office has deliberately preferred to remain relatively incognito when it comes to announcing investment and wealth management strategies.

The family office serves as wealth and trust management of high net worth families. Families can be defined as multi-generation family businesses, as well as high net worth individuals who may have come into inheritance or independent net worth. The family office can comprise an individual, department or separate firm whose sole objective is wealth management and legacy planning for the family. The single family offices (SFO) serves the investment needs of one family while the multifamily office (MFO) is structured much like an asset management firm, providing customized wealth management and planning to a larger number of families and high net worth individuals. This explanation may sound simple; rest assured, the family office structure is one of the most complex in the entire investing sphere.

Family offices are on the rise, and institutional investors are feeling the effects. U.S. Bank’s Ascent Private Capital Management has coined the term “insti-viduals” to describe the marked increase in family office dealflow usually presented to traditional institutionals such as pension funds. And why should the finance industry be surprised? We have had constant challenges with U.S. public pension funds and alternative investors such as hedge funds metting out disappointing returns. While traditional institutionals and hedge funds are very regulated, family offices do not have to register with regulators once investment advice is kept within ten generations of ancestry.

According to Campden Research’s most recent family office report, family offices hold more than US$4 trillion of assets, and the global average for assets under management (AUM) comprises US$921 million. Family offices are fast approaching the alternative investment cumulative AUM of US$5.7 trillion, albeit with much less sensastionalism. Indeed, The Wall Street Journal reports that since 2011 three dozen hedge funds have converted into family offices. The symbiosis between family offices and private equity is also strong and growing, where family offices are taking higher stakes in private equity deals.

Such astounding growth demands a inherent need for continuity. We are confident that the family office is stepping in to fill investment gaps left by failing institutionals and alternative investors. Upon exclusive study of the Family Office Exchange’s FOX Guide to the Family Office, The Family Office Club’s Family Office Report and Trusts & Estates’ expert panel discussion of The Famiy Advancement Sustainability Trust (FAST), we suggest beneficial processes for family offices. In this regard, measures of internal policy ensure family office longevity and legacy.

The Family Office Exchange (FOX) stipulates critical management issues faced by family offices:

  • Goals for the Family and Roles for the Family Office: Ultimately, family investment, philanthropic and legacy objectives dictate the family office’s focus. Issues are further subdivided by:
    • Ownership and Governance;
    • Scope of Services and Delivery Process;
    • Cost of Offices and Allocation of Fees;
    • Operating Structure and Management Talent;
    • Network of Internal and External Advisors;
    • Communications and Client Reporting;
    • Back Office Systems and Procedures.

FOX Family Office Benchmarking™ provided surveyed data from its family office membership concerning family office risk perception. Most families are initially worried about financial and operational challenges. Business risks such as talent acquisition, operating structure, and investment advisory comprise a hefty 37% of the families’ risk perception. Economic and financial risks comprise 26% of risk concern. However, when it came to actual family challenges such as legacy continuity, the family risk perception measured a mere 7%. Via Trusts & Estates’ Family Advancement Sustainability Trust (FAST) analysis, the risk reality shows quite the opposite.

On examining the quantitative and qualitative data of family business challenges affecting the family office, roughly 60% of disruptions and failure stemmed from family communications and generational problems, while only 3% of issues arose from financial and investment advisory challenges. Talent and advisory acquisition in the financial industry does not pose a threat to the family office in our current workforce environment. The Institutional Investor reports a marked increase in hedge fund managers either leaving lagging funds to manage family offices, or converting hedge funds into family offices for streamlined clientele. Private banking divisions at Citigroup, Morgan Stanley and J.P. Morgan have dedicated top senior bankers to be primarily responsible for multifamily office dictates. Family offices have a wealth of investment and estate talent to choose from. Given the flexible regulatory nature of a family office, top talent once constrained in the institutional arena may find room to expand expertise for the family office. In short, it is truly the “Ownership and Governance” issue that needs prioritized attention.

FAMILY OFFICE GOVERNANCE

As with any enterprise, family office governance policies need to be formulated long before execution of any financial and operational implementation. Family offices are in need of much more qualitative guidelines for business and wealth continuity. The Family Office Club based out of Key Biscayne, Florida gives specific insight into structuring family office ownership and governance guidelines via The Family Office Report. Remember, unlike standardized business or investment firms, each family office would have highly tailored objectives, so customization of certain objectives and criteria would be necessary. However, this framework helps with organizational structure across the board. Key components are as follows:

  1. Mission, Vision, & Goals:

    The mission is the starting point for what The Family Office Club coins “The Family Compass.” Family businesses may already have commercial mission and vision statements. However, the family office is responsible for management of the actual family’s qualitative mission, vision and goals. These are high level objectives for wealth creation, succession, philanthropy and legacy.

  2. Ethics & Values Policy:

    The ethics and values policy defines what is acceptable to the family’s core values when it comes to external talent, vendor transactions, business acquisitions, paths of philanthropy, and internal code of conduct. The ethics and values policy covers all issues of compliance such as money laundering, insider trading and bribery concerns. This policy should be reviewed consistently in strategy sessions with both family and external professionals within the family office.

  3. Investment Mandate:

    As expected, this mandate delineates family office investment governance. The investment mandate sets the investment criteria and asset class composition of investments for the family office. All taxation, income growth, wealth creation strategies, liquidity concerns and payout requirements must be detailed in this mandate. According to the Family Office Club, the Chief Investment Officer is responsible for the creation of this mandate, along with input from the CEO and vested family members. The mandate can be revised on a monthly basis. Quantitative social capital investments and philanthropic endowment strategies should be included in this mandate, if applicable. This mandate also aids the family office in shareholder activist campaigns when the need arises.

  4. Key Performance Indicators:

    Key Performance Indicators (KPIs) are highly detailed and action specific dictates per each member of the family office. Measurable outcomes are expected for involved family members and external hires. We would suggest broad KPIs be set for all external vendors, businesses and asset managers who deal with the family office. The Family Office Club suggests creation of at least three KPIs per member, as well as three “smart numbers” comprised of various KPIs for the entire family office.

  5. Systems & Processes:

    Systems & Processes here covers the details needed for organizational continuity within the family office. Where the ethics and values policy or strategic plan may deal with broad succession planning, systems and processes deal with the documenting of detailed processes carried out per member, so that in the case of natural causes or termination, talent or legacy replacement can occur without severe disruption to actual procedures. According to the Family Office Club, each member may add to a mini-process book, which then should be reviewed by selected family office executives.

In addition to the governance policies stated above, the family office will greatly benefit from the creation of a Family Advancement Sustainability Trust (FAST). The FAST is a brainchild of Marvin E. Blum, JD, Thomas C. Rogerson, Gary V. Post, JD of the Blum Firm. The FAST has the structure of a directed trust, but encompasses more than the typical mandate for disbursement of funds to heirs or philanthropic beneficiaries. In the authors’ own words, the FAST is “A pool of funds to invest in the family members—in the family relations, development, and advancement—rather than just distribute to the family members.” The FAST comprises four committees: the Trust Protector Committee, the Investment Committee, the Distribution Committee and the overall Administrative Trustee. Both family members and outside professionals within the family office comprise these bodies. The FAST is primarily for continued family education, family cohesiveness and legacy in both qualitative and quantitative concerns.

The family office has existed across geographies and dynasties, quietly providing funding and making investments long before our global banking system came into play. Modern day family offices are now formalized, and are stepping in to fill investment gaps that are fast being created by lagging institutional and alternative investors. Thus, it is of utmost importance that existing and newly created family offices implement solid governance practices to ensure financial, operational and legacy continuity.

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The Blueprint for Community Banks in a Digital World

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Historically, community banks have been the pillar for any community, as they take care of the needs of the local businesses and families. They have been instrumental in helping the American economy recover from the 2008 financial crisis, as they are highly capitalized and better prepared to withstand an economic crisis than their larger counterparts. Nonetheless, community banks are disappearing at an alarming rate. The total number of banks insured by the FDIC decreased from 7,087 in 2008, to 4,938 in 2017 – a 30% decrease in less than 10 years; this was mostly due to abundant M&A activity, as well as more than 500 bank failures.

Heavy regulations account for a large part in the growing consolidation. A new survey from the Federal Reserve and Conference of State Bank Supervisors found that community bank compliance costs have increased to 24% of community bank net income, in the past two years alone. For almost all bankers (96.7%), regulatory costs were the deciding factors when considering an acquisition.

Bank regulations are a two-edge sword, with both edges cutting deep into community banks’ ability to survive. First, overregulation heavily handicaps community banks from competing for their vital place in the financial ecosystem through increased regulatory costs, increased requirements for capital with fewer sources, burdensome new risk management requirements, new rules dictating every consumer financial product, etc. Eighty-two percent of U.S. bankers claim that government regulations are not on par technology advancement, severely impeding growth.

Second, and equally important, regulations create friction between banks and their consumers. They make it difficult for banks to offer their customers what they want and how they want it. The nail in the coffin: these friction points serve as inspiration for fintech entrepreneurs and other nonregulated competitors to come up with innovative solutions.

The only way to escape from between a rock and a hard place, is to be BOLDER.

The biggest adjustments banks will have to make, is to become the masters of their own fate. Banks cannot expect to survive by simply navigating the regulatory environment and waiting for interest rates to rise.

As financial technology brings a myriad of new capabilities with exponential uses, the banking industry is heading into a new, untapped market, which has not yet been regulated. It is imperative that bankers do not wait for regulators to leisurely catch up and introduce static rules, which often inhibit growth. Bankers understand their industry’s challenges much more deeply than regulators; they have the most skin in the game. They either get ahead of the technological curve, by embracing new technologies and taking action, or fall behind. Behind their competitors, behind the banking industry, behind the needs of their customers. Banks must aim to shape the new competitive landscape, or risk being an outsider in other players’ environment.

Although community banks find themselves in an impossible situation, being the cornerstone of communities for decades, comes with certain advantages over their financial technology and banking competitors.

ADVANTAGES AND RECOMMENDATIONS:

Advantage #1: Trust. In 2017, eighty-six percent of U.S. consumers still place community banks as the number one institution to securely manage all their personal data. Community banks still have the people’s trust, and they must capitalize on it. Trust is power. Trust is something many fintech companies can only dream of earning. The fact that customers trust community banks to protect their information, execute transactions and hold on to their money, puts community banks in a position of power, when competing with the banking and financial technology industry.

Advantage #2: Deep relationship with their communities. Technology alone will not be able to replace community banks, at least not in the foreseeable future. This is because community banks have specialized in the exact things technology severely lacks: emotional intelligence, personal relationships, and as previously mentioned, having the trust of their community.

Community banks focus on providing traditional banking services in their local communities. They are “relationship” bankers as opposed to “transactional” bankers. Long-term relationships with their communities allows to better understand their borrowers and gives them nonstandard data, which they can use to make credit decisions. In many cases, local businesses/startups can only depend on community banks for loans, as they might not always be able to satisfy the more rigid requirements of big banks.

No other institution/technology can support their local communities better than these banks. Big banks are too rigid, and technology alone could never fulfil the role of a bank. Technology can only enhance and automate processes, which make banks more efficient. Innovative technologies are there to serve the banks and their communities, not the other way around. The community bank, as an institution, is here to stay. However, individual community banks’ fates depend on how well they adapt to the new market.

Recommendation #1: Focus intensely on helping customers achieve their goals. That is it. To do so, they must focus on “changing the bank” rather than “running the bank.” The old way of running a bank is making them irrelevant, unable to meet the demands of their customers. The way banks take charge of their own destiny, is by taking an aggressive stance to “change the bank.” It all starts with the team.

Recommendation #2: Assemble a team with a high market intelligence: hiring banking executives with 35 years of experience in the old banking model is not recommended, especially if they do not have an elevated level of current market intelligence. They will not be able to change the bank. As with most other industries, banking needs to adopt and embrace the modern workforce, based on freelancing, flexibility and scalability. As of today, 16 percent of bank’s workforce already engages with freelance workers, and thirty percent of bankers believe this number will increase by fifty percent in 2018. The bank needs to become an agile, efficient, on-demand institution. The workforce needs to reflect these values.

The benefits of the modern workforce represent a new, albeit indispensable access to a wide-ranging pool of in-demand skills and knowledge, that transforms the bank from a static and rigid institution, into an agile entrepreneurial and innovative organization.

Recommendation #3: Employ artificial intelligence and other digital ecosystems, on a large scale. Technology can outperform all employees when it comes to matters of the back-end office and operations. However, the motivation here is not to eliminate the need for employees, but rather to free the employees from tedious and menial tasks, and allow them to focus on engaging with and serving their customers. As the bank evolves to a digital-first business model, bankers must step up their efforts to create relationships with their communities, and actively help them accomplish their goals.

In the end, banks need to once again become the leaders of their communities, helping and enabling their customers to achieve financial success in any way possible. When banks help people achieve more, people will become increasingly confident in this partnership, and will renew their commitment. The old way of “running the bank” will only achieve running the bank into oblivion. As new technologies and systems emerge, banks cannot wait for regulators to tell them how to engage. Banks must learn and adopt these new advances, in a way that makes them leaders of their communities once again, and in the process, teach regulators how to create a more functional regulatory environment.

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