That was then. This is now

Transcription

1 That was then Over the past year, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out. The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs. -Summary for the discussion draft of the Restoring American Financial Stability (ultimately the Dodd-Frank Act), Chairman Chris Dodd, Senate Banking Committee, 2009 This is now Hardly anyone has actually read Dodd-Frank, besides the Chinese government and our correspondent in New York. Those who have struggle to make sense of it, not least because so much detail has yet to be filled in: of the 400 rules it mandates, only 93 have been finalized. So financial firms in America must prepare to comply with a law that is partly unintelligible and partly unknowable. A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee. IT S A WONDER THE JOBLESS RATE ISN T EVEN HIGHER THAN IT IS. -The Economist, February

2 November 16, 2012 The Dodd-Frank Act and its impact on community banks. Kim Ford, Vice President of Public Affairs

3 This summary of provisions contained in the Dodd- Frank Wall Street Reform & Consumer Protection Act and associated regulations therewith, along with other information contained in the presentation, does not constitute legal advice and does not create any attorney-client relationship. DISCLAIMER Because of the generality of this summary, the information provided may not apply to your business, should not be treated as legal advice, and should not be acted upon without specific advice from your legal counsel based on the facts and circumstances of your particular situation. First Data makes no representations or warranties as to the accuracy or completeness of this information.

4 Our Agenda: Answer 3 questions 1. Who cares? 2. So what? 3. What s in it for me? 4

5 Who cares? Virtually everyone within the financial services sector. Landmark U.S. Payments Industry Laws / Regulations -- All Within the Last Five Years OVERDRAFT REGULATIONS requires consent before FI could assess fees for overdrawing an account CREDIT CARD REFORM ACT OF 2009 designed to curb abusive credit card lending practices; also contains prepaid card restrictions DODD-FRANK ACT significant financial reform law ; Title X created the Consumer Financial Protection Bureau and contained the Durbin amendment, regulating debit card interchange rates & addressing network routing and payment acceptance UNLAWFUL ONLINE GAMBLING payment cards may not be used for Internet gaming IRS MERCHANT TAX REPORTING requires financial institutions and processors to aggregate merchant trx & submit data to IRS annually 2010 ADA STANDARDS updated standards impact public accommodations and ATMs (specifically audio output reqt s) 5

6 The Dodd-Frank Wall Street Reform & Consumer Protection Act Originally intended to prevent another economic crisis, the sweeping regulatory reform package signed into law on July 21, 2010, fundamentally changed the financial services landscape and will result in a panoply of new regulations for years to come. FINANCIAL STABILITY establishes the Financial Stability Oversight Council, requires living wills ORDERLY LIQUIDATION regulated winding down of FIs that pose systemic risk BANKING REGULATOR CHANGES OTS abolished, FDIC insurance coverage increased to $250K, FDIC assessments HEDGE FUNDS/INVESTMENT ADVISORS Hedge funds and private equity advisors must register with the SEC as investment advisors and must provide information about their trades and portfolios so that regulators can assess systemic risk INSURANCE new Federal Insurance Office within the U.S. Treasury Dept to monitor the insurance industry and regulate certain insurers BANKING LIMITS establishes prudential requirements for FIs; title contains the Volcker Rule (bans proprietary trading) DERIVATIVES comprehensive regulatory scheme for derivatives, many derivatives have to be cleared and traded on an exchange or swaps execution facility, and imposes capital and margin requirements PAYMENT, CLEARING & SETTLEMENT FSOC designate systemically important financial market utilities; rules on risk management standards INVESTOR PROTECTIONS spans investor protection, credit ratings, securitization, municipal advisor registration; covered entities must keep 5% of credit risk of securitized assets and mortgages; Shareholders of public companies will have a say on pay ; defines qualified residential mortgages CFPB creation of new federal consumer protection agency with broad jurisdiction over consumer financial products and services; the Durbin amendment FRB CHANGES narrows FRB lending authority and provides greater oversight over the agency (stems from emergency lending criticism) IMPROVING ACCESS TO FIS establishes programs designed to reach the unbanked and underbanked populations TARP reduces TARP authorization by several hundred million and no new programs under TARP allowed MORTGAGE REFORM limits on compensation of and steering by mortgage originators, home mortgage underwriting requirements, certain prohibitions on mortgage terms, new restrictions on the terms of high-cost mortgages, rules for mortgage servicers on escrow accounts and force-placed insurance, additional requirements for appraiser independence IRC 1256 CONTRACTS clarified that Section 1256 of the IRC does not apply to certain derivatives contracts transacted on exchanges 6

7 Dodd-Frank Exemptions for Community Banks those with less than $10 billion in assets Durbin debit card interchange fee cap Future assessments that pay for the increase in the FDIC reserves Direct enforcement authority by the Consumer Financial Protection Bureau Rules by the Commodity Futures Trading Commission requiring "financial entities" to conduct central clearing of derivatives Annual stress tests from regulators Systemic risk oversight imposed by the FSOC (rule applies to FIs with more than $50 billion in assets) Orderly liquidation authority for the largest, systemically risky financial institutions (by the FDIC) 7

8 Fun Fact During the enactment of the DFA, the Congressional Budget Office reported to Congress that the creation of several DFA-mandated agencies, the Consumer Financial Protection Bureau (CFPB), the Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), and the Office of National Insurance would cost taxpayers $6.3 BILLION. To add some perspective If you paid $1 dollar every second of every day, it would take almost 32 years to reach $1 billion. A billion seconds ago, it was A billion hours ago, we were living in the Stone Ages 114,000 years ago. If you started counting to 1 billion and did so non-stop for 24 hours a day, 7 days a week, it would take you 95 years to finish. 8

9 SO WHAT IS THE IMPACT ON COMMUNITY BANKS??

10 Generally, the Act will result in higher compliance and operational costs and more consolidation in the industry, particularly at the community banking level. Maureen Young, partner, Financial Services Corporate and Regulatory Group, Bingham McCutchen LLP According to the American Bankers Association, the impact of Dodd-Frank on community banks can be broken down into four categories: (1) higher operating costs to comply with scores of new rules (2) limitations on capital (3) restraints that may drive community banks out of lines of business (4) greater uncertainty and risk 10

11 The Consumer Financial Protection Bureau The CFPB was created to ensure adequate protections are in place for consumer financial products and services. Authorized to Conduct rule-making, supervision, and enforcement for federal consumer financial protection laws Restrict unfair, deceptive, or abusive acts or practices Take consumer complaints Promote financial education Research consumer behavior Monitor financial markets for new risks to consumers Enforce laws that outlaw discrimination and other unfair treatment in consumer finance Although the Dodd Frank Act exempted banks under $10 billion in assets from primary enforcement by the CFPB, many of the CFPB s rules will still affect community banks. 11

12 Recap of The Durbin Amendment Section 1075 of the Dodd-Frank Act includes the following statutory provisions DEBIT INTERCHANGE RATES PIN & Sig debit interchange must be reasonable and proportional to debit issuers costs Effective 10/01/11 Exemption for government issued benefit cards and general-use reloadable prepaid cards Exemption from debit IRF regulation for FIs <$10 in assets FRAUD MITIGATION NETWORK FEES Fraud mitigation cost adjustments for interchange Allows the FRB to make adjustments to interchange for issuers Issuer must comply with fraud-related standards outlined by FRB Network fees cannot be used to Directly or indirectly compensate issuers & circumvent interchange fee regulations Effective 10/01/11 Effective 10/01/11 EXCLUSIVE NETWORK ARRANGEMENTS Issuers and payment card networks are prohibited from restricting participation in electronic debit transaction processing to only one network or two affiliated networks Effective 4/01/12 MERCHANT ROUTING Issuers and payment card networks are prohibited from setting priority routing rules and requirements merchants have control over routing Effective 10/01/11 DISCOUNTS/ INCENTIVES MINIMUMS/ MAXIMUMS Allows merchants to offer discounts to consumers to incent alternative payment methods (e.g. cash, check), with non-discriminatory caveats Does not differentiate on the basis of the card issuer or payment network Is offered to all buyers and clearly disclosed Allows merchants to establish up to a $10 minimum for credit card transactions Government agencies and institutions of higher education may establish maximum amounts for credit card payments Effective 7/22/10 Effective 7/22/10 12

13 Executive summary of the final regulations for key provisions within Section 1075 PROVISION FINAL REGULATIONS EFFECTIVE DATE DEBIT INTERCHANGE RATES CIRCUMVENTION OF DEBIT INTERCHANGE FRAUD STANDARDS The FRB adopted a stand-alone cap of $.21 per transaction with an ad valorem component of 5 basis points (to reflect each issuer s portion of fraud losses). Applicable only to debit issuers with $10 billion or more in assets. The FRB will review circumvention/evasion of debit interchange regulations on a case-by-case basis. Net compensation from a network to an issuer (excluding interchange fee revenue + other specific types of revenue) is prohibited, although that may not be the only determining factor in a finding of circumvention/evasion. The FRB allows a fraud prevention adjustment to the debit interchange cap of $.01 per transaction, provided an issuer meets general fraud prevention standards. October 1, 2011 October 1, 2011 October 1, 2011 NETWORK EXCLUSIVITY MERCHANT ROUTING Each debit card issuer, regardless of asset size, must participate in two unaffiliated networks without regard to the authorization method. Merchants are allowed to control the routing of debit card transactions, but routing is limited to the payment card networks enabled on the debit card. Networks may not have exclusive arrangements beginning October 1, Issuers must participate in 2 unaffiliated networks beginning April 1, October 1,

14 Key Durbin Effective Dates Interchange cap Circumvention of interchange Fraud adjustment Merchant routing End of network-imposed exclusivity arrangements Issuer compliance with network exclusivity Network exclusivity compliance for prepaid, healthcare cards and government-administered cards Effective dates contained in the 6/29/11 final regulations from the Federal Reserve Board October 2011 April 2013 April

15 Post-Durbin What is First Data seeing? 15

16 On the DFA Horizon What to expect next year Better picture of what s happening on the Volcker rule, especially the reporting standards Finishing prudential standards (i.e., capital and liquidity requirements and leverage limitation of 15-1) New fees and assessments Mortgage providers / mortgage servicers i.e., clarity on the definition of a qualified residential mortgage, which will become the standard in terms of what is written as a standard mortgage in the US going forward The credit risk retention rule (also known as the skin in the game provision) which requires banks with securitized assets to withhold 5% of the credit risk of those assets before securitizing them More progress on over-the-counter derivatives regulation 16

17 Looking to the Future As we look to the future, how do financial institutions continue to generate revenue, add value to your customers and manage costs in such a difficult regulatory and economic environment? (I.e., what s in it for me?) 17

18 What We Know Community banks characteristics uniquely define them. Trust in local banks is relatively high Demand for lending is still out there. Tend to have a geographic focus, Tend to focus on relationships Tend to hold loans instead of securitize them Tend to be funded more by deposits than assets According to the Chicago Booth / Kellogg School Financial Trust Index, people s trust in local banks is at 56% This is relatively high when compared to trust in large corporations, at 15% There are still opportunities to grow your loan portfolio (banks with less than 10 billion in assets comprise almost 60% of small business lending) 18

19 Solutions to Consider Drive debit volume Analyze all outsourcing relationships and drive out unnecessary costs Ensure you are using the right fraud prevention tools Compliance by design (as opposed to an afterthought) Know Your Customer 19

20 INSIGHTS INTO CONSUMER PREFERENCES

21 Setting the Stage By the end of 2011, there were 6 billion mobile subscribers, which equals 87% of the world s population. (International Telecommunications Union) 64% of mobile phone time is spent using apps. (Nielsen 2012) Mobile payments are expected to quadruple to $630 billion by (Juniper Research) More than half of the world s adult population (over 2.5 billion) do not use any form of formal financial services, yet about 70% of all people on the planet use a cell phone. CONCLUSION: AS CONSUMERS MOVE THEIR LIVES INTO A MORE FULLY MOBILE, MULTI-DEVICE, MULTI- SUBSCRIPTION MODEL, THERE IS AN OPPORTUNITY TO REACH CONSUMERS IN DEVELOPED MARKETS IN A NEW AND INTRUSIVE WAY, AND TO ACCESS THE PREVIOUSLY UNTAPPED, UNREACHABLE, AND UNBANKED MASS OF HUMANITY IN EMERGING ECONOMIES. Center for Media Research Report: Engage at Every Stage: Using Mobile Relationship Marketing (MRM) to Put More Interaction in the Hands of the Customer Report, October 2012) 21

22 The following slides highlight some excerpts of a study conducted by Applied Research & Consulting, LLC For Details about the consumer survey: A nationally-distributed online survey of 500 consumers All screened to meet the following criteria: Adults, 18 and older Have a checking account in their name Have a debit card and/or credit card The survey was conducted in September

23 Banking Attitudes Large majorities of respondents expect their bank to provide online banking services and real-time access. Almost a third expect a mobile phone app. Banking expectations 0% 20% 40% 60% 80% 100% I expect my bank to provide online banking services 82% 14% 3% 1% I expect real time access and support of my financial accounts 81% 16% 1% I expect my bank to provide me the information and tools that allow me to make my own financial decisions I expect my bank to take my individual circumstances into consideration in their dealings with me I expect my bank to offer me products/services that match my lifestyle It's important to me to earn rewards or recognition from my bank for being a loyal customer 43% 39% 65% 59% 45% 44% 31% 34% 4% 1% 5% 2% 11% 2% 14% 2% I expect my bank to provide a mobile phone app 32% 37% 28% 3% I would like my bank to save me money by sending me offers and discounts for non-banking products or services 29% 41% 26% 3% [n=502] Agree (8-10) Neutral (4-7) Disagree (1-3) Don't know 23

24 Banking Attitudes Smartphone users are more likely to expect a number of services from their bank than basic cell phone users. Respondents are more likely than those 55+ to expect a mobile app from their bank (39% vs. 24%, not shown). Banking expectations 0% 20% 40% 60% 80% 100% I expect my bank to provide online banking services 85% 79% I expect real time access and support of my financial accounts I expect my bank to provide me the information and tools that allow me to make my own financial decisions I expect my bank to take my individual circumstances into consideration in their dealings with me I expect my bank to offer me products/services that match my lifestyle It's important to me to earn rewards or recognition from my bank for being a loyal customer 32% 44% 40% 43% 53% 61% 64% 67% 75% 84% I expect my bank to provide a mobile phone app I would like my bank to save me money by sending me offers and discounts for non-banking products or services 12% 21% 35% 45% Smartphone [n=307] Basic cellphone [n=185] 24

25 Banking Attitudes Women are more likely than men to expect real-time access, consideration of personal circumstances, and products/services that match their lifestyle. Banking expectations 0% 20% 40% 60% 80% 100% I expect my bank to provide online banking services 80% 85% I expect real time access and support of my financial accounts I expect my bank to provide me the information and tools that allow me to make my own financial decisions I expect my bank to take my individual circumstances into consideration in their dealings with me I expect my bank to offer me products/services that match my lifestyle It's important to me to earn rewards or recognition from my bank for being a loyal customer 35% 39% 39% 50% 53% 62% 67% 65% 77% 85% I expect my bank to provide a mobile phone app I would like my bank to save me money by sending me offers and discounts for non-banking products or services 31% 34% 27% 32% Male [n=240] Female [n=262] 25

26 Online Banking Nearly three quarters of respondents bank and pay bills online frequently (using a desktop or laptop). Only a minority make person to person payments online. Relative to the Benchmark wave, all three online banking activities have increased. How often do you do the following online, using a desktop or laptop computer? 0% 20% 40% 60% 80% 100% [among respondents who use desktop or laptop] % Frequently 0% 20% 40% 60% 80% 100% Banking (e.g., check balances, make transfers, etc.) 74% 88% Banking (e.g., check balances, make transfers, etc.) 74% 69% Pay bills 71% 85% Pay bills 71% 66% Make a person to person payment (e.g., pay a friend for your share of a group purchase, or pay for something you purchased from your neighbor, etc.) 15% 30% Make a person to person payment (e.g., pay a friend for your share of a group purchase, or pay for something you purchased from your neighbor, etc.) 9% 15% [n=500] Frequently plus Sometimes Wave 2 [n=500] Wave 1 [n=997] 26

27 Online vs. Mobile Banking Banking activities [among respondents with smartphones] 0% 20% % 40% Frequently 60% 80% 100% Smartphone owners still use a computer more frequently than a mobile device for banking activities. Banking (e.g., check balances, make transfers, etc.) 33% 76% 76% Pay bills 20% Make a person to person payment (e.g., pay a friend for your share of a group purchase, or pay for something you purchased from your neighbor, etc.) 6% 16% Desktop/laptop [n=305] Smartphone/tablet [n=307] 27

28 Mobile Banking Apps Have you downloaded your bank s mobile app onto your smartphone? [among respondents with smartphones] Have you downloaded your bank s mobile app onto your tablet? [among respondents with tablets] Yes 47% No 53% Yes 29% No 70% [n=307] Don't know 0% Don't know 1% [n=156] by Age % Yes 0% 20% 40% 60% 80% 100% [n=117] 55% [n=133] 46% 55+ [n=57]* 32% Nearly half of all smartphone users have downloaded their bank s app. Smartphone users are more likely than those 55+ to have downloaded their bank s app. Among tablet users, fewer have downloaded their bank s app. *Estimates may not be reliable due to small sample. 28

29 Responsibility for Account Security How responsible do you personally feel for maintaining the security of your credit/debit card accounts? It is completely the banks and merchants responsibility, not mine (1) Banks' & merchants' responsibility (1-3) 17% My responsibility (8-10) 17% 5.48 It is completely my responsibility, not the banks and merchants (10) [n=502] When respondents are asked to locate themselves on a continuum of personal responsibility for payment card account security, the average response is right in the middle of the scale. There are no differences by age, gender, or smartphone usage. [n=502] Neutral (4-7) 66% 29

30 Key Takeaways LARITY OMPLIANCE ONSUMERS OMMUNICATION USTOMER PREFERENCE ONFIDENCE 30