BANKING IN 2014 AND BEYOND

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1 BANKING IN 2014 AND BEYOND Steve Broerman Lorrie Harper Maureen Shildwachter US Bank Fifth Third Bank Huntington Bank OAPT Public Finance Training Institute June 2014 The Banking Environment Current & Future Trends Provide a high-level overview of current banking marketplace Factors impacting access and types of services Economic factors Cash management trends and tools Effective, efficient RFP writing 2 Banking Marketplace Local Banking Footprint Size of footprint Electronic Banking vs. Local Branch Banking Marketplace Factors impacting deposit availability Factors impacting account access Factors impacting types of service 3 4 Projected Trends Regulation/Requirements Trends in bank consolidation Trends in possible branch expansion /contraction Changes in Too Big to Fail Small Banks vs. BIG Banks Dodd Frank & Consumer Protection Act 2010 Objective: Promote financial stability of US by: Improving accountability & transparency Ending Too Big to Fail Protecting taxpayers from bailouts and abusive financial services practices More than 243 provisions calling for 67 studies and 22 periodic regulatory reports! 5 6 1

2 Highlights of Dodd-Frank New regulation and supervision of financial institutions Repeal of Regulation Q authorizing interest bearing transaction accounts for corporations Volker Rule restricts banks from making certain types of private equity and hedge fund investments Changed FDIC limits, assessments and guarantees Durbin Amendment provides the Federal Reserve regulatory power over interchange Collins Amendment now added to establish minimum leverage and risk based capital requirements Highlights of Basel III The BASEL III Accords are new regulatory standards released by the Basel Committee on Banking Supervision that address capital adequacy and liquidity of banks. A landmark achievement that will help protect financial stability and promote sustainable economic growth. The higher level of capital, combined with a global liquidity network, will significantly reduce the probability and severity of banking crises in the future. Nout Wellink, Chairman Basel Committee on Banking & Supervision 7 8 Basel III s Approach to Liquidity Basel s Significant Regulatory Impact Focuses on unencumbered liquid assets on the bank s balance sheet Liquidity Coverage Ratio (LCR). Liquid assets should be sufficient to cover acute liquidity stress scenario which assumes significant deposit runoff and high loan commitment takedowns. Result will be larger balance sheets, higher proportion of securities, and increased pricing for committed facilities, assets, and liabilities. Liquid Assets >= 100% Stressed Cash Outflows (Cash, Treasuries, Limited Agencies) (Liquidity Crisis: Withdrawals of Deposits, Draws on Letters of Credits, etc.) Historically, the focus of regulatory structure has been capital, not liquidity provided by the Federal Reserve Discount Window, Federal Home Loan Bank System, and other banks. The future focus will be on capital AND liquidity. Bank balance sheets will be de-risked holding more lower risk securities and fewer loans Bank Holding of Treasuries $181 billion $675 billion Total Treasuries Outstanding $8.4 trillion $12.5 trillion Bank Ownership Share 2.2% 5.4% 9 10 Other Significant Basel Impacts Depositors will likely see significant pricing decrease for deposits based on their run-off factor. New products will be developed emphasizing 31+ day puttable or callable features or 31 day withdrawal notice requirements. Credit commitments will become more expensive and more difficult to get without other relationship with financial institution due to SAL requirements. New Regulation & Supervision of Financial Institutions Ends Bank Bailouts Creates safe ways to liquidate failed banks and mandates new capital requirements. Increases Regulation of Payment, Clearing & Settlement Systems Provides uniform risk management standards for bank payment, clearing, and settlement activities. Exposes Executive Compensation & Corporate Governance Gives shareholders a nonbinding vote on executive compensation and golden parachutes

3 New Regulation & Supervision of Financial Institutions Increases Transparency & Accountability for Exotic Instruments Provides more regulation for assetbacked securities, hedge funds, and over-the counter derivatives. Provides More Protection for Investors Increases accountability and transparency for credit rating agencies. Enforces Oversight Regulations Allows regulators to pursue financial fraud and conflicts of interest. Possible Side Effects Req Q Effects: Significantly impact the way in which banks structure their product offerings. Influence the way in which banks calculate account analysis. FDIC Effects: Increases potential banking fees to you as higher FDIC rates are passed through. Reduces rates banks are willing to pay Impact of Economic Factors Finance Manager Asking for More Funding Fed Funds Rate Draw Down of QE Interest Rate Environment QE: Fed s Quantitative Easing Trends in Fees & ECRs Earnings Credit Rates (ECR) tiered or tied to Average Balance Levels Different bank appetite for balances to cover fees Hard Charges vs. Soft Charges Finance Manager Being Pulled In Many Directions

4 Cash Management Trends & Tools Collection to deposit collections timely. Investment to eliminate idle balances. Payment to properly time disbursements. Remote Deposit Capture Increased Efficiencies Streamlined Process Creates Check Copies and Deposit Record Funds Availability Always Next Day/No Branch Cut-off/Same day until 8 p.m. Elimination of Float Security and Accountability Electronic Payments Vs. Checks Increased Efficiencies Streamlined Process Creates Check Copies and Deposit Record Funds Availability Always Next Day/No Branch Cut-off/Same day until 8 p.m. Elimination of Float Security and Accountability does your bank provide same day availability for all or part of check deposits made via scanner? ACH Payments cost effective payment method. Automated Clearing House (ACH) Payments Banks now provide initiation of recurring and pre-dated ACH transactions two weeks or more in advance of the settlement date. Same Day ACH When? Collection The most cost effective collection method. Cash 21 Management Cash Management Image courtesy of renjith krishnan/freedigitalphotos.net Credit/ Debit Cards Acceptance From Consumers Still Expensive Ability to Charge Convenience Fee Directly PCI Compliance Requirements Commercial/Purchasing Cards Can some purchases be migrated to a Centrally Managed Purchasing Card Program? Purchasing Card Rebate Annual Net Spend $500,000 Cash $2,500 Investment Star Ohio Balance $3,500,000 Investment $2, Image courtesy of adamr/freedigitalphotos.net

5 Commercial/Purchasing Cards Better Reporting Program Manager for every cards Most users not taking advantage of all features Revenue Sharing Discount Negotiation Vendor List Stored Value Cards (Pre-Paid Cards) Used for payroll Look and feel just like a bank account Only allow payments of actual balance* *Some allow paper checks that can still bounce. Control of Activity Self-Service Changes Mobile ATMs To Support Government Functions, Events, Emergencies Mobile Banking/Payments Mobile Banking/Payments Text Alerts For Critical Updates

6 Effective, Efficient RFP Writing Overview What is the purpose of an RFP?? To streamline the evaluation process when purchasing goods or services What will it do for me?? A good RFP will help the writer collect comprehensive, comparable bids for an equitable evaluation of potential service providers Overview continued What purpose will it serve: Define processing requirements Provide foundation for service contract Enhance communication Encourage competition Build/ solidify relationships What Are You Seeking Service Provider: an entity that provides services to another entity Partnership: a cooperative relationship between people or groups who agree to share responsibility for achieving some specific goal. An open and interactive communicative, consultative partnership must be established- it s a 2 way street Why Write an RFP To do the RFP, you need: Know what you need. Why you need it and how you will evaluate which is the best product for the job Put the project in context for the bidders. Explain the purpose of why you are bidding. State the goals and objectives You need to provide bidders: Scope of services to be provided Identify any restrictions imposed Provide the budget- price range or price ceiling Describe the selection procedure. Outline the deadlines for submitting the proposal, when it will be reviewed and by whom, and when decision will be made BE GENEROUS ON DEADLINE!!! Logic Flaws in RFP Using RFP helps create fairness Competition gets best service and value Kitchen sink RFP pricing tables prevent over charging & creates better contracts Focus on pricing or feature over all other factors Provides detailed information on service capabilities

7 How??? What role should you play to make the process efficient and effective? How do I begin writing an RFP?? Copy another similar entity s RFP Use AFP RFP templates Customize your own to specific wants/ needs 7 Step RFP Process Set Objectives- service, price, location Create Scoring Template Schedule Vendor Meetings/ Presentations Create and Issue RFP Allow for Q & A Simplified evaluation, Score, Award Manage Implementation Process Tips Share your objectives to invite creativity Ask for evaluation of current practices and suggestions for improvements Ask for what you really want Ask for references Ask questions that comparatively make a difference between products or vendors More Tips Be sure to get electronic copy of bid sheetcheck the math!! Don t bid when it is not convenient to bid, or make potential bank or process changes Do product demos before awarding to ensure ease of use and to confirm technical details Questions 41 Image courtesy of anankkml/freedigitalphotos.net 7