Five Change Agents to Watch

Banking has become a very dynamic industry and for better or worse, these change agents could end up having a significant impact on its future.

Banking has always has been a collection of threats and opportunities, risks and rewards. The industry is always evolving, and bankers that don’t look to the future risk being like the head of one regional bank who vowed in the late-1990s not to offer Internet banking “until people can program their VCRs,” and then spent most of a decade playing catch-up.

Today those challenges are defined largely by regulation, new technologies, evolving customer expectations and the economy. Bankers fret over how to make money in a rate-starved environment. They wring their hands about the costs and headaches of regulation-and how, perhaps, to reduce those requirements.

They worry a lot about competition, both from the bank down the street (or across the country) and a growing number of nonbanks intruding on traditional banking turf, such as payments or lending. There are so many potential directions from which to choose. Making the right bet feels at once crucial and impossible.

In a testament to the industry’s importance and vitality, banking boasts a long and diverse list of thought leaders on these topics. It includes everyone from regulators to lawmakers, bankers to nonbank competitors, all looking toward the future from their own vantage points, and all pushing or pulling banks to alter their business practices in response.

As bank boards plot their own institutions’ futures, they would be wise to keep an eye on what five of these leaders identified by Bank Director magazine are doing and saying. Richard Fairbank, chairman and CEO of Capital One Financial Corp., is leading the blind-man’s race to a digital future. No one knows how the whole digital banking space will play out, but that’s not stopping him from throwing a lot of different things at the wall to see what sticks. Fairbank’s goal is to be there, wherever ‘there’ might be, when the time arrives.

Chip Mahan, chairman and CEO of little Live Oak Bank in Wilmington, North Carolina, employs a business model based on Small Business Administration (SBA) lending that looks poised to take a bite out of a lot of community banks’ income statements. You might not like it, but you also can probably learn something by studying his strategy-and the thinking behind it.

Nonbanks constitute a growing threat. At PayPal, CEO Dan Schulman is using payments as a beachhead to invade banking turf. Bankers are ambivalent: Is PayPal friend or foe? Perhaps it’s more of the latter. PayPal offers small-business loans, international remittances and a lot of other bank-like products, plus it already has a European banking license.

Regulation is top-of-mind for most bankers, and no one flies under the radar more than Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network. FinCEN doesn’t get the press that the Federal Reserve or Comptroller of the Currency receive, but as the fight against global terrorism becomes more sophisticated, Shasky Calvery’s profile as the tone-setting industry sheriff is increasing and becoming more threatening to bankers on a personal level.

Last, but certainly not least in bankers’ consciousness, is Sen. Elizabeth Warren. If the industry has a public enemy number one, the Massachusetts Democrat is it. Her work as the architect of the Consumer Financial Protection Bureau is well-known. Warren has a mostly antagonistic relationship with the big banks, but the left wing of the party loves her. She stands to influence both policy and next year’s presidential election, whether bankers like it or not.

Richard Fairbank
Richard Fairbank has never quite fit into the big-bank fraternity, and maybe that’s because he’s always a step ahead of the game. “Most companies say, ‘Here’s where we are, and here’s where we think we can get to,’” Fairbank explained in a 2008 interview. “We’ve said, ‘This is where we think the market is going. How can we get to that endgame?’”

Today, the chairman and CEO of $311 billion asset Capital One Financial Corp. is all digital, all the time. New technologies beyond mobile loom that will change the way people bank, he argues, presenting an opportunity for those willing to take the lead. “The pace of disruption is sweeping, breathtaking and accelerating,” he said in his second-quarter analyst conference call. “Banking is inherently a digital business, and is ripe for transformation.”

To help win the race to this technology-driven future, Fairbank has made a priority of hiring top “digital talent,” and then empowering those folks with “digital workspaces,” as well as the tools and investments. Long a leader in the use of data to drive its powerhouse credit card business, Capital One is developing in-house software design capabilities. Its 2012 acquisition of online bank ING Direct, renamed Capital One 360, has given it a platform to expand its digital push. “We are working backwards from a future where the vast majority of interactions with our customers will be digital,” he says.

A lot of bankers talk about using technology to connect with customers. What makes Fairbank, who co-founded Capital One in 1988, worth watching is his unflinching willingness to invest in ideas that might or might not work. The company’s noninterest expenses rose by $100 million in the first half of the year, to $2 billion, because of his technology investments.

“Digitalization is the Wild West of banking. No one knows exactly where things are going,” says Sameer Gokhale, an analyst with Janney Capital Markets. “Rich is going about this the right way, making a lot of small investments.” Everyone else should be able to learn from both his successes and failures.

James “Chip” Mahan
James “Chip” Mahan is one of banking’s mad scientists, always pushing the envelope on innovation. Twenty years ago, he launched the nation’s first Internet bank, Security First Network Bank, and its profitable sibling S1, the Internet banking platform provider. In 2006, Mahan hatched a plan to start a branchless bank that would only make SBA-guaranteed loans to a handful of national niches, such as veterinarians, small-town drug stores and funeral homes.

Regulators initially balked: The combination of out-of-market lending, high loan concentrations and low core deposits looked like a near-perfect high-risk trifecta. If the application had come two years later, it almost certainly would have been rejected. In 2007, however, the regulators were still open to creative new ideas.

“I thought it was important to allow some experimentation to see if there were different ways to use the small-bank charter,” recalls Joseph A. Smith Jr., North Carolina’s banking commissioner at the time, and now a partner with the law firm Poyner Spruill in Raleigh. “Having one bank that focused on a different kind of lending would give our banks insights” into new ways of serving the market.

They’re getting an eyeful. With $679 million in assets, Live Oak is the nation’s number two SBA lender, behind only Wells Fargo & Co., having originated $805 million of 7(a) Loan Program loans in 2014. Mahan sells most of the loans to investors or other banks, reaping a nice gain on sale, as well as recurring servicing revenue. The company regularly produces a 30 percent-plus return on equity, and in July went public to rave reviews.

Mahan’s out-of-the-box thinking is provocative. He argues that banks waste millions of dollars on branches when everything is going digital. In his view, the industry expertise that comes from employing “domain experts” who understand the nuances of running, say, a veterinary clinic, trumps location.

Live Oak’s loan officers don’t get paid commissions and must invest personal funds in the company. In return, they’re lavished with amenities like gyms and dog parks, and plenty of equity. While Mahan’s business model might not be for everyone, he’s proving that there’s more than one way to run a profitable bank.

Dan Schulman
Dan Schulman is the kind of creative-thinking hippy that many traditional bankers find threatening. He once spent 24 hours living the life of a homeless person on the streets of New York City to see how the other half lives. “I was born with social activism in my DNA,” he told The New York Times.

Named CEO of PayPal in 2014, Schulman aims to use technology to make the financial world more accessible to the masses. A former group president for enterprise growth at American Express Co., he also clearly wants to make his new company-with its $40 billion-plus market capitalization-more like a bank.

Apple Pay might be the big dog in the battle over mobile payments and digital wallets, but PayPal-which was recently spun out from eBay, and is now an independent company (again)-poses a significant challenge. The San Jose, California-based firm pioneered secure online payments, and today processes more than $600 million in volume each day.

Its person-to-person payment options include Venmo, a mobile app popular with the college set, and PayPal.me, which allows people to initiate payments via a text or Facebook message. But the core business is with merchants, and that’s where the biggest threat lies. The company already has a European banking license, and its relationship with small businesses at home includes things like international remittances and a compelling small-business lending operation.

As a payments facilitator, PayPal has access to more detailed borrower sales data than a bank can get, allowing for better underwriting. Repayments are sucked straight from a borrower’s incoming receivables stream, which PayPal manages. “These things are very much bank territory,” says Zilvinas Bereisis, a senior analyst with the consulting firm Celent. “They have an advantage.”

The company started lending two years ago, and now has more than $500 million in small-business loans on the books. Company officials say the volumes are accelerating rapidly. No doubt some bank competitors’ heart rates are, too.

Jennifer Shasky Calvery
Straddling the line between law enforcement and finance, Jennifer Shasky Calvery puts a lot of bankers on edge. Since being appointed as the head of the Financial Crimes Enforcement Network in 2012, the number of BSA/AML enforcement actions has jumped. Money service businesses and casinos get a lot of attention, but so do banks. Already, she’s levied big penalties on the likes of JPMorgan Chase & Co., TD Bank and HSBC, as well as Old National Bancorp, TCF Financial Corp. and Associated Banc-Corp.

Shasky Calvery made her bones prosecuting Russian organized crime networks, so taking on bankers isn’t too daunting. When asked in a 2013 interview to explain the uptick in enforcement actions, she replied: “Maybe it’s because of the new leadership at FinCEN.”

Bankers have reason to be personally concerned: Last December, FinCEN hit Thomas Haider, chief compliance officer at MoneyGram, with a $1 million civil money penalty for failing to ensure that the money-service business complied with AML requirements. “We’re going to see more individuals being prosecuted,” including, possibly, commercial bankers, predicts Ed Wilson, a partner who specializes in BSA compliance at Venable LLP in Washington, D.C.

A two-time All-American basketball player at George Washington University in the early-1990s, Shasky Calvery’s core job is to disrupt funding of terrorists, rogue nations and other ne’er-do-wells. FinCEN is the central clearinghouse for the mountains of Suspicious Activity Reports (SARs) and Currency Transaction Reports generated by banks; while no bank ever gets an award for a good SAR, Shasky Calvery says they assist law enforcement by helping to fill in the gaps. Her latest focus is virtual currencies, such as bitcoin, which have reportedly been used by the terrorist group ISIS.

Bankers might file their BSA responsibilities under the category of good citizenship. FinCEN’s efforts are “more than just good business,” Shasky Calvery said in a May speech. “It’s about doing each of our parts to keep illicit actors out of the financial system.” It’s a duty that bankers can ill afford to ignore.

Elizabeth Warren
No one has caused bankers more pain, or maintained a more contentious relationship with them, than Sen. Elizabeth Warren, and that’s not changing any time soon.

Warren was a driving force behind the Dodd-Frank Act, which saddles banks with added costs, risks and headaches, and chief architect of the hated Consumer Financial Protection Bureau. As Massachusetts’ senior senator, she’s not only the most visible roadblock to Republican-led efforts to scale back Dodd-Frank, she wants even more restrictions imposed on the industry. Her 2013 proposal to reinstate Glass-Steagall-style separations between investment and commercial banking, also supported by Sen. John McCain, refuses to die.

It has become fashionable for bankers to show their disdain for Warren, but the former Harvard law professor gives as good as she gets. When JPMorgan Chase CEO Jamie Dimon condescendingly suggested in June that she didn’t understand the global banking system, Warren quickly fired back: “The problem is not that I don’t understand the global banking system. The problem for these guys is that I fully understand the system and I understand how they make their money. And that’s what they don’t like about me.”

“She’s a very effective counter-puncher,” says Brian Gardner, a Washington analyst for Keefe Bruyette & Woods. “If you’re going to take her on, you need to be very tight in your argument, or you will lose.”

Expect her profile to increase in an election year. If a bill to scale back Dodd-Frank has the votes in the Senate, Warren probably has enough clout to attach her proposed Glass-Steagall restrictions to it-a deal killer in the House. Could Warren also be a kingmaker? The party’s left is already suspicious of Hillary Clinton’s drift to the center, and looks to Warren for leadership. “With just the right wink, she could sink Clinton’s ship,” Gardner says.

Warren might not cut off the party’s nose to spite its face, but she is likely to continue her political attacks on big banks, Gardner says. That would be par for the course.