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One definition of rich is getting into the top 1%. If that’s your goal, it’s becoming harder to reach.

The income needed to exit the bottom 99% of U.S. taxpayers hit $515,371 in 2017, according to Internal Revenue Service data released this week. That’s up 7.2% from a year earlier, even after adjusting for inflation.

Since 2011, when Occupy Wall Street protesters rallied under the slogan “We are the 99%,” the income threshold for the top 1% is up an inflation-adjusted 33%. That outpaces all other groups except for those that are even wealthier.

To join the top 0.1%, you would have needed to earn $2.4 million in 2017, an increase of 38% since 2011. The top 0.01% threshold has jumped 46%.

Meanwhile, the top 0.001% — an elite group of 1,433 taxpayers — earned at least $63.4 million each in 2017, up 51% since the Occupy protests.

The median taxpayer, at the 50th percentile, has seen income rise 20% since 2011.

.001% Club

Americans need $63.4 million to join the top .001%; $41,740 to be in top half

Rising inequality is a top focus of the Democratic presidential campaign.

“We cannot afford to continue this level of income and wealth inequality,” Vermont Senator Bernie Sanders said during Tuesday’s debate. “We cannot afford a billionaire class, whose greed and corruption has been at war with the working families of this country for 45 years.”

Though the rich in the U.S. are doing well, they also pay the greatest share of taxes. The top 1% earned 21% of the country’s income, and paid 38.5% of federal individual income taxes. The top 1% paid a greater share of income tax to the U.S. Treasury than the bottom 90% combined (29.9%).

Working-class taxpayers do pay many other taxes, including federal payroll taxes for Social Security and Medicare, and state and local levies. However, the bottom half of the income distribution pays very little toward the federal income tax.

The top 50% — taxpayers with an adjusted gross income of $41,740 or more — paid 97% of taxes, and earned 89% of income reported to the IRS.

Tax Burden

Top 50% of taxpayers pay 96.9% of income taxes

The income tax brings in about half of all federal revenues, according to the Congressional Budget Office.

Overall, the IRS data show the U.S. collected $1.6 trillion in income taxes from 143.3 million taxpayers reporting a total of $10.9 trillion in adjusted gross income in 2017, the most recent year available.

The IRS data don’t reflect the effects of the tax overhaul signed by President Donald Trump at the end of 2017. The law lowered individual income tax rates while eliminating many deductions and slashing the rate on U.S. corporations to 21% from 35%.

IRS data through 2017 largely show that average tax rates paid have increased in recent years.

Average Tax Rates

Average tax rate for the top 1% was 26.8% in 2017, up from 23.3% in 2008

Investing in funds that focus on green solutions or companies already delivering solutions can de-risk your portfolio, build a corporate sector that addresses the climate crisis, and allow your assets to grow in harmony with the future.

High-net-worth investors can join angel networks like Powerhouse in Oakland, California, Cyclotron Road at University of California Berkeley, or Prime Coalition, a group out of Cambridge, Massachusetts, that works on early-stage investing. People like to use venture funds like ours as a platform for co-investing – they can see the companies and then, if they want, invest directly in future rounds. Expected returns are the same as for other types of venture capital investments. 

We use a ‘trifecta’ to analyze which sectors to invest in to optimize for returns and sustainability. First, we follow the carbon. Next, we want to fix something that’s broken and really move the needle. Finally, if we look at a sector and the iconic names are 100 years old or more, it’s time to invest.

This leads us to transportation and energy, which are no-brainers. It also leads us to less obvious places, like food and agriculture. This sector generates some 30% of carbon and about 4 out of 10 people on this planet work in it. We just did an investment in Bellwether Coffee, which has a more sustainable method of roasting coffee, and Apeel Sciences, which uses a plant-based coating to keep food fresh for longer. I also like the agricultural data and analytics platform company Farmers Business Network, now in its pre-IPO round.

The circular economy — which aims to minimize waste and use of natural resources — is another appealing sector. We just had an IPO with The RealReal, which started as aspirational fashion but by the time it went public, the circular economy was a key theme for investors and customers. There’s a Los Angeles company, For Days, where you can buy organic clothing and send items back any time to be recycled and swapped for new ones at a very low cost. A company called Yerdle acts as the back office for companies like Patagonia and Eileen Fisher for recycling and resale.

The 25 wealthiest dynasties on the planet control $1.4 trillion

August 10, 2019

The numbers are mind-boggling: $70,000 per minute, $4 million per hour, $100 million per day.

That’s how quickly the fortune of the Waltons, the clan behind Walmart Inc., has been growing since last year’s Bloomberg ranking of the world’s richest families.

At that rate, their wealth would’ve expanded about $23,000 since you began reading this. A new Walmart associate in the U.S. would’ve made about 6 cents in that time, on the way to an $11 hourly minimum.

Even in this era of extreme wealth and brutal inequality, the contrast is jarring. The heirs of Sam Walton, Walmart’s notoriously frugal founder, are amassing wealth on a near-unprecedented scale — and they’re hardly alone.

The Walton fortune has swelled by $39 billion, to $191 billion, since topping the June 2018 ranking of the world’s richest families.

Other American dynasties are close behind in terms of the assets they’ve accrued. The Mars family, of candy fame, added $37 billion, bringing its fortune to $127 billion. The Kochs, the industrialists-cum-political-power-players, tacked on $26 billion, to $125 billion.

So it goes around the globe. America’s richest 0.1% today control more wealth than at any time since 1929, but their counterparts in Asia and Europe are gaining too. Worldwide, the 25 richest families now control almost $1.4 trillion in wealth, up 24% from last year.

To some critics, such figures are evidence that capitalism needs fixing. Inequality has become an explosive political issue, from Paris to Seattle to Hong Kong. But how to shrink the growing gap between the rich and the poor?

As the tension increases, even some billionaire heirs are backing steps such as wealth taxes.

“If we don’t do something like this, what are we doing, just hoarding this wealth in a country that’s falling apart at the seams?” Liesel Pritzker Simmons, whose family ranks 17th on the Bloomberg list, said in June. “That’s not the America we want to live in.”

A notable addition this year: the Saudi royal family.

The House of Saud is worth $100 billion, based on the cumulative payouts royal family members are estimated to have received over the past 50 years from the Royal Diwan, the executive office of the king.

That’s a lowball figure. After all, oil giant Saudi Aramco, the linchpin of the Saudi economy, is the world’s most profitable company. The kingdom is hoping to take it public at a $2 trillion valuation.

Tallying dynastic dollars isn’t an exact science. Fortunes backed by decades and sometimes centuries of assets and dividends can obfuscate the true extent of a family’s holdings. The net worth of the Rothschilds or Rockefellers, for instance, is too diffuse to value. Clans whose wealth is currently unverifiable are also absent.

But of those we can track, most are reaping the rewards of ultra-low interest rates, tax cuts, deregulation and innovation. Koch Industries, for instance, has a venture-capital arm. The latest generation of Waltons is establishing its own enterprises.

Other big gainers include the owners of fashion house Chanel and Italy’s Ferrero family, whose brands include Nutella spread and Tic Tac mints. In India, the fortune of the Ambani family swelled $7 billion, to $50 billion.

In all, the world’s 25 richest families have $250 billion more wealth, compared to last year.

The rich aren’t necessarily getting richer together. The Quandt family dropped eight places following a poor year for Bayerische Motoren Werke AG, which has battled trade tensions and slowing global markets as BMW invests in the disruptive shift to self-driving electric vehicles. The Dassault, Duncan, Lee and Hearst families all fell from the list.

And this could in many ways represent a peak, as U.S. President Donald Trump escalates a trade war with China and worries grow about a global recession.

“It can be very challenging to preserve wealth over the long-term,” said Rebecca Gooch, research director at Campden Wealth, a network and education business for generational-wealth holders. “Family-owned operating businesses can shift from booming to declining, a family’s investment portfolio might not be well diversified or there can be issues with generational transitions.”

South Korea’s central bank cut its policy rate for the second time this year and warned that growth would be weaker than forecast as a global economy hit by trade tensions slows.

The move comes amid a wave of rate cutting by central banks around the world to shore up growth and highlights the sense of urgency at the Bank of Korea to offer further support for the economy, especially with consumer prices falling. Governor Lee Ju-yeol had repeatedly said the BOK had some policy room to act while expressing doubts over whether the bank’s growth forecast for this year could be achieved.

Central banks have been adding stimulus as the effects of a global slowdown seep into economies around the world, with Australia, India, and Singapore among those to have taken action this month. Judging by the pace and extent of cuts so far, the BOK has been on the cautious side in taking rates lower as it remains wary of financial risks from too-low interest rates.

Recent data have continued to paint a gloomy picture of South Korea’s economy. Exports dropped for a tenth month in September, industrial production contracted more than expected in August, and consumer prices have started to fall in lockstep with declining producer prices.

In July, the BOK forecast the economy would expand at 2.2% this year, a projection that it now sees as untenable. In a statement, the central bank reiterated its intention to keep judging whether it was necessary to adjust the degree of policy accommodation, leaving the door open to another possible cut.

The International Monetary Fund added to the increasingly gloomy view for the outlook with its latest forecasts predicting the slowest expansion of the world economy this year since the global financial crisis. The IMF also slashed its projection of growth for South Korea this year to 2% from an earlier view of 2.6%.

While a truce between China and the U.S. may offer some relief to global trade, previous developments in the tariff tussle have shown tensions can quickly flare up at any time

Rate Path

Central bank watchers will be looking to see whether Governor Lee will hint at further moves to come at his press conference later in the day.

“The key question is when the BOK will cut again, and given the economic fundamentals are not looking good, markets should be prepared for another cut,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “It may come in the first half of next year or later and the BOK may opt to cut rates to aid an economic recovery if tech demand bottoms out.”

According to a Bloomberg survey conducted Oct. 1-8, about half of the 25 respondents expect the policy rate to remain unchanged at 1.25% throughout 2020, while a slightly smaller group forecast a further lowering of rates to 1% or 0.75%. Two still expect a hike sometime next year.

The BOK is scheduled to update its gross domestic product and inflation projections at its November meeting. Signals of a significant downgrade by Lee on Wednesday may prompt analysts to bring forward their projected rate cut timing, or amend their calls for no change.

“We think growth will continue to struggle for momentum over the coming quarters,” Alex Holmes, an economist at Capital Economics, wrote in a note after the decision. The firm expects further rate cuts next year to guard against the threat of a prolonged period of damaging deflation, Holmes wrote.

Germany’s car industry built its world-class reputation on sedans like the Audi A4, the BMW 5-Series and the Volkswagen Passat, reliable models that look good in the family driveway or company lot. But a shift in consumer taste to more hulking vehicles is coming at the worst possible time.

Demand for sport utility vehicles that initially took hold in America has spread across the globe, dramatically changing the product mix of carmakers along with their production footprint. Higher sales of the lucrative vehicles, while good for German manufacturers overall, threatens to hurt the workforce in factories at home that are heavily geared toward traditional sedans and hatchbacks.

A car’s combustion engine alone counts more than 1,000 parts, compared with just a couple of dozen components in an electric motor that doesn’t require an exhaust, transmission or fuel tank. The repercussions from the simpler setup cascade through the making of an electric car, with fewer people involved in development, testing, parts purchasing and service.

“The SUV trend will certainly have implications for production structures,” said Rolf Janssen, a partner at Roland Berger consultancy. “For workers, this adds additional pressure to the overall transformation trend.”

Factory Output

Factory staff are starting to push back. In June, Neckarsulm worker representatives estimated the site’s utilization rate at a woeful 60%, despite model revamps for A6, A7 and A8 sedans. The factory, which employs almost 17,000, is missing out on the SUV sales boom and lacks firm commitments to assemble upcoming electric models, the powerful works council said, vowing to not budge on concessions as Audi seeks talks to cut costs.

Since 2009, sales of A6 sedans and hatchbacks have sagged to make up 12% of the total, down from 20%, while the A4 made at the Ingolstadt headquarters has declined to 18% from 31%.

“We urgently need plan to improve capacity utilization now and a medium-term solution for the future,” Neckarsulm labor head Juergen Mews said in a statement.

Audi said its German sites remained the backbone of its global production network. In Ingolstadt, which already makes the Q2 compact SUV alongside sedans, the brand is in the midst of construction work to make the plant more flexible, a spokeswoman said. Talks with the labor council on future allocation plans are ongoing, she said.

Volkswagen’s factory in Emden has likewise faced problems as SUVs like the T-Roc cannibalize the trusty but staid Passat. Falling demand for the former drawing card has forced VW to put some 10,000 staff at Emden on reduced working hours and cut temporary employees.

Plant Rebalancing

Even VW’s headquarters plant in Wolfsburg, the world’s largest single car-manufacturing complex, faces risky times. The ubiquitous Golf, the car that brought VW back from the brink in the 1970s and set the tone for compact city hoppers, has struggled to maintain its allure amid mushrooming offerings of popular compact crossovers.

As an offset, the 20,000-worker plant also makes the popular Tiguan SUV, and should get a boost from Golf production being moved from Puebla in Mexico, Cox said. SUVs make up 42% of production at Wolfsburg with the Tiguan and Seat Tarraco, and VW plans to build compact electric SUVs in Germany, a spokeswoman said. SUV sales should account for half of VW brand deliveries by 2025 and the group will step up bundling similar products across its 12 automotive brands to boost efficencies, according to the company.

BMW has also sought to balance its SUV footprint, adding the X1 entry-size model to its Regensburg site in Bavaria. BMW said its global production network was able to react to changes in demand and customer behavior, while utilization at its eight German plants was “good.”

German SUVs

Mercedes began German production of the GLA compact crossover at Rastatt in 2013 and Sindelfingen last year, in addition to the mid-size GLC SUV in Bremen. But its lucrative GLE and GLS vehicles are still made in Tuscaloosa, and the top-priced G-Wagon is largely hand-built in Austria at contract manufacturer Magna International Inc. Mercedes upgraded its facilities early to quickly react to changes in demand, a spokeswoman said, as demand for Mercedes SUV models has increased every year since 2009.

Switching production to new models is difficult, expensive and time-consuming. Roland Berger estimates that it can take as long as a year to retool a plant to start making SUVs alongside sedans — provided the legwork to accommodate the bigger and heavier vehicles has already been done.

BMW’s Dingolfing factory, its biggest in Europe, last year made 330,000 sedans, from the entry-level 3-Series all the way up to the top-range 8-Series coupe. The facility’s hopes now lie partly on the iNext crossover, a technology flagship in the mold of the i3 electric car and the i8 sports car, which use a carbon fiber chassis, that will go on production in 2021.

“Some of the juggernaut or brownfield plants with deeply ingrained structures will face a tougher task,” said Roland Berger’s Janssen.

运营休闲服装品牌“优衣库”的日本迅销在海外的利润不断扩大。2019财年（截至2019年8月）的合并决算（国际会计准则）中，优衣库海外业务的营业利润超过日本国内。这是日本主要零售业企业的主力业务首次出现海外利润超过国内的情况。不仅是出口产业，海外市场也逐步成为日本零售和服务等非制造业的增长重点。

“已经被全世界接受”，在10月10日召开的决算说明会上，迅销会长兼社长柳井正强调了海外业务的成果。迅销2019财年的净利润同比增长5％，达到1625亿日元，创下历史新高。　

显示主业赚钱能力的营业利润增长9％，达到2576亿日元。细分的话，海外优衣库的营业利润增长17％，达到1389亿日元，高于日本国内优衣库（下降14％，为1024亿日元）。

拉动海外业务的是以中国大陆为中心的亚洲。在由中国大陆、香港、台湾组成的“大中华地区”，迅销2019财年的销售额和利润均实现两位数增长。利用社交网站的数字营销以及与日本热门形象合作的品牌战略获得了以年轻人为主的支持。加上增加开店，新的利润来源也推动了增长，扭转了韩国抵制日货运动的影响。

迅销很早就进驻海外市场。2001年海外1号店在伦敦开张，2002年在上海打造中国首家门店。随后又在欧美和亚洲开设新店，到2019年8月底，优衣库业务在全世界的门店数增加到2196家。

优衣库10月进驻印度，在新德里开设1号店。在被定位为增长市场的“大中华地区”，到2019年2月底已有768家门店，计划到2021财年增加到1000家以上。

迅销在股市中受到高度评价。出于对海外优衣库业务增长的期待，其股价在7月升至上市以来的最高值（每股7万230日元）。目前股价由于对韩国的抵制日货运动及人民币贬值的担忧而暂时低迷，但2018年年底以来的上涨率达到9％，高于日经平均指数（8％）。

市场上有相关人士好评称，“作为休闲款功能性商品，实现了与以时尚为卖点的其他企业产品的差别化，这一点成为优势所在”。

但竞争对手已处于领先位置。根据调查分析网站QUICK FactSet的统计，运营“ZARA”的Inditex（西班牙）的销售额中超过8成来自西班牙以外，在开展海外业务方面领先。

2018财年Inditex的销售额为3.3823万亿日元，营业利润5533亿日元，超过迅销。Inditex以少量多品种为武器，灵活调整产量和库存，营业利润率达到16％，高于迅销的11％。

在电商（EC）业务方面，Inditex和迅销的线上销售占比均为1成多。近年来开展网上销售的新兴企业不断崛起，加强数字业务对于实现增长而言不可或缺。

在10月10日的决算说明会上，迅销提及把电商业务作为“主业”。提出扩大电商对象地域至印度和印尼等、加强线上下单店铺取货的“线上线下融合”。从中长期来看，计划把电商业务的销售额占比提高到30％。

日本内需企业加速“出海”

随着人口下降，日本国内市场不断萎缩，在这种情况下日本内需型企业前往海外寻求出路的动向逐年增强。在上市企业当中，零售业和服务业的海外销售额占比已经迫近到10％。日本企业正试图抓住持续扩大的“全球内需”，借此取得持续性增长。

日本零售业的海外销售额占比接近10％，5年间提高了3个百分点。

经营生活杂货店“无印良品”的良品计划在2019年3～8月的合并营业利润当中，超过3成来自海外业务。该公司不断在中国大陆、韩国、欧美、澳大利亚等地开设门店，到8月底海外店铺已经达到515家。

永旺在中国大陆和亚洲经营商业设施和零售店，在当地购物中心的店面销售额保持着2位数增长。永旺重视在增长潜力大的郊区开店，享受到中产阶层消费扩大的红利。

日本餐饮业也在加速开展海外业务。萨莉亚（Saizeriya）合并营业利润的45％来自海外。截至2019年8月底，在海外经营411家门店。该公司社长堀埜一成表示，“（在亚洲）意大利餐厅正不断渗透，利润持续增长”。

日本服务业的海外销售额占比达到9.5％左右，5年里提高超过6个百分点。Recruit控股通过并购使2018财年（截至2019年3月）的海外销售额占比达到约46％，比5年前提升了20个百分点。电通在2014至2018年进行了164宗海外并购，快速推进全球化。

日本经济产业省的海外经营活动基本调查显示，2017年度末非制造业日企的海外法人数为1万4196家，超过制造业的1万838家。越来越多的日企进驻东盟。

另一方面，日本零售及服务业整体不到10%的海外销售额占比要进一步提升并非易事。迎合当地文化和习惯的“本地化”不可或缺，与制造业相比进驻海外更加困难。

经营牛排店的日本Pepper Food Service公司进驻美国市场，但以廉价、简单为卖点的经营模式并不被当地接受，2年时间超过半数店铺关闭。在百货商场方面，高岛屋等进驻中国大陆和亚洲市场，但在很多地区因消费模式和收入阶层的不同而陷入苦战。

Attend RMA’s premier event of the year to discover best practices for dealing with the critical issues facing your bank today and some that you’ll face tomorrow. Bankers from large, regional, and community banks should attend this conference, which features recognized speakers and specialized tracks. You’ll get specific how-to information in breakout sessions. This conference offers an opportunity to get the latest information on risk management, specialized lending, and regulatory issues. It is designed for risk management professionals at every career level.

Financial institutions continue to face tight margins, challenges in growing loan and deposit levels, heavy competition, and continued pressure on earnings. In this environment, how can bank and credit union leaders squeeze more margin from their portfolio?

The answer is by understanding relationships and the profitability they bring to your organization.

A very small percentage of relationships, typically about 1%, contribute the most value to an institution’s profitability. The loss of any of these key relationships can diminish institution health. Full relationship management is typically related to commercial accounts where an individual’s business and personal network are included in his or her scope of influence. These ties can magnify the results of any front-line interaction.

Understanding your relationships and where the value comes from is imperative to managing a profitable portfolio.

Can You Identify the 1%?

In 2019, Kaufman Hall and Financial Managers Society surveyed 114 CFOs and senior leaders in North American financial institutions. Sixty-nine percent of all respondents noted that they are not able to view the profitability components of all the accounts influenced by one customer— i.e., the relationship value of that customer. Without this baseline capability, it’s impossible to fully understand which relationships drive the most profitability for your institution.

Knowing the value of all relationships offers many important benefits that impact profitability, including the ability to:

• Retain and expand relationships with your “best customers,” pricing loans and deposits appropriately and providing a commensurate service level
• Identify sub-par customers, who represent improvement opportunities
• Market products and services appropriately, including cross- and up-sell opportunities

Once you’ve accurately defined relationships, begin analyzing their profitability.

Measuring Profitability for Institution Leaders and Relationship Managers

Once your institution can effectively build and manage relationships, it’s critical to use a robust calculation and modeling engine that measures both historical and forward profitability.

Here, the consistency is vital. You need to be consistent between historical and projected profitability, and have a consistent approach to how you analyze profitability across the organization, products, branches, and relationships. Be sure to make the data transparent, agree on methodologies for calculation and how to access the source data, and define each calculation needed (examples include Funds Transfer Pricing (FTP), Risk Adjusted Return on Capital (RAROC), provision expense, and cost allocations).

Institution leadership can get a more accurate gauge of current performance and better predict future performance based on factors such as relationship profitability of the portfolio as existing loans and deposits mature, and the effect of new business on future profitability. They can also look at performance by individual relationship manager to guide incentive compensation, inform coaching opportunities, and identify best practices used by top performers.

Individual relationship managers can prioritize their business development and account management efforts by understanding how relationships perform, and focusing extra time on the top and bottom deciles.

Unfortunately, 68% of survey respondents say their institutions lack an automated means to analyze the profitability of complex relationships. Respondents cite lack of data (45%) and lack of analytics tools (55%) as top impediments to relationship profitability analysis.

Don’t Price in a Vacuum

Building on your understanding of your client’s sphere of influence and empirical profitability, each deal you make must add value rather than dilute it.

The ability to understand how proposed new business impacts profitability hurdle rates (such as Risk Adjusted Return on Capital) and to compare pricing scenarios before making a deal empowers relationship managers to achieve a win-win for the organization and for the customer. For the institution, you create value through:

• Enhanced earnings
• Retained or improved relationships (especially those in the top 1%)
• Profitable growth
• An effective and efficient process for loan officer and other relationship managers

For the client, you create value by:

• Establishing an efficient process to make better, faster decisions
• Providing multiple options to best structure deals to meet their unique needs
• Promoting a strong relationship with the institution, focused on long-term value

Create a Culture of Profitability

To create a culture of profitability across the organization, financial institutions must not overlook any opportunities. By bringing relationship profitability information from the back office to the front lines, your team can leverage data to drive day-to-day decisions that improve value and customer service.

Are you truly creating a customer experience culture that nurtures, builds trust, personalizes and exceeds expectations? Maybe not. After all, it is a tall order for banks and credit unions, these days. Customers are demanding more from their financial services of choice, and are quick to move on if they aren’t getting the satisfaction they deserve.

In today’s banking market, customer experience is a rough landscape for financial institutions to navigate with all of the requirements of the digital transformation era. So, what can be done when customer experience challenges are escalating every day? It’s really quite simple.

In an industry favorite on-demand recording of a Fintech Roundtable Discussion, five panelists discuss and debate the mission-critical shift credit unions and banks are making to cloud-based phone and contact center solutions in order to maximize customer-facing IT investments, while driving growth in new and underpenetrated markets via a better-integrated customer experience.

The customer-focused discussion addresses and solves for major strategic IT challenges including improving the digital customer experience, enhancing data analytics capabilities, increasing return on investment of existing technology applications, meeting regulatory and compliance requirements, as well as reducing operating costs, enhancing data security and improving overall business operations.

Yes, it’s a lot to take on. But these critical challenges require immediate resolution in order to successfully achieve a truly customer-centric banking culture that drives growth – an absolute necessity in today’s banking market.

So, let’s dive deeper into the key points discussed during the Roundtable, as it’s critical for banks and credit unions to address the shift in the financial services industry before it is too late.

Multimedia Customer Engagement + Cloud Contact Center

Telephony is no longer enough for banks and credit unions. Customers have grown accustomed to experiencing a 100% on-demand, digital customer experience across almost all facets of their daily routine, and they require the same from their banking experience.

Financial institutions are facing the heat from the digital transformation that is sweeping the banking industry. Customers are demanding a faster, more effective banking experience from anywhere, at any time, and on any device, and guess what? They’re picky about exactly how they receive their services from a financial institution, too.

Customers want a multimedia customer engagement experience. An all-inclusive, one stop ticket to their service of choice, on any channel they demand.

Phone, email, SMS web chat, self-service options, social media, you name it. Customers want it all, and financial institutions much oblige. If not, and especially as digital transformation continues to evolve forcing banks and credit unions to dive deeper into modern communications technology, customers will take their business elsewhere. It’s already started.

A truly impactful customer experience is at the heart of every successful financial institution and as we stand at the precipice of innovative communications technology, there is no excuse.

So what exactly is, Multimedia Customer Engagement? It’s the concept that ensures financial institutions become customer-centric and respond more powerfully to modern customer communication demands.

Made possible with a Multimedia Contact Center Solution, smart banks and credit unions are leveraging every major channel a customer could potentially want to communicate on. Literally putting customers in the driver seat of their own banking experience and giving them the power to be serviced on their media channel of choice. Whether they are in the car, at work, at home or at a baseball game, customers have the ability to choose between SMS, email, web chat, voice, self-service options or social media in order to get their banking needs met.

People perpetrate fraud. People, sometimes just one individual calling all the shots, also run private businesses.

From Bernie Madoff to Kentuckyana Jones to Elizabeth Holmes, fraud is in the news. It is worth a closer look for bankers, other lenders and investors as to the “how” (and how to ensure you and your financial institution aren’t next). Is there a pattern that professionals can see and avoid?

Let’s test your knowledge and pattern recognition for fraud cases impacting your profession.

Fraud Quiz: What do these lender or investor-related fraud cases have in common?

Theranos: $9 billion fraud with some pretty smart investors and board members as victims in this much-hyped Silicon Valley medical device company. Charged with wire fraud and conspiracy to commit wire fraud (against investors, doctors and patients), founder and CEO Elizabeth Holmes’ trial details were recently announced, with jury selection to begin July 28, 2020. The trial will commence in August 2020 in a San Jose federal court and Holmes faces penalties of up to 20 years in prison and millions in fines.

Fast Fact: Theranos never distributed audited financial statements to investors or anyone else.  MarketWatch reported, “… none of the Theranos investors, who invested more than $700 million with Holmes between late 2013 and 2015, had ever requested audited financial statements.”

Olivet University/Newsweek Media Group: Olivet, a San Francisco Bay Area evangelical college, now owns the former Harlem Valley Psychiatric Center in Dover, N.Y., and to secure financing, officials from the school overstated Olivet’s financial health to prospective lenders, giving them false financial statements, said New York prosecutors. A bank defrauded in the scheme appealed to a state judge to award them money not paid back in the fraud scheme.

Fast Facts: 1. District Attorney Cyrus Vance, Jr.’s office said school officials created a fictitious auditor to make the university’s false financial statements appear legitimate. 2. The $35 million money laundering scheme’s indictments also involve Newsweek Media Group (also known as IBT Media), Christian Media Corp. and Oikos Networks in the expanded fraud probe.

Canopy Financial: Two top executives of the now-bankrupt Chicago healthcare transaction software company defrauded investors and customers of more than $93 million. They falsified bank statements to obtain $75 million from private equity firms.

Fast Fact: The execs used a counterfeit auditor’s report (with KPMG’s name and logo) to support the credibility of their falsified documents.

Kentuckyana Jones: Treasure hunting reality TV personality Kentuckyana Jones (aka Michael Barrick) defrauded multiple banks using false financial information over a five-year period before being caught. According to his plea agreement, the schemes identified by prosecutors involved the antiques trader recruiting associates to purchase business property using falsified documents that substantially inflated assets and income to lenders. Whenever a loan was in danger of going into default, he would repeat the process, creating further fake documentation to acquire new loans to pay off previous ones, ultimately exceeding over $1.4 million.

Fast Fact: The case involved five different banks being deceived into issuing loans.

Munire Furniture: The CFO for Munire Furniture plead guilty to an $18 million accounting fraud in April 2016.  He prepared fraudulent financial statements for the New Jersey-based manufacturer of crib and baby furniture that overstated sales and accounts receivables.

Fast Fact: A commercial bank and a municipality were defrauded into providing loans in this case that was jointly pursued by the United States Attorney for the Southern District of New York, and the Assistant Director-in-Charge of the New York Field Office of the FBI.

Bernard L. Madoff: In this now legendary fraud, the company seemingly had audited financial statements from a CPA firm, and they were distributed to potential investors and other third parties. The SEC charged that the 3-person CPA firm, Friehling & Horowitz, CPAs, P.C., had essentially sold its license to Madoff.  Facing a possible 100+ years in prison, David G. Friehling became a cooperating witness in the multi-billion-dollar scheme.

Fast Fact: The accounting firm had been claiming for 15 years that it didn’t conduct audits (the highest level of accounting assurance engagement), so they weren’t subject to the rigorous review programs required for CPA firms which do audit work.

The Pattern

OK, so how many of these examples were familiar to you? You can see the pattern is financial statement-related fraud. If you follow the news, you also see this type of fraud isn’t all that rare and the victims aren’t just the vulnerable, naïve and eager to trust. They’re educated professionals like you and your colleagues.

In some respects, it’s never been easier or more enticing to commit fraud, because it’s become so simple in the current environment (and the payoff is so big). A recent Association of Certified Fraud Examiners (ACFE) Report called out that, “… while only 19% of total frauds were perpetrated by executives, their median loss of $850,000 per occurrence was more than 17 times greater than the median loss of frauds perpetrated by low-level employees. In addition, 65% of these frauds involved corruption, and 27% were shown to directly involve financial statement fraud. Furthermore, 66% of executive frauds involved collusion, which has been shown throughout various studies to render internal controls ineffective if present.” (¹⁾

The bottom line is that executives and others are perpetrating financial statement-related fraud or, in the case of Theranos, investors never requested audited financial statements.

Some fraudsters get caught eventually and their stories further point out how many tools are now available to defraud banks, other lenders and investors, which also involves unwanted publicity for lending professionals and investors (and even regulators in some cases).

Why Audited Financial Statements

For private companies, reviewed and audited financial statements communicate to lenders and other stakeholders how the business used its resources to generate profit and expand its business, or how the company incurred loss (and the chances the business succeeds over time).

Unlike public companies, which have the Securities and Exchange Commission (SEC) providing oversight and the EDGAR platform for financial document submission and exchange, private companies have a non-standard regulatory and document exchange ecosystem. Financial statements are still developed but it can be a bit a more like the wild west getting assurance as to their accuracy (and even their origin). The audited financial statement is the highest level of “assurance” available, but as detailed in the fraud cases it is not a requirement for private businesses to provide them (or verify their source).

This means the onus is on those who consume and rely on the data in financial statements to be part of the solution to validate the data’s accuracy (and its source). Bankers, other lenders, investors of all types, risk management and planning professionals, the C-suite, and the rest of the ecosystem rely on getting the best data possible to make informed decisions regarding a private business and that has to include financial statements, audited by a licensed, Peer Reviewed CPA professional. Using less thorough or non-objective financial documents to help make important decisions just doesn’t make sense today.

Risk management and due diligence models and tools (and the professionals that use them) are only as good as their data inputs, and that includes financial statements, optimally audited financial statements from CPA firms authorized to issue audit (and review) reports. Those firms must adhere to a number of stringent professional requirements including, but not limited to, maintaining firm licensure with their state professional requirements. These requirements include maintaining firm licensure with their State Board of Accountancy and where required, participating in a peer review program. These audited financials, prepared by experts, contain the data on which you can count.

The Wall Street Journal recently detailed the demise of the National Bank of Delaware County (NBDC), a small community bank that had been in business since 1891, after it bought Bank of America’s sole branch in an upstate New York town. “People waited in four-hour-long lines at the Monticello, N.Y., branch and withdrew nearly half of their deposits, moving them to banks with more reliable technology … The community bank, which had been in business for more than a century, eventually sold itself in a fire sale,” the Journal dolefully reported. But despite cautionary tales, community financial institutions aren’t doomed.

Community banks have made a positive impact on our country, and they can continue their legacy with help from both traditional and non-traditional players. They’ve also played an important role in the lives of so many Americans. I’m one of them. When I was starting out as a young entrepreneur and needed additional capital to grow my business, all the big banks turned me away. It was a small community bank in Tulsa, Okla., that took a chance on me, and I’m still banking with that outfit 30 years later.

Since that time, the banking game has definitely changed. It’s no longer just about getting more accounts and deposits; it’s about servicing account holders in the ways they want to connect. It’s about enabling customer engagement across an increasing number of channels and platforms. With technology rapidly transforming our world, customer service looks a lot different than it did a decade ago, much less a century ago.

Consumers expect a banking experience as modern as their one-click shopping, app-based ride services and voice-controlled digital assistants. They want easy and convenient access to their financial accounts using the latest digital devices — anytime, anywhere. That means banks of all sizes need an omnichannel strategy that integrates web, mobile, SMS texts, email and voice. And by voice, I don’t just mean phone.

More than one in three consumers now own a smart speaker like Amazon’s Alexa, Google Assistant, Apple’s Siri, Cortana or Bixby, according to data from Adobe Analytics. And even more consumers use digital voice assistants on their smartphones, Pew Research finds. Now is the time for community financial institutions to get on board with voice banking because conversational engagement will soon extend beyond smart speakers and smartphones and will be used increasingly via software in a wider range of voice-enabled platforms, such as smart watches, televisions and automobiles. Conversational voice banking need not remain a “big-bank” technology; community banks can roll out this next-generation convenience as well.

Community institutions typically don’t have the IT staff or budget for R&D and compliance like big banks. Consumers, however, still want the technology that the major players offer but smaller banks sometimes can’t afford. But all is not lost; community financial institutions can continue to succeed by creatively capitalizing on their strengths and thinking outside the box. In today’s environment, with companies offering “right-sized” Software-as-a-service solutions for institutions of all sizes, seeking the right technology partners can enable community banks to continue to meet consumer preferences for a friendlier financial institution and simultaneously satisfy consumer demands for a technology-enhanced banking experience.

Innovators are reimagining the consumer experience and have developed turn-key solutions that equip smaller community financial institutions with modern technologies. Leveraging artificial intelligence and data analytics allows these institutions to meet the demands of digitally-savvy consumers with high-tech expectations. And this is not “tech for tech’s sake”; innovation in customer engagement is critical to the success of community institutions today. It should work hand-in-hand with the institution’s traditional customer channel experience.

Balancing the importance of in-person and digital customer engagement is crucial for community banks to protect their market share. Consumers want their financial institutions to meet them where they are, in the communications channels they like to use. In addition to smiling faces, community institutions need a technology-based, speed-first strategy. Luckily, community bankers have a history of putting technology to work for their customers. United American Bank in Knoxville, Tenn., for example, pioneered home-computer banking, bringing the service to its customers first in December 1980. Technology developers, such as Clinc AI, can help community banks lead again.

“The disappearance of hometown, community banks is not good for America,” the final slide of an NBDC shareholder presentation once read. I agree. But I’m confident that looking beyond their own walls for technology solutions will allow

“I don’t think there’s any more important topic at this time in our recovery in the economy and the state of community financial institution management,” said Dave Koch, managing director of Advisory Services at Abrigo on the topic of core deposits. “Deposits are a thing that we have coveted for a while and became quite easy. Now once again we’re back to the question of, where do I go to get more deposits? It’s a challenging and vexing business in a strong and growing economy.”

There are three, successful deposit management strategies that financial institutions can use to update the assumptions in their asset-liability models and to satisfy internal and/or regulatory requirements, according to Koch in a recent webinar, “Analyzing Core Deposits for Risk Management and Loan Growth.”  

Understand the makeup and behavior of your depositors. An institution should be able to look at the actions they have taken and determine what the demographics and behaviors of their depositors are today as the depositors of today look different than those of of 10 or 15 years ago. An important question to research is, “What makes this depositor engage with us?” This new class of depositors expects different kinds of conveniences, like online access and easy transfer of money with technology. This changing depositor landscape is shifting the strategies utilized for successful deposit management. 

Develop your pricing strategy relative to the behavior of deposits. After figuring out whom the depositors are, it is important for a financial institution to have a firm idea on pricing strategy. This includes knowing if an account will be stable or reactive to specific market conditions. Financial institutions are looking for stable deposits that are not sensitive to pricing; however, it is unlikely that deposits will behave in a steady manner. It is more common to have reactive money, which is caused by people demanding to receive the market rate when rates are higher. Although this situation can be manageable, it is important to identify the split of price-sensitive and insensitive deposits. How can a financial institution keep depositors engaged on levels other than price?

There are a lot of depositors who choose to go with other financial institutions not solely because of price but based on what they get from the relationship. Specific perks include cashback based on the number of transactions, free on-line banking and other rewards. A financial institution should learn more about those benefits and identify whether it will be profitable to incorporate those relationship-building strategies into their lines of business. 

Understand deposits’ impact on the balance sheet. Lastly, for an effective deposit management strategy, there should be an awareness of how deposits act on balance sheets. From a contractual term, deposits can look different from how they are being used in practice. On paper, non-maturity deposits are short-term contracts that can be canceled with the stroke of a pen or a click of a mouse. Yet, in practice, it’s much more common for these deposits to have a long shelf-life, and leadership should still be able to identify how this money can be leveraged and what can be funded by their deposits. In order to do this, a core funding duration or life should be calculated so that deposits are allocated in a way that continues to accomplish the overall institutional mission, which is providing excellent credit services to the market place. 

A number of financial institutions are turning to video banking technology to extend their services finds London-based RBR’s Teller Automation and Branch Technology 2019 report. This trend is particularly strong in rural areas, the research found.

Video banking technology provides banks with an additional point of contact for their customers. It enables them to offer a wider variety of transactions and assistance remotely, addressing the needs of customers in areas where full-service branches cannot be profitably located.

Bridging the Gap Between Self-Service and In-Person

The study shows that video banking allows banks to provide remote teller services to assist with transactions such as cashing checks and dispensing cash in denominations that are not typically offered at an ATM. In addition to the expansion of services, the hours of operation can also be extended.

One market where the technology is making a difference is Canada, where it allows credit unions to reach customers spread across the country’s vast geography. An example is FirstOntario Credit Union, which offers remote teller services at ATMs. Members are able to talk to and see a teller via the ATM screen and carry out services including loan payments, cash advances and booking appointments.

Video Banking Helps to Extend Bank Footprints

Banks are using video banking to build a presence in areas where a regular branch may prove too expensive to establish and maintain. In some markets, terminals have been marketed as micro-branches or booths and allow banks to offer assisted self-service transactions. According to RBR’s research, such terminals have grown in popularity within the Turkish market and are currently deployed by banks including Kuveyt Türk and ZiraatBank. DBS Bank in Singapore has deployed similar self-service terminals in soundproof booths to provide customers greater privacy when making video transactions.

“Video banking technology is now at the forefront of banks’ strategies in the provision of new offerings and cost efficiencies,” said Beatriz Benito, who led the company’s study. “Both customers and banks can benefit from the successful implementation of video banking technology in the transition towards customer-centricity.”

Policies and procedures

Finally, a bank must have strong policies and procedures in place. The policies provide a framework for vendor management while the procedures provide for implementation. The policies should reflect the commitment of the board of directors to establish a culture of compliance with regulatory guidance. Regular reporting to the board should provide oversight by demonstrating that the procedures are effectively implementing the board’s policies.

Vendor management, as with every aspect of a bank’s risk management program, is essential to a safe and sound financial institution. The vendor management program should be established with appropriate reporting structures so that the senior management and the board of directors have the appropriate information necessary to control and monitor risks to the bank.  

Vendor management programs require constant supervision and oversight to remain effective. Automation should be considered wherever practical to maintain compliance. Third-party reviews of the program can also provide assistance in identifying weaknesses or holes in compliance, processes or procedures.

Documentation

The best vendor management program is not worth much during regulatory exams if you cannot demonstrate your compliance and capabilities. That is why documentation is key.

Documentation is the evidence of complying with the requirements of the bank’s policies and procedures, regulatory/legal requirements and contractual obligations.   

Effective documentation should maintain:

• Each vendor’s risk report, due diligence and monitoring reports (ideally, a copy of the vendor contract would be contained in this file);
• All contracts in a centralized and organized filing system;
• All reports to the board;
• All internal vendor management audits;
• Vendor-related customer complaints;
• Regulatory notifications;
• Control testing results: The bank should routinely test all vendor management controls and requirements and document the results;
• Updated risk assessments and due diligence to the vendor files; and
• Deviations from policy or procedures with appropriate explanations.

Monitoring

A vendor management program without appropriate monitoring is like driving in dark at 90 mph without headlights.

Deliverables, metrics or service agreements, risks and due diligence must be tracked, monitored and updated. Mandatory monitoring should include:

• Business strategy (including acquisitions, divestitures, joint ventures) and reputation (including litigation) that may pose conflicting interests and impact the vendor’s ability to meet contractual obligations and the service-level agreement;
• Compliance with legal and regulatory requirements: Have enforcement actions or material litigation been filed against them?
• Financial condition: What fiscal changes have they experienced and why?
• Insurance coverage: Maintained, updated with appropriate limits and deductibles;
• Key personnel and ability to retain essential knowledge in support of activities;
• Ability to effectively manage risk by identifying and addressing issues before they are cited in audit reports;
• Process for adjusting policies, procedures and controls in response to changing threats, new vulnerabilities, material breaches, or other serious incidents;
• Information technology used and the management of information systems;
• Business continuity plans: Testing and reporting of test;
• Subcontractors: Location of subcontractors, and the ongoing monitoring and control testing of subcontractors;
• Agreements with other entities that may pose a conflict of interest or introduce reputation, operational or other risks to the bank;
• Ability to maintain the confidentiality and integrity of the bank’s information and systems;
• Volume, nature, and trends of consumer complaints, in particular those that indicate compliance or risk-management problems;
• Ability to appropriately address customer complaints;
• Cybersecurity; and
• Contract milestones including notification dates, renewals and terminations.

The monitoring aspect of a vendor management program is the result of the risk assessment, due diligence and contracting with the vendor. However, it is also represents the future of the vendor relationship. The bank’s monitoring activities should be tailored to develop the vendor relationship and provide visibility into the vendor’s operations and activities on numerous levels by adopting a multi-layered approach to monitoring,  gathering information from various people or areas of the vendor. This alone provides additional controls and verification on the information provided.

Of course, to achieve an appropriate level of monitoring, the bank has to devote appropriate, experienced resources to monitoring and provide the tools necessary to deliver the expected results.

Contracting

The contracting aspect of an effective vendor management program is not just signing a document or turning it over to the lawyers for drafting. Contracting in the context of vendor management requires a disciplined approach by the bank. Since the contract between the bank and the vendor will be the final authority and the point of reference for all expectations from both parties, the process of contracting must be established internally.  In developing this process the bank should consider:

• Who manages the bank’s contracts?
• How are the bank’s contracts managed? Is it a centralized, decentralized or hybrid process?
• Who is responsible for negotiating terms?

• Can financial incentives impact the vendor’s negotiations?
• Can operational incentives or issues impact the vendor’s  negotiations?
• Are there market incentives or issues that could impact the vendor’s judgment?
• Are there strategic incentives or issues that could impact the vendor’s  judgment?
• Who manages amendment and renewals?
• Who is monitoring changes in the environment (technological, market, legal, regulatory, customer base)?
• What approvals or notifications are necessary for contracts? Are there different tiers for varying costs and impact?

• Board approval is required for a contract that involves critical activities.
• Regulatory notification is required for contracts involving check and deposit sorting and posting, computation and posting of interest and other credits and charges, preparation and mailing of checks, statements, notices and similar items, or any other clerical, bookkeeping, accounting, statistical or similar functions performed for a depository institution. This requirement has been very broadly interpreted by the regulators to include notification of contracts involving any technology-related services.
• Who is authorized to execute the contracts?
• Banks should be wary of the risk inherent in a decentralized system, a system that broadly grants contracting authority or practices that give apparent authority to employees and an agent.

Of course, the documentation itself is very important to the contracting process. The final contract should represent the business terms both parties expect, mitigation of the risks identified in the risk assessment, and tools to maintain due diligence and monitor ongoing performance. The key provisions that should be considered in any contractual relationship are:

• Nature and scope of arrangement

A thorough and complete description of the services to be provided is the core of any services agreement. Regulators recommend that the description also include ancillary services such as software or other technology support and maintenance, employee training and customer service. 

• Performance measures

Service levels, metrics, deliverables or benchmarks are a second essential element to an outsourcing agreement. Regulators caution that performance measures should not incentivize undesirable performance, such as sacrificing accuracy for speed or compliance requirements, to the detriment of customers. 

• Cost and compensation

The contract must establish payment terms, but banks should ensure the contracts do not include burdensome upfront fees or incentives that could result in inappropriate risk taking by the bank or the vendor. The contract should specify the conditions under which the cost structure may be changed, including limits on any cost increases and any penalties for any failures to meet service levels, controls and audit requirements, or late payments.

• Audit rights

The regulatory authorities have broadly applied the legal authority they are granted in the Bank Service Company Act to include rights to directly examine bank vendors.  Banks are presumed to include contractual language that will give them and regulators access to the vendor’s operations, records and employees to conduct examinations and audits when appropriate.

• Confidentiality and integrity

Contracts must require confidentiality of any customer information provided or even potentially available to the vendor. Vendors must protect that information according to regulatory standards and applicable law. The contract should specify when and how the vendor will disclose information about security breaches, and whether the breach resulted in unauthorized intrusions or access that may materially affect the bank or its customers. The contract should address the power of each party to change security and risk management procedures and requirements, and to resolve any confidentiality and integrity issues arising out of shared use of facilities owned by the third party.

• Ownership and license

In a world where it is becoming common for banks and vendors to jointly develop or create products and services,  the contract must address ownership rights of jointly developed property as well as ownership rights of property contributing to or utilized in that development. Also, the bank should require the vendor to warrant that any third-party intellectual property used is (1) licensed for the services provided, (2) that such use, and the property or tools the vendor is contributing, will not infringe upon someone else’s intellectual property, and (3) in the case of software and/or hardware, the property will not transmit any unwanted or harmful programs to the bank’s systems.

• Indemnification

Many times this is a point of contention or confusion. However, it is important that the bank ensure that any indemnities it provides to the vendor make sense from a risk management perspective and that any indemnities it receives from the vendor appropriately assess the risks inherent in the relationship. 

• Default and termination

Banks should always ensure the contract provides them the right to terminate if the vendor fails to meet its obligations. However, regulators have identified three other points to consider in the default/termination clause:

1. The bank should determine whether it includes a provision that enables the bank to terminate the contract, upon reasonable notice and without penalty, in the event that, among other circumstances, a regulator formally directs the bank to terminate the relationship. 
2. The services agreement should permit the bank to terminate the relationship in a timely matter without prohibitive expense. 
3. The services agreement should include termination and notification requirements with time frames to allow for the orderly conversion to another vendor.

• Dispute resolution

Most contracts should provide for some form of dispute resolution, either an informal process of meetings between management or a formal plan involving arbitration or mediation.

• Liability caps

Large risks banks face come from limits of liability. A vendor that a bank pays $50,000 per year could expose the bank to a class action that costs $25,000,000. If the bank has agreed to a limit of liability on the amount of fees paid to the vendor in a year, this outsourcing poses a significant risk. 

To address this risk, the bank also should determine whether any liability caps are in proportion to the amount of loss the bank might experience. Banks should reject the all-too-common “annual fees paid” formulation unless that amount is an accurate reflection of the bank’s risk.

• Insurance

The contract should stipulate that the third party is required to maintain adequate and appropriate insurance coverage, to notify the bank of material changes to coverage, and to periodically provide evidence of coverage or upon demand.  

• Customer complaints

When a vendor could receive complaints from customers, the contract should specify whether the bank or vendor is responsible for responding to customer complaints and outline specific standards for when a response is given and instruct the vendor which bank officer should receive the complaint. In those situations, the contract must also address retention guidelines and escalation procedures for customer complaints.

• Business resumption and contingency plans

Given the increased regulatory attention to disaster recovery, banks would be wise to require the vendor to provide the bank with disaster recovery plans, testing schedules, the ability to participate in the tests and the sharing of the results of those tests.

• Foreign-based third parties

Contracts with foreign-based third parties should include choice-of-law and jurisdictional provisions that provide for adjudication of all disputes under the laws of a specified jurisdiction. Regulators do not require that the jurisdiction or applicable law be the United States or a political subdivision thereof, bu when a U.S. bank submits to the laws and jurisdiction of a foreign country, there should be a plan in place to protect its rights in that jurisdiction and an articulable reason for accepting the foreign jurisdiction.

• Subcontracting

The contract should specify: (1) any specific activities that cannot be subcontracted; (2) whether the bank prohibits the vendor from subcontracting activities to certain locations or to specific subcontractors; (3) a notification to the bank before a subcontractor is engaged (with an opportunity to perform due diligence on the proposed subcontractor) or when an existing subcontractor is terminated; and (4) ability to perform an audit and get due diligence on subcontractor. 

The bank should also reserve the right to terminate the services agreement without penalty if the vendor’s subcontracting arrangements do not comply with the contract or if the bank does not approve a proposed subcontractor.

• Responsibilities for providing, receiving and retaining information

As part of establishing and reporting performance metrics, the contract should require the vendor to provide and retain timely, accurate and comprehensive information that allows the bank to monitor performance, service levels and risks. Additionally, regulators have recommended other reports that many vendors are not eager to accept but actually are very important to maintaining an effective vendor management program.  Specifically:

• Prompt notification of financial difficulty, catastrophic events and significant incidents such as information breaches, data loss, service or system interruptions, compliance lapses, enforcement actions or other regulatory actions.  
• Personnel changes, or implementation of new or revised policies, processes and information technology.
• Notification to the bank of significant strategic business changes, such as mergers, acquisitions, joint ventures, divestitures or other business activities that could affect the activities involved.
• Responsibility for compliance with applicable laws and regulations

The contract should require compliance with laws, regulations, guidance and best-practices standards applicable to the bank. Some vendors will try to avoid this by saying the regulations that govern banks do not apply to them. However, the bank is still responsible for compliance with its laws and regulations, and a vendor that is not meeting those requirements when performing services for the bank is putting the bank at significant risk. Bank vendors must be informed of the requirements, and they must agree to follow and implement relevant rules, regulations and laws that apply to banks.

The bank must always weigh the nature of the services, the risk posed by the outsourcing, and the relationship of the parties to construct contractual provisions that meet the bank’s needs, vendor-management program and legal/regulatory requirements.

Due diligence

After the risks of the outsourcing to the bank are evaluated, the bank must necessarily turn its focus to the potential vendor and perform due diligence. The amount of due diligence required is directly related to the level of risk and complexity of the vendor’s service. Critical vendors, those with access to confidential data, particularly customer data, and those that pose high risk to the bank will require the most extensive due diligence.

Banks too often rely on their prior experience with the vendor or recommendations from other banks as a proxy for due diligence and do not conduct a thorough vetting of the vendor. That is a recipe for major problems because a vendor’s condition can change and the expectations and requirements of a vendor may vary widely from one bank to another. 

To establish an effective due-diligence component of the vendor management program, the bank may need to investigate the following:

• Strategies

Consider the effect of the vendor’s business plans and focus on the outsourcing. If  its business focus is moving away from the services the bank needs, that should be a red light for the bank. Similarly, if it is contracting, acquiring or partnering with businesses that are competitive to the bank, certain contractual and operational controls may be necessary. Also, if the vendor is associating itself with businesses that may reflect negatively on the bank in the eyes of the public or the regulators, that is another factor to consider.

• Legal and regulatory compliance

The vendor’s potential to impact the bank from a compliance standpoint has to be quantified and, when appropriate, the bank should evaluate the vendor’s legal and regulatory compliance programs to ensure that not only does the vendor have the appropriate licenses to provide the services but also to ensure that it has the necessary internal controls and programs to provide the services in compliance with applicable laws and regulations. Also, the bank should investigate whether the vendor has any enforcement actions against it, or regulatory related civil actions that could materially affect its ability to perform as expected.

• Financial condition

The bank should review the vendor’s  financial statements, to make a reasoned judgment as to whether the vendor will be financially able to perform the outsourcing. Audited financial statements are the best because the auditors state whether they believe the vendor will be in business one year later.

• Reputation

Determine how the vendor is viewed by existing customers, its industry and the public in general.  Review marketing materials to make sure the vendor accurately represents it business, deliverables and capabilities.

• Operational capability

Fundamental to any outsourcing is the ability of the vendor to perform.  Whatever the relationship is, the bank should determine if the vendor can provide the services and products the bank needs. This may take the form of reviewing the vendor’s existing products and services, the vendor’s resources, its proposed staffing and its experience.

• Fee structure

The proposed fee structure of the service must be analyzed to determine if it creates inappropriate risks such as high upfront fees or fees that could incentivize inappropriate behavior.

• Background checks

One of the reasons that banks are so heavily regulated is that their business is considered vital to the U.S. (and global) economy, and perhaps  national security, as well. To that end (not to mention some federal legal requirements), a bank must be sure that its vendors (and their subcontractors) are not hiring employees with criminal records.

• Security

Because of the critical nature of the information that banks possess and the financial implications of transactional relationships, banks must consider a vendor’s access to confidential customer information, money or accounts. When such access is part of an outsourcing, the bank must scrutinize the vendor’s information security and physical security programs and policies, internal controls and infrastructure.

• Human resource management

The bank should review the vendor’s programs to train employees on policies and procedures and its process for dealing with violations and failure to pass screenings. Depending on the services provided, the bank may need to consider the vendor’s succession plan for key personnel and its ability to continue to retain or attract skilled employees to perform the services.

Appraise  how the vendor’s employment practices could bear on the relationship or reflect on the bank. For example, diversity programs are part of the business landscape, and a vendor without a diverse employee base may have potential social or legal issues in its future or may even  damage the bank’s reputation. 

• Subcontracting

It is imperative that the bank assess any potential vendor’s use of, and reliance on, subcontractors and its ability to monitor and manage them. If the services provided by the subcontractor have the potential to impact the bank or if they involve customer information, due diligence may be required on the subcontractor. 

• Insurance

Assess the vendor’s insurance coverage to ensure that appropriate types and levels of coverage exist. Of course, the coverage requirements will vary depending on the size of the vendor and the nature of the outsourced function. 

Be wary of the terms of coverage and other contractual terms. For example, a high deductible or co-insurance requirement in conjunction with a limit of liability may render the insurance coverage ineffective.

• Business background and strategy

Recent innovations in products and services, and the resulting boom of new banking vendors, might seem to shift the due-diligence focus away from vendor backgrounds. In many cases, the vendors are providing something brand new. However, even in cases where the service, product or the vendor is new to the market, consider how the vendor got into its business and its roadmap.

• Risk management

Examine the effectiveness of the vendor’s risk management program and internal controls. Include a review of the vendor’s internal audit department and its effectiveness, as well as a review of Service Organizational Control reports and any external certifications.

• Management of information systems

Understand  the vendor’s technology systems, processes, maintenance and compatibility. The bank should also understand how the metrics expected from the service will apply to the vendor systems and schedules for upgrades and/or enhancements.

• Disaster recovery

There is concern among the regulators that banks are not paying enough attention to their vendor’s business continuity plans as evidenced by the FDIC’s guidance recently issued. Evaluate the vendor’s ability to deal with service disruptions from external and internal events and determine how those disruptions and recovery plans will impact its operations. Ensure the vendor is appropriately testing those procedures and confirming they remain effective and up to date.

• Incident reporting

The bank should determine if the vendor has a satisfactory and sufficient process to identify, report, escalate and resolve incidents, including but not limited to, data security incidents, employee-related incidents, operational disruptions, compliance violations and legal claims. The vendor must be able and willing to report anything that could impact the bank, the bank’s customers or the vendor’s ability to perform.

Although no amount of diligence can eliminate all risk, the bank’s due-diligence policies and procedures should reasonably assure the board of directors, senior management and regulatory authorities that the appropriate investigation into potential third-party vendors was conducted.

Risk assessment

Before anything is outsourced, the bank should first determine whether the outsourcing is consistent with its strategic direction and then conduct a cost/benefit assessment. This assessment should include all risks of the outsourcing, starting with: whether there are qualified and experienced vendors to perform the service on an ongoing basis; if the bank will be able to provide the appropriate oversight and monitoring of the vendor going forward;  and what resources are required and what safeguards are in place for disruptive events.

Once these preliminary issues are addressed, additional key risks from outsourcing functions to external vendors should be considered:

• Operational/transactional risk

The ability of the service provider to perform the expected function should be one of the first risks considered. When evaluating this risk, consider the vendor’s infrastructure, resources, training program, employee onboarding, expertise, equipment, facilities, employees and corporate governance. Make sure the vendor can perform the tasks expected without subjecting the bank to undue risks.

• Reputational risk

The  adage “birds of a feather flock together” is not only good advice for people (and birds) but also for a bank choosing its associates. Be mindful that the choice of vendors can reflect directly on how the public and the regulators view the bank. Evaluate how the vendor runs its operations and how those operations could (not will) impact customers. Assess the vendor’s legal and compliance history and its overall reputation. By choosing any given vendor, its reputation becomes part of the bank’s reputation.

• Compliance risk     

Very few people outside the banking industry understand the length, breadth and complexity of the regulatory structure that banks must follow. With any outsourcing, the bank must evaluate the compliance risk in the relationship. In some cases, a vendor may have a direct impact on a bank’s ability to comply with legal and regulatory requirements. For instance, outsourcings involving consumer privacy, consumer protection, information security, record retention, and/or Bank Secrecy Act and Office of Foreign Assets Control should be thoroughly vetted. 

However, in some relationships, the regulatory implications may not be so obvious. Always consider the indirect effect that a relationship could have on compliance. For example, a vendor may not have a direct impact on regulatory compliance (like a vendor that provides disclosures); however,  the vendor may be responsible for providing tools that enable a bank to meet its regulatory obligations. 

• Concentration risk

One noted frequent weakness in vendor management is an over-reliance by some banks on a single vendor for too many operational functions. Without appropriate risk identification and mitigation, certain operations, and possibly even the bank itself, could be jeopardized or impaired by over-reliance on a single service provider, a limited number of service providers or those concentrated in the same geographic location. Always consider what would happen if that vendor or the vendor’s geographic location suffered a catastrophe and how that would affect the bank.

• Strategic risk

Before embarking on any outsourcing, senior management should determine how that outsourcing fits into the bank’s long-term and/or short-term strategy. Once that analysis is done, the outsourcing should be specifically tailored to meet the bank’s business plans. For instance, if the outsourcing is a short-term fix to an immediate problem, the risk inherent could be considerably higher than a long-term relationship with an established partner. A vendor with a limited duration is less likely to be as engaged and as responsive and may be  more willing to compromise on the things that are essential to regulatory compliance and effective vendor management.

• Legal risk

Once perhaps the most overlooked risk in an outsourcing relationship, legal risks have now been recognized as significant by banks who engage third-party service providers. Through numerous examples over the past few years, banks have learned that vendors can do things or fail to do things that get banks in legal trouble. In addition to analyzing legal risks, banks must also consider regulatory implications like data security, Reg E and Reg Z, as well as the rules of payment systems that can result in hefty fines, chargebacks and penalties when vendors fail to meet their obligations. For example, a business that uses recurring debits to a bank account, but is not appropriately capturing, storing or cancelling customer authorizations, can quickly cause a bank to incur substantial fines from NACHA (previously National Automated Clearing House Association) and chargeback demands from other financial institutions.

• Financial risk

Two aspects of financial risk should be considered:

First, evaluate the financial condition of the vendor and whether it will financially be able to perform as agreed. Balance sheets, profit and loss statements, audited financials and public filings are all tools banks can use to evaluate a vendor’s financial health.

Second, consider the financial risk of the outsourcing. How much should the bank be willing to pay and how should payments be structured? For instance, if the bank were to pay 100 percent at contract signing, the bank incurs a much greater risk that paying a vendor after performance.

• Country risk

Many banks will assume that a “country risk” analysis does not apply to them because they do not contract with vendors outside the United States. That may be true, but how many of their vendors have subcontractors located outside the U.S. that are providing part of the services or products to the bank? Many vendors that provide services and products to the banking industry have some components of their operations offshore either subcontracted to foreign companies, domestic companies with foreign operations, or foreign subsidiaries or affiliates. 

Country risk may very well be the most overlooked risk category that the regulators specifically identify. A bank should not only determine if the services or products provided involve offshore operations, affiliates, subsidiaries or contractors but also if any of the vendor’s operations are offshored in any manner. If so, then it is necessary to consider exposure to economic, social and political conditions and events in the foreign country — if those conditions could adversely affect the ability of the vendor to meet the level of service required — and any harm to the bank that may result. 

Of course, this is after a determination is made that the foreign country is not on the list of countries that are prohibited to U.S. banks. If so, then analysis ends, and the vendor should not be used.[2] If the country is not “prohibited” but is under sanctions, careful and thorough legal analysis is required before a contractual relationship is established.

• Credit risk

Finally, one of the most obvious and important risks that a bank should consider is credit risk. This may not be a risk inherent in most vendor relationships, but when the bank is contracting with a third party to originate loans on the bank’s behalf, when the third party solicits or refers customers, engages in or conducts underwriting analysis, or implements product programs for the bank, the credit risks have to be identified and mitigated. It is imperative in those situations that the bank understands the underwriting and credit standards the vendor is applying to those potential bank customers and that those meet the bank’s risk appetite.

At the end of the risk assessment, the bank should be in a position to determine the risk “value” of the outsourcing. The valuation is not just a fiscal or convenience determination but an incorporation of all aspects of the outsourcing risk and mitigation tools. If the value of the risk posed by the outsourcing is within the bank’s established risk profile, the outsourcing can proceed. 

Further, the risk assessment should be revisited and updated as appropriate. Needs change, circumstances change, operations change and as a result a vendor that was  categorized as low risk can suddenly pose a significant risk to the bank.

银行系理财子公司与VC/PE

今年6月，国内规模最大的银行系理财子公司“工银理财”亮相。

在获得银保监会批准开业后，工商银的全资子公司工银理财，一口气发布了六款新规产品，并透露其符合资管新规要求的产品已超3700亿。工银理财的注册资本为人民币160亿元，值得注意的是，“特色私募股权”为其三大重要产品系列之一。

例如，工银理财的权益类产品“博股通利”，即科创主题的私募股权产品。它将选取具有发展潜力的科技创新企业，在企业成长过程中直接投资未上市的股权，后续主要通过科创板上市退出。此外，工银理财还同高瓴资本、君联资本等进行合作。

按目前规定，银行自有资金不可以进行股权投资，因此银行系下子公司不断开展各类股权投资业务。例如建设银行也通过建银国际、建信信托和建信股权三个平台来开展PE基金业务和直接股权投资；邮政储蓄银行此前也明确表示，理财子公司成立后，将参与未上市企业的股权投资，如Pre-IPO阶段、PE阶段。

在起步阶段，银行理财子公司倾向于与私募等机构进行合作，进行优势互补。因此，有私募股权投资人认为：“银行理财子公司与VC/PE间的合作将大于竞争。”

银行理财子公司能否缓解“募资难？不少VC/PE机构正翘首以盼，抱着极大的希望，但也有IR提醒：根据目前的信息，银行理财子公司产品应该仍以固定收益类为主。就配置比例来看，股权投资可能排在比较靠后的位置，也就是说最后其流向股权投资市场的资金未必很多。另外，银行理财子公司多以直投的方式参与到一级市场，对于“银行理财+资管计划+私募基金LP”的投资路径，不少人还在观望当中。

VC/PE圈还在等待更多的相关细则出炉。最新消息显示，各家银行理财子公司高管团队正陆续到位。据21世纪经济报道称，招商银行方面，行长助理兼资产管理部总经理刘辉或将担任招银理财董事长，招行原零售信贷部总经理汪涛或将担任招银理财总经理。

平安银行方面，中国平安联席CEO、平安银行董事长谢永林或将担任平银资产董事长，平安银行首席资金执行官王伟负责平银资产的相关筹备，平银资产的具体管理或由平安证券副总经理张东操盘。

光大银行方面，度小满金融原副总裁张旭阳重回光大，拟出任光大银行理财子公司董事长。光大银行资产管理部总经理潘东拟出任该行理财子公司总经理。不过，上述任命仍需监管批准。