The banker in Frank Capra’s classic It’s a Wonderful Life may be idealized, but it is nonetheless true that banking is the core on which the business community rests. Bankers’ decisions impact business; what is impacting their business — and the decisions they are making for their own and everyone else’s business?
Local bankers share their expertise and experience to bring their insights on specific issues to In Business Magazine readers.
Alliance Bank of Arizona
FinTech and Big Data
FinTech is showing us the powerful role of data in the ability to personalize and streamline retail banking and investing. And, as some sizable banks are now creating partnerships with FinTech enterprises, the result could be more nimble and tailored banking solutions, particularly at the retail banking level. At banks like Alliance Bank of Arizona, where our focus is on business banking, we don’t see FinTech as a major disruption.
Analytics and Big Data play a significant part in the research tools our bank uses to not only underwrite loans but also to improve our relationship-centric approach to doing business. Leveraging this data will continue to be a large component of our operating model in the years to come. But for business clients, we believe the tip of the spear is a knowledgeable banker — someone who often is an expert in the client’s specific industry sector — who can tap not only exceptional data but also a breadth of industry experience, all within a business bank that is built to be responsive.
With that expert banker as a business’s conduit to customized banking and finance solutions, we can harness much of the innovations delivered through FinTech — both the speed and responsiveness that really matter to customers and risk modeling fueled by artificial intelligence as a tool to support our decision-making on the front end, in conjunction with blockchain transforming the backend.
Will every financial service be available in the future via an app on a smartphone? Not every one. Bill paying with a few clicks is a natural, and automated investing within some determined norms is certainly happening. But the benefits of a real relationship with a banker — who knows the client’s business intimately; who knows its competitive environment, locally and globally; who knows its past and present, and the personalities who drive that company — come from a human-scale connection with a skilled individual who can bring important value to the client’s enterprise.
It’s true that FinTech is changing banking at nearly every level. Once slated to be a separate set of tech-driven competitors to traditional banks, some FinTech upstarts more recently have moved in-house, via strategic partnerships with long-established banking names. Now, we’ll need to see if these new alliances drive more efficient financial platforms and better, more highly tailored banking solutions. Will FinTech enterprises be disruptive alternatives, or a new source of innovation that reshapes financial products and services within established banking companies? Or some of both?
Some of the answers will come from how the regulatory environment treats FinTech companies. Today, industry disrupters might have fewer regulatory requirements than a traditional banking model, even as the Comptroller of the Currency has floated the idea of a “special charter” for FinTech companies. To be sure, new FinTech companies have not yet experienced an economic downturn, and the impact of such an event on less-regulated entities and their customers is not clear. Ultimately, balancing thoughtful oversight with a necessary openness to innovation will determine the broader impact of FinTech on how consumers bank, and how financial services companies of every kind do business.
Terry W. Frydenlund
President and CEO
1st Bank Yuma
Banking on the Border
The issue of “banking on the border” is complex and multi-tiered. We start first with the bank and the business model it chooses to follow. 1st Bank Yuma happens to be a small-business-focused bank. That model seems to work in smaller markets like Yuma and Nogales. Because we are shareholder owned and a for-profit enterprises, one of our primary goals is to generate a return (profit) for our shareholders. How does that tie into border banking? That requires a somewhat complex answer.
Issues related to border banking have been developing for many years. Banking is one of the primary sources for payments throughout the country — customers deposit their funds with us, and, through various sources of payments (checks, wires, debit card transactions, credit payments, etc.) those funds are then distributed to others. Sounds simple; however, our society has some small portion who are determined to engage in nefarious acts and illegal activity. One of the primary illegal activities is illicit drug dealing and money laundering. In an effort to crack down on this activity (and now the flow of funds to terrorists), our government enacted the Bank Secrecy Act. This piece of legislation and the resulting regulatory rules that followed caused the banking system to implement numerous processes that require reporting, tracking of customer activity, intrusive inquiry into the customer’s business and business financial activity, et cetera. Based on the collection of this information, banks are then required to file reports of various types to the federal government. All this activity comes at an operational cost to the bank. Depending on the type of business our customer is engaged in, particularly if they are engaged in cross-border activity, the amount of work (cost to the bank) can increase dramatically. As a result, banks are forced to make decisions regarding the viability of a customer relationship based on the risk vs. reward.
This is not meant to be a complaint about the regulatory burden, as we have proof that our reporting efforts are being looked at and investigations are being conducted that could potentially stop illegal activities. The bottom line for us is the bottom line. There will come a point at which the risk vs. reward of a particular customer relationship will slide to the wrong side of the ledger and that account relationship may then be closed.
Suffice it to say, the biggest challenge to banking on the border is the ability of the bank to know its customer, its willingness to spend the funds (operating costs) necessary to monitor those relationships and conduct the necessary reporting required by regulation and legislation, and to try to find a way to pass that cost on without alienating the customer. Nobody wants to do business with drug dealers, terrorists or other criminals, but not everybody is a bad guy.
This is by no means the only challenge to border banking, but when dealing with customers, this regulatory environment seems to be the one that inevitably raises its head and causes the biggest impediment to conducting business in an efficient manner.
Candace D. Wiest
President and CEO
West Valley National Bank
The New BSA Standard
Like every bank board in the country, we face the challenge of complying with escalating compliance associated with the Anti Money Laundering and Bank Secrecy Act (BSA). Language in the Dodd Frank Act raises the stakes for bankers, directors and shareholders. For example, the regulatory agencies utilize a tool called a Matter Requiring Attention (MRA). These are must-do items that the agencies feel are important enough to hold a bank’s board and management accountable to cure. While a repeat MRA is never good news, consequences of failure to comply with an MRA for the Bank Secrecy Act are onerous. When a bank is cited for a repeat violation or failure to cure a BSA-related MRA, the examiners must consider a Cease and Desist order under Dodd Frank. This is a public order that can affect the bank’s board of directors, its directors and officers insurance, its ability to raise capital, whom it hires, and its ability to merge with or acquire another bank — and it will most definitely keep the bank’s management team focused on compliance rather than its core business. In addition, officers and directors may be liable for civil money penalties. As a result of the BSA, we hire several consultants to help us with BSA compliance and also spend thousands of dollars annually on audits. Expensive? Definitely. But cheaper than a Cease and Desist.
There is no question that money laundering needs to be controlled for the safety of our country. And no other industry or system in the U.S. is better equipped to be the watchdog than the U.S. banking system. But that process becomes increasingly complex as relatively new industries like the marijuana industry seek banking services. To be fair, the regulatory agencies find themselves in a difficult spot. In the case of the marijuana industry, while it is legal in many states, it is still not legal by federal statute. Yet, why keep an industry that has the capacity to launder money out of the only system in the U.S. designed to identify money launderers?
There are other cash-intensive businesses that require additional scrutiny, such as check cashers, liquor stores, et cetera. While there is regulatory guidance for most of these entities, more guidance is needed with the new standards for BSA compliance. It is also a challenge for a community bank to find and devote the resources to monitor cash-intensive businesses. In Arizona, for instance, there are far fewer community banks than in other states in the country, so it is difficult to hire the expertise needed to monitor these types of accounts.
Because of the cost and potential risk of these types of accounts, many banks avoid them. Those businesses are, therefore, forced into a cash economy. The situation raises numerous questions: Is the public safer with buildings full of cash? Do we really want a new unregulated currency like Bit Coin? And again, why would we want to keep industries that have the capacity to launder money out of the U.S. banking system?
In addition to dealing with the potentially far-reaching consequences of the situation, bankers have an obligation to their shareholders. How can they be rewarded for the risks taken in banking cash intensive businesses?
The overriding question for bankers is, “What, exactly, is the new standard, so we can comply with it?” This is not just in Arizona, of course; I believe there are bank boards all over the country trying to figure out how to deal with these questions. In my opinion, with more guidance and training, the community banks will be better equipped to handle these accounts. After all, smaller banks do have relationships with their customers.
Other Capital Concerns
Offset the Rising Costs of New Labor Laws with the Work Opportunity Tax Credit
by Jordan Taylor
Faced with growing concerns over income inequality, cities and states across the country are taking action to raise their minimum wage rates and mandate that employers offer paid leave. While this trend is helping low-wage workers attain greater economic security, it is also imposing costly burdens on businesses.
Arizona is one of 19 states that implemented a higher minimum wage beginning in early 2017. The Fair Wages and Healthy Families Act — which was passed by Arizona voters as Proposition 206 in the November 2016 elections — raised the state minimum wage from $8.05 to $10 per hour on January 1. This amount will increase each year until it reaches $12 per hour in 2020. The new law — which went into effect July 1 this year — also requires most employers, including small businesses, to offer workers paid sick leave. Organizations with fewer than 15 employees must provide up to 24 hours of paid sick leave per year, while those with 15 or more employees must provide up to 40 hours per year.
As businesses in Arizona and elsewhere grapple with the escalating costs imposed by laws like the Fair Wages and Healthy Families Act, they are often forced to make difficult decisions to maintain profitability. For example, some businesses may need to slow hiring efforts, lay off workers or raise prices. Fortunately, the federal tax code offers alternative ways to save money — with no negative consequences — in the form of tax incentives. One incentive that saves American businesses an estimated $1 billion each year, but is overlooked by many employers, is the Work Opportunity Tax Credit (WOTC).
Created with the goal of helping people who have traditionally faced barriers to employment transition into the workforce, WOTC offers employers a tax credit that ranges from $1,200 to $9,600 for each qualifying employee hired. There is no limit on the number of workers for whom employers may claim WOTC, so businesses that hire many new employees can significantly reduce their tax burdens.
To qualify for WOTC, an employer must hire an individual from one of the following “target groups”:
- Recipients of government benefits, such as Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI) or the Supplemental Nutrition Assistance Program (SNAP)
- Individuals between the ages of 18 and 39 who reside in federally designated Rural Renewal Counties or Empowerment Zones
- Long-term recipients of unemployment assistance who have been unemployed for at least 27 consecutive weeks
- Individuals with disabilities who have completed or are undergoing vocational rehabilitation
- Summer youth employees who work for the business between May 1 and September 15
Additional requirements may apply for each of these target groups. Since the groups are intended to encompass individuals who have faced challenges to entering the workforce, it is likely that many WOTC-eligible hires will occupy minimum-wage positions. Therefore, WOTC serves as a particularly valuable tool for those businesses most affected by increased minimum-wage rates.
The exact amount of tax savings that an employer receives under WOTC is based upon the qualifying hire’s target group and the number of hours that he or she works during the first year of employment. For most target groups, the employer will earn a tax credit of 25 percent of the new hire’s first-year wages if at least 120 hours are worked, and 40 percent of first-year wages if the employee completes at least 400 hours.
Claiming WOTC is a complex process with a significant amount of paperwork that must be completed promptly and accurately. Most businesses consult tax professionals to ensure proper completion of each step in the process. After finding and screening a candidate who may belong to one of the WOTC target groups, the employer must file IRS Form 8850 with a state workforce agency (SWA) within 28 days of the new hire’s start date. Once the SWA conditionally certifies the employee as belonging to a target group, the employer must submit either Form 9061 or 9062 to the SWA. Finally, after the employee is verified as eligible for WOTC, the employer claims the credit by submitting Form 5884 to the IRS.
This popular tax incentive is currently due to expire on December 31, 2019. However, due to the many benefits that WOTC offers for employers, workers and society as a whole, there is a strong chance it will be renewed at that time. As the nationwide effort to increase minimum wage rates and enact stricter labor laws continues, all employers should consider WOTC as a powerful way to offset their rising costs.
Jordan Taylor is a CPA with Capital Review Group, a leading national incentive/tax advisory firm that leverages in-depth knowledge of federal and state tax law combined with technical and business expertise to maximize tax savings for businesses.