Identity Thieves Hack IRS. Again.

In an attempt to file fraudulent tax returns, identity thieves hacked IRS computer systems once again. In a statement from the IRS, they said they halted an attack attempting to access PIN information. An E-file PIN is used in some instances to electronically file tax returns.

The identity thieves stole social security numbers outside of the IRS, and, using that information, they attempted to create E-file PINs. No data was compromised or disclosed on the IRS computer systems.

They identified 464,000 unique social security numbers used in the unauthorized attempts, of which 101,000 were used to successfully access an E-file PIN. The IRS will notify affected taxpayers by mail that their SSN were used in the attempt and have marked their accounts to protect against any tax-related identity theft.

Last week the IRS had a systemwide computer failure and could not accept many tax returns. The IRS said in their statement that this incident is not related or connected to the outage last week.

In 2015 the IRS had a massive data breach that led to $50 million in bogus tax refunds. A later report found that the computer system the IRS used to detect identity theft may have been vulnerable to hackers.

For the full statement from the IRS, click here.

Forbes’ Best Banks 2016

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For the seventh straight year, Forbes has come up with a list of America’s Best Banks. While we’d like to see measures of customer satisfaction included in these rankings, Forbes uses a more typical set of criteria based on strength and stability. Here’s how they determined the best in order to rank the 100 largest publicly traded banks and thrifts:

We looked at 10 metrics this year regarding asset quality, capital adequacy, growth and profitability. Banks range in size from $7 billion-in-assets Banc of California to $2.4 billion giant JPMorgan Chase JPM +0.00%. We tweaked the methodology this year to better reflect the current banking environment. We dropped return on average equity and nonperforming loans (NPLs) as a percentage of loans. We added three new metrics: return on average tangible common equity; net charge-offs as a percent of total loans and efficiency ratio.

Other metrics include: net interest margin; nonperforming assets as a percent of assets; reserves as a percent of NPLs, two capital ratios (Tier 1 and risk-based) and revenue growth over the last 12 months. All data is based on regulatory filings for the period ending Sept. 30. Each of the 10 metrics are weighted equally in the final rankings.

In addition to the rankings, Forbes discuss what has been going on in the banking industry. A few notable observations stand out:

  • There were only eight bank failures last year compared to 157 in 2010
  • The FDIC’s Problem Bank List stood at 203 in September, the lowest level since 2008, compared to a peak of 888 in March 2011
  • In order to comply with all of the regulatory orders, banks have been forced to raise a lot of equity and raise expenses.
  • There is a massive gap in size between the four biggest U.S. banks and everyone else, yet none of the Big Four could crack the top 50, with Wells Fargo the top performer at No. 52.
  • Last year’s top 50 banks returned 7.2% on average in the stock market, twice the return of the bottom 50.

There is a massive gap in size between the four biggest U.S. banks and everyone else, yet none of the Big Four could crack the top 50, with Wells Fargo the top performer at No. 52.

For the Forbes article about “America’s Best Banks 2016”, click here. For the article about their methodology and the full list showing each bank’s assets, return on equity and other financial details, click here.

Now, without further ado, here is Forbes list of “America’s Best Banks 2016”

  1. CVB Financial (holding company for Citizens Business Bank)
  2. PacWest Bankcorp
  3. Prosperity Bancshares
  4. Glacier Bancshares
  5. Hilltop Holdings
  6. Signature Bank
  7. First Republic Bank
  8. Community Bank System
  9. Bank of Hawaii
  10. Western Alliance Bancorp
  11. Cullen/Frost Bankers
  12. Cathay General Bancorp
  13. East West Bancorp
  14. BankUnited
  15. Home BancShares
  16. Washington Federal
  17. National Penn Bancshares
  18. Umpqua Holdings
  19. Columbia Banking System
  20. Investors Bancorp
  21. Bank of the Ozarks
  22. Capital One Financial
  23. First National of Nebraska
  24. State Street
  25. Pinnacle Financial Partners
  26. Popular
  27. PrivateBancorp
  28. BBCN Bancorp
  29. New York Comm. Bancorp
  30. Central Bancompany
  31. First Interstate BancSystem
  32. South State
  33. WesBanco
  34. First BanCorp
  35. Flagstar Bancorp
  36. U.S. Bancorp
  37. Commerce Bancshares
  38. Simmons First National
  39. BOK Financial
  40. BancorpSouth
  41. Provident Financial Svcs
  42. Park National
  43. BB&T
  44. MB Financial
  45. United Community Banks
  46. Capitol Federal Financial
  47. Great Western Bancorp
  48. F.N.B.
  49. United Bankshares
  50. International Bancshares
  51. SVB Financial Group
  52. Wells Fargo & Company
  53. Union Bankshares
  54. M&T Bank
  55. First Financial Bancorp
  56. Banc of California
  57. Old National Bancorp
  58. Renasant
  59. Northern Trust
  60. First Citizens BancShares
  61. PNC Financial Services
  62. JPMorgan Chase
  63. Capital Bank Financial
  64. Texas Capital Bancshares
  65. Fifth Third Bancorp
  66. Webster Financial
  67. Huntington Bancshares
  68. Customers Bancorp
  69. SunTrust Banks
  70. NBT Bancorp
  71. Chemical Financial
  72. Zions Bancorporation
  73. Bank of New York Mellon
  74. Citigroup
  75. Trustmark
  76. First Midwest Bancorp
  77. Wintrust Financial
  78. KeyCorp
  79. IBERIABANK
  80. Comerica Incorporated
  81. Valley National Bancorp
  82. Northwest Bancshares
  83. FirstMerit
  84. TFS Financial
  85. UMB Financial
  86. Associated Banc-Corp
  87. Sterling Bancorp
  88. Astoria Financial
  89. Berkshire Hills Bancorp
  90. Bank of America
  91. Synovus Financial
  92. Fulton Financial
  93. Regions Financial
  94. TCF Financial
  95. Citizens Financial Group
  96. People’s United Financial
  97. Hancock Holding
  98. EverBank Financial
  99. First Niagara Financial
  100. First Horizon National

A Look at the CFPB's Monthly Complaints Report

As participants in the financial services industry, we should be interested in what the Consumer Finance Protection Bureau (CFBP) is working on. To better understand this regulator, StratAgree has begun to review their monthly reports of consumer complaints. The most recent report was released in late December. In it, the CFPB lays out complaints by product/service, by state/district and by company.

Please note that other organizations and individuals have already criticized the CFPB data and analyses as flawed, inaccurate and downright wrong. Our purpose is not to criticize as we believe that over time the data will become more valuable. As a relatively new resource, we believe it will improve. But, because of the report’s current shortcomings, we will attempt to make reasonable corrections as practical.

The monthly report is comprised of three main sections:

Section 1 – Complaint Volume (by product, state, and company)
Section 2 – Product Spotlight (a different product profiled each month)
Section 3 – Geographic Spotlight (a different state profiled each month)

This month’s review will focus on the first section of the November 2015 report. Note that the CFPB uses different time periods for different metrics. To avoid confusion, we’ll point out the month(s) being reported in chart titles and captions. Also, when practical we will provide a comparison to the June 2015 report (the first report in the series).

Section 1 – Complaint Volume

Complaints by Product/Service
The top three products/services complained about in November 2015 were Student Loans, Debt Collection and Mortgages comprising 31%, 19% and 19% of total complaints, respectively. These top three products/services are the same as in the June 2015 report where Student Loans, Debt Collection and Mortgages comprised 32%, 20% and 19% of total complaints, respectively.

CFPB Nov 2015 Rept Complaints by Prod
CFPB Nov 2015 Report Complaints by Product/Service © 2016 StratAgree™

The bottom three products/services complained about in November 2015 were Bank Account or Services, Money Transfer and Other Financial Services comprising 1% of total complaints, each.

These bottom three products/services are the same as in the June 2015 report where Bank Account or Services, Money Transfer and Other Financial Services each comprised 1% of total complaints.

Complaints by State/District
Because populations vary widely from state to state, total complaints per state is misleading. We’ll therefore use the normalized data (complaints per 100,000 population).

The top three states/districts for complaints in November 2015 were Washington DC, Delaware and Maryland with 674, 433 and 390 complaints per 100,000 population, respectively.

CFPB-Nov-Rept-Complaints-per-100000-by-State-2015-11
CFPB Complaints per 100,000 Population, by State 2015-11 © 2016 StratAgree™

These top three states/districts are the same as in the June 2015 report (the first CFPB report) where Washington DC, Delaware and Maryland had 577, 371 and 333 complaints per 100,000 population, respectively.

The bottom three states/districts for complaints in November 2015 were North Dakota, Iowa and West Virginia with 99, 113 and 117 complaints per 100,000 population, respectively. These bottom three states/districts are the same as in the June 2015 report (the first CFPB report) where North Dakota, Iowa and West Virginia had 81, 96 and 97 complaints per 100,000 population, respectively.

The regions with the highest per-capita complaints are the District of Columbia and two of its neighboring states–Delaware and Maryland. This would suggest that awareness of the CFPB is highest in the regions with the highest concentration of federal government and CFPB employees as well as their friends and families. We’ll watch to see if this disturbing anomaly subsides over time.

Monthly Complaints for Top Ten Most Complained About Companies
The data for complaints by company is provided as a rolling average of 3 months’ complaints. The most current data is from the period July – September, 2015. Apart from the age of the data, there are two big problems with the complaints by company data. First, it does not factor in the size of the company. And second, it does not take into account differences in industry (credit reporting vs. consumer banking vs. credit card companies, etc.). With these flaws, larger companies will obviously have more complaints than smaller companies. Here are the numbers in graphical form.

CFPB Nov 2015 Rept Jul-Sept Complaints by Company © 2016 StratAgree™
CFPB Nov 2015 Rept Jul-Sept Complaints by Company © 2016 StratAgree™

Let’s look more closely at the four banks listed in the “Top Ten Most Complained About…” list. They just happen to be the largest four banks in the country. For context, here is a pie chart showing the 2015 market shares of Bank of America, Wells Fargo, JP Morgan Chase, Citibank and all others:

Bank Market Shares 1Q 2015
Bank Market Shares 1Q 2015 © 2016 StratAgree™

Considering their large size, we can expect the number of complaints about these banks to be large as well. In fact, we could assume that complaints about each of these banks should roughly equal their market share. But, before we can make that comparison, we need to strip out non-bank product complaints from the CFPB data so we can compare apples-to-apples. Here’s a chart showing the breakout of complaints about the largest banks as a percent of total bank product complaints (credit reporting and alternative financial services complaints have been removed):

CFPB Nov 2015 Rept Jul-Sept % Complaints by Bank
CFPB Nov 2015 Rept Jul-Sept % Bank Product Complaints by Bank © 2016 StratAgree™

Breaking the data this way, we see that the four banks that have 54% of the consumer banking market are the target of 60% of consumer bank product complaints. More interesting is the fact that Bank of America and Wells Fargo appear to have more complaints than their market share would indicate while Chase and Citibank appear to have fewer complaints than we would expect. That observation makes it just wrong for the CFPB to label them as part of the “Ten Most Complained About Companies”

Only time will tell if the CFPB data quality will improve, but for now we can’t determine with certainty whether the biggest banks are better or worse than other banks.

Summary

The vast number of consumer complaints to the CFPB relate to credit issues–76% of complaints appear to be about credit products and credit reporting and 19% are regarding debt collection. Other financial services (money transfer, etc.) account for 2% of total complaints while complaints about checking and savings accounts were just 1% of the total.

Complaints about checking and savings accounts were just 1% of the CFPB total.

Geographically, the highest complaining regions were Washington DC, Delaware and Maryland with complaints per 100,000 population of 674, 433 and 390, respectively. Complaints for the rest of the country averaged 197 per 100,000 population. It would appear that CFPB employees, their families and friends are driving artificially high complaint volume in those regions.

Lastly, the CFPB’s Top Ten Most Complained About Companies data doesn’t tell us much because it doesn’t consider company size or other differences (banks are lumped in with credit reporting agencies, monoline credit card companies, mortgage servicers and alternative financial services providers like payday lenders and money transfer businesses).

Even with the flaws, it is helpful to see which products are being complained about and which regions generate the most complaints. StratAgree will continue to monitor future CFPB monthly complaint reports and strive to draw meaningful conclusions from them.

Key Purchase of First Niagara Will Make it 13th Largest in U.S.

Cleveland-based KeyCorp (KEY) agreed to buy First Niagara Financial Group Inc (FNFG) for $4.1 billion.

What Does It Mean?
Large bank deals appear to be back. Though they had slowed in the aftermath of the financial crisis, acquisition of banks over $1 billion in assets is picking up again. Key reports that the combined company will have over 1,300 branches in 15 states and deposits of almost $100 billion. The deal is the 2nd biggest this year and, when completed, Key’s purchase of First Niagara will make it the 13th largest bank in the U.S at $135 billion in assets.

First Niagara, a well-known brand in Western New York had fallen on hard times over the past several years. After a decade of rapid growth through acquisition, the company was just not able to adapt to the extended low-interest environment. Expenses were too high compared to its revenue. Other factors, including the announcement of a “process issue” and a $1.1 billion writedown of company goodwill spooked market watchers and eroded company credibility. For the past two years, rumors persisted that the bank was being prepared for a sale.

What Can We Expect Now?
In the protracted low-interest-rate environment of the past seven years, banks have had to focus on expense control to protect profitability. Because Key and First Niagara both have a presence in many of the same markets, tough decisions will have to be made about which offices to keep and which ones to shut down. Customers will be impacted by any such changes so bank decision makers will need to exercise care.

Rival banks like Buffalo-based M&T Bank will be doing their best to take advantage of the customer disruption that will come as Key blends First Niagara into its operations. In fact, it is expected that competitor banks will target affected customers with special offers specifically designed to lure them away from the disruption.

While some analysts are saying that Key paid too much for troubled First Niagara, only time will tell. One thing is certain–bank mergers appear to be back.

Do You Have Your Chip Card Yet?

EMV is here

Citi Chip Card small_optYour chip cards should have arrived by now. As reported previously, the EMV (Europay MasterCard and Visa) protocol takes effect tomorrow (October 1st) in the U.S. By now, your bank, credit union or credit card company should have provided you with a new card bearing a chip on the left side (see photo).

As shown in the cover photo, these chip-enabled cards have to be inserted into a card reader in order to securely pay for your transaction. The cards also have the old magnetic stripe on the back and can continue to be used (swiped) the old fashioned way.

So why all the fuss?

Simply put, chip cards are much more secure than traditional payment cards because they have a secure computer in them.  When inserted into a chip-enabled terminal, a link is established with the payment network. This link checks the authenticity of the card and uses a unique code to secure the transaction. To date, there have been no known fraud losses using the EMV standard.

In contrast, traditional credit and debit cards use a magnetic stripe to hold data. The data on that “mag stripe” (located on the back of your card) is read by a payment terminal when you swipe your card. It’s the exact same technology that’s been used in tape recorders since the 1930s.  It works like this: a magnetic medium (audio tape or your card’s mag stripe) slides against a “read head” that picks up the data. Instead of music, a payment terminal picks up your name, card number and other data from your card’s mag stripe. Technicalities aside, it’s fairly easy for crooks to copy your mag stripe data onto a counterfeit card.

One common way the criminals get their hands on your data is by installing a mag stripe reader (called a “skimmer”) on an ATM or other payment device. The creeps have gotten pretty good at making their skimmers look innocent–you may think you’re inserting your card into the ATM’s card slot, but that slot may actually be a skimmer (click here for our recent alert on skimmers). After they’ve captured the data from their victims’ cards it’s a simple process to record the stolen data onto the mag stripe of a fake card.

What happens October 1st?

October 1st is the date that liability for losses shifts to merchants.  Previously, when you notify your card issuer about what you suspect is fraudulent activity on your card, the issuer (your bank or credit union, for example) typically has to cover the loss. Europay, MasterCard and Visa developed the new standard (called EMV) and gave everyone time to prepare to shift to EMV compliant chip cards.

Beginning October 1st, liability for fraud losses begins to shift to the less secure links in the payment chain. For example, if a bank hasn’t issued chip cards, liability for fraud losses stays with them. Likewise, if a merchant isn’t ready to accept chip cards, the liability for fraud losses shifts to them. This liability shift is meant to be a powerful incentive for all industry players to upgrade to the new technology.

Is everyone ready?

Nope.  While most major banks have made the change, many issuers have resisted the cost and effort required to develop the cards and technology. Likewise, many merchants have not completed their upgrades.  You’ve likely seen new terminals in some stores.  They work just fine for mag stripe transactions but on many of these terminals, the chip reader is not yet functional.

If your bank chose to issue EMV cards before the liability shift begins, your new chip card should already be in your purse or wallet.  Although the new cards still carry a mag stripe and will work at any merchant, at some point merchants will begin to require you to use the chip function of the card.

With chip, you dip

Unlike a mag stripe transaction where your card is swiped through a slot, you insert the left edge of your chip card into a slot in the payment terminal. Again, look at the cover photo–it shows me inserting my Chase Freedom Visa card into a terminal this morning to pay for an oil change.  Once inserted, your card remains in the terminal for a few seconds to allow the terminal and card to communicate with the payment network. Don’t forget to pull your card back out and take it with you after the transaction completes! It’s very common for people to forget and leave their card there.  EMV may sound clunky, but you’ll get used to it quickly and we’ll all be safer because of it.

What happens next?

Here’s the schedule of the liability shift milestones:

October 1, 2015 – Liability shifts for Visa, MasterCard, American Express and Discover used at most stores you shop at (except pay-at-the-pump gas stations).
October 1, 2016 – Liability shifts for MasterCard used at ATMs.
October 1, 2017 – Liability shift for Visa, MasterCard, American Express and Discover liability used at pay-at-pump gas stations AND for Visa and AmEx used at ATMs.

I’m fortunate that my preferred cards have all been upgraded to chip cards and are ready for EMV.  If your cards don’t have a chip, contact your bank or card issuer and find out when you can expect new, more secure cards.