He’ll tell you he isn’t the definitive expert on some of the most anticipated and discussed banking industry trends heading into 2019, but Paul Hickman, president and CEO of the Arizona Bankers Association, has much to offer in detailing a clear exposition of what’s to come.

Hickman helps to deconstruct the effects of the repealed Cole Memorandum, how Arizona’s FinTech Sandbox will impact the consumer and state and how we can relax — momentarily — when it comes to the anticipation of another recession.

Hickman talked with Az Business about the industry and what we can expect in the coming year.

Paul Hickman

Az Business: How are the Federal Reserve’s interest rate hikes impacting banks in Arizona?

Paul Hickman: I think this is going to be helpful since the rate hike is based on the judicial, traditional model. Yes, the rate will go up, but so will the lending rate. The banks have been waiting for the rates to normalize. If we look back, we can observe that the interest rates were higher in 2007 and 2008 and have grown higher under current Federal Reserve Chairman Jerome Powell. The “sell” is that a correction was essentially overdue.

It will be interesting to see how this changes — or doesn’t change _ during the current administration, combined with a potential trade war with China and new concerns with turbulence in the Middle East.

AB: Things have been so good with the economy for so long and many are expecting a recession in the not-too-distant future. What did the banking industry learn from the last recession that will help it better handle the next recession?

PH: I’m an amateur analyst, but looking back, it’s important to keep in mind that the last recession involved a financial crisis which traditionally involves a prolonged rebound. The last recession also emanated from the housing industry. Arizona was front and center in respect to exponential growth in housing. Housing became one dimensional and should have remained a derivative industry, rather than a primary driver of the economy.

When the housing industry leads the economy, it becomes problematic. When industry leaders first became aware of the issue, they should have hit the pause button. Arizona simply didn’t have the buyers to support the boom of gated communities in the late 1990s and early 2000s.

We can learn from Michael Lewis’ “Big Short.” Preceding and during the last recession, federal regulators simply didn’t wrap their minds around the potential effects of the collateral debt obligation and mortgage-backed securities. We had a 70-year run on housing in the United States up until 2008.

Once the music stopped, it brought the economy to its knees. Arizona fell further in the latest recession than during the Great Depression because it didn’t have an evolved economy. That’s why we became Ground Zero compared with other markets. We lost 15 banks in Arizona.

Now, we have new compliances and regulations in place. If and when the next recession comes, it won’t be driven by housing. The latest growth cycle has been long and it’s good. The more notable economists say it will be good for the foreseeable future. Inflation is at 2 percent and is targeted to increase to 4½ percent to 5 percent.

We’ll see how Chairman Powell will react under the current administration.

AB: What kind of impact do you see Arizona’s “financial technology sandbox” having on Arizona’s banking industry?

PH: I think this is going to be really interesting having a regulatory-free zone for companies comprised of certain sizes. I’m proud of Arizona for leading this. Ultimately, it’s good for us and produces a lot of positive attention for banks. We’ll see good innovative companies stay here and grow their employment. It also has the potential to bring in more high-wage employers, which in turn boosts housing — and it’s not happening in a vacuum.

The only hindrance could be the Office of the Comptroller of the Currency’s fight with the Conference of State Bank Supervisors on how regulation will be chartered — federal versus state. This will likely slow us down.

AB: How can Arizona consumers expect to be impacted by the FinTech sandbox?

PH: If companies utilize the sandbox, Arizona consumers will be a test case who can use the new products. They may become the first beneficiaries of some new products. It could also be a risk if it doesn’t work.

AB: The Cole Memorandum said the Justice Department would not enforce federal marijuana prohibition in states that legalized marijuana in some form. Now that the attorney general has repealed the Cole Memo, how does that impact the banking industry’s ability to do business with the exploding cannabis industry?

PH: This is one of the more interesting subjects in terms of not only business factors, but also social and political implications.

The electorates in half of society are getting ahead of the political class, much like they did with gay marriage — it happened very quickly. We haven’t seen such a quick societal shift in the modern era, with the exception of gay marriage, and I believe the issue of marijuana legalization is much the same.

Attorney General Jeff Sessions firmly believes that marijuana is a gateway drug to other substances and that’s why he repealed the Cole Memo. And, Republicans aren’t going to touch the issue with a 10-foot pole because they don’t want to be primaried. Furthermore, the FDIC isn’t even going to talk about it.

When the 2016 election looked like Democrats were going to remain in control, more states were going to legalize marijuana for medicinal and/or recreational use, with the exception of Arizona.

In 2020, they’ll get marijuana legalized for medicinal and/or recreational use in Arizona and a handful of other states.

For now, while the FDIC isn’t talking about it and a chilling effect has taken place, my prediction is that community and regional banks simply aren’t going to touch the issue. Our industry is the one that’s blocking progression, not because of the new administration, but because of the attorney general.

AB: De novo activity is actually gaining traction across the country. Are we seeing the possibility of any new banks coming to Arizona?

PH: I think de novo is gaining a little bit of traction. I think we’ve seen 13 banks that are up — two of them are “in organization.” It’s a good thing, offering a broad and robust banking center. Between 2009 and 2011, there were zero additions. No de novo applications were approved or advanced.

Rural America still has a need for brick-and-mortar. Digital banking is great, but I believe de novos are needed in niches. In fact, if marijuana is legalized and a new administration establishes Cole Memo-type regimes, we could easily see niche de novos in this area. It will come down to how the serving attorney general feels about it more than how the administration views the issue.

AB: What can we expect to see in the coming years in terms of mergers and acquisitions in the banking industry?

PH: Reform Bill 2155 — also known as the Economic Growth, Regulatory Relief and Consumer Protection Act, which rolls back reforms from the 2010 Dodd-Frank Act — will take a little pressure off compliance and lower costs a little bit. The pace of mergers and acquisitions will also be reduced some. Naturally, consolidation occurred and was exacerbated by the recession.

AB: How will Arizona’s new tougher data breach law impact the banking industry?

PH: I don’t think it will affect it too much since our industry already has the most stringent data breach laws intact. Additionally, since they are so comprehensive, tough, dynamic and stringent, their proactive nature could help economic entities who have faced data and cybersecurity breaches. The standards in play in banking are financially costly, but so are the reputational costs of not having them in place.

The banks are naturally blamed when cybersecurity is compromised, but it’s the banks that have to put the money back — and that’s not cheap. Insurance for a cyber attack comes with a $250,000 deductible. For a community bank, that’s a huge impact to the budget if a claim is filed.

AB: What issue, trend or concern will have the biggest impact on Arizona’s banking industry in 2019?

PH: One of the biggest national and local trends is the evolution of payment systems. International entities have a 365-settlement regime, but we don’t. The feds control that. While real-time settlement is being considered, until we have that system in place, the progression of digital currency will remain at a standstill.

While Arizona did engage in a discussion during the last legislative session regarding allowing merchants to pay Bitcoin for sales tax remittance, it was a problem with the feds. You can’t implement digital currency regulations in one state — it would cost billions of dollars. The bill was ultimately vetoed by the governor.

We may also see the continuance of token-based digital currency like Apple Pay. Maricopa County has a real problem with skimmers. These skimmers can park near a gas station and utilize a Bluetooth device to download credit card information — and how can they be policed? You need probable cause, which is not an easy feat when someone is simply sitting in a parked car. Tokenization is one way to protect merchants and consumers from skimming, so we may very well witness larger banks adopting tokenization first.

Another issue in banking is criticism that has risen as a result of closing accounts along the border. De-risking is a result of reacting to increased scrutiny in compliance cost and increased penalties for making mistakes. It’s an unforgiving environment. And the casualties are the people who need to find a new bank.

Although discontented border merchants has settled some within the last year, we’re still keeping our eye on de-risking.