Reconnecting Cuban and U.S. Banks - How Far Have We Come?

Reconnecting Cuban and U.S. Banks: How Far Have We Come?
May 09, 2016

Last year, Pompano Beach, Florida-based Stonegate Bank was making early
inroads at reconnecting the U.S. and Cuban banking systems. In July of
2015, immediately following the reopening of the U.S. embassy in Cuba
and the Cuban embassy in Washington, D.C., Stonegate signed a
correspondent banking deal with Banco Internacional de Comercio, a
Havana-based bank. Then in November, the bank introduced a debit
MasterCard to be used by Americans who qualify to visit the island.

A lot has happened since then, says the bank's founder and CEO, Dave
Seleski. At the second Cuba Opportunity Summit, held in New York in
March, Seleski spoke with the Knowledge@Wharton show on Wharton Business
Radio on SiriusXM channel 111 about how the business relationship
between Cuba the U.S. has grown, and the surprising area in which the
island's banks outperform their U.S. counterparts. (The summit was
organized by Knowledge@Wharton, The Lauder Institute and Momentum.)

Following is an edited transcript of the conversation.

Knowledge@Wharton: A year ago, the ink was about just drying on
everything in terms of the new relationship between the U.S. and Cuba.
How has the year gone for you?

Dave Seleski: For us, it's been very good. But I think for American
companies, it's been great. You look at how many more companies have
gotten engaged in Cuba: You've got the airlines now, you've got the
cruise lines. Verizon, Sprint; they're talking to AT&T now, Starwood.
I'd say probably close to 100 Fortune 500 companies have been down there
and at least explored the possibilities.

[Last year,] people were saying, "Well, maybe I'll go down, maybe I'll
see what's going on; we'll see what opportunities arise." Now, it's
tremendous. And we've got the President visiting. I think it's just
going to lead to more good things.

Knowledge@Wharton: How much does President Obama's visit add to it?
[His] going down there, I think, affirms for a lot of people where [the
relationship] is headed.

Seleski: I think you're exactly right. It's about permanency. The fact
that he is going down is just another example of how permanent these
changes are and how this really cannot be rolled back at this point. I
think it really puts an emphasis on that, and it also is a legacy — in
terms of making a change that's going to significantly impact the Cuban
people.

"Their banking system is sophisticated…. They have all the products that
we would typically have."

Knowledge@Wharton: What have you been doing in the last year to expand
your reach into Cuba and build up the banking infrastructure on the island?

Seleski: We've been more focused on helping American companies and their
financial needs in getting down there. Our correspondent relationship is
up and running. A big thing was figuring out how to get money back and
forth on a timely basis; that's been a big issue over the last nine
months. Now, we can get money through an intermediary bank in 24 hours
or less, which I think is faster than anybody else. We formed our Cuba
banking group internally with two people who handle everything related
to Cuba. We issue debit cards to travelers who are going down there, and
it's especially important for commercial travelers who have continuous
needs.

And we're working on some other things…. [When] you're a little bit of a
pioneer, there's a lot of research and development costs as you set this
stuff up. So it takes a little bit longer. But we're very pleased with
the results so far.

Knowledge@Wharton: What do you see as the next level for this whole process?

Seleski: Well, there are some other products and services we're working
on, but I think it's more a matter of just being a help to these
American businesses that are going down there, being able to navigate
the financial system — being able to assist them, to add value. You
know, a bank is a bank. I mean, let's face it, you make a car loan; you
make a car loan. They're all the same, right?

Knowledge@Wharton: Sure.

Seleski: Maybe the interest rate is a little different, but it's really
about service, and it's really about being able to add value. To be able
to help them to navigate the Cuban banking system, for instance, to be
able to help the payment systems go back and forth, and that type of
thing — I think that's really going to be the critical component of what
we're really working on.

Knowledge@Wharton: What are the basic differences between our banking
system in the United States and what's operating right now in Cuba?

Seleski: Well, their banking system is sophisticated. I mean, there are
about five or six banks, and they're all 100% owned by the government,
but it is sophisticated. They have all the products that we would
typically have. But there are two banks in particular that are focused
on international business and they have their bulk of the correspondent
relationships. We liaise with those two banks — there are cultural
issues, there are language issues and technology issues that need to be
sorted out. We hope to be able to bridge that gap for American companies
so they don't have to worry about it.

Knowledge@Wharton: I would imagine all of that gives you a good overall
perspective about what changes still need to happen in Cuba. As [we've
noted when talking] with a lot of people, it's clear that there are many
things that need to be upgraded to get them to just a basic level.

Seleski: Yes, but I think a lot of it is creating private enterprise
down there, and creating self-employed workers. I think we're up to a
half a million privately owned businesses in Cuba, and a lot of that is
going to create wealth. It's the velocity of money. Really, what it
boils down to — because like you said, the infrastructure and everything
has been neglected for so many years — is you need a significant amount
of capital.

You need to get that as foreign investment, or you can self-generate it
via businesses doing better in Cuba. Hopefully, between the two, that
will all come about.

Knowledge@Wharton: I'd expect the focus on the local business end —
whether it be through entrepreneurs, small business or tourism — is
going to be a very important piece to this. It's important to be able to
establish that piece of the economic puzzle on Cuba's end. Foreign
direct investment is a great thing, but when you have it right within
your own country — the economy and the capital build up — that's important.

Seleski: Well, obviously, there's been a lot of immigration from Cuba to
America, and we've seen how the Cubans have added so much to American
society. We just had two presidential candidates who are of Cuban
origin. So given the opportunity, I'm sure the Cuban people will make
the most of it.

And I think a lot of the measures we've taken will be beneficial,
especially the last executive order, which lifted some of the travel
restrictions and should increase the amount of tourism, which obviously
creates more money in Cuba. And we're allowing of Cuban nationals to
open bank accounts in the U.S. They were allowed to before, but there
were a lot of restrictions. If you had a Cuban entrepreneur who
potentially needed to buy materials, he'd come to Florida or wherever,
and he was very limited on how he could use the U.S. account to do that.
Now he can do that. That's supporting the Cuban entrepreneur, that's
supporting private enterprise down there, and it's all coming together
very nicely.

"I think we're up to a half a million privately owned businesses in
Cuba, and a lot of that is going to create wealth. It's the velocity of
money."

Knowledge@Wharton: You're in Miami, and when we talked with you before,
we also discussed how the Cuban population in Miami was reacting.
Obviously for decades, there has been a well-known negative view towards
the island among U.S. Cubans. If I remember correctly, you said it was
starting to feel like that was switching, because the millennial
generation obviously were not as directly impacted by the Castro
revolution as older Cuban Americans.

Seleski: I think that's true. And I think also that now a lot of people
who maybe don't agree with the [new] policy realize it's impossible to
roll back the policy at this point.

So the best thing is to support the policy — even though they don't
agree with it — because we're doing this in the interest of the Cuban
people. They've got relatives in Cuba, so they're helping them by doing
that. I think a lot of people become much more pragmatic about the idea
that the train has left the station, and it's time to get onboard. So we
get very little in the way of negative comments about what's going on.

Knowledge@Wharton: What is it like for you to come to an event like
this? Being one of the first companies to have your level of contact
with Cuba and Cuban businesses, I would imagine you're getting asked a
lot of questions about your experience.

Seleski: It's actually pretty rewarding. You know, originally, you'd go
to an event, everyone would be kind of be looking at each other and
there were no real interactions. But look at the energy in this room….
It's exciting to be a part of it. And hopefully, more banks will get
involved down the road, so that we're not the only one. I think that's
the goal down the road. But it's exciting to see what's going on here.

Knowledge@Wharton: How important, though, are the delegations that are
making visits and bringing businesses to Cuba? And there are other
nations in the Caribbean doing this as well. These are all important
pieces as well, correct?

Seleski: I agree, and I think it's an educational process on both sides.
You're educating the New York delegation or Texas delegation or Virginia
Delegation about what the Cuban culture is, but also, you're also
educating the other side, to some degree, about how we do business.
There's a learning curve for them as well.

It's been a socialistic model, and it will continue in some aspects to
be a socialistic model, in my opinion. Education and health care — these
are some areas where they've been very successful. But it's a learning
curve on both sides, so the more contact, the better.

Knowledge@Wharton: What was the learning curve like for you, going
through this process?

Seleski: You know, it was not as steep, because bankers are bankers.

Knowledge@Wharton: Right. Pretty straightforward.

Seleski: It's funny: One of the bankers said to me, "You know, your loan
growth was a little off; it wasn't quite what it was before." So we are
concerned with the same things — not having losses, operational issues,
money laundering and things like that. It's probably the same if you had
a group of lawyers together — you don't have that cultural divide as much.

Knowledge@Wharton: It's interesting you bring up money laundering,
because we were speaking with somebody from [Royal Bank of Canada]
before, and I didn't realize that that's a concern a lot of banks will
have with places like Cuba right now.

"[Cuba's] anti-money laundering procedures are actually tougher than
ours … in their banks. [It] goes on everywhere, but their compliance is
tougher than ours."

Seleski: Right, right. Their anti-money laundering procedures are
actually tougher than ours … in their banks. I mean, it goes on
everywhere, but their compliance is tougher than ours.

Knowledge@Wharton: Really?

Seleski: It really is.

Knowledge@Wharton: Is it the government control of the banks that leads
to that?

Seleski: No, I just think that they take it very seriously. You know, it
was funny. I had my bank secrecy officer down there, and she is very
tough. We were going through branches, and they have an individual bank
secrecy officer in each branch.

Knowledge@Wharton: Oh, wow.

Seleski: …They monitor that very closely. They take it very seriously.
They take drug trafficking very seriously. You know, money laundering
and everything else that goes with it.

Knowledge@Wharton: So the concerns that we hear from time to time up in
the United States about the potential for hacking and the disruption of
the financial sector, those are really not valid worries?

Seleski: I don't think so. The issue for banks is the fact that there's
still an embargo in place. If you're transferring money or if you're
doing transactions in Cuba or with people doing business with Cuba,
you've got to understand what the ramifications are and what's legal and
what's not legal. And I think for a lot of banks — they don't want to
deal with it. It's just too much headache. That's why we've got a
specialized group that handles it. I mean, they can probably recite the
regulations by memory. But that's probably the biggest thing that really
hurts other banks coming into Cuba. So once the embargo goes away, or we
get some more chips away at it, I think we'll see other banks get more
engaged.

Source: Reconnecting Cuban and U.S. Banks: How Far Have We Come? -
Knowledge@Wharton -
http://knowledge.wharton.upenn.edu/article/reconnecting-cuban-u-s-banks-far-come/