One of the lessons learned from the 2009-2010 bank failures is the importance of the foundation of bank strategy – your core values and purpose.
In our experience, banks that are clear on its purpose and consistently live out a set of corporate values tend to deliver both consistent performance and strong employee satisfaction.
Alternatively, many banks that failed began to chase growth outside of its stated purpose and/or in conflict with its stated values. If a bank’s stated purpose is to be the economic engine in a certain community then you wouldn’t expect that half its portfolio would be in CRE two states away. And if teamwork was a core value, you wouldn’t expect it to hire a bunch of lone wolf super star performers.
Two other personal observations on values:
Customers (especially Gen Y) increasingly don’t care what you do until they know why and how you do it.
The next generation of Board members expects organizations to be both values-centered and performance-driven.
So let’s take a look at your values.
Documenting Your Values
Your bank’s values serve as the cornerstone for your bank culture and help you answer the basic question of “should we or shouldn’t we”. They typically are first defined by your founder though they may evolve over time. Jim Collins, author of Good to Great, has a great tool for defining and testing your values.
I encourage clients to identify three to seven core values with each core value being a single word (eg, teamwork) or short phrase (eg, do the right thing). Just make sure they are words or phrases your organization already uses daily. No “corporate speak”. Then for each core value, include a few brief descriptors to help employees understand the meaning. You can sometimes create an acronym of your values that reinforces a theme or your most important value (example here), but don’t alter your values just to create an acronym.
Regardless of format, values must be authentic to be believable. They are not aspirational. They need to already exist within your organization.
And most importantly, they must be alive in your organization. Otherwise, they will come off as a meaningless list of words from a leadership team that doesn’t understand what’s really going on.
Making Values Come Alive
Yes, you need to post your values on the walls, but you need to go beyond that to make them come alive. Just as parents use rituals to reinforce family values (eg, grace at dinner, prayers at bedtime, church on Sundays), leaders need to create opportunities to communicate and reinforce values so they become part of the fabric of your organization. Here are five ways to make your values come alive:
1. Recruit for values
You can’t train values. People either share yours or they don’t. Include your values in your job postings (eg, “are you a hard-working, team-oriented…”) to self-screen and then design your interview questions to determine whether the candidates align with each of your core values.
2. New employee orientation
Make sure your values are explained in your employee handbook and include them in your new employee onboarding process.
3. Performance reviews
Jack Welch, former CEO of General Electric, built a very simple performance review system. GE measures every employee on two scales; performance and alignment with company values. They learned that the most destructive person in their organization was the high performer that didn’t live by the company’s values. Because of their high performance, managers would often let these culture killers live by a different set of rules thereby undermining everything management was espousing to all the other employees.
The GE review process is a very effective way to hold people accountable for their behaviors. If “teamwork” is a value (for example), you will need to discipline the manager that routinely takes all the credit for his team’s performance.
4. Recognition and reward
Find ways to publicly recognize employees that live out your values. Before your next quarterly or annual all-employee meeting, invite employees to send in stories recognizing their peers for living out your values. Have a committee pick the best example and then recognize the winning employee at the meeting. Take a picture of the CEO presenting them with a gift and include it with a story in your annual shareholder report.
If you have a company newsletter, highlight a value in each issue and include stories of employees living out that value.
And a thoughtful email from an executive to an employee can go a long way…“Susan, I really appreciate the great “teamwork” you showed getting the Acme deal closed yesterday. You jumped in, stayed late and helped us deliver great service to our customer. That teamwork is what helps separate ABC Bank from everyone else.” Make sure you copy their manager, too.
5. Day to day management
Incorporate values into your meeting rhythms. Rotate values of the week and start your weekly meeting with a short story or example or a personal challenge around the value of that week. Even better, invite others to share their examples or stories.
When making difficult decisions, relate it to a value. When customer issues come up, discuss how it could have ideally been handled in accordance with your values. And continue to look for opportunities to reinforce your company values.
To become a values-centered, performance-driven bank, leaders must first hold themselves accountable to corporate values. They also must communicate and coach their team members on the bank’s values, reward those that live by the values and hold those that don’t accountable.
As I was driving through the Appalachian Mountains on the way to facilitate a strategic planning retreat, I found myself listening to radio coverage of the House Energy and Commerce Committee hearing on the HealthCare.gov debacle.
As you know, the online marketplace launch for ObamaCare, the HealthCare.gov website, has been a technical disaster. It crashed on the day of launch, confidential consumer data has been exposed (why aren’t bank examiners screaming about GLBA violations?) and the site continues to be up and down to the point that consumers are now being encouraged to call in rather than try the website.
As I listened to the heads of all the government technology contractors explain how the disastrous results weren’t their fault, it struck me how much they sounded like bank core vendor conversion teams after a bad conversion.
And now that banks are starting to actually upgrade their core systems again after a four year lull and make other major technology investments such as Internet banking, loan origination and electronic content management upgrades, I thought I would share the top three lessons learned from the HealthCare.gov debacle:
1. Implementation is the Bank’s responsibility
Cheryl Campbell, senior vice president of the leading government systems contractor, told the House committee that the Obama administration ultimately bears responsibility as the "systems integrator or quarterback on this project." She and other contractors testified that confusion among the tech firms led to problems with the website.
While that sounds like passing the buck, she’s correct. And the same applies to your bank.
Many bankers wrongly assume that because they pay hefty conversion or implementation fees to vendors, then the vendors will take full responsibility of your conversion or implementation. Wrong. You are responsible.
If a customer’s debit card doesn’t work after a conversion, do your customers care that it was because of a vendor mistake? Of course not. They blame you.
You must understand all the steps and sequencing of those steps that go into a conversion or new system installation and then understand what part the various vendors play. Each vendor has a role, though it is typically much less than what bankers assume. They tend to focus only on the parts they are directly responsible for, and their corresponding training, installation and data conversion.
But what about customer communication of the changes? Or policy or procedural changes? Or business continuity changes?
Similarly, you should not rely on others to tell you the testing was successful. The same government contractors, testifying before the same committee on September 10, assured lawmakers that they were ready to handle a surge of users when the federal exchange opened on Oct. 1. Turns out they had only tested the system for a few hundred concurrent users despite their internal projections that 7 million consumers would register in the first year.
You need to take charge and take ownership of the entire implementation process (including testing) and hold your vendors accountable to your plan and expectations.
2. You must do integrated testing, not just unit testing
The Washington Post reported last week that as late as September 26, there had been no “end-to-end” testing of the site mimicking the real-life experience of trying to get online and buy coverage.
Ms. Campbell said her company’s portion of the site worked when it was tested, but when it was integrated into the entire system, it did not work.
How many times have bank operations and bank technology executives seen vendors point the fingers at other vendors? It’s mind numbing.
So you must take ownership of your systems testing whether it’s installing a patch, an annual update or a major conversion. And you need to go beyond mere unit testing. You must do integrated testing.
Unit testing is the simplest form of testing. It’s testing just one single concern (use case) without testing any interdependencies. It might be that a new patch doesn’t change a certain interest calculation or that data mapping a group of account numbers mapped correctly or that a server remains connected after an operating system update.
Integrated testing is much broader and includes testing multiple issues (multiple use cases). Integrated testing attempts to mimic real life scenarios as much as possible and needs to test real life volumes and system interdependencies such as operating system or database changes to applications, multiple interfaces, network connectivity, etc.
And just because all the products come from Jack Henry, Fiserv or FIS, doesn’t mean that you can assume they are testing all the connection points. In fact, this has become one of the more common breaking points in core system conversions. Banks assume that core, DDA, Internet banking, bill pay and multi factor authentication will all work seamlessly because they all come from the same vendor. Dangerous assumption.
3. Set a Go, No Go decision a month in advance of your go live date
It now appears that Secretary Sibelius knew of the problems ahead of launch, but she did not communicate these to the President. I would imagine she felt enormous pressure to go forward with launch hoping that things would work out.
The same pressure mounts for bank operations and IT executives.
So we recommend that at the beginning of your implementation project, you schedule a "Go, No Go" decision meeting at least one month ahead of your scheduled live date.
That meeting needs to include your CEO, the heads of all external vendor implementation teams and your internal implementation team. The sole purpose is to decide whether to go forward with the original go live date.
This is a candid assessment of the results of your full implementation test and whether it makes sense to go forward with the scheduled implementation date. If everyone agrees to go forward, we go so far as to require everyone to sign the document saying they are confident of a successful implementation.
Now is no time to hide from accountability. A bad implementation, particularly of customer facing systems, is nearly impossible to fully recover from so the CEO needs to be asking hard questions and the ops and IT folks need to provide candid answers.
Otherwise, if things fall apart, you’re likely to hear what Congress heard from Ms. Campbell.
"It was not our decision to go live," Campbell said, saying such a call was up to the Centers for Medicare and Medicaid Services (CMS).
And I’d hate to see you thrown under the bus with them.
As you head into your 2014 bank strategic planning retreat, there is no shortage of questions on the minds of directors and CEOs. Where is growth going to come from? Do we need to improve our bank efficiency? Is our technology up to date? What’s going to happen with Basel III? How do we attract younger customers? How do we deal with this new compliance burden?
With so many questions, let me suggest a planning framework to keep your next planning retreat focused. Here are the top five questions to answer in your 2014 strategic plan:
1. What’s your bank’s purpose?
Your institution’s purpose is its higher calling and should articulate why you exist. Sure you want to make money for your shareholders – that’s a given. But you, or your founders, could have started any number of businesses to make money. So why did you chose to open your specific bank?
Your purpose should evoke an emotional response in the minds of your customers and in your employees. It’s something people should be attracted to and can stand behind. And it’s not something that should change every few years.
Encourage your CEO to spend some time either confirming your existing purpose or defining a new one. You might pass along some of these examples for inspiration:
Freedom to travel
Make the world's information universally accessible and useful
Bring inspiration and innovation to every athlete in the World
Help our Clients achieve economic success and financial security
Bank of San Antonio:
Help businesses grow
Don’t waste time wordsmithing a bank mission statement in your planning session. Instead, identify your purpose in 10 words or less.
2. What makes your bank truly unique?
We use the term “brand promise”, but others call it competitive advantage or unique selling point. At the heart of this question is what you are promising your customer (and prospective customer) that is different from the competition.
Here’s a quick test to know whether you’ve identified a true brand promise:
- Does your promise matter to your customer?
- Is it noticeably different from what your competitors promise?
- Can you prove it before they become a customer?
Far too many banks rely on “we give great service” as their brand promise. But “great service” fails the above test. While service matters to the customer, it’s no different than what every other big bank, community bank and credit union promises. And, it’s very difficult to prove that you give great service to a prospect before they become a customer.
So, if you’re going to promote “great service” as your brand promise, you need to be able to back that up. Do you have hundreds of positive Yelp reviews? Have you been voted the best bank by an outside firm (local business paper, Greenwich, etc.)? Do you offer a money back switch guarantee?
3. Where do you want your bank to be in 1, 3 and 10 years?
Your 10 year goal is your singular long term goal. It should focus your bank on a single long-term goal. It should be audacious but not impossible. Think of Kennedy’s famous 1961 challenge to put a man on the moon within the decade. Jim Collins coined the term Big Hairy Audacious Goal (BHAG) to capture this concept.
There are four types of BHAGs:
- Target BHAG – “Be $3 billion in assets by 2025”.
- Role-model BHAG – “Be the Nordstrom’s of Illinois community banks”.
- Common enemy BHAG – “Crush ABC Bank”
- Internal transformation BHAG – “Become the bank every University of Florida graduate wants to work for”
Any of the four types can be effective, but you need to determine how you will measure your BHAG. You need to know how you’re progressing and when you get there.
For your nearer term goals (1 and 3 years), we suggest setting just two financial targets. Most commonly, it is:
- Total bank assets and a profitability metric (ROA, ROE, net income, pre-tax income, etc) or
- A capital ratio (total capital, Tier 1 capital, etc.) and a profitability metric.
You’ll have lots more financial targets for ALCO, risk management and departmental purposes, but identifying the top two helps focus the board, management and employees.
4. What needs to happen to get you there?
We recommend that you identify the top 3-5 actions (or strategies) to get you to achieve those targets and goals. What are the top 3-5 actions to get you to your three-year goal? And what are the top 3-5 actions to get you to your one-year goal?
The important part of this question is the prioritization. A list of 10 strategies is very difficult to execute and even harder to communicate. The executive team’s job in a planning session is to brainstorm ideas, debate and then prioritize the most important strategies to achieve your goals. Keeping it to 3-5 forces you to prioritize and makes it easy to communicate internally.
5. Who’s responsible for what and by when?
This is like a mini project plan. For each of the 3-5 actions you identify for your one-year goal, you need to assign ownership responsibility. You need one name by each action. Even though multiple people typically need to be involved in each action, you still need to identify the one person responsible for the action.
Then that person needs to identify a due date for the action for which they are responsible. They also need to identify two or three interim milestones so the CEO can make sure they are staying on the timeline.
If you can answer those five questions, you will have a strong plan that can be communicated and executed.
Learn More About Bank Strategic Planning:
Back in January, in a post on the Fiserv OSI acquisition, I asked who the next core vendor to fall would be. Yesterday, we got our answer. In a deal valued at $1.2 billion, Davis and Henderson Corp. announced its planned acquisition of Harland Financial Solutions.
Just like the last time Harland was acquired, lots of clients are calling me asking who the acquirer is.
Davis and Henderson, or D&H, is a Canadian technology company only vaguely familiar to US banks and credit unions through its Mortgagebot loan origination product which they acquired in 2011.
They are actually similar to Harland in that it is another checks company trying to evolve to become a technology company.
With the acquisition, D&H will add a little more than 5,000 US banks and will have combined revenue of $1 billion. That will put them at roughly the same revenue as Jack Henry.
A couple of quick thoughts:
- D&H is a major player in the checks business in Canada, however, they did not acquire Harland's checks business.
- D&H is a strong company in lending technology. MortgageBot is strong, and they have an integrated commercial/consumer/mortgage loan origination system (Cyence) that is stronger than Harland’s Credit Quest and Decision Pro. But D&H has traditionally been geared toward large banks from a price and tech resources standpoint. Molly Latham, our Lending Practice Manager, has asked them before whether they were going to bring those products down-market to community banks and the sales rep said that it was on their roadmap. We’ll see if that’s where this is going.
- D&H will be new to the core processing, Internet banking, and online account opening business. Yikes. We know how that’s worked out with other vendors before, but unfortunately Phoenix, Ultradata, Sparak, Intrieve, Cavion and uMonitor customers are used to being bounced around and being promised more development dollars. I’d be particularly worried that Phoenix and Ultradata core will continue to remain in no man’s land with yet another owner that doesn’t know the core processing business. Maybe D&H will actually deliver on Harland’s promises, but I wouldn’t expect major development dollars for a while. History has taught us that vendors will typically focus on integrating their legacy products with their newly acquired ones before they start to tackle new developments in the acquired products. I hope I’m wrong.
- In five years, D&H will have grown from 100 customers to nearly 6,000. That’s impressive if you’re a shareholder and frightening if you’re a customer. I hope their management team consists of superstars.
- My quick read on the financing of this deal is scary. At year end, D&H only had $5.5 million in cash. Goodwill and intangibles make up 86% of their assets. So how are they financing a $1.2 billion acquisition? D&H has said that it will finance it, in part, by raising nearly $600 million through the sale of subscription receipts and unsecured debentures. D&H’s leverage is already sky high and its liquidity is very low, so it will be important to know how much of that $600 million will be additional debt. We’ve seen several highly leveraged core processing acquisitions before and none of them survived. Unless I’m reading this incorrectly, I’d be very, very worried about this. Harland customers, it’s hard to believe this, but your vendor management financial reviews might have just gotten uglier.
The transaction is slated to close about August 19, 2013.
Correction to original post: Original - "I wouldn’t have too many concerns about their ability to integrate Harland’s checks business.". Correction - D&H did not acquire Harland's check business.
As the industry continues to resolve its credit and capital problems, many banks and credit unions are now shifting their focus to improving efficiency. And, the numbers confirm it’s a good time to focus back on efficiency.
After seven quarters of efficiency improvements, community and small regional financial institutions ended the year with efficiency ratios headed the wrong direction. Poor Q4 results wiped out the efficiency gains made earlier in the year. This comes at a bad time as several leading indicators are showing the U.S. is in for a mild recession later this year.
So what can you do?
Here are the top 5 ways to improve your bank's or credit union's efficiency in the second half of 2013:
1. Streamline Workflows
Remember the story about the two guys in the 1800s who wanted to speed up transportation? One guy looked at the problems with the horse drawn carriage. Horses averaged 6 mph and required stops for rest and feeding. So, he built a mechanical horse that could go 10 mph and didn’t need rest stops. The other guy built a train.
Many banks and credit unions have “automated” their new accounts or loan origination processes and ended up with a mechanical horse. They see incremental improvement and perhaps get their loan decisioning down from 2 hours to 1 or the new accounts process down from 45 minutes to 30. But to get your consumer loan decisioning down to 7 minutes or your new accounts process down to 10 minutes whether in the branch, online or over the phone (yes, that’s the new best practice), you have to build a train.
Redesigning workflow coupled with better use of technology is how you build that train.
2. Improve Technology ROI
Technology is now the second largest non-interest expense in banks and credit unions and is growing at 8-10 percent a year. Yet efficiency ratios are flat or getting worse. So, where’s the disconnect?
The biggest culprit is technology utilization. Banks and credit unions typically use less than 50 percent of the technology they pay for. So to improve technology ROI, they either need to lower their spending to match their utilization or increase their utilization to match their spending.
Lowering spending comes from the discipline of properly evaluating new purchases and effectively negotiating contracts, and utilization improvements come from using technology to streamline your workflows.
3. Measure and Reward Performance
Employees adjust their behavior based on the metrics they’re held against. You get what you measure.
While the banking industry is awash in financial metrics, we use virtually no personal or departmental performance metrics. And, when you don’t identify and reward performance metrics, employees tend to figure out their own performance metrics. Namely, they look around and see what people get in trouble (or fired) for, and they do everything they can to avoid that.
Over time, that breeds a culture of risk avoidance instead of risk management. When employees are more focused on avoiding mistakes than on serving customers or making you money, you end up with a 30-minute new accounts process. Or a consumer loan decision that takes an hour. Or, just 30 remote deposit capture installations.
4. New Approach to Containing Compliance Costs
With the explosion of new regulations, the examiners seem to be encouraging a “more cops on the beat” approach. Community and small regional financial institutions can’t afford to simply throw more people at the problem. Instead, consider these best practices to manage compliance costs:
Focus resources on the highest compliance risk areas. Identify and prioritize higher risk regulations (those that can drive civil money penalties, fines, branch opening delays, etc.), issues at the top of examiner’s priority list (Fair Lending, CRA, UDAAP, flood insurance, BSA, etc.), regulations that have significantly changed and issues that have received past criticism.
- “Bake” compliance and risk management into workflow improvements. The ideal workflow process improves efficiency, customer service and risk management.
- Use technology to automate compliance data gathering, controls monitoring, data validation and risk monitoring.
- Manage compliance staffing costs with new sourcing models. A mix of in-house and outsourced resources are required to manage compliance cost-effectively.
5. Continuous Expense Management
Adding structure to your purchasing processes can save you money:
- Require at least one other bid on any vendor purchase over a certain dollar amount.
- Require a business case for technology investments over a certain dollar amount. It can be as simple as a one page document with bullet points under three headings; expected costs, expected benefits, and expected risks with what you’re going to do to mitigate those risks.
- Negotiate every vendor contract. Do not accept list price.
There’s a right way to improving efficiency. By streamlining workflows, improving technology ROI, rewarding personal and departmental performance, employing a new approach to compliance and adopting a continuous expense management discipline, you can make significant efficiency improvements without adding risk or jeopardizing customer service.
Article originally posted in the ABA Banking Journal by leading community bank and credit union consultant Ken Proctor, Managing Director of Risk Management with Abound Resources.
Late on a Friday afternoon, the day after Christmas, a large commercial bank received a file of ACH credits from one of its commercial customers, submitted through the bank’s electronic banking system. The file totaled over $400,000. Then, the following Monday afternoon, a second file of ACH credits for almost $300,000 was received by the bank from the same commercial customer.
The originator of the transactions had used the proper identification and password information, and both transactions were validated according to procedures established by the bank, and, apparently, agreed upon with the customer.
In this case, the bank, in addition to authenticating the user ID and password, used a sophisticated scoring model to validate the transactions. Both scored as valid, even though they were originated on days of the week that were different than such transactions were typically received from this customer; came from a different originating computer address; and were for amounts in total and individually.
It wasn’t until late Tuesday afternoon that someone became aware that something was amiss. A gentleman from California called the bank’s customer to ask why he had been sent $22,000. By the time the customer notified the bank on Wednesday morning of the odd call, and the bank investigated the issue, only a small portion of the stolen funds could be recovered.
Of course, the customer felt the bank should reimburse it for the loss. The bank, with justification, noted that it had received the transactions from someone who logged on with the proper user ID and password, and that the transaction was further validated using a procedure agreed upon by the customer.
The bank refused to pay, and the customer sued. Extensive investigations by both parties determined that both bank and customer were somewhat to blame for the loss, and ultimately, the parties settled. By then, the bank had spent more than the settlement amount on attorneys and investigators. And its reputation was damaged from the negative press resulting from the lawsuit.
CLICK HERE to continue reading the full article on the ABA Banking Journal website and learn:
- How did it happen?
- Protecting your financial institution and customers
- Six steps on how to beat the Trojans
From our experience working with hundreds of banks and credit unions, here are the top six most common business continuity mistakes:
1. Focus only on technology
The FFIEC Business Continuity Handbook came out in 2008, yet many banks and credit unions still view business continuity as a technology recovery issue. They assume that a bank or credit union disaster recovery plan is an adequate business continuity plan. As we have learned repeatedly from recent disasters, recovering technology is not enough if you can’t access your offices, your employees don’t know where to go or your armored car carrier can’t get to your branches. Your business continuity plan must address recovery of technology and critical business processes as well as your personnel plan.
2. Outsourced banks or credit unions assuming that they don’t need testing
Many banks and credit unions that outsource core processing assume their core provider will take care of everything in the event of a disaster. They don’t. In fact they don’t even take care of all of your technology. It’s your responsibility to recover your network and network-based applications, your telecom and data com infrastructure. It is also your responsibility to have a bank or credit union business continuity plan and to test it regularly. One of the lessons learned from Katrina was that while nearly all New Orleans-based outsourced bank and credit unions’ core, Internet banking and ATM systems never went down, the communication lines between the institutions and their vendors were disrupted for days. And many institutions learned the hard way how dependent their operations were on server-based applications including document management and COLD storage, teller, new accounts, loan origination, accounts payable, etc.
3. Disaster Focus
In part because the old term was “disaster recovery”, many bank and credit union CEO’s still view the business continuity process as a process to recover from major disasters such as fire, flood and hurricane. In reality, only two of the top eight most common causes of system downtime are “disasters”. The top four most common causes of system downtime are human error, unexpected updates or patches, server room environment issues and power outages.
4. Lack of buy-in
Because of the reasons above, business continuity planning and testing rarely makes the priority list of bank and credit union CEOs. As such, organizational culture evolves to the point that BCP is viewed as an IT-only issue and/or as something that needs to be done for the regulators. Without executive support, it’s very difficult to get the business lines engaged in the bank or credit union business impact analysis and BCP testing.
5. Outdated plans
With changes in personnel, technologies, and processes, business continuity plans are constantly evolving. You should be updating your BCP at least yearly because of the rapid changes – larger institutions more frequently. Also, you should include a brief BCP review with every significant technology implementation, process improvement initiative, product launch, new branches merger or acquisition.
6. Not enough testing
Just as a strategic plan is worthless without execution, a business continuity plan is worthless without training and testing in your bank or credit union. Until you have tested multiple scenarios, you won’t know whether your plan works and whether your people can execute the plan.
After yet another marathon strategic planning session with yet another client struggling to come to terms with the crushing weight of compliance costs, the slow death of consumer banking, the weekly assault on the mortgage business and fears of next month’s guidance (and likely attack) on overdraft programs, I found myself staring at the ceiling in a Hampton/Fairfield/Holiday Inn in Middle America.
Unable to sleep, I finally read the CFPB’s Annual Report. Yeah, the glamorous life of a bank consultant / credit union consultant doesn’t exactly stack up to the Showtime series.
With all the swirling questions our clients are asking about the impact of Dodd-Frank and CFPB, I was hoping to find some little nugget that might help to predict how much worse the regulatory environment is going to get. Questions like:
- Can my lenders still use discretion to make a loan to a “questionable” borrower or will that trigger a Fair Lending issue if I don’t use a credit score-based rate sheet?
- How do I serve my rural borrowers who can’t meet the new QM guidelines?
- My customers want overdraft protection…is the CFPB going to kill that product in March?
And there it was in the fourth paragraph of embattled Director Cordray’s year in review summary; “Exemplary enforcement actions were taken in fiscal year 2012”.
Our industry’s worst fears confirmed – the CFPB’s measuring stick is enforcement actions.
As virtually everyone in the industry pointed out, we didn’t need the CFPB. The banking and credit union industry was already the most heavily regulated industry in the United States. We already have industry oversight by the FDIC, Federal Reserve, OCC, NCUA, 50 state banking agencies and 47 state credit union agencies.
Alas, we didn’t win that argument. Sixty senators felt that yet another agency was needed. So let’s see who was right. Let’s measure the CFPB by its own measuring stick. How’d they do?
In fiscal year 2012, nearly 1,000 highly paid CFPB employees spent $340 million, and their crowning achievement was forcing two credit card companies to rebate $60 to less than 2% of American cardholders.
So a couple of people got $60 at a taxpayer cost of $340 million. Hmm.
Ok, so what about their fulfillment of their self-declared mission to “make life better for consumers”? Have consumers’ lives been enriched by the CFPB?
I got a B in macro economic theory so I’m not as smart as all the Yale and Harvard lawyers running CFPB, but it sure looks as if the only consumers whose lives have been enriched by the CFPB are the 1,000+ CFPB employees making, on average, more than $150,000 a year.
Who knew government regulators were part of the 1%.
Occupy CFPB, anyone?
I didn’t exactly go out on much of a limb two weeks ago in my analysis of the Fiserv acquisition of OSI when I predicted more vendor consolidation. But this week’s FIS and ACI acquisitions do highlight my point about how payments are driving everything in the bank IT systems world right now. Payments are driving all of the innovation, and payments will drive most of the acquisition activity in the bank technology vendor (and credit union technology) space for a while.
Why is that? Because every graph of ecommerce and mobile payments have the “up and to the right” hockey stick, growth curve that investors crave.
It’s still too early to pick who will ultimately own mobile payments processing. Will it be banks? Phone providers? EFT processors? Card networks? Or any of the upstart non-traditional players? Remains to be seen, but the bank technology vendors are betting that having hooks into you and your customer network will be part of their winning strategy.
Both of these acquisitions were clearly about vendors’ access to your payments’ processing. And while neither of these two acquisitions will have much of an immediate impact on most small to mid size banks and credit unions (neither mFoundry or ORCC were top 3 players in the small to mid size bank and credit union market), there is an important takeaway here.
With bank technology vendors and credit union technology vendors so eager to get your payments processing, they are willing to deeply discount the platforms that give them access to those payments.
Our team negotiates Internet banking, bill pay and mobile contracts every day, and the strategy of FIS, Fiserv and Jack Henry seems to have become “give away” Internet banking and mobile in order to keep bill pay and other payments processing where their margins are huge. Now, they don’t actually give it away for free, but they are willing to do deep discounts to ice out the best of breed, third party Internet banking and mobile providers. Those third party providers have to partner with payments processors and their revenue share arrangements are not as lucrative as the core guys who own the processing network. Thus the pricing advantage of the cores.
This strategy has been successful in many banks under $1 billion and credit unions under $300 million where it can be harder to justify bigger spending for “great Internet banking and mobile systems” vs. “good Internet banking and mobile systems”. Especially when Internet banking and mobile penetration remains very low.
That creates a pricing challenge for the best of breed vendors, and is in part what fuels their eventual sale to the cores. But the best of breed vendors’ search for a stronger value proposition to justify the higher price is also what fuels our industry’s innovation.
The improvements in Internet banking and mobile user experience, the move towards a single Internet banking platform for consumer, small business and commercial, the expanded security and functionality for commercial cash management, the ability to develop custom mobile apps, and the seamless integration between Internet banking and remote deposit capture have all been driven by best of breed vendors.
So let’s hope all that venture capital money keeps funding these upstarts.
Meanwhile, I’d encourage three things:
- Each year in your strategic technology planning process, revisit your best of suite vs. best of breed strategy with your business lines, product managers and IT. As you grow, banks and credit unions tend to start moving away from a purely best of suite strategy to include a handful of best of breed applications. And the first two apps that cause institutions to break off from core are Internet banking (typically driven by commercial functionality needs) and loan origination.
- Even if you decide to stick with a best of suite strategy, it’s helpful to still check out some of the best of breed vendors before you call your core and simply order their new product (like mobile remote deposit capture). It will help educate you on what’s possible and help you push your core vendor for better features.
- Use this knowledge to get better pricing concessions from your core providers or your best of breed providers when your contracts come up for renewal. You know they want your payments business. Make them earn it.
The Mortgage Bankers Association recently published its prediction for 2013 mortgage origination activity, and it raises some concerns for community banks and credit unions.
Mortgage lending has been a lucrative revenue producer for many community banks and credit unions, and many have jumped on the bandwagon since the refi boom exploded in 2009. For many institutions, the income from originations, asset sales and interest on the warehouse balances was a big part of their profitability in 2012.
It remains a top priority going into 2013. From our recent industry survey, mortgage origination was ranked the second highest growth strategy for community banks and the fourth highest growth strategy for credit unions.
Now we learn that the MBA predicts refi activity to drop precipitously and, while new mortgage activity will increase, they predict new mortgages won’t be enough to offset the refi drop.
To be fair to our friends on the production side who are still working 60 hour weeks with huge application volumes, the MBA predicted a $300 million drop in applications last year and mortgage applications actually rose $500 million in 2012 to $1.7 trillion. So they could be way off.
But it does raise a good question. Will you know when to scale back your production resources?
Community banks and credit unions historically are quick to hire in a boom and very slow to fire (or reassign) in a downturn. We’ve been bank consultants and credit union consultants through several boom and bust cycles, and our experience is it often takes three to four quarters for banks and credit unions to adjust their production resources to decreased activity levels. Back when ROAs were 1.5%, you didn’t feel much pain if you were a bit late making those adjustments. In this environment, you don’t have that luxury.
So how can CEOs, CFOs and mortgage line of business execs spot the difference between a one or two month aberration and the beginnings of a downturn?
The answer lies in some key data points in your mortgage loan software. The simplest leading indicator to track is the number of mortgage loan applications, and you should be looking at both the number of new mortgage apps and the number of refi apps by month (if you’re a high volume shop, you’ll want to look at these metrics on a weekly basis). And if you’ve been adding originators, you’ll want to also look at those numbers on a per originator basis.
You can then compare your application trends to regional or national trends. If you want to get real fancy, you can incorporate leading indicators into your mortgage line of business scorecards (which would also include metrics for production volume, efficiency, performance, profitability, etc.). Side note: a dashboard of your bank or credit union’s production data compared to leading national indicators will become part of your enterprise risk management (ERM) dashboard in coming years.
Here’s a very simple illustration of how you might use leading indicators to spot trends. The sample data below suggests that this institution’s applications peaked in August due to a slowdown in refi apps. This is largely consistent with their state wide trends though at the state level there was a bigger year-end kick than at this institution and new purchases had stronger growth at the state level.
This would serve as an early warning for the mortgage group. A few possible takeaways from their leading indicators:
- No need for them to do anything drastic yet, but they’ll want to watch the total monthly apps number closely. When the total number of applications start consistently dropping below 52-53 per month, they should revisit their production resources and staffing levels.
- With a shift from refis to purchases, they probably need to reallocate their marketing efforts to include more purchase-focused campaigns.
- They also need to dig in and see why their purchase app volumes are not growing as fast as the state numbers. Perhaps drill down and compare purchase app volumes at their MSA level to get a feel if it’s a geographic issue – or an internal one.
- They might need to coach some of their younger originators who might have stayed plenty busy the last three years just taking refi call-ins on how to get out and network with realtors and builders.
This simple illustration highlights one of the great frustrations in our industry. Banks and credit unions are awash in data, yet devoid of actionable intelligence. The vendors in our industry provide virtually no trend information on the data within their systems much less incorporate industry statistics from third parties. If my nine year old can calculate a simple 3 month moving average, surely the vendors’ programmers can build it into their report writers. That goes for all vendors – not just loan origination vendors.
Bank and credit union executives need more than accounting data. They need actionable intelligence from leading indicators to respond quickly and to navigate today’s environment.
Vendors, do you hear that opportunity knocking?