Navigating Legislative and Regulatory Sea Changes
One thing everyone connected to the banking industry can agree on is there is no lack of daily headline-grabbing developments. One area that contributes to this condition is the variety of regulatory related topics.These range from new Federal legislation on several topics, to revised examination and regulator-initiated directives, to state-level regulatory and legislative actions, to global central bank deliberations, to name a few.
The current environment (since GLBA in 1999 and close to winding down) has similarities to a series of major waves of legislative and regulatory activity beginning around 1980 with the deconstruction of Reg Q and creation of market pricing for checking, NOW, deposit accounts and mortgage loans through to the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act (FIDICIA) in 1991. Insured deposit institutions were faced with a wide and evolving range of capital, business/product, operational, accounting, and regulatory changes in a fairly compressed time frame.
Failed institution activity set records that still stand in volume, if not by size of failure. All of today's large bank tech vendors were much smaller than today, but have clearly figured out how to support surviving clients and grow their businesses over the past 30 years. Many more of the industry vendors have arrived and departed as part of the vendor consolidation movement.
One fairly predictable set of outcomes from this high level of intense, some would say stressful, level of legislative and regulatory sea changes is the increase in IT requirements for the surviving institutions and many of their tech vendors. In many cases, consultants usually experience a positive, new business-oriented impact, if the consulting firm is well qualified and effective at engaging C-level decision makers who realize outside assistance is needed.
Every bank tech vendor should pay close attention to the financial well being of its customer portfolio. Close to half of the 7,000 remaining banks and thrifts are going to face a difficult time for the remainder of 2010 and into 2011. The other half should represent a different type of opportunity for those bank tech vendors that are well positioned to focus on client requirements, delivering real value to the client, and enabling their clients to improve their competitive capabilities.
Acquiring institutions will add to their IT budgets to cover conversions, increased level of customers, accounts, transactions, etc., but most likely at a lower spending rate than the failed or selling institution's IT budget. New business requirements may be added to the acquiring institution's solution footprint -- which means more business for some vendor.
From a solutions perspective, credit analytics and collateral recovery solutions have an opportunity to shine in this environment. Loan workflow solutions that connect origination, servicing, recovery and asset disposition also have strong potential. Virtually all risk-based solution categories (not to imply all risk vendors) across the board will continue to see opportunities expand for probably at least the next five years.
Big, medium and small institutions will produce different dynamics. The surviving big institutions will still slowly expand their aggregate share of industry IT spending. That dynamic leads many vendors to devote R & D, marketing, and sales resources to try and capture the big bank deals. While the revenue potential is appealing, if not addictive, vendor business risks tied to the big institution deals are real and significant. The big institutions are more likely to have in-house alternatives and vendor management -- procurement/bidding processes that de-couple hardware, software and services into subset deals that can be separately negotiated and managed by the bank or a trusted third party.
Medium and small institutions are far more inclined to pick a strategic vendor for more comprehensive and, for these institutions, cost-effective alternatives. At the end of this sea change, market leaders will be the most fit and ready for the rest of the decade.
Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.
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