Banking Utilities Vs. Banking Innovators--Which Will You Become?

Dangelo, Mark mark@mpdangelo.com 

August 23, 2016


(Mark Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.)

The financial service industry is at a tipping point.

Bankers perform like a high-wire acrobat tipping side-to-side carrying a large pole (i.e., regulations) for balance in an effort to complete their tasks. The pole is also meant to spare his life (to retain a safe and sound balance) while walking across a void on an increasingly thinning wire. Stumble and fall and you are no more.

Whereas stress tests and guidance will continue to protect the acrobatic banker from falling and killing the crowd below (i.e., a safety net protecting investors and consumers), the restrictive and myopic focus to force the individual to balance under immense loads will eventually destroy the highly skilled performer--or force him into retirement. In today's world, financial institutions can only go forward or fall--there are few if any branches attached to their thinning wire path.

But why has the financial services industry yielded limited returns, while specialized segments (i.e., FinTech) have grown by thousands of percentages? Historically since 2006, the mortgage and finance industries lost more than 600,000 jobs and shuttered or merged 620 institutions, resulting in a collective industry that is once again stable and generally out of the headlines. Yet, this rebalancing has come at a cost--in capabilities, in flexibility, in opportunity and in organic growth.

The past three years have witnessed a return to consistent low delinquencies and defaults; however, executive offices and industry groups cite risk and burden of regulation (e.g., Dodd-Frank) and consumer demand (e.g., lack of household formation) as factors in an anemic recovery of interest in financial services and products. Though the industry has shrunken in likely benefit of its reemergence, it has not, as a collection of linked industry segments (e.g., retail banking, custody, commercial, risk and security, trading and settlement, payments, technology, et al) been able to find cohesion due to long-tail restrictions and an overabundance of complexity that penalizes early adopters and frequently rewards mediocrity.

The very regulations that have (as some believe) made the financial supply chains "safer and sounder" have also created operating environments and cultures which are unable to adapt and lead without explicit directions often for fear of retribution. Meantime, non-traditional players are working all sides of the delivery equation--consumers, technology, data, recovery, security, patents, software--as media coverage analyzes how these innovators are finally deconstructing decades of decay in favor of the future. Maybe they are; maybe it is just another wrapper for a new act?

Are the headlines the realities? From cross-border issues, to valuations, to business models, financial services have never been as much in flux. Institutions are undergoing reimagining and rebuilding into structures that are both fluid and rigid (i.e., fluid to meet consumers and rigid to satisfy regulations). If we broke an institution up along 12 distinct but generic continuums, we would not only gain insight into markets being served and likely profitability, but adaptability and capabilities.

A representative set might include:
--Layers of needs
--Layers of solutions
--Layers of regulation
--Consumer shifts
--Data and digitization
--FinTech
--Market sentiments
--Economic uncertainties
--Privacy, security and recoverability
--Analytics and measurements
--Availability of skills
--Legacy

Moreover, by further decomposing an organization these along lines of business (e.g., mortgage, asset management, brokerage and security), another layer of insight would be gleamed from the black boxes containing the institution's inner workings. Now add another layer of experts, advisors and political pundits and you have a delivery mix that is murky and prone to long-lead times in an effort to "get it right/"

Banking profits are still very positive, so why hasn't the workforce and level of pay rebounded? What increasingly bipolar is that institutions are booking profits, while at the same time reshuffling workforces and shedding more jobs. Oliver Wynam stated in its annual State of Financial Services Report: "Average returns of large financial firms have fallen from over 20% in the early 2000s to 7% in 2013, the level of utilities companies." Even as productivity per worker stalls, the idea of doing more with less likely as a result of survival scars are having an impact on organic growth potential as consumers shift their usage and behaviors.

Why have financial institutions created skunk works, formed internal innovation teams and funded venture capital initiatives for technology advancements? Since 2008, headlines have increasingly built on the theme that FinTech firms are the wave of the future. This is true for many as FinTech investments went from under $100 million to more than $50 billion globally (projected for 2016)--a 500-fold increase over nine years.

For financial workers, it has been the ultimate insult. They survived the greatest threat to their existence since the Great Depression only to watch investment money and their own executives shunning internal growth in favor of lift-and-shift apps and solution sets. Fundamentally, it has become the new global outsource process--without the people due to technology advancements in provisioning (e.g., cloud), security (e.g., ported to specialty vendors), and app and API vendors (i.e., those who provide the interfaces and glue along with consumer contact landing zones).

Can anyone blame the executives and speculators seeking out the next growth curve across financial services? Institutions hit with layer after layer of regulation coupled with multi-year litigation and government fines are afraid to take risks that do not come with an explicit "get out of jail free" card sanctioned by a regulator in writing. A quick example of this is the global negative brush of payday loans, which has created a shadow banking system for those deemed unacceptable to society's core values.

And what are these investments chasing? The three obvious answers are efficiencies, growth and profit (by layering attributed risks and isolating contamination). Additionally, strategy models and M&A ideals still fail to properly account for hidden complexities within legacy worlds especially when integrated with emerging APIs and compartmentalized FinTech software and experts.

Bankers, for their part, using familiar themes often prefixed with "e-" continue to stockpile investments in solutions that while developed innovatively, are often obsolete or missing the mark upon delivery. And, how many bankers are willing to stake their careers on investments that are written off the first year of their delivery?

This is the environment facing us as we buckle down from a long, hot summer. Banners of innovation, fast moving themes of innovation (e.g., cloud, digitization, big data) and partnerships with technology monikers may create headlines, but unlikely will allow enterprises to transform themselves from a slowly developing financial utility to a fast-adapting financial innovator.

We are embarking on a new model of financial services that within five years will likely have traditional bank models that are utilities--and other institutions that are technology feeders. The utilities will be the plumbing or back-office delivery behemoth controlled by regulators under the auspices of "safeness and soundness." This divergence should be recognized for what it really is--regulation is about managing utilities--regulation is nearly never about true innovation.

Those who stay within and invest among financial enterprises by the end of 2016 will be forced into decisions of "now that they say we are grown up and regulated, is this what we want to be?"

(Views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)

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