The American Dream and the community banks that support it are being crushed by economic pressures and regulation, says Louis Hernandez, CEO of core systems provider Open Solutions, Glastonbury, Conn.
Hernandez’s new book, Saving the American Dream, is about how the basic tenets of quality of life in America — the ability to own a home, get an education, have a good job or own a business and acquire financial security — are at risk. “My parents were immigrants, all the romantic flag-waving is very real to me,” he says. “I travel a lot and I’m fascinated by how much we’ve exported our ideals to other countries.”
A large part of the problem, in his view, is that the small businesses that create most jobs are unable to obtain capital from the community banks that do most of the lending to that sector, because they are overburdened by regulation. “Regulations are making it near-impossible to do our role, it’s politically and socially acceptable to beat up banks,” he says. Hernandez is in favor of repealing Dodd-Frank. “It’s so skewed right now,” he says, pointing out that many of the measures in the act intended to prevent another financial crises are amendments to existing laws, and that expensive and unrelated extras have been thrown in.
“The basic business model of banking is under more pressure than people realize — between interest margin compression, regulatory burdens and fee income being under attack,” Hernandez says.
Hernandez has similarly strong views about the way banks are letting tech-savvy nonbank competitors, such as Square, PayPal and Google, get into the mobile payment business.
“The ubiquity and acceptance of technology has surpassed the safety and soundness of regulations,” he says. “The banking industry’s technology is as old as any industry’s — it’s ill-equipped to compete with the likes of Kiva and the Lending Club. At such sites, you’re two clicks away from being approved for credit. Then you go to your bank for its old, transaction-based system. Bank leaders need to realize their world has changed. Google Wallet, Square, and PayPal shouldn’t exist.”
Asked about the attitude of bankers who wait and watch nonbank mobile payment activity on the sidelines unconcerned, feeling that no matter who enters the space, banks will still own the rails that payments move across, Hernandez is skeptical. “When they’re through waiting, all they’re going to be left with is the rail — they’ll be limited to the least valuable part of the chain,” he says. “Just collecting tolls is not a solution.”
Open Solutions itself is working on building a global payment system to be used by all its customers, currently 560 financial institutions. “We’re creating a new set of rails that don’t exist today,” he says. “We are the network and we are regulated.” The system will take advantage of payment applications customers have already built in the company’s DNAappstore, an Apple App Store-like platform where users share and sell homegrown software that works with Open Solutions’ core DNA system. So far, 30 organizations have built 150 apps; there’s a backlog of 300 apps under review. The new payment network will also use pieces of the automated clearinghouse in the U.S.; it will not use the card networks.
One suggestion Hernandez has for banks: fund more startups. “What if banks funded every idea coming out of Silicon Valley?” he asks, pointing out that all the venture capital in Silicon Valley amounts to about 12 billion, a sum banks could easily afford. “We can out-fund Silicon Valley and apply all those ideas to banking; it wouldn’t be that expensive or risky,” he says.
“There is innovation going on, but not enough,” he says. “Staying innovative is a full-time job. We must shatter the limitations that have left us ill-equipped to compete in the new world to fulfill our role as trusted financial intermediaries.”