ORLANDO, Fla. - Branch efficiencies, how bank performance compares to credit unions, the future of credit models, new risk management concerns and trends in technology integration were among the issues examined in a far-ranging discussion here by a panel of analysts.
Discussing "Top Industry Trends" during Harland's Connections Conference here were Terence Roche, a principal with Cornerstone Advisors; Patty Hines, research director with TowerGroup; Randy Roth, president of Vitek; JR Clemons, president of Harland's Risk Management & Compliance unit, and Raju Shivadasani, president of Harland's Enterprise Solutions Group.
Below are the insights they shared in response to a series of questions.
Q: Begin with your views on some of the pressing economic issues facing financial institutions right now.
Hines: The commercial and business side has, for the most part, held up and it's a pretty decent picture. On the consumer side the news is worse, and I can't predict what will happen. I don't think the economy can continue to take these things over and over again.
Q: What about community and midsize banks and CUs?
Roth: Some guys who invested in Fannie and Freddie have been hurt terribly by this and were blindsided. We're looking at clients and saying 'This is like the 10-year itch, just two years earlier. In the 80s everyone thought financial services was doomed, and in the 1990s everyone thought it was doomed. Most of our clients are going to weather it.
Roche: I think that probably a little sifting is going on out there, especially with midsize and community CUs. They are talking about what they can control. I would say what has changed the most in strategic planning is that two years ago the overwhelming topic was growth, and now it's capital preservation.
Clemons: I think this will probably be the year of risk. Everyone in the organization from top to bottom must be focused on the issue of risk-credit risk, operational risk, portfolio risk. But I think you can expect a big raft of new regulations and compliance to come down the pike.
Shivdasani: I think the system is going through a cleansing. I do tend to be optimistic about matters in general, but we're a resilient bunch. But I think we should not forget as we go through this process that there are good loans to be made. I do worry about lending freezing up. Fundamentally, deposit taking institutions have done a good job. Think of BofA, a deposit-taking institution, buying Merrill Lynch. I want to make sure that as you go about your business that you not get too paranoid and continue to go about your business, and use technology to aid the process of knowing who your good customers and members are.
Q: How will current scenario change the mortgage market, with Fannie and Freddie now explicitly backed by the federal government. Where will all the mortgage debt go now?
Clemons: I believe there has to be a set of institutions that help support the mortgage market, and how that shakes out will depend a great deal on the election. But it's going to be difficult to find someone to purchase $5-trillion in mortgage debt. I think we'll end up with a few institutions doing that, maybe not be as big as Fannie and Freddie, but they are going to have to have some type of government support. I think at the end of the day it will be two or four or five (secondary market buyers), but we've got to have the entities.
Q: With ongoing margin pressure and now with earnings pressure, do credit issues put more emphasis on making processes more efficient?
Roche: We're going through a a three-year period where one of the conundrums is that a lot of money has been for infrastructure growth. And now we're not going to see that growth. If you look over the past five years, margin is compressed about 45 BPs, fee income compressed about 45 BPs, but banks and CUs have done a good job with expenses down about 50 BPs. I don't think that's a long-term trend. There is a rightsize that can happen pretty quickly in the backoffice.
But a lot of capacity we built is in branches, and you have capacity there to do something. You have not filled up the work bucket for those people to do something. Assuming mass branch closings is not on the table, in the future the pressure will be on what to do with half the staff sitting in branches? I think where people are looking the hardest for efficiencies is in the commercial area.
Hines: Most folks have not automated the commercial area. So there is a lot of great technology that is out there that banks should be investing in, but aren't because of economy. A lot of (commercial lending personnel) keep pushing it back.
Roth: We get a lot of questions right now about reengineering different business processes across the bank. When times are good and things are rockin' and rollin' you don't look at the things you can do to streamline processes.
Shivdasani: We're seeing this in some of the credit unions and banks that are becoming quite cognizant of the fact that they have gotten further away from using all the capabilities in their systems. We're seeing an increase in system utilization reviews to see if they are using the system to its fullest extent possible. We see it mostly with our older users.
Clemons: This is near and dear to me. One of the key things we have with (Harland's) CreditQuest is the ability to focus specifically on the commercial side, and it's an area of cognative dissonance, the unwillingness of commercial lenders to change the way they have acted in the past. Even when we present the opportunity to automate the process, they often just want to automate what they have done in the past.
I think this will happen until the government says you need to collect data in a new format. Barring that, I think we will run into that resistance for some time.
Q: What about the Experian Decision Model and Beacon Scores and other models? Will those models hold true in automated decisioning?
Hines: I think the scores will hold up. I think again it gets back to the fact that score alone is not sufficient to make a decision. So I think it's always going to be a score along with something else. I don't think the problem is with the score, it's with the overall methodology. The problem is that 70% of loans in the U.S. have the same risk rating.
Clemons: It's really a process of taking subjective data and trying to put it into an objective, fact-based model. If banks can start to collect that data we ought to be able to figure out what really happened and then find out where the faults were.
Q: I am at a credit union and we are just getting into business lending. I was told that U.S. Bank has a program where, just based on a score, someone can get up to $100,000 on a business line of credit. True?
Clemons: With many businesses that are small the true credit you are checking isn't that of the business, but the owners of the business. It's a personally guaranteed loan.
Roche: If you are in this business and (seeking less than) $50,000 or $100,000, everyone is moved into a consumer model. In the commercial groups, I think the models work pretty well. If looking for efficiency question you have to ask is are you putting too much overhead on the deal. There are plenty of $40,000 and $50,000 credits in your portfolio that are being over-managed. I agree you can't over-rely on credit, but I think on the other end you have to start saying if we have good, transparent information about the buyer and asset, why are we doing annual reviews?
Q: What other issues concern you?
Roth: Some institutions have gotten away from the fundamentals, such as the capacity to pay. I think the models are relatively good.
Q: Regarding efficiency in a branch, what do you see being done to get more out of the branch? Being efficient can mean getting the same out of the branch but with fewer people?
Roche: If you go to an $80-million branch that's pretty profitable, you probably have pretty good capacity. But a lot of people are sitting with $18 million or $20 million branches, with no real endpoint for when they will get profitable. You have to have four or five people there, so you have a capacity issue there. I think, number one, you're seeing a return to the branches of simple lending and taking the lead in building the book of business for business loans. I know it sounds completely counterintuitive to those who have centralized, but have we centralized too much? I think if you add all that up this is where there is the most opportunity. Where I see the falldown is that there isn't enough training.
Roth: We see a lot of banks getting into CRM without a real strategy for using it, and there is no training and it fails.
Roche: Small business is knowledge-based training. What I see in branches is they just don't understand enough about small business. When we were building for growth we were paying people and judging people for production. I think what you're going to have to do over the next three to give years is pay generalists for production.
Shivdasani: Wearing my automation hat, I have walked into branches and seen 10-15 people and it should be closer to four or five. I look at what's happening in airports and kiosk lines. How much of traffic could be redirected to branch kiosks?
Hines: I think what you're seeing with branch automation is needing to switch out some of those old, old backoffice systems, because you need a CRM system or call center. It's been talked about for years and years. You also have some interesting new technology players who are entering. There is a lot that these systems do that people don't even know they have got.
Clemons: I focus on lending systems, but if you look at following through on some of the concepts about empowering people in the branch, we can provide you with the technology to do that. The technology is there to make it happen and still give you the kind of controls you need to ensure you don't have run-amok lenders in a branch somewhere.
Q: I see banks are much more efficient than CUs. What are the implications for future?
Roche: If you look at the components of an efficiency ratio, really what you see is that banks have more fee income and non-interest income than credit unions do. Also, the average branch size at a bank is much higher than a credit union.
Roth: It's a dangerous comparison. The credit union has a different philosophical proposition. The credit union is thinking about what can it do for the member.
Q: What about the branch and efficiencies?
Roth: When Raj talks about the kiosks and the airlines, they are absolutely the worst at customer service, and they got us to use kiosks. But at banking we're so conservative we're afraid to take that step. If the airline industry can do it, anyone can do it.
Roche: Branches represent about 35% of all transactions. That has declined every year, but not because teller transactions went down, but because every new channel built their own volumes. Are teller transactions declining on a real basis? No. They are going up.
Hines: The banks that are doing really well are the ones in the small towns where you have a chance to find out how (customers) are doing every day. What's interesting with deposit capture is you are pushing the customer out, and it's hurting that ability to develop that relationship.
Clemons: In the mid-1990s, in Europe banks were building branches where there was no human present. But they abandoned that. There was no contact, no warm and fuzzy around a kiosk. You can't tie that customer in or make them feel like part of the organization that way.
Q: What about integration?
Roche: A lot of clients understand this intellectually, but having trouble translating that into what it means in practical terms and savings. I think what you have to start thinking about is that if Harland delivers a perfectly integrated system, how does that translate into a business benefit for you? You have to start on the other end by taking the number of people you have and the number of loans you close and that number has to get better. You need to start having some hard conversations about measurable, hard dollars about savings from business integration. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com/ http://www.sourcemedia.com/
