Open Solutions CEO Louis Hernandez Jr.'s recently released book "Too Small to Fail" offers his take on the financial crisis, the role of community banks in the American economy, and how small institutions need to band together to embrace the technology innovations that will transform the industry.
BTN: It's fairly unusual for a tech company CEO to write a book. Why did you take on this project?
Hernandez: I was compelled by the lack of attention I felt community-based institutions were receiving in terms of their role in the global economy. We deal with just over 4,000 institutions, and as I went around the country and the world I felt like a lot of people were looking for thought leadership.
BTN: Give us a quick explanation of the title, "Too Small to Fail."
"Too Small to Fail" was obviously a play on "too big to fail," which has been the systematic risk assessment that has driven a lot of the public policy and the focus on larger financial institutions. The notion is it's really the less diversified, the less capitalized, but seemingly more prudent community-based institutions who stood true to the initial goals of the banking industry. They did this by focusing on one community at a time, holding their paper, and investing in the people that ended up being the unique pillar of stability. That group, I think, has been underappreciated and has real long-term value.
BTN: You say that executives and boards must rethink how they will compete and the value they add to the market. What is the answer is to that for community banks?
I think there's two things that have happened as a result of the crisis: the main thing is it's given greater freedom for boards and CEOs to clarify why they're here, what value they bring, what their competitive differences are and to focus solely on those strengths.
And [they can do this] unencumbered by getting into areas they don't know because they've seen the downfalls of doing that. I'm hoping this crisis...has really unmasked the longer-term underlying issues that need to be addressed, and has in some ways freed the thinking and inertia that has been created in our industry around running institutions in certain ways.
The era of core replacement always seems to be right around the corner. Given what we've been through, is it finally here?
I think so; I think you're seeing the signs of that. This nagging issue [of aging technology] has turned into a severe competitive disadvantage and more people are realizing that....these nagging issues have become a severe systematic risk internally, an enterprise risk management problem and created efficiency risk.
Everybody has known for some time that we're littered with some of the oldest technology of any industry and there's no reason for it. It's not for lack of spending...this industry continues to dominate total tech spending. It's not because of that, it's because we need new ideas. And you're starting to see that emerge with some big projects globally, you're starting to see with new entrants to this market, [firms] like [Oracle], Temenos, and Corelation-a rewrite [from] the former Jack Henry founders. You've [also] seen Fiserv bringing new products. I think it's a good sign because it reflects that the industry is demanding new and more innovative ways.
BTN: One of the challenges banks face is how to capitalize on the proliferation of channels. What's Open Solutions' take on that?
Instead of creating two buckets: core processing, and business intelligence and CRM, we need to figure out a way to start not from the product or process but start from the person. If you start there, I believe you'll be able to take those two budget line items and combine them into one and save about half of your IT budget. Open [Solutions] is not going to, by itself, be able to do this. It's really the collective group. We all need to contribute-vendors, institutions, partners-collectively we need to figure out a way, otherwise we're all in jeopardy of not having a sustainable model.
BTN: Sounds great. How does that happen?
It starts with a fresh set of architectures that start with the person, not the process or the account. We've taken baby steps along the way, somebody needs to wipe the slate clean. That's why I'm excited about all these new products. Around the world you're seeing a surge in new technologies. This is critical, because the more these become viable proven approaches, not account-centric or process-centric, you'll begin to see more dramatic savings, you'll begin to see the rewards of innovation.
BTN: What's your call to action to the community bank industry?
What I'm trying to get to the institutions to recognize is that individually you add value, but collectively you're a real force. And we need to stop talking about collaborating and actually do it. We need to be representative of the strength of a network of thousands of representatives committed to the same approach of servicing one community at a time, of measuring risk one community at a time, and investing in these relationships, holding our own paper and understanding what that means. It's that collective collaboration that can yield innovation at lower costs, drive down costs across the industry and help manage risks better. This is my message to community banks: we need to do this better so you can exploit your strengths in a way that's more dramatic than one institution.