I listened in on a recent Web seminar from Wolters Kluwer Financial Services that promised an overview of the provisions of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act that would have the most impact on retail banks. I was struck by two things: more than 900 people registered for the call, and by the time it ended an hour later there wasn't much detail laid out on what would be expected of banks. That's not to fault the experts running the call, but the reality is that while the industry is clamoring for knowledge the specifics will be unknown for another year or more in some cases. But some of the areas in which process changes will be demanded, and current technology likely falls short, are already easy to spot: mortgages, risk management, and core systems.
Deposit Accounts: A California judge's $200 million ruling against Wells Fargo related to overdraft fees incurred as a result of high-to-low sequencing of transactions led analysts at Keefe Bruyette & Woods to predict that high-to-low sequencing may soon be banned, and that the newly created Consumer Financial Protection Bureau will target other service fee generating practices. These require banks to rethink revenue models, but also raises technology issues. Banks that don't have real-time core systems may have significant work to do when it comes time to re-order how debits are processed and fees assessed.
Mortgages: Origination risk has been on lenders' mind for more than a year as they react to the GSE's new loan-quality requirements. Dodd-Frank adds onus on lenders to use a standardized format to assess a borrower's ability to repay a loan and opens lenders up to borrower lawsuits if the loan eventually goes bad. Added, too, are requirements around commission structure and certification of loan officers. The section of the Act that creates the CFPB already outlines 12 new data points that must be collected. The net result is that without updated loan origination systems and workflow, the regulatory demands may add so many work hours to loans as to drain the profitability out of them.
Risk Management: The Financial Stability Oversight Council is charged with managing the industry's systemic risk. The Office of Financial Research will be similarly empowered to collect vast amounts of data. To meet these demands, banks without an enterprise risk management system, or further, a way to tie the outputs back to the institutional profitability, should put that on the project roadmap.
You'll notice a theme throughout all these tech requirements: demands for data. And, as most of you know, there's no room for "wait and see" when it comes to planning technology projects. Gartner analyst Doug McKibben has a good metaphor when he discusses how banks should create a coherent, business-focused strategy and long-term plans in reaction to Dodd-Frank. He advises, "Use the lemons to make lemonade."