The alleged victims are all commercial entities, not individual consumers. Congress recently established an agency with a virtually unlimited budget to protect consumers — but not business customers — from banks. What's next?
That's the smoke, but let's look for the heat source. Have banks dealt with hard times by becoming excessively greedy and unethical? That's not plausible. It would be hard to carry out such a program in just a few years — even if we wanted to do it.
At first glance, a major cause of the complaints and litigation is operational and delivery complexity with consequent loss of transparency. This in part reflects constantly proliferating government requirements. For instance, appraisal management companies were brought into being by legal fiat, not by market forces. No one claims they are providing more accurate appraisals.
Underlying this is a mega-trend: outsourcing by banks.
Achieving the "right" outcome for any mortgage delinquency can only result from exceptional good luck given an inert independent trustee and an unaffiliated servicer having misaligned interests — not to mention today's intense political pressures.
Likewise a merchant is vulnerable to paying excessive card discounts and transaction fees because its acquiring bank plays only a nominal role. Merchant costs are determined by independent vendors navigating the intentionally unfathomable complexities of the oligopoly associations' interchange structures.
When you outsource, your control is weakened. Someone else, or multiple third parties, will be optimizing their own bottom line — not yours. They may not believe that their revenues depend much on whether your customers get more value — or even a fair deal. How do you quench the sparks from the resulting short circuits, much less bring your chickens home to roost?
In theory, the outsourcing mega-trend for everything from loan servicing to direct mail marketing to merchant processing is a financially valid response to economies of scale and specialized expertise. But, that theory is false, as shown, for instance, by the sprouting of small default mortgage servicers that have proven able to get good or better results.
And if the driver is economies of scale, then why would a very big bank outsource 85% of their credit card collections to multiple vendors — from the first day of delinquency onwards? Isn't there incremental value in directly managing and integrating all your contacts with your customers?
One reason for large-scale outsourcing is that it can look better to outside analysts and to regulators if a bank lowers its compensation expenses and replaces these by "other" costs-even if total costs increase and the ultimate bottom line impact is adverse.
But a second and more powerful reason is that most banks have lost or never acquired the core competencies needed to operate many of their key processes economically and agilely — processes running the gamut from telephone call centers to mainframe systems. And they need both cheaper and more expensive people than fit within their procrustean HR policies.
Maybe the outsourcing would be OK if banks had learned how to manage these operations with a tight feedback loop and a strong whip hand. Of course they haven't.
A bank recently told me "When we asked for a small change, they said it would take 18-24 months. We just don't bother asking anymore. And we scarcely think about any major modifications or innovative products." Another bank had a similar experience with a different vendor.
A third bank that is generally regarded as well-run said they managed particular outsourced functions by splitting the business and moving some of it between outsourcers depending on results. Except, when I asked them when they had most recently shifted any volume based on performance — it turned out to have been so long ago that they couldn't remember.
Staff assigned to manage outsourcers is sometimes pathetically small, weakly qualified, and subject to the temptation of getting too cozy with the vendors. (When I ran a small bank, I told my people: "I'll fire you if you even let a supplier buy you lunch.")
To treat your customers as you want them treated and to prosper, you need to know which operations and functions are key, and you have to own and deploy the skills to assure that these are good, better and even best in class.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at firstname.lastname@example.org.