While last week my news feeds on social media showed an avalanche of humorous ice bucket challenges, it sparked a comparison to me of the recent Avalanche of Regulation Infographic published by the American Bankers Association (ABA). The burden of regulatory compliance is dousing the fires of creativity and customer loyalty in banking.
How Regulations are Stifling Innovation
Just like a bucket of ice water can bring a chilly reality to one’s day; the growing regulatory burden appears to be stifling innovation in financial services.
The survey conducted by the ABA and routed as a call to action to members of Congress shared some sobering statistics from the banking sector show that more regulation is resulting in fewer products and choices for consumers. Compliance considerations are clearly having an impact on the marketing of products or services in financial services based on the organizations that responded to the survey:
- 44% reduced current consumer financial products or services due to compliance regulatory burden
- 27% cancelled a new product launch, delivery channel, or market due to compliance considerations
- 31% are ‘holding off’ on new products, delivery channels or markets, while they determine the regulatory impact
The increased costs of compliance, including increased compliance staffing are reducing the amount of available investments both financial and human capital in the development of new financial products or services.
The regulatory burden alone for the Dodd-Frank Act has added 14,000 pages of new rules, regulations, and pending guidance. Dodd-Frank is requiring more than 60 million hours of paperwork for compliance; and we are only 50% through the mandated rules. That’s a lot of time that could have been used to identify customer needs and develop solutions to meet those needs.
Impact of Regulations on Banks and Credit Unions
It is not surprising that over the past decade, the growing costs of compliance are fueling consolidation between smaller financial institutions. The era of growth and creating innovation of start-up De Novos is a fading memory. Traditional community banks are faced with challenges of maintaining profitability while maintaining compliance to the same regulations are national banks with significantly more resources. The resulting impact means fewer choices for consumers in many communities.
The unintended consequences of regulation stifling innovation. While most financial regulations start from a good intentions point of view of protecting consumers, financial assets, or the banking sector in general; there are unintended consequences in the execution and operations of compliance that can hinder creativity and innovation.
- Fears of UDAAP enforcement: Consumer protection rule-making and enforcement start from a good construct – to protect the consumer from unfair, deceptive, or abusive marketing practices. Creating simple to understand terms and condition is a good thing. However, most financial products are complicated – even the simple checking account can contain an account holder agreement longer than the play Romeo and Juliet. Enhancing customer disclosure s and notices can improve customer understanding of their financial options. However the fines and enforcement are sponsoring a culture of fear, uncertainty and doubt in bank marketing team’s ability to be creative in marketing. Over-regulation of a particular product’s features or functionality risk commoditization of the product, resulting in a “vanilla approach” to structuring a financial product or service. Last year’s ABA Bank Compliance Officer Survey showed that 78% of banks said they will or may need to change the nature, mix, and volume of mortgage products. In the last three years, the market share of non-bank mortgage services has nearly tripled, and that shifts consumers into product systems that are less regulated.
- Big Data & Privacy: Privacy is fundamental in financial services. Online privacy preferences are a staple of web privacy statements. Privacy regulation has evolved as technology has evolved. Conflicts with privacy and technology, including surveillance have been headlines for the last year. Big data and the usage of data to drive customer experience and eMarketing can be a tricky ski slope. Traditional notice and choice concepts of fair information practices could not have anticipated how data analytics and big data have emerged. Creating regulation that could anticipate future uses of data would be difficult to enforce or interpret, especially with pace of technological change. Rather, collectively, the advances in innovation enabled by big data need to be balanced with clear customer awareness of data usage and respect for context.
- Net Neutrality: While not directly a result of prudential banking regulators, the recent FCC actions are prompting an online debate over net neutrality and the risks that regulatory change could hinder innovation on the internet. The concept that all internet data is equal is under scrutiny. When the internet was created, we could not have anticipated things like digital video streaming, Netflix, social media or You Tube. While big players in the internet service provider (ISP) space debate the interpretation of the ruling the implications to pricing and access to content for smaller and medium sized ISPs can’t be forgotten. Small Businesses are a primary driver for economic growth, and profitability to financial institutions. The net neutrality debate stems from a legal interpretation of jurisdiction, but has creating an avalanche of concerns regarding competition, payments processing, and evolution of payments.
- The evolution of payments: Historically, no payment method has truly ever been totally obsolete – barter is still used today, just like checks are still written by consumers and businesses. The rapid emergence of technology has driven changes to payments, including testing our perceptions of traditional payment mechanisms. Mobile technology alone spurs innovation in customer access and usage. It is difficult for regulations to keep pace with technology innovation and can risk applying old business models to a new hybrid banking landscape. Debates over remotely written checks, industry efforts to electronify checks, and virtual currency are creating a hailstorm of questions about how to protect payments, but not halt innovation. Bottom line the debate can create confusion for end customers – both financial institutions and service providers need to monitor the influx of regulatory commentary and how it may affect the development of their payment strategy roadmap. Innovation in payments requires technology + meeting customer needs in a way that still delivers a protected transaction. Payments are a critical component to most financial institutions profitability, and as payments evolve, the regulatory oversight needs to evolve in parallel, but without slowing down technology innovations.
We need regulation in financial services, to avoid the repeat of the mistakes seen during the Financial Crisis.The structuring and marketing of financial products and services needs to continually evolve, but at a much faster pace due to the pace of technology innovation.
The avalanche of regulation and the corresponding delays in product enhancement are an “ice-bucket” wake up call for financial services. As an industry, we need to understand how regulation can stifle innovation and take steps to address the fear, uncertainty and doubt within our organizations and identify ways to tip the scales and creating a more balanced governance model for compliance and innovation.
Linnea Solem is the Chair of the Shared Assessments Program and is Chief Privacy Officer, Vice President Risk and Compliance for Deluxe Corporation. Linnea is a management professional with 20+ years financial services experience in areas eCommerce, technology, business development, marketing, information practices and risk management. She is a Certified Information Privacy Professional and led Deluxe’s compliance initiatives for Y2K, GLB, Check 21, and Red Flags Legislation. You can connect with Linnea on LinkedIn.
Reposted with permission from Deluxe Blogs