As banks look to the year 2020, we’ve identified five key risks that need to be actively assessed and monitored as the industry changes and adapts to consumer demands and competition. When it comes to data security and technology, regulatory risk, finding qualified personnel, profitability, and bank survival, bank directors need to ask:
- How do we as an organization identify these risks on an ongoing basis?
- How do they affect our organization?
- How can we work with management to manage future risks?
Here’s a snapshot of the risk areas, what’s anticipated as we look to the future, and steps you can take to stay competitive and mitigate risk.
Data Security & Technology
It’s important to keep up with your peers and provide services as your clients demand them. More sophisticated payment platforms that make it easier to access and transfer funds will continue to gain popularity, particularly mobile platforms.
Being competitive requires innovation, which means software, bank integration, and sophisticated marketing and delivery. Third-party service providers may be the answer to help cut expenses and improve competition, but they also present their own unique risks.
With innovation comes opportunity: attacks on data security will increase, making the safeguarding of data a high priority for banks. While technology is an important element to this issue, the primary cause of breaches is human error. To this end, it’s essential for management to set the example from the top while promoting security awareness and training.
Expectations from the Consumer Financial Protection Bureau regarding consumer protection will intensify. Anticipate some added expenditure to hire and retain technical experts to manage these expectations. Regulations are on the way for small business and minority lending reporting, as well as the structure of overdraft protection and deposit product add-ons, among others. Directors and management need to evaluate:
- Compliance management infrastructure
- Staffing needs and costs
- Impact of proposed regulatory change to the bottom line
For instance, baby boomers are retiring at a rate faster than Generation X can replenish, making it more difficult and costly to attract and retain skilled people. Meanwhile, the shrinking availability of skilled labor in this country is costing organizations throughout the United States billions of dollars a year in lost productivity, increased training and longer integration times.
A bank’s succession plan for its people should:
- Identify key roles and technical abilities in your organization
- Assess projected employee tenure
- Develop a comprehensive employee replacement strategy
- Prioritize training and apprentice programs
The bottom line at traditional banks will continue to be stressed as momentum builds for institutions to reduce product and service-related fees. Overhead expenses also will continue to increase as banks boost spending for IT infrastructure to support demands by customers for mobile technology and technical innovation and finding and retaining qualified personnel to manage complex regulatory requirements. Responses to these trends are already underway. Some institutions are:
- Divesting of consumer-related products laden with heavy regulatory requirements
- Sharpening strategic focus on holistic customer relationships with professional and small business customers to increase relationship-driven revenue
- Exploring new or more complex commercial lending products and partnerships designed to increase interest income to attract customers in new markets
Banks will need to closely monitor the impact of regulatory initiatives on future earnings from fees and alternative revenue sources.
Here are some proactive steps to consider as your bank prepares for 2020:
- Develop an ongoing strategy for mergers and acquisitions to expand capital
- Consider charter conversions to lend flexibility in expanded product and service offerings or a change in regulatory expectations or intensity
- Evaluate the impact of higher regulatory expectations
To help identify and manage risk, management should plan regular discussions in the form of annual strategic planning meetings, regular board meeting agendas, and targeted meetings for specific events. The focus should extend beyond known institutional risks, such as credit, interest rate and operational, but should also look at key strategic risks.
If your institution can innovate with the times to stay ahead of risk and competition with a systematic approach, then the path to 2020 will be less fraught with difficulties.