5 Strategies for Maximizing Cybersecurity Efficiency

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The balance between operational efficiency and risk management is a story ultimately told in the bank’s efficiency ratio; the rising cost of cybersecurity tools and talent don’t take a break when the market indicates trouble on the horizon.

The ever-evolving threat landscape lays a finger on the scales, given that cybersecurity incidents are costing banks more than ever. But there five ways banks can maximize their cybersecurity maturity leading into this uncertain environment by focusing on the less glamorous half of the ratio: the cost of doing business.

1. Include Line-of-Business Training in Cybersecurity Personnel Development Plans
Employees drive the every bank’s digital transformation strategic initiatives. As bank technology stacks grow, so do the exposure to cybersecurity risk. This has ushered even the most mundane workflows carried out by cybersecurity professionals further and further into the bank’s service chain.

Simply put, cybersecurity analysts make risk-based decisions about whether to accept or reject communication from bank customers all day long. In many ways, these employees act as digital bank tellers who engage in Know Your Customers practices more intimately than anyone else — except without all the line-of-business training expected in these customer-facing roles. When the cybersecurity team’s objective changes from defending the bank to supporting growth goals through cybersecurity, each risk-based decision figures into the opportunity at hand.

2. Streamline the Tech Stack
Banks, particularly those that grow through mergers, often struggle with weaving together an integrated tapestry of IT infrastructure. This can be further complicated by a la carte shopping for best-in-show solutions for disparate use cases. As banks evaluate the most opportune areas to increase their efficiency, this is an excellent time to find overlapping features between tools. Consolidating the technology stack can reduce the overall spend for ongoing licensure, as well as the number of systems to learn, support and monitor. Simpler operations are more efficient operations; streamlining the tech stack allows the organization to take full advantage of this principle.

3. Focus on the Cybersecurity Culture
For too long, the banking industry has repeated the outdated cybersecurity mantra: Humans are the weakest link. The elements of the typical security awareness training program begins with sending fake phishing emails to employees and ends with corrective trainings and action plans. Often, phishing test failure is a key risk indicator that follows employees over time. This leaves employees with only two conclusions: The employee is powerless against cybersecurity attacks, because humans will always be the weakest link, or every email represents an opportunity to fail.

If the goal of a security awareness training is to reduce cyber risk, would the program be any less effective if departed from the “Gotcha!” approach? Humans are the greatest factor in detecting and responding to attacks. This approach empowers employees to be active participants in every phishing decision and serves as a more impactful means of professional development during a time when budgets are thin.

4. Strengthen Collaboration and Communication
While the pandemic certainly feels like a thing of the past, the impact it has made on every bank’s culture still prevails. Whether the strategy has been to fully embrace work from home, return to office or to find some compromise with hybrid work schedules, communication within the bank looks different today.

In times of economic uncertainty, collaboration and communication are even more critical — which makes this is the best time to focus on communication and collaboration. Include loan production and other front line employees in incident response tests to practice critical lines of communication before it’s necessary. Empower business continuity teams to place a greater emphasis on simple exercises like cross-training within a department to increase collaboration and resiliency during turnover, which might happen due to changes in the market.

5. Strategize the Way AI Will Shape the Bank
While some experts are predicting the impact that artificial intelligence will have on the workforce over the next 10 years, one thing is certain: Employees are already using AI in their workflows. This creates opportunities for design without focus — the enemy of efficiency — but the greater risk that loose AI adoption poses to banks is model risk. Without a foundational model risk governance framework, banks will repeat the mistakes of AI pioneers. Banks should make this a planning year and invest time in strategy rather than budget in new automation tools.

As banks navigate the delicate balance between operational efficiency and risk management, the rising cost of cybersecurity and the looming uncertainties in the economy place risk managers in the pivotal role of controlling the efficiency ratio. By focusing on the strategic measures of risk management instead of revenue operations alone, banks can maximize their resilience and efficiency leading into the second half of 2023. Whether a hot or cold economy greets the industry in 2024, it will be the efficient banks that have the most to gain.

Modernizing Business Lending to Drive Growth

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Digitization has altered the business lending landscape and created competitive pressure that will continue to push solutions modernization — and consumers and businesses are ready.

Digital efficiency here is key and underpins lending success. Most importantly, it improves consumer retention, upsell, and cross-sell opportunities for lenders. As the future of business lending caters to the needs of younger entrepreneurs, financial institutions will want to add solutions that offer seamless experiences. This includes a fully contactless digital lending process: seamless digital applications all the way to fast, automated loan decisions. Financial institutions can jump-start and grow digital business lending by implementing advanced technology solutions to digitally engage borrowers and optimize lending processes.

Digital-First Mindset Drives Growth
Millennials are the largest drivers of new loans. This makes sense considering there were more than 166 million individuals under the age of 40 in the U.S. in 2020 — more than half of the U.S. population.

Financial institutions are feeling the pressure all around. Digital banking reigns supreme as consumers increasingly prefer to manage their finances digitally and loyalty is waning. Institutions need to offer innovate lending solutions and reconsider how they engage consumers. Already, digital-savvy financial institutions are scooping up this business. According to the Bain Retail Banking NPS Survey, 54% of loans and 50% of credit cards in the U.S are opened at providers that consumers do not consider their primary financial institution. And more than three-quarters of those surveyed who received a direct offer from a competitive institution said they would have purchased from their primary institution had they received a similar offer.

As more and more lenders provide digital-first experiences, consumer expectations have evolved. Processes that used to take days can now happen in minutes. Technology has decreased the operational effort required of financial institutions and enables demand creation, so institutions can reach new consumers and foster deeper relationships with existing ones.

Pressure to Modernize Business Lending Solutions
Institutions that have not modernized business lending processes are feeling the pressure. Those that still rely on manual and paper-based loan approval procedures find they are out of step with a digitized world, affected by:

  • Slower decision times.
  • Burdensome data management.
  • Time-intensive manual processes that span disparate systems.
  • Inefficient application processes and communications with the borrower.
  • Expensive wet signatures.
  • Difficult document collection, management and storage.

The cumulative effects of these inefficiencies are compounded by the evolving landscape in lending. Nearly nine in 10 financial institutions believe they will lose some business to stand-alone fintech companies over the next five years. That fear is not unfounded.

Managing Credit Risk in a New Era
The business credit framework has not changed. Lenders still consider credit profile and history, firmographics and cash flow analytics when evaluating debt capacity. This requires the ability to collect and analyze data like macroeconomic factors, industry trends, digital presence, credit performance, financials, bank accounts, POS transactions and business credit reports.

Solutions to manage risk, however, have modernized. Advancements in machine learning techniques have transformed risk analysis to consume thousands of data points and leverage insight and learning from decades of loan performance data. For business lenders, this means better, faster, more accurate and consistent decisions in compliance with the set credit policy. Digital-first lenders can:

  • Use superior workflow tools to aid in better decision-making and operational resiliency.
  • Leverage risk assessment techniques that cannot be performed by humans.
  • Improve accuracy and consistency of credit decisions.
  • Specialize and customize by industry based on business goals.
  • Leverage new data sources and decades of credit performance data.
  • Process large volumes of data in seconds alongside the ability to identify and focus on what matters most.

Financial institutions transitioning to digital channels enjoy more opportunities to better serve consumers, expand market share and drive more revenue.

Evaluating Your Technology Relationship

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It’s tough to find a technology provider that puts your bank’s needs first. Yet given the pace of change, it’s becoming crucial that banks consider external solutions to meet their strategic goals — from improving the digital experience to building internal efficiencies. In this video, six technology experts share their views on what makes for a strong partnership.

Hear from these finalists from the 2021 Best of FinXTech Awards:

  • Dan O’Malley, Numerated
  • Nicky Senyard, Fintel Connect
  • Zack Nagelberg, Derivative Path
  • Doug Brown, NCR Corp.
  • Joe Ehrhardt, Teslar Software
  • Jessica Caballero, DefenseStorm

To learn more about the methodology behind the Best of FinXTech Awards, click here.

If you’re a bank executive or director who wants to learn more about the FinXTech Connect platform, click here. If you represent a technology company that is currently working with financial institutions, click here to submit your company for consideration.

The Missing Piece in Customer Engagement Strategies

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Usage of appointments in banking has increased significantly since the outbreak of the coronavirus, and is expected to continue in a post-pandemic world.

Appointments increased nearly 50% in the second half of 2020, according to customer usage data, allowing banks to manage limited branch capacity while ensuring the best possible customer service. For example, Middletown, Rhode Island-based BankNewport experienced a month-over-month increase of more than a 466% in appointment volume between March and April of last year, with numbers remaining steady into May 2020. The $2 billion bank noted that these appointments allowed them to prepare for customers, solving their needs efficiently and safely.

Now, nearly a year later, appointment setting is helping banks to meet the transformative and digital-centric needs of their account holders. Online appointments enable any customer or prospective customers to schedule high-value meetings with the right banker who is prepared to speak on a specialized topics. In addition, these appointment holders can choose their preferred meeting channel, such as in-person, phone or virtual. But, how does this translate to customer engagement?

Customer engagement begins when a question or task needs to be done. As the customer or prospect starts searches for an answer on a local bank’s website, banks can use appointment scheduling to ensure that customers have options beyond self-service or automated customer service to connect one-on-one with staff. By optimizing consumer engagement strategies with high-value appointments, banks can increase revenue, boost operational efficiency and improve overall customer satisfaction.

Increase revenue
Today, many branches are faced with the challenge of maximizing revenue opportunities with highly compressed margins. This leads banks to search for more cross-sell opportunities such as opening new accounts, loans or alternative revenue-driving sources.

Appointments help banks maximize these opportunities by connecting customers or prospects with the most knowledgeable service representative to handle sensitive topics, such as account openings or wealth management inquiries. Banks should take full advantage of these crucial meetings because engaged customers are more apt to expand their relationship with an institution when provided with the right resources at a time they’ve scheduled. In fact, TimeTrade SilverCloud data shows that appointment scheduling increases the likelihood that a person will move forward with a loan or deposit by 25% to 40%; customers and employees are better equipped for the meeting’s purpose and have stronger intent to transact.

Boost operational efficiency
Proper branch and contact center staffing levels allows banks to be more efficient without adding to the overall headcount. In the absence of appointment scheduling, employees can be burdened by prolonged rescheduling of meetings and correcting inconsistent information, stemming from unproductive customer interactions and resulting in wasted time.

Appointment scheduling allows employees to prioritize their time to address complicated issues and ensure their full potential is being used during business hours.

This can be further optimized with customer self-service. As more account holders reach a resolution without staff interaction, employees can spend more time with complex customer inquiries. Bank of Oak Ridge saw technology-related questions decrease by 64% after implementating a consumer self-service solution, allowing employees at the Oak Ridge, North Carolina-based bank to expand existing relationships and focus on more critical tasks.

Improve customer satisfaction
Like employees, customers’ time is valuable and their money is personal. When their time is wasted by a low-value interaction, this can greatly impact the overall customer experience. Negative comments about unprepared or ill-informed staff can be detrimental to an institutions’ reputation and consumer trust.

It is paramount that banks route customers to the employee best suited to meet their financial needs and questions. Banks that cultivate a comprehensive customer engagement experience, using online appointment scheduling, will be well equipped to meet customer needs and provide a great experience.

Banking by appointment is a powerful tool in today’s new business environment. Banking competition is increasingly prominent, and going the extra mile to make financial transactions and consultations as easy as possible will be an essential differentiator among institutions. Enabling customers to connect with the right person at their right time, and capturing pertinent customer information at the time of scheduling, allows banks to provide the right answer, resulting in more satisfied customers, better served employees and a healthier bottom line.

New Research Finds 4 Ways to Improve the Appraisal Experience

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Accelerating appraisals has become increasingly important as lenders strive to improve efficiency in today’s high-volume environment.

Appraisals are essential for safe mortgage originations. Covid-19 underlined the potential impact of modernizing appraisal practices, and increased the adoption of digitally enabled appraisal techniques, appraisal and inspection waivers, and collateral analytics.

Banks have numerous opportunities to improve and modernize their appraisal process and provide a better consumer experience, according to recent research sponsored by ServiceLink and its EXOS Technologies division and independently produced by Javelin Strategy & Research. The research highlights several actions that lenders can take to improve their valuation processes, based on the feedback of 1,500 single-family homeowners in March who obtained either a purchase mortgage, refinance mortgage, home equity loan/line of credit for their single-family home, or who sold a single-family home, on or after January 2018.

1. Implement digital mortgage strategies that streamline appraisal workflows. One of the most-compelling opportunities to make appraisals more efficient is at the very onset of the process: scheduling the appointment. Scheduling can be complicated by the number of parties involved in an on-site inspection, including a lender, appraiser, AMC, borrower and real estate agent. Today, two-thirds of consumers schedule their appointments over the phone. This process is inefficient, especially for large lenders and their service providers, and lacks the consistency of digital alternatives.

Lenders that offer digital appraisal scheduling capabilities provide a more-predictable and consistent service experience, and reduce the back-and-forth required to coordinate schedules among appraisers, borrowers, real estate agents and home sellers. Given younger consumers’ tendency to eschew phone calls in favor of digital interactions, it’s essential that the industry embraces multiple channels to communicate, so borrowers can interact with lenders and AMCs on their own terms.

2. Increase transparency in the appraisal process. Even after an appointment is scheduled, consumers typically receive limited details about the appraiser, what to expect during the appointment and how the appraisal factors into the overall mortgage process. For example, 61% of consumers received the appraiser’s contact information before the appointment; while only 20% were provided with the appraiser’s photo and 9% were told what type of car they will drive. Providing borrowers with more information about the appraisal appointment bolsters their confidence; information gaps can contribute to a less-satisfying experience. Nearly 20% of consumers said they were not confident or only somewhat confident about their appointment, while over 30% said the same about the names of the appraiser and AMC.

3. Focus on efficiency. Overall, 38% of consumers said the duration of the overall appraisal process contributed to a longer mortgage origination process; delays among purchase mortgage and home equity borrowers were even higher.

For example, about two-thirds of appraisal appointments required the consumer to wait for the appraiser to arrive within an hours­long window or even an entire day, as opposed to giving the consumer an exact time when the appointment will take place. Given this challenge, lenders and appraisal professionals that offer more-precise appointment scheduling can improve the consumer experiences and streamline the origination process.

4. Implement processes and technology that support innovative approaches to property inspections and valuations. Covid-19 highlighted the opportunity banks have to adopt valuation products that sit between fully automated valuations and traditional appraisals, such as valuation methods that combine third-party market data and consumer-provided photos and video of subject properties. This approach still relies on a human appraiser to analyze market data and subject-property

This concept is gaining traction in the mortgage industry. In the future, it’s conceivable the approach could be expanded with the use of artificial intelligence and virtual reality technologies.

No matter the method an appraiser uses to determine a property’s value, the collateral valuations process is fundamentally an exercise in collecting and analyzing data. Partnering with an innovative AMC allows lenders to take advantage of new techniques for completing this critical market function. You can view the full white paper here.

A New Opportunity for Revenue and Efficiency

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Intelligence-Report.pngIn 2017, Bank Director magazine featured a story titled “The API Effect.” The story explained how banks could earn revenue by using application programming interfaces, or APIs, and concluded with a prediction: APIs would be so prevalent in five years that banks who were not leveraging them would be similar to banks that didn’t offer a mobile banking application in 2017.

Today, the banking industry is on a fast track to proving that hypothesis.

Banks are hurtling into the digital revolution in response, in no small part, to the outbreak of Covid-19, a novel coronavirus that originated in China before spreading around the globe. The social distancing measures taken to contain the virus have forced banks to operate without the safety nets of branches, paper and physical proximity to customers. They’re feeling pressure to provide up-to-the-minute information, even as the world is changing by the hour. And they’re grappling with ideas about what it means to be a bank and how best to serve customers in these challenging times.

One way to do so is through APIs, passageways between software systems that facilitate the transfer of data.

APIs make it possible to open and fund new accounts instantly — a way to continue to bring in deposits when people can’t visit a branch. They pull data from call centers and chat conversations into systems that use it to send timely and topical messages to customers. And they enable capabilities like real-time BSA checks — an invaluable tool for banks struggling to process the onslaught of Paycheck Protection Program loans backed by the Small Business Administration.

All those capabilities will still be important once the crisis is over. But by then, thanks to the surge in API adoption, they’ll also be table stakes for banks that want to remain competitive.

In short, there’s never been a better time to explore what APIs can do for your bank, which is the purpose of this FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

The report unpacks APIs — exploring their use cases in banking, and the forces driving adoption of the technology among financial institutions of all sizes. It includes:

  • Five market trends driving the adoption of APIs among banks
  • Actionable API use cases for growing revenue and creating efficiencies
  • A map of the API provider landscape, highlighting the leading companies enabling API transformation
  • An in-depth case study of TAB Bank, which reimagined its data infrastructure with APIs
  • Key considerations for banks developing an API strategy

To learn more, download our FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

Banks Ignore Credit Administration at Their Peril

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Not long ago, I asked the CEO of a mid-sized bank how he makes funding decisions when looking to add new technology or software systems. He told me that when it comes to spending money on software, he only listens to two people: the CEOs of other banks, and “Whatever my chief lending officer says.”

The question that immediately popped into my head was, “Why doesn’t the chief credit officer have a say?”

This situation is not unique. For a long time, credit administration has taken somewhat of a back seat when it comes to resource prioritization within banks. But this mindset can be dangerous for banks; if executives don’t give credit administrators the budget they need, it can come back to bite their institutions in several ways. Bankers would be wise to take a second look at how they allocate resources and consider three reasons why credit administration should be a bigger priority.

The resource disparity
It’s not hard to understand why credit administration can sometimes get overlooked. The lending side of the house gets the most investment because it brings in the revenue. When push comes to shove, the money makers are the ones who will receive the most attention from management.

It’s not as if credit administrators have been completely forgotten: Bank CEOs usually understand the importance of managing the loan portfolio. But the group often doesn’t receive funding priority, while it often feels like the lending team has a blank check. Credit administration is just as important as loan production; closing the resource gap can decrease risk and increase efficiency for your bank.

Limiting credit risk
The biggest reason banks should invest more in their credit administration department is risk mitigation. When credit administration systems are ignored, spreadsheets can run rampant. This opens the door to numerous risks and errors, including criticism from auditors and examiners.

Outdated systems can open your bank up to risk because administrators are unable to gather and analyze data in a coherent way. They are left using multiple systems and spreadsheets to create a complete view of a loan — a fragmented process that makes it easy to miss important risk indicators. Credit administrators require powerful tools that increase a loan’s visibility, not limit it. To mitigate risk, banks should invest in systems that make it easier for credit administrators to see the complete picture in one place.

Increasing operational efficiency
Investing in credit administration also improves operational efficiency for your bank’s employees. Clunky, outdated systems impede credit administrators from accessing important information in succinct ways. Fumbling through multiple systems and screens to find key data points increases the time it takes to perform even the most routine tasks. Performing a simple data extraction will often involve IT, wasting multiple employees’ time. What could be a simple and straightforward loan review process has turned to a slow, cumbersome and ultimately expensive process.

Outdated software can also negatively impact your team’s overall job satisfaction. Poorly designed systems can be frustrating to use; upgrading other departments’ systems could create a perception that credit administrators aren’t valued by the organization. This could hurt your company culture and lead to costly turnover down the road. Investing in new software and giving credit administrators tools that make their jobs faster and easier is a way that banks can demonstrate their support, keep employees happy and improve the efficiency of their work — potentially improving overall profitability.

Credit administration and loan production are two sides of the same coin, but resources have been weighted significantly toward the lenders for too long. It’s time for a change. Reassessing how your bank can support its credit administration team can mitigate risk, improve operations and ultimately save your bank money.

The Keystone Trait of Prudent and Profitable Banking

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The more you study banking, the more you realize that succeeding in the industry boils down to a handful of factors, the most important of which is efficiency.

This seems obvious, but it’s worth exploring exactly why efficiency is so critical.

A bank, at its core, is a highly leveraged fund, with the typical bank borrowing $10 for every $1 worth of capital. This makes banks profitable. However, it also means that banks, by design, are incredibly fragile institutions, using three times as much debt as the typical company.

Warren Buffett wrote about this in his 1990 letter to shareholders:

The banking business is no favorite of ours. When assets are twenty times equity — a common ratio in this industry — mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks.

The primary source of mistakes in banking, Buffett noted, is what he refers to as the institutional imperative, “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

Buffett was writing about a commercial real estate crisis in the early 1990s that was laying waste to the banking industry. As competition for commercial loans heated up, banks cut rates and eased terms in order to win business. When real estate prices crashed, banks paid the price for doing so.

It was during that time, for instance, that Security Pacific Corp., one of the great California banking dynasties, sold itself to BankAmerica Corp. to stave off insolvency.

These pressures — the fear of missing out, if you will — have not gone away. They factored into the financial crisis, causing lenders to move down the credit ladder in order to make subprime loans. And the word on the street is that these same pressures are causing some banks to cut rates and ease lending terms today.

The key is to insulate yourself from these pressures.

Part of this is psychological — understanding how emotions, particularly fear and greed, play into decision making. And part of it is practical — operating so efficiently that it eliminates the temptation to boost profitability by easing credit standards.

The direct role of efficiency in a bank’s operations is obvious: The less revenue a bank spends on expenses, the more that’s left over to fall to the bottom line.

But the indirect role of efficiency is even more important: A bank that operates efficiently can relinquish some of its margin to attract the highest-quality credits. It also eliminates the need to stretch on credit quality in order to earn one’s cost of capital — a return on equity of between 10% and 12%.

“Being a low-cost provider gives one a tremendous strategic advantage,” Jerry Grundhofer, the former chairman and CEO of U.S. Bancorp, once told Bank Director’s Jack Milligan. “It allows you to deal with challenges, be competitive on the asset and liability sides of the balance sheet and take care of customers.”

Indeed, it’s no coincidence that the most efficient banks when it comes to operations also tend to be the most prudent when it comes to risk management.

But not all efficiency is created equal. In banking, efficiency is expressed as a ratio of expenses to revenue. The key is to have the right mix of the two.

The temptation is to drive efficiency through cost control. The problem with doing so, however, is that a bank can only lower its costs so far before it begins to cannibalize its business.

The same isn’t true of revenue, which tends to be twice as large as expenses. Consequently, the most efficient banks through time generally are those with the highest revenue to assets, not the highest expenses to assets.

The archetype for a high-performing bank isn’t just one that operates efficiently, but one that drives its efficiency through revenue, the denominator in the efficiency ratio.

An Easy Way to Lose Sight of Critical Risks

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audit-6-7-19.pngLet me ask you a question…

How does the executive team at your biggest competitor think about their future? Are they fixated on asset growth or loan quality? Gathering low-cost deposits? Improving their technology to accelerate the digital delivery of new products? Finding and training new talent?

The answers don’t need to be immediate or precise. But we tend to fixate on the issues in front of us and ignore what’s happening right outside our door, even if the latter issues are just as important.

Yet, any leader worth their weight in stock certificates will say that taking the time to dig into and learn about other businesses, even those in unrelated industries, is time well spent.

Regular readers of Bank Director know that executives and experienced outside directors prize efficiency, prudence and smart capital allocation in their bank’s dealings.

But here’s the thing: Your biggest—and most formidable—competitors strive for the same objectives.

So when we talk about trending topics at this year’s Bank Audit and Risk Committees Conference, hosted by Bank Director in Chicago from June 10-12, we do so with an eye not just to the internal challenges faced by your institution but on the external pressures as well.

As we prepare to host 317 women and men from banks across the country, let me state the obvious: Risk is no stranger to a bank’s officers or directors. Indeed, the core business of banking revolves around risk management—interest rate risk, credit risk, operational risk.

Given this, few would dispute the importance of the audit committee to appraise a bank’s business practices, or of the risk committee to identify potential hazards that could imperil an institution.

Banks must stay vigilant, even as they struggle to respond to the demands of the digital revolution and heightened customer expectations. I can’t overstate the importance of audit and risk committees keeping pace with the disruptive technological transformation of the industry.

That transformation is creating an emergent banking model, according to Frank Rotman, a founding partner of venture capital firm QED Investors. This new model focuses banks on increasing engagement, collecting data and offering precisely targeted solutions to their customers.

If that’s the case—given the current state of innovation, digital transformation and the re-imagination of business processes—is it any wonder that boards are struggling to focus on risk management and the bank’s internal control environment?

When was the last time the audit committee at your bank revisited the list of items that appeared on the meeting agenda or evaluated how the committee spends its time? From my vantage point, now might be an ideal time for audit committees to sharpen the focus of their institutions on the cultures they prize, the ethics they value and the processes they need to ensure compliance.

And for risk committee members, national economic uncertainty—given the political rhetoric from Washington and trade tensions with U.S. global economic partners, especially China—has to be on your radar. Many economists expect an economic recession by June 2020. Is your bank prepared for that?

Bank leadership teams must monitor technological advances, cybersecurity concerns and an ever-evolving set of customer and investor expectations. But other issues can’t be ignored either.

At our upcoming event in Chicago, the Bank Audit and Risk Committees Conference, I encourage everyone to remember that minds are like parachutes. In the immortal words of musician Frank Zappa: “It doesn’t work if it is not open.”

Five Reasons Behind Mortgage Subservicing’s Continued Popularity

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mortgage-6-3-19.pngMortgage subservicing has made significant in-roads among banks, as more institutions decide to outsource the function to strategic partners.

In 1990, virtually no financial institution outsourced their residential mortgage servicing.

By the end of 2018, the Federal Reserve said that $2.47 trillion of the $10.337 trillion, or 24%, of mortgage loans and mortgage servicing rights were subserviced. Less than three decades have passed, but the work required to service a mortgage effectively has completely changed. Five trends have been at work pushing an increasing number of banks to shift to a strategic partner for mortgage subservicing.

  1. Gain strategic flexibility. Servicing operations carry high fixed costs that are cannot adapt quickly when market conditions change. Partnering with a subservicer allows lenders to scale their mortgage portfolio, expand their geographies, add product types and sell to multiple investors as needed. A partnership gives bank management teams the ability to react faster to changing conditions and manage their operations more strategically.
  2. Prioritizes strong compliance. The increasing complexity of the regulatory environment puts tremendous strain on management and servicing teams. This can mean that mortgage businesses are sometimes unable to make strategic adjustments because the bank lacks the regulatory expertise needed. But subservicers can leverage their scale to hire the necessary talent to ensure compliance with all federal, state, municipal and government sponsored entity and agency requirements.
  3. Increased efficiency, yielding better results with better data. Mortgage servicing is a data-intensive endeavor, with information often residing in outdated and siloed systems. Mortgage subservicers can provide a bank management team with all the information they would need to operate their business as effectively and efficiently as possible.
  4. Give borrowers the experience they want. Today’s borrowers expect their mortgage lender to offer comparable experiences across digital channels like mobile, web, virtual and video. But it often does not make sense for banks to build these mortgage-specific technologies themselves, given high costs, a lack of expertise and gaps in standard core banking platforms for specific mortgage functions. Partnering with a mortgage subservicer allows banks to offer modern and relevant digital servicing applications.
  5. Reduced cost. Calculating the cost to service a loan can be a challenging undertaking for a bank due to multiple business units sharing services, misallocated overhead charges and hybrid roles in many servicing operations. These costs can be difficult to calculate, and the expense varies widely based on the type of loans, size of portfolio and the credit quality. A subservicer can help solidify a predictable expense for a bank that is generally more cost efficient compared to operating a full mortgage servicing unit.

The broader economic trends underpinning the growing popularity of mortgage subservicing look to be strengthening, which will only accelerate this trend. Once an operational cost save, mortgage subservicing has transformed into a strategic choice for many banks.