Winners Win, Even at Compliance
During the 1970s, U.S. automakers found themselves bombarded by two contradictory mandates: make their cars both safer and more fuel-efficient. Trouble was, making cars safer meant making them stronger (usually, heavier) while mileage efficiency required lighter vehicles.
After some fumbling, the carmakers hit on the answer. They began to compete on the very things that had given them headaches: safety and mileage. They strengthened their cars and advertised the crash test results. They lightened their cars and advertised mileage rates. And through it all, they trained their customers to accept the price of each incremental improvement.
Today’s regulatory deluge offers enterprising banks the same kind of opportunity. Yes, the Dodd-Frank law and the growing power of the Consumer Financial Protection Bureau have imposed unprecedented compliance burdens on financial institutions and it will be years before their full impact is known. However, this much is undeniable: The job of banking remains the same as ever, which is to find ways to create strategic competitive advantage out of today’s reality.
Whether you’ve been in banking for decades or a few years, this isn’t your first encounter with the need for strategic innovation. Whether it was dealing with economic crises or new technologies that hammered old business models, each time the survivors trod the same path: accept the reality, focus forward and seek competitive differentiation.
However onerous the compliance burden, all banks are bearing it and when everybody feels at a competitive disadvantage, somebody has to be wrong. Rather than focusing on the burden, executives need to ask themselves: In this new framework, how can my bank carve out a strategic advantage? Here are some suggestions:
First, embrace compliance, not as a costly burden but as a strategic imperative. That’s not just rhetoric. History is replete with fortunes being made by people who recognize that solving a stubborn reality is the key to the future. Getting really, really good at the hard stuff often vaults a company past competitors who stick to an old strategy and just ameliorate the hard stuff.
Think of the 1970s carmakers enthusiastically advertising their car-crash dummy footage in order to attract safety-conscious buyers.
Create a positive compliance culture inside the bank. That’s probably a big change for many banks, where complaints about regulations are the norm in boardrooms and around the water cooler. But shift your mindset. As one client put it, “If we’re going to be in banking, we’re going to be good at compliance.” That takes decisive moves at the top of the bank and consistent leadership sustained over time all across the institution. Keep the board engaged, but don’t let compliance dominate board agendas. Think of compliance as “business as usual.”
Consider compliance from the customer’s point of view. After all, it wasn’t only government agencies that spurred the growth in regulations. Consumer trust in banks was badly damaged, too. To satisfy regulators, banks need only conform to the rules as written; satisfying customers takes innovation and creativity, since the rules are not written.
Recall some of the early, grudging compliance with overdraft fee disclosures mass-mailed to customers. If the goal had been, rather than bare compliance, actually restoring the trust of long-time customers through transparency, clarity, and honesty, how might those letters have been different? How might today’s product descriptions be different? Consider how restaurant menus now compete to display the most nutrition information in the most diner-delighting ways after years of resistance to disclosure regulations.
Top-notch compliance doesn’t have to impede new product innovation. You can continue to innovate by establishing an efficient and compliant product approval process, one that even includes customers in the early stages. You can show customers that you are committed to their needs, privacy, security and convenience. It is not far-fetched to envision marketing campaigns that emphasize how you protect customers from cyber-attacks and make fees easy to understand. Make sure your compliance groups include business line/customer-facing people, not just technicians.
Innovation means rethinking every way compliance touches customers and asking how it could be better.
Let common sense guide interpretation. When people object to a new rule, they tend to cast it at its most draconian, detailed and expensive. But in truth, so many regulations are new, and so many regulators are still learning their roles and responsibilities that much remains open to interpretation – both for you and the regulators. Your guiding rule should be to understand and comply with the spirit of the regulation, while at the same time using common sense and good judgment to mitigate the impact to the bank and its customers. Forget about the draconian interpretations – they rarely prevail.
Seek compliance insight where available. Everybody is wrestling with the same questions. Participate in compliance forums where your challenges are discussed and see what others are doing. Ask your processors how they have interpreted the requirements. What tools are they providing to capture the necessary information and enforce whatever conditions are required for reporting and documentation of compliance? Tap specialists for special needs. Remember that no one has “the” correct answer. It will come down to what you and your regulator can reasonably work out.
Create efficient compliance processes. Can your compliance processes be streamlined to make them more efficient and less expensive? Are you making good use of available tools and information? What is the most efficient, cost-effective way you can gather the necessary data without compromising quality? Establish a regular process to test all compliance models (liquidity, capital, loan losses, etc.) for accuracy and robustness, including back testing. In other words, prove to the regulators that the bank’s management team is fully engaged. Make sure compliance isn’t understaffed for its growing responsibilities, but set efficiency standards.
Relationships matter here, too. A lot of compliance outcomes end up negotiated. To get a fair hearing you need to have positive, proactive and open relationships with your regulators at all levels of your bank. You can’t be a winner at compliance if your teammates are antagonizing the scorekeepers. If regulator relationships are currently frosty, you may need to provide employee coaching to get the communication you seek.
None of the foregoing is to gainsay the banking industry’s right, even the obligation, to vigorously object to mountains of regulations and their growing intrusiveness. But it will take years to undo or modify the latest batch of regulations. In the meantime, some banks will prosper and some will not, all operating in the same regulatory environment.
Henry Thoreau’s advice comes to mind: “When a dog runs at you, whistle for him.” When faced with an unalterable obligation to spend much of your bank’s time on compliance, approach compliance with an optimistic spirit and competitive intent.