Silver Lining for Community Banks: Using New Regulations to Your Advantage
By Mike Percy
In recent days and months, there has been much discussion about the challenges small banks face to comply with increased regulatory requirements, particularly those stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act. Though the costs of compliance have increased and can prove burdensome, especially to small banks, industry observers and participants who approach the requirements with a glass-half-empty attitude are missing an important opportunity: If community banks take a strategic approach to compliance, they can differentiate themselves from the competition.
Going Beyond the Minimum
The benefits of thoughtfully implementing new regulatory requirements have been demonstrated in the past. Consider the know-your-customer requirements that mandated that banks obtain more information about their customers’ behavior to better verify customer identities, which in turn helps identify suspected money laundering activities. When the requirements went into effect, some banks simply did the minimal amount that was required.
Other banks took a more strategic approach. Some saw the new information-gathering requirements as the chance to truly get to know their customers better and enhance the level of service they provide. For example, some institutions developed dynamic discussions with account applicants, with bank staff varying their follow-up questions based on the information new customers provided. These fluid conversations were designed to create better account-opening experiences and to yield insightful data to better serve customers and support new product and service development.
Setting a Community Bank Apart
Community banks can take steps to successfully combine compliance efforts with a focus on enhancing customer service.
*Fully integrate new regulations for a consistent customer experience. Given the multitude of regulations being implemented during the next several years and their potential impact on bank customers, compliance efforts must be embedded into existing processes. An approach that bolts new systems or processes onto existing ones typically is inefficient and leads to inconsistency that could have a negative effect on customers’ experience with the bank and the bank’s ability to effectively comply with new regulations.
*Spread compliance-minded professionals bank-wide. It is no longer cost effective or time efficient for a community bank to rely exclusively on its compliance department as the sole line of defense in the bank’s efforts to comply with new regulations. Regular communication with and training of existing personnel is critical to instituting a culture of compliance. When hiring new employees, community banks should seek out professionals who are operationally focused and capable of integrating new regulations and compliance activities into operations.
*Create open lines of communication. When all those at a community bank expand their focus to include new regulatory requirements, continuous communication is necessary to prevent duplicating efforts. Consider the example of a proactive underwriting manager who invested in a fair-lending tool to boost his department’s compliance activities. Unfortunately, the manager did not inform the bank’s compliance officer, who had already implemented a different fair-lending tool. Regular meetings between lines of business and members of the compliance team will foster more effective and efficient systems of compliance.
*Seek input from business leaders who understand customer needs. The leaders who manage a bank’s lines of business are accountable for day-to-day activities and are in the best position to recognize how regulatory changes could affect customers. Bringing business leaders into the decision-making process early and often can make the difference between a problematic compliance framework and a solid program that operates as designed and fosters growth of the business.
*Focus on what the bank does well. Some community banks are jettisoning lines of business that are no longer profitable, especially as they analyze overall rising expenses as well as costs specifically associated with compliance. This is an opportunity to focus exclusively on areas where the community bank excels in serving clients.
Conversely, competitors eliminating lines of business also can provide community banks with an opportunity to fill a market void and strengthen their competitive position. These types of decisions should be made in the context of market analysis that identifies opportunities and risks.
Small but Mighty
Every bank, regardless of size, will encounter challenges in meeting new regulatory requirements. Finding the silver lining in increased compliance efforts and costs can position community banks as stronger, more competitive, and more focused on their customers’ needs than ever before.
Mike Percy is a partner with Crowe Horwath LLP in the Fort Lauderdale, Florida, office.
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