The fundamental purpose of a bank has been rooted in serving customers by accepting deposits and lending funds. And while that has remained its primary function for centuries, financial institutions’ products and services have greatly evolved – and so have its risks. Some types of risk, like credit risk and portfolio risk, have continuously been a concern for financial institutions, while other forms of risk, like cyberattacks, are fairly new to the banking landscape. While the various challenges have increased over the years, the number of solutions and services to navigate these risks have grown as well. According to a survey conducted by Independent Banker, there are several key business challenges that community bank CEOs are keeping an eye out for in 2019, and bank leaders are tapping technology to solve them.
Managing risk and regulations
Due to the fact that lending is a cornerstone of banking and is the key to profitability, making informed loans is a must. Regulators are beginning to lighten the regulations put in place following the financial crisis, but there are still many regulations surrounding the banking industry. The Independent Banker survey reveals that complying with those regulations ranks among the top three business challenges for more than a third of community bank CEOs throughout the country. Another study by Protiviti and North Carolina State University reveals that regulatory changes rank highest among banking risks recognized by banking executives and board members globally.
This is in part due to the fact that regulation and compliance is costly, especially for smaller financial institutions that don’t have the resources and budget that larger financial institutions do. It’s important that community financial institutions find ways to allocate adequate time and resources to ensure risk is monitored accurately and efficiently. Oftentimes, that requires additional manpower, but with today’s technology, community financial institutions can implement solutions that can automate time-consuming tasks, such as loan spreading, risk rating, or client correspondence, so that employees can focus on larger, more intensive tasks.
One big regulatory change affecting community banks this year is the current expected credit loss (CECL) model that will go into effect for SEC-filing financial institutions on December 15, 2019. While all financial institutions will be subject to compliance with the CECL method, every institution isn’t expected to implement CECL the same way. Some institutions are finding that their previous methods of using Excel and other spreadsheets to calculate losses are creating additional complications due to time-consuming and repetitive data extracts, version-control issues, and difficulty walking auditors and regulators through the process and data. For financial institutions looking to navigate this challenge, there are many benefits to ditching the spreadsheets and implementing software solutions to automate the process and gain meaningful insight into portfolio performance.
Keeping pace with technological changes
Among top concerns surveyed by Protiviti, banking executives and board members around the globe had the most accelerated concern regarding their institution’s ability to keep pace with disruptive technology and its existing operations and legacy IT infrastructure. This concern had the largest year-over-year increase.
“While regulatory compliance matters remain a significant source of risk, digital disruption and other threads to business competitiveness are being viewed with increasing concern,” Michael Brauneis, managing director for Protiviti, noted in the research results. “The results for 2019 show this shift is not only continuing, but is, in many areas, accelerating.” A vast majority of banks have recognized the impact that fintech is having on the banking industry. Banks are now investing in fintech to help automate and increase efficiencies in many operational, risk management and compliance activities. Take fraud, for example. The study notes that “anti-financial crime and fraud risk management functions are at the center of significant innovation and cost reduction efforts.”
Financial institutions face significant competition within the banking industry today. Not only do they have to consider what their peers are doing, but banks and credit unions must also look to online alternative lenders and fintech providers to satisfy customers’ expectations for quality, turnaround time, cost and innovation. To navigate this challenge, expect financial institutions to continue expanding third-party partnerships with software vendors and increasing their technological investments.
Loan growth is the key driver for community bank profitability, but increased competition, coupled with a slowdown in bank lending, has created a more difficult environment to grow lending portfolios. “I think the biggest challenge is there has been a slowdown, not a screeching halt, in loan generation,” Thomas Dureay, CEO of Summit Bank told Independent Banker. “There is just heightened competition, which also impacts the pricing on your loans.”
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Community banks can’t change the current lending environment, but they are in control of their lending processes. For banks looking to navigate this challenge, it will be important to assess the internal processes that can be streamlined or automated. Many community banks rely on paper-based or manual loan origination which creates significant bottlenecks, inconsistencies, and data-entry errors. Using technology to create a faster, more efficient lending process not only allows banks to book more loans with a speedy turnaround, but it also cultivates a more positive borrower experience to better position a bank among its competition.
Financial institutions face many obstacles, and community financial institutions with more limited resources can feel significant pressure from these challenges. However, there are many more solutions and resources available today to help these institutions navigate the technological and financial pressures that they face.