Collaboration and
Outsourcing – The time has Come
A Three-Part
Series. Part One- Why Outsource?
For many financial institutions, resources are the main
limitation for the offering or products and services. While traditional products such as business
loans, commercial real estate, mortgages and consumer loans remain the mainstay
of the offerings by financial institutions, the competition for customers in
these areas remains fierce. According to the FDIC, community banks and
smaller institutions have found that
the traditional model for income has experience
some positive growth in the past two years, but this growth continues to be
strained by the number fintech companies
that have begun to “disrupt” the financial services industry. Fintech, regtech and other software
companies continue to make inroads in the traditional community bank and credit
union customer base.
“Researchers have projected that fintech could be responsible
for a reduction of between 10% and 40% of bank revenue by 2025. It’s estimated
that between 15% and 25% percent of U.S. banks could be gone by 2020 as a
result of consolidation brought about largely by the rise of fintech and
increased regulations on banks.[1]”
Opportunities Abound
in Other Areas
As competition for customers
in the traditional banking products continues to increase, the need for innovation that
will increase overall non-interest income becomes more important. While there are other opportunities
available, financial institutions often find themselves unable to attempt new
things based upon limited resources such
as training, software and experience.
Despite the fact that there may be some difficulties, the returns on the
investment in these products is worth the effort. For example,
“McKinsey, a consultancy, analyzed the impact of fintech on
retail banks from an opportunity standpoint. It determined that progressive
banks can increase revenues from innovative new offers and business models by
5%; increase revenues from new products and distinctive digital sales by 10%;
and lower operational costs through automation, digitization and transaction
migration by 30%. This would result in a total potential net profit opportunity
of +45 percent. [2]“
In addition to the innovations in fintech and in the
software’s overall effectiveness in general, often overlooked markets such as
the remittance market remain a strong
source of potential income.
o
Global remittances have grown to a record level
of $613-billion in 2017, a 7% increase from $573-billion in 2016, according to
the World Bank.
o
Payments to low- and middle-income countries
rose at a high percentage: up 8.5% to $466-billion last year, from $429-billion
the year before, according to the World Bank’s Migration and Development Brief.[3]
“Operation chokepoint”- the rather infamous program brought
heavy scrutiny on money services business in general and remittances
specifically has now ended. However, the
fear of regulatory concerns still remains with many financial
institutions. As a result, this huge
market with its potential for large amounts of noninterest income fees remains
largely untapped.
Outsourcing
With the proper understanding of how a money remitter
(’MSB’) works and combined with outsource resources to properly monitor
transactions, MSBs present an outstanding opportunity for noninterest
income.
There are ways for institutions to address this concern and
that is what the interagency guidance on third party resources is intended to
address. According to the recent
guidance published by the FFIEC
Collaborative arrangements involve two or more banks with the
objective of participating in a common activity or pooling resources to achieve
a common goal. Banks use collaborative arrangements to pool human, technology,
or other resources to reduce costs, increase operational efficiencies and
leverage specialized experience [4]
This is not to say that you should offer products that you
don’t understand. On the other hand,
under the right circumstances, financial
institutions can offer full range of
products using the services of a third party
By using the collaborations not only with other financial
institutions, but with fintech firms, regulatory tech firms and specialized
consulting firms the possibilities for growth and additional products increases
dramatically.
In part two we will discuss the risk assessments process
James DeFrantz is the Principal of Virtual
Compliance Management Services LLC. He can be reached directly
at JDeFrantz@VCM4you.com
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