Dangelo, Mark
(Mark Dangelo is managing principal and creator of Innovative Relevance® (www.Innovative-Relevance.com), including books, industry reports and articles. He is a known as a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results. He is a frequent contributor to MBA NewsLink. He can be reached at m_dangelo@innovative-relevance.com or at 440/725-9402.)

We see inflection points in history where a new idea or a solution to break lingering economic decay often arrives from external, non-industry vertical sources. And no, I’m not referring to presidential politics or Occupy Wall Street protesters, but other financial services professionals, their cooperatives and conferences that started assembling across North American cities. 

After listening and reviewing hundreds of hours of presentations and dialogues during the past six weeks (e.g., SIBOS, U.S. Covered Bond Conference of the Americas), there are groupings of evolving actions which are still cageling--but which contain a huge impact potential.

In a search for relevant, innovative solutions, there are common threads among these varied financial venues if we choose to take note. These are ideas and directions coming from individuals representing widespread financial services institution disciplines--without the drama and political positioning so ingrained in many venues.

Whereas some of these can be positive or negative, each observer--banker, customer, regulator or politician--will spin the event or implication to meet their principles. However, the impacts are there and in some cases rapidly converging as a result of technology advancements. 

These events are not true Black Swans of 16th century definition, but are interconnected smaller, surprise events or Gray Swans, whose impacts are less pronounced but equally important for repositioning an industry in decline. Unlike Black Swan lore, it is better to recognize the event before your competitors.

• Mobile banking is a not a proxy for tradition. Financial consumer channels are increasingly owned by non-traditional operators and actors--60 million new tablets and 500 million smartphones in 2011 alone. From fixed-income trading, to swaps, to retail banking, the delivery channel is now being defined by retailers (e.g., Amazon, Apple), mobile operators (e.g., SKT, Telus, Verizon) and technology firms (e.g., Apple, Google, NTT, Samsung, SunGard). Banks and their legacy products have been assigned to self-inflicted commodity arrangements for an economy and consumer that will continue to deleverage debt and homes for the remainder of the decade.

• Layering to grow--and exit. To maintain competitive relevancy, layering of solutions (e.g., people, processes and technology) has become mandatory for every product and service offering. This “slice and dice” approach provides for growth, as well as retrenching to eliminate unprofitable segments, while harvesting investments. Annual estimates range from 10 percent to 25 percent impact against the installed infrastructural base for reoccurring application and architectural rationalization--and decommissioning. This will be a huge reconciliation and auditing challenge wrapped in security, privacy and regulator concerns. Data migration and relevancy will become an entirely new service competence--rather than a traditional bolt-on as part of a methodology.

• Breaking Fee Addictions. Fee-based income addiction is supporting built-in inefficiencies and obsolete practices. Fees for innovation will be accepted as evidenced by current cost channel providers charging consumers--in some cases, the fees are readily embraced and even defined by the paying consumer. While banks have found a current “fee-pain” threshold when compared to consumer account migration, these “sweet-spots” will be short-lived as innovators understand the value of customer data and value products--far-outweighing fee income for future high-earners. Additionally, fees will not lure those currently “under-banked” consumers consistently estimated at over 30 percent of all potential wage-earners.

• Assembling App “Big Data.” While everyone is rushing out smart phone and tablet apps, the real hidden gem is the data generated and collected on the mobile consumer--especially channel usage and patterns. As the Boomers decline in importance, app data will be outside legacy system restrictions and spread across the cloud. Putting together 10+ exabytes of financial data in 2011 was hard enough; assembling hundreds of exabytes on mobile users during the next decade will be harder and far more complex, requiring extensive collaboration and “big-data” practices that have outgrown traditional mining and analytics. Yet, this is where the profit resides for future non-commodity offerings.

• Using TLS (Technology, latency and speed). To shatter fee-addiction, banking operations must completely retool delivery as they add capital and ensure liquidity. Speed and halving of information cycles (e.g., source, use, storage, management, disposal) provides banking consumers and loan investors an opportunity to perform premium due diligence in response to market conditions (and personal challenges). Rather than charge increased fees for commodity offerings, TLS disintermediates the markets creating separation from competitors and a defensible brand for expansion (e.g., follow the “i” progressions when introduced a decade ago). TLs for retail, trading, due diligence and custom products offers the greatest solution for fees based on value.

• An Amalgamation of “New” Shadow Banking. The shadow banking segments are growing again--albeit not in off-balance sheet asset holders of the Top 100. Nowhere is this more obvious that with peer-to-peer personal lending and even with asset managers and private equity lending to businesses. As banks continue to resist reducing rates (i.e., the lending spread has risen and held at over 200 basis points versus historical trends), others are stepping in to fill the void. Disenfranchised consumers grow more vocal and hostile to perceived financial inequities (e.g., purchasing power of the middle class has not risen since 2000-2001).  Finally, the information profile management increasingly locked in these non-traditional environments may create new opaque risks--highly fragmented and non-correlated data.

• Government Shocks--for Resiliency.  In 2005, central banks (primarily Asian) were estimated to purchase 40 percent to 50 percent of all GSE and U.S. government debt. In 2011, this percentage is less than 15 percent, especially for GSE paper. With GSE and mortgage credit reforms now likely on hold until 2013-2014, we are already witnessing efforts to bring into GSE sales private investors who are not seeking explicit government guarantees. It will remain to be seen what the spreads are for these “slices” and what information will be needed for the life-of-the-loan in terms of due diligence. Only by approaching the financial supply chain in reverse will originators, servicers and the U.S. government understand their new role in housing finance. In general, pending legislation has fixed very little for tomorrow including getting passage of covered bond legislation, as the U.S. now lags not only Europe, but Canada, Australia and soon the Middle East and South America. 

Seeking out and predicting Black Swan industry events has its merits, but usually this surprise event is not recognized until time has passed. However, as noted from many dependent and independent industry disciplines, there are multiple solutions and events that would have a very material impact on housing and housing finance today. 

It is these shades of Gray Swans from financial services industry peers that hold immediate actions and innovation value if given an opportunity to be heard and better yet adopted. Yet, with everyone in their own silos projecting polarizing ideas for others to follow; it is unclear when positive impacts will be felt domestically. 

(The views expressed in this article do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions; articles or inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)