ByDavid C. Reiling
In an article that appeared in the June 2011 issue of Bank Technology News, editor-in-chief Penny Crosman called for banks to look at a completely different business model—"to go after revenue in a different way because their core business is under threat." Or, in the words of Jeff Carter, former executive at MIT's Center for Future Banking, banks need to "lethally innovate."
Crosman's comment could not have come at a more important time in our industry. Recent historic changes to our financial systems, combined with an explosion of financial technology (fin-tech) innovations, are creating opportunities to modify how banking services and community development organizations conduct business. In recognition of this extraordinary set of circumstances, the Federal Reserve Bank of St. Louis, in partnership with the Federal Reserve Banks of Atlanta, Dallas and Minneapolis, presented "Exploring Innovation: A Conference on Community Development Finance" this past May.
The conference, for which I was honored to serve as presenter, moderator and panelist, was billed as a "catalyst for unleashing ideas" and "a unique experience for re-imagining community development finance possibilities."
I am pleased to report that the conference did, indeed, deliver on these promises. From the inclusion of graduate students to voice their fresh perspectives on advancing the New Markets Tax Credit program to alternative presentation formats and the coalescing of ideas from various groups, the conference itself was an example of innovation. The dynamic and articulate participants offered exciting, real-world examples of unique financing models addressing all aspects of thriving communities, from housing and infrastructure to community engagement and leadership development.
As exhilarating as the presentations and discussions were, I was struck during the conference by two particular points that are taking our industry into uncharted waters—points that need further consideration and subsequent action.
Elizabeth Duke, a member of the Board of Governors of the Federal Reserve System, said in her keynote address that the Federal Reserve is at the intersection of government and the financial services sector, which caused me to wonder: What does the intersection of bank regulation and innovation look like? Moreover, what should it look like to accommodate the fin-tech boom?
At one end of the spectrum, there is the tremendous amount of innovation happening in the financial services sector. At the other end are regulators entrenched in existing rules and challenged to meet the new round of regulations through Dodd-Frank. Where the two ends of the spectrum intersect is a cloud—and it's not an Apple-connecting one. Rather, this cloud is made up of uncertainty of unprecedented proportions, which is causing bankers to postpone innovation trials due to the current high level of regulatory scrutiny and the threat of pending, unknown and new compliance regulations and regulators. The domino effect will be that less money and creativity will be invested in the fin-tech world because nothing is coming out the other side. Or, fin-tech experts will produce innovations without bank involvement, thereby realizing the threat alluded to by Crosman.
At $600 million in assets, my institution is as big as it has ever been. Yet, more and more frequently, I find that the bank I represent at community banking conferences is the smallest among the participants. I believe this trend will persist, which tells me that a new definition of "community bank" is emerging, that banks closer to $1 billion will comprise the smaller end of the "community bank" scale.
What does that mean for communities served by these institutions? They may have stronger banks at the end of the day, but there will be fewer of them. I believe that the more community banks you have, the more creativity there is in the system. Therefore, the fewer chartered banks that exist will mean less creativity for the marketplace.
What's more, the larger a bank becomes, the more difficult it is to innovate on a small scale. At Sunrise's size, we can try numerous experiments that don't put the bank in jeopardy even if they falter. The bigger the bank, the less likely you are to try (and fail) because to impact the bank itself, you need to conduct a bigger experiment, which means more risk and more people from whom you need buy-in. In the long run, the trend toward larger community banks could stifle the degree of innovation we have enjoyed.
Whether a bank is $600 million or $24 billion in total assets, all of us are trying to serve our communities to the best of our ability within the regulations and laws of the land.
Despite our industry's uncertain future, it never ceases to amaze me how concerned and focused community bankers are on their communities. This was demonstrated time and again during the conference when individuals described how they overcame the complexity of funding a unique facility, program or project. It was also demonstrated by the insightful questions posed, such as one put to me by a Federal Reserve employee. "Dave," she said, "if there was one thing that you would work on that would have the most impact in somebody's life, what would it be?"
I don't think she expected my answer: The fact is that a person's psychological well-being centers on having work, being needed and providing for their family. Financial well-being is the basis for that psychological well-being. Therefore, in my opinion, the basis for everything is a person's job—preferably a job providing a living wage, but let's say a job with healthcare benefits and a retirement plan.
"So, do you mean you would focus on job training and getting people ready for work?" she asked.
"If that's how you interpret it in your setting, then that's what it means," I replied.
The Exploring Innovation conference has been over for a couple of months now, and I challenge its organizers and participants to keep alive the momentum that was created there. For the Federal Reserve that may mean—or require, quite frankly—a renewed focus and additional initiatives on job creation and small-business support.
For attendees: Ask yourselves how you can take what you learned and apply it in your marketplace.
To everyone involved: We created a network of people interested in and dedicated to innovation and community. Let's not allow it to disappear. How can we leverage this network to further what we're doing or inquire about new products and services that are being tested elsewhere?
And for myself, I continue my quest to understand more deeply what my own question posed: What does the intersection of bank regulation and innovation look like? What should it look like? I invite you to help me discover the answer.