If there is one truism at work in the modern financial services industry, it is this: Change is constant. From almost every point of view and every perspective, change is at work. Whether it involves adjusting to new regulatory requirements or reviewing the competition’s new marketing initiatives or simply trying to keep your existing customers happy, you can be sure that change is driving it. In most cases, change brings with it increasing expenses. After all, it is hard to do something different without incurring some expense along the way.
In our industry, there are several factors driving expenses:
- EMV continues to be in the news. As the October 2015 liability shift approaches, everyone is hard at work developing strategies, tactics and tools to take advantage of the benefits EMV brings. In the interim, criminal forces are taking advantage of the lag time between now and the shift. A Forbes article, US Credit Card Fraud Is Spiking Ahead Of EMV Secure Chip Introduction, quotes Allen Friedman, director of payment services at Ingenico, “Sixty-seven percent of the UK-issued card fraud is from the US.” Between the preparation for the US EMV implementation and the continuing battle against fraud, expenses are rising.
- On the domestic front, many FIs realized that when it comes to payment products, product diversification is a key strategy in fueling growth. Less than five years ago, offering one or two payment products might have been enough. Today’s highly competitive environment requires an FI to offer several products, from cards to mobile wallets to other hi-tech, customer-oriented payment solutions to meet the needs of their customers.
- Along with the research and development of new payment products come the costs associated with customer retention, customer acquisition and market penetration. The good news is that, in the digital age, digital marketing is driving down costs when compared to the old standard of print advertising. The bad news is that digital marketing requires a much greater frequency than print, and meeting the rapid pace of digital marketing has its own inherent costs.
Of course, the best solution to rising expenses is an increase in revenue which is easier said than done. No matter how sound your business strategies, there are many obstacles and distractions that must be overcome to meet revenue projections. The primary obstacles every FI faces are:
- Ensuring regulatory compliance. This single task can involve almost every aspect of an FI’s business. The ever-changing regulatory landscape helps ensure plenty of activity, but not much revenue. The upside comes by maintaining a compliant environment.
- Vendor management. When an FI grows, it frequently comes across many areas where it makes more sense to augment its own capabilities and resources by partnering with vendors who can share the load associated with certain tasks. Of course, a third party also adds an element of risk to the FI’s operational capabilities. These risks include operational, financial, legal, and compliance complications that in turn might create regulatory and/or legal risks. An effective vendor management program is essential for maintaining visibility and awareness of vendor services, expectations, and performance.
- Audits and oversight. Maintaining effectiveness and efficiencies in these two areas take an incredible amount of time and for FIs as well as most businesses, time is money. The more time spent here, the more money- and opportunity for making money- the organization loses.
While the obstacles and distractions to increased revenues are many, they can each be overcome through applied discipline, diligence and dedication. In proof of that point, we spoke to Joe Mayhew, AVP of Consumer Loans at CoastHills Credit Union, headquartered in Lompoc, CA. CoastHills CU faces the same challenges as any other FI in terms of marketing, audits, line reviews, customer retention/acquisition. Some, they have overcome and others they are looking to resolve. Still, in an environment and economy where there are more distractions and increased costs than ever before, the efforts of CoastHills have resulted in high levels of growth for a credit union that not only manages to survive but thrive.
Part two of this article on Thursday will discuss how one financial institution overcame the problem.