Welcome to our Summer 2019 edition of New Coordinates. I hope you are having a terrific summer and managing the record heatwave. Travelers to France and Italy have seen some of the most elevated temperatures in history. Can you imagine what the Tour de France cyclists experienced? I made it to Newfoundland and Nova Scotia, and the break from the heat was most welcome. Average daily temperatures ranged from the low 50s to low 70s. Great hiking weather and stunning scenery. I recommend it.
As summer winds down, we all transition to planning for 2020. So Treliant has lined up some forward-looking perspectives in this edition. My colleagues touch on a number of challenges that financial services companies face today in managing regulatory change, building the case for risk and compliance programs, de-risking innovation, and protecting consumer privacy. I hope you find it all thought provoking.
Autumn Headwinds Surrounding NIM
Before the summer, I spent some time talking with financial services leaders across the country. A common concern I heard was how the changing interest rate environment would impact Net Interest Margin (NIM). This is putting financial executives in a tough situation. Most of them are wearing a lot of hats, weighing strategic choices for investment, and now battling NIM headwinds.
Just as a reminder, NIM is the all-important delta between what banks pay on customers’ deposits and, in turn, charge for extending credit. As the Federal Reserve eases rates in the back half of 2019, earnings forecasts for 2020 are already projecting risks associated with tighter margins.
The war for gathering and retaining low-cost deposits while finding attractive credit opportunities will wage on. Surgical pricing will be essential, from a profitability perspective. But from a compliance perspective, bankers must remember to maintain consistency to avoid UDAAP or Fair and Responsible banking issues. Their pricing activities are closely watched by a myriad of regulatory agencies.
The Diversification of Outsourcing
A second theme I heard was around the topic of outsourcing services versus hiring permanent staff. Outsourcing or leveraging contractual labor offers both appeal and risk. The appeal is that the expense is viewed as variable, with the ability to suspend on short notice. The risk is that the third-party relationship must be monitored to ensure alignment with all stakeholders.
We are seeing a rise in managed services activity including:
•Secondments. This is typically in higher-level roles where an external search is occurring. A six- to nine-month bridge can allow proper time to onboard a new hire, while continuing “business as usual.” Risk functions are particularly scrutinized by regulatory examiners to ensure that there is continuity. We also see companies hire a secondment to serve as an onboarding coach to a newly hired senior officer. It is not a given that a chief executive officer has the background to appropriately coach that individual on the requirements of the role. Coaching is an effective way to ensure a successful transition and ramp up.
•Interim resource surges. People are often requested two to 10 at a time. These spurts tend to be project-related and can carry a wide range of durations. In some cases, companies lack subject matter expertise and supplement staff this way. In other case, companies simply lack internal bandwidth and need this incremental support to move through a project or business need.
•Large-scale projects. These require 50 to 100 resources to handle repetitive tasks such as lookbacks, quality control, or transaction monitoring. There may be a sponsor at the company who provides guidance and oversight, or the project can be viewed as independent monitoring.
•Outsourcing a function altogether. This is often called for when geography might limit a company’s ability to source permanent talent.
•Joint marketing agreements. These can be viewed as a means to offer clients products in a “white label strategy.”
As you can see, leveraging external resources to assist with business objectives can happen in a variety of ways. The key is to ensure you align yourself with a reputable firm that has “skin in the game” with your company. This is something we do frequently at Treliant for our clients. We are happy to have a conversation if you are considering such a strategy.