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Regulation Implementation Paralysis — Painful or Not?

With regulatory change in the works, not being prepared to participate in the related propose-feedback-publish process can be bad for financial institutions and their bank technology vendors.

The dust has not begun to settle on the massive scope of new requirements for bank regulations that were passed by Congress in 2009 and 2010 and how they should be implemented and evaluated in the future. The responsible agencies, which draft proposed new regulations to implement new Congressional legislation, gather feedback from the market participants before revising and publishing final ones are overwhelmed. This propose-feedback-publish (PFP) process has prescribed timeframes that strive to incorporate a two-way communication cycle while acknowledging that the "industry participants" will use the feedback cycle as an extended lobbying forum to steer the new requlation(s) toward a more favorable set of requirements for the "industry."

None of the market participants can foresee the finish line timing for each new regulation with any precision, which is not bad by itself -- and should not cause any pain for institutions or bank technology vendors. However, not being prepared to participate in the process can be bad for institutions and their bank technology vendors. Bank technology vendors that use the PFP process to heighten their communication effectiveness with client institutions can move the needle in terms of adding value for their clients. While this opportunity may seem weighted with "soft" benefits, like education, training, brainstorming the impact on an institution's operations, and perhaps even discovering improvement opportunities (can a new regulation lead to lower cost?) can be part how a vendor makes a difference for its clients. This "make a difference" opportunity becomes part of the fabric of the broader institution-vendor relationship model.

Institutions. The clients have to be interested in participating, at whatever level their staffing permits. While every institution has an equal opportunity to participate, most customer bases can be segmented based on level of interest, which might range from highly motivated, to interested, to keep me up to date, to let me know what to do with reasonable notice. Overlaying this interest level will be a cost/pricing dimension -- will there be any costs, either software- or services-related, that the institution will have to pay on top of existing contracts or vendor commitments. This subject will become contentious if the vendor wants additional compensation and the institutions (collectively) believe the new requirements are covered as part of the vendor's ongoing compliance commitment. The needle can quickly plummet and get stuck in the mud for a vendor that takes a hard-nosed approach on the cost/pricing dimension when compared to the actions of direct competitors. One key takeaway for every institution is to assess how their vendor(s) seizes the opportunity associated with any new proposed regulation. Which one(s) made a difference?

Bank technology vendors. The other side of this opportunity can be very challenging for the range of bank technology vendors, from startups or niche vendors to the largest ones (e.g., FIS, Fiserv, Jack Henry). Clearly the startup/niche vendors will be challenged on the business development/revenue dimension and cannot afford long delays in the regulatory implementation cycle -- so pain will be their answer, which often leads to being acquired by a larger firm. Large vendors can be effective tactical buyers to gain product development and early adopter market insights that a startup or niche vendor has already achieved. Moving the needle for the largest vendors is a cumulative process, not tied to just one or two key legislative or regulatory issues. How a larger vendor segments its clients and approaches each opportunity by segment may seem tedious -- but it focuses the vendor's attention where it adds the most value -- at the client level.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.

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