Selling Into FinReg

July 26, 2010 0 Comments Industries by Jack Dean

BREAKING NEWS: Washington D.C.  A regulatory sea change of immense proportions washed up onto the shores of the American financial services industry this week.  Initial damage assessments are indeterminable at this time.  Hundreds of additional waves of regulatory rules (243 to be exact) are expected in the storms aftermath.  Ten regulatory agencies including the Federal Reserve, FDIC and SEC have been assigned permanent clean-up duties. One agency, the CFTC, has asked for $45 million in emergency funding just to hire new staff to deal with the aftermath.  Thousands of lobbying organizations have been mobilized by local establishments to garner public support as they work to mitigate collateral damages.  Businesses, mostly banks, directly in the path of the 2300-page legislative monster have declared a state of emergency.  For example, J.P. Morgan Chase, operating at the epicenter of the storm, has assigned more than 100 triage teams to assess response priorities.  In a sign of despair sales professionals have been spotted aimlessly wandering the hallways of their customers looking for signs of life … and clues about the implications to them. Tax-deductible contributions are encouraged and can be made by going to your online bill pay solution and selecting ‘U.S. Treasury’ in the payee drop down table.  We will have additional reports from the scene as conditions on the ground warrant.

Interestingly, not everyone agrees that the storm has come ashore quite yet.  The Wall Street Journal headlines this week screamed, “Impact to Reach Beyond Wall Street; Key Questions Unresolved for Businesses and Consumers Until Bill Goes Into Effect”.  I know I’m in the minority, but I beg to differ with the implication that business decisions are being deferred.  The headline should have read “Attention Sales Professionals: Your Financial Services Customers Are Assessing Business Model Implications – NOW IS THE TIME TO SELL THE FINANCIAL VALUE OF YOUR SOLUTIONS INTO A POST-FINREG WORLD”.

Personally, I’m concerned sales professionals will be lulled into a false sense of complacency when they read the headlines and listen to some of the circumspect titans of the industry.  Just last week we heard some of these calming utterances (translations provided):

  • Wells Fargo – CEO Stumpf said, “Right now we are proceeding with our efforts to gain a better understanding of all the components, and we will work internally with our regulators on implementation plans as the rule-making process evolves.  At this stage, it is too soon to definitively estimate the financial impact given the varying implementation timelines for different components of the bill, the need for some additional clarifications since the actual rule writing is still on the horizon and the size of potential financial offset.  There will be areas where we will be affected, like debit interchange.  There is simply insufficient information at this point for us to make a determination as to the net economic outcome.”  (Translation:  We’re still negotiating with regulators and rule-writers so we’re not going to tip our hand.)
  • BB&T – CEO King said, “Obviously, there are a lot of changes.  I’m not going to spend a lot of detail on this because frankly so much is uncertain today to try to assume one has a lot of specificity with regard to what all this means, I think is naïve.   Just freshly signed yesterday, has 2300 pages, it’s going to take months and years to figure all this out.  Who knows whether there’ll be cleanup bills and what interpretations and regulators will be.”  (Translation: I’m not going to get cornered in this earning conference call by disclosing our response plans or financial impact before I have to.  You’ll just have to wait.)

On the other hand, other CEOs recognize big changes are coming and have been more frank and straight-forward in comments made last week:

  • PNC – CEO Rohr said, “There are a variety of issues in the legislation that we are currently studying.  There is much more to come in the hundreds of regulations expected over the next few years.  One thing is clear.  The reform bill will impact revenue and increase the cost of doing business.”
  • J.P. Morgan Chase – CFO Cavanagh said, “And of course, whatever impacts there are going to be will be in part mitigated at least through adjustments to business models or pricing of products and services.”
  • Citigroup – General Counsel Helfer said the company would soon name a senior executive to lead an internal task force in charge of assessing the business implications of rules to be written to put the new law into effect.  The business model assessment will determine if Citigroup should “charge more, not charge more, or not do business”.
  • Bank of America – CEO Moynihan dropped a bombshell on investors on July 16 by warning that the financial-overhaul legislation could cost it as much as $4.3 billion a year in lost revenue, plus a one-time charge of $7 billion to $10 billion.  Mr. Moynihan said it would take years to offset the lost revenue.

Dubbed the Dodd-Frank Wall Street Reform and Consumer Protection Act (HR 4173), this federal bill constitutes the biggest expansion of government power over the financial services industry since the Glass Steagal Act of 1933.  Taken together with earlier legislation passed and regulations promulgated, the implications on industry participants (and sales professionals selling into it) are mind-numbing.

Thankfully, clues have begun to emerge into the focus areas of management.  Last week earnings season began in earnest.  I reviewed twenty earnings conference calls and created a list of three issues that consistently appeared at the top of the CEO’s radar screen.  They include:

  1. Regulation E Overdraft Requirements – Passed last November and scheduled to kick-in this month and next, Reg E provisions will have a major negative impact on fee income.  The Federal Reserve amended this regulation to prohibit banks and other financial institutions from charging overdraft fees (a.k.a. NSF or non-sufficient funds) for ATM or one-time debit card transactions unless the customer ‘opts-in’ and permits such charges.  Otherwise, the transaction will be rejected at the point of sale.  Financial institutions are optimistic that consumers will ‘opt in’, but early indications are that only approximately 20% have taken action to do so.   Industry experts estimated industry-wide overdraft fees of $35 billion to $40 billion in 2009.  J.P. Morgan Chase alone estimates a potential impact of $700 million in 2011, not including any offsets.
  2. Debit Card Interchange Fees – Passed as an amendment to the Dodd-Frank bill (a.k.a. the Durbin amendment), the provisions remove control of interchange fee pricing from the card networks and effectively place that responsibility in the Federal Reserve.  This applies to banks with assets in excess of $10 billion. The interchange fee is a transaction-based fee that is paid by a merchant’s bank (the “acquiring bank”) to the customer’s bank (the “issuing bank”).  The National Retail Federation, a Washington, D.C.-based trade group says debit interchange fees costs merchants $20 billion annually. Huntington Bank, a relatively small regional bank, estimates its annual interchange fee generates $90 million in non-interest income per year.
  3. Bureau of Consumer Financial Protection – The Dodd-Frank Act created a new federal agency to operate within the Federal Reserve with the authority to enforce its rules against any financial institution with more than $10 billion in assets.  Auto dealers were excluded from its expansive jurisdiction.  During earnings conference calls, most banking industry executives declined comment on the implications of this new agency pending its implementation and clarification of authority.

Other issues mentioned during these earnings conference calls included the CARD Act, housing and mortgage industry regulations, deposit insurance reforms, bank capital and liquidity requirements including the soon-to-be-released Basel III pronouncements, proprietary trading restrictions, the financial stability oversight council, and over-the-counter derivatives trading reforms.  As you can see, the financial services industry has a lot of strategic issues on its mind these days.

Without business model changes, the financial impact of the new laws and regulations will depress total revenues, increase non-interest expenses, reduce financial leverage, and lower ROAs and ROEs.  These are the most important performance metric value drivers of the financial services industry.

Banks and other financial institutions are not likely to sit still and take this medicine.  Business models will change.  New approaches will emerge.  Technology, automation, and business intelligence will be embraced.  And, unintended consequences will occur.  That’s why it’s critically important for sales professionals to initiate a strategic approach to account planning that incorporates active collaboration with financial services customers during this time of business model assessments.  Now is the time to sell into FinReg.