Too Small to Fail
How the Financial Industry Crisis Changed the World's Perceptions
by
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What a dramatic set of changes we have all been through as the global economic engine adjusted to new realities. The credit crisis triggered by the subprime mortgage market in the United States quickly spread to other credit products, and it ultimately threatened not only the U.S. banking industry but also the global economy. This near-disaster impacted financial institutions throughout the world and changed the banking landscape in an unprecedented fashion through consolidation, bailouts and new government regulations, to name a few.
Even before the financial crisis exploded onto the international scene, seismic shifts in the geopolitical, economic, demographic and technological arenas were impacting the global topography and, as a result, the broader financial services market. While these changes represent a continued evolution of how we live, work and play, their acceleration has dramatically impacted the role of financial institutions. Meanwhile, the dramatic shift in the financial services landscape, which reached a critical point in 2008, masked some larger issues faced by the industry. As the competitive landscape intensified, boards and executives were increasingly looking for new ways to compete and new strategies to offset fundamental shifts in the basic business model for financial institutions.
The increasingly global competitive environment for financial institutions has resulted in accelerating margin compression, channel proliferation, pressure to increase non-interest fee income, increased regulatory scrutiny, heightened fraud and security risks and the “consumerization” of the entire industry. To stay competitive, financial institutions must diversify revenue streams, increase non-interest fee income, know more about their accountholders, capitalize on the increased interaction with the people they serve through more touch points, address fraud, security and regulatory concerns with greater flexibility, all while dramatically improving operating efficiency.
Rather than addressing these issues directly, many in the industry, through a combination of factors, chose to pursue less strategic, but more profitable, product and service strategies. The accelerated pace of earnings that resulted only reached a critical point when the subprime market began to falter. Because of the subsequent shakeout in the financial markets, the strategy of pursuing high-return/high-risk profile products as a way to mask the underlying business model shift has decreased. Now that this has been exposed, the pressure will once again return to the more fundamental issues that need to be addressed by the industry; particularly, how it will survive and thrive for the future. As signs of stability emerge, institutions will have to provide greater clarity about their contribution to the economic engine and redefine a long-term sustainable business model.
At the same time, financial institutions, which once pioneered computational innovation, are now stuck with some of the oldest technologies of any industry, layering on and masking this weakness with newer technology in a desperate attempt to meet their strategic needs. This costly and outdated technology infrastructure has been a nagging issue, exacerbated by inertia and regulatory incentives against change. It has turned into a severe competitive disadvantage as institutions look for greater flexibility and efficiency in meeting the changing landscape of the industry. By masking these legacy systems with layers of newer technologies, the industry's infrastructure has become expensive, inflexible and increasingly ineffective.
This became evident as industry pressures mounted, and poorly integrated, outdated, and inaccurate information contributed to the disjointed nature of the subprime and related credit and risk decisions. Large institutions thought to be more stable with their scale benefits, diversity and capital bases proved to be, in large part, the weak link as the economic environment became more difficult.
The “Too Big to Fail” thesis may give way to the less diversified, less scaled but seemingly more prudent community based institutions that largely avoided the subprime crisis by maintaining direct ties to their communities. This collaborative network of community based institutions shows renewed value, reflecting a relatively unique pillar of stability for our economy and a new mantra of “Too Small to Fail.” This book reflects on the pace of change that impacts all aspects of how we live, its implications on the financial services industry, and the unique interrelationship of recent history and the current state of the financial industry. It also lays out a path to navigate the future that will ultimately reposition the industry and individual institutions for long-term success.
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About the Book
The financial meltdown resulting from the subprime mortgage fiasco culminated in the most dramatic economic slowdown since the Great Depression. The global economic crisis raised the debate about the role of financial institutions and the role of regulators in an increasingly interconnected and rapidly changing world. It also altered the marketplace's perception of historically trusted financial institutions. Over the years, geopolitical, economic and technical trends have had a subtle, but very powerful, impact on the basic business model for financial institutions worldwide and on their interactions with accountholders. Add to that increased margin pressures, regulatory and compliance issues, fraud and compliance concerns, and competitive threats, and it becomes obvious that the old business model simply won't work going forward. At the same time, the financial industry is littered with some of the oldest technologies of any industry, which contributed to the poor credit decisions that fueled the crisis. A recognized entrepreneur and award-winning innovator, Louis Hernandez, Jr., using historical examples, points out that the rate of change impacting the financial services industry is accelerating. The industry has been slow to respond to change, and the focus on the recent crisis has uncovered fundamental problems that financial institutions have been avoiding. Hernandez outlines a process to map the future direction of individual institutions and the industry in a way that addresses near-term issues and overarching global changes, such as a re-emergent Asia and the dynamics of a knowledge economy. He points out that the “Too Big to Fail” thesis has given way to the seemingly more prudent, community-based institutions that largely avoided the subprime crisis. These institutions have demonstrated that they represent a unique pillar of economic stability. Now, he says, is the perfect time for the leaders of these community-based institutions to seize the day and lead the financial services industry back to the center of economic vitality and drive global economic growth, one community at a time. In Too Small to Fail, Hernandez issues the call to action, “Do you have the extraordinary drive it will take to inspire the industry and bring financial institutions back to their place as trusted intermediaries?”
About the Author
Louis Hernandez, Jr. is the chairman of the board and CEO of Open Solutions Inc., a leading provider of enabling technologies for financial institutions. A successful leader and entrepreneur, he has led and advised several high-growth companies. He now serves on the boards of three publicly traded companies: Avid (Nasdaq: AVID); Unica (Nasdaq: UNCA); and certain subsidiaries of HSBC (Nasdaq: HBC), the largest non-government-backed bank in the world. Mr. Hernandez was named one of the financial services industry's five most innovative leaders, a 2007 Innovator of the Year and was inducted into the Leadership Hall of Fame by Bank Technology News. He is also a recipient of several local and regional business leadership and entrepreneurial awards. Mr. Hernandez is a recognized technology executive having been appointed by the Governor of Connecticut to serve on several economic, business and educational boards. Mr. Hernandez has been published in numerous leading journals and speaks regularly on the topics of technology, economics, innovation, strategic planning and globalization. Through his foundation, he is involved with a number of not-for-profit community organizations. Mr. Hernandez lives with his family in Connecticut.