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| Before you give new products the green light (July 15, 2009) |
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Innovation in banking is a wonderful thing, but unbridled new product development, with no risk filter, can drive your bank into trouble
Posted on July 15, 2009
By Steve Cocheo, executive editor,
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A few years back, The Leaders Bank launched remote capture service. But the problem was, many key players in the bank didn’t even know that this was happening.
Leading edge or shredding edge? The $665.7 million-assets bank, founded in 2000, learned some key lessons from that experience, Snyder told listeners during the recent ABA Regulatory Compliance Conference. “With technology, we can launch things a lot faster,” said Snyder. “But this means that we have to do a lot more due diligence up front, and develop more understanding of the risks the new products will bring to the institution. Then, we have to figure out how to mitigate those risks.” This understanding, by itself, raises awareness, but doesn’t necessarily get the job done. Snyder told assembled bankers how her bank devised an organized process to ensure that disasters like the check kite could be prevented. [One of Snyder’s fellow panelists separately explained that such efforts are beyond a “best practice”—in some form, they are actually expected by regulators. Lisa White, assistant vice-president, banking supervision and regulation, Federal Reserve Bank of Richmond, shares her thoughts in the nearby box.] Another challenge brought about by technology is the increasing likelihood that community banks, if not exactly in the vanguard, will be close to it. Snyder noted that in former times, community banks tended to hang back, and let larger banks do the pioneering and experimenting. Once those institutions took the hits and arrows that pioneers take, community banks would take up the new products and services. Setting up a gatekeeper Snyder, who is also Leaders Bank’s chief risk officer, said that the solution to this issue was formation of a bankwide Enterprise Risk Management Committee. No new product or service can launch at the bank, now, unless it has been approved by the committee. The committee meets monthly, and has a broader list of duties than solely new product oversight. But Snyder said that new products continue to be a standard agenda item. The group consists of Snyder, as head of compliance and of risk management; the chief financial officer; the chief credit officer; the director of Human Resources; the head of Treasury Management; the head of Operations; and the presidents of the bank’s local banking centers. Snyder chairs the committee. “This doesn’t mean that I own the risk,” she said. “It means that I orchestrate the risk.” Creation and use of this committee “has given a lot of structure to our entire process,” said Snyder. “Things are no longer as scattered.” Many details used to be addressed only after a product hit the streets, Snyder said. “Community banks are not as structured in this area, typically, as larger banks, because our regulators are not requiring us to be as structured,” said Snyder. While structure isn’t necessarily an issue, smaller banks are still expected to get the new product challenge right. Compliance is only one facet The purpose of the committee’s reviewing product proposals is manifold, going beyond risks and compliance issues. The ERM Committee also reviews proposals for practicality, cost-benefit efficiencies, and other filters intended to maximize return on scarce resources. “Many times we have turned down new product proposals,” said Snyder. Some of these rejects, she said, have been no more than “pie-in-the-sky” notions that won’t likely produce results. Sometimes, they are the fruit of overoptimistic thinking. “Often, it’s a business-line person looking at the idea, but not with a critical eye,” said Snyder. The ERM Committee brings that cold, hard look to proposals, from the multiple perspectives implied by its structure. One of the committee’s current requirements for presentation of an idea is a three-year projection of potential results, which forms the basis of the committee’s weighing of costs versus benefits. “It really makes people who want to launch a service think through what they want to do,” said Snyder. Even where a product is approved—and some that are rejected on the first go-round are refined, re-proposed, and passed—the process has helped the bank by building a better foundation for success. “Many of you have launched products that were failures,” said Snyder to listeners. The committee process has forced Leaders Bank employees to think things through before they bring ideas to the committee. As a result, they tend to not only have a plan in hand, but have also anticipated committee members’ questions, and devised backup plans and contingency plans in case the product or service, once launched, experiences a “hiccup.” They have learned to anticipate the committee’s question, “If such-and-such happened, what would we do next?” Those who didn’t start out this way, adapted. “We have had people learn that when you come into a meeting unprepared,” you won’t win, said Snyder. “They have had to come back 30 days later, having had their hands slapped.” Not a lockstep effort Now that the committee has create a formal review process for new product development, a complementary informal “process” has sprung up. It’s indicated the bank has found that the necessity of making a formal request for approval has led the bank’s staff to work harder, up front, to sweat the details and issues of an idea earlier in the process. It isn’t unusual, said Snyder, for people developing ideas to talk out the issues that they are examining, with her, before going before the committee. Snyder addressed the concern of the need for prudence and care versus the traditional advantage of community banks of not having to put ideas and proposals through the bureaucracy of a large bank. She said that the bank had achieved a balance, in its experience. Some proposers have had an idea, and with very little lead time, managed to put together a convincing case—even a day before the committee meeting. So flexibility can co-exist with process. Another element of product development that challenges compliance and risk functions is the “new wrinkle” or a new version of an existing product. Leaders Bank’s former problem child, remote capture, is a good example. “We just went through approving consumer remote deposit capture,” said Snyder. While the bugs had been worked out of the commercial product, the consumer version, while technologically similar raised additional issues because it involved personal accounts. While the bank is primarily a business bank, consumer RDC was adopted in order to serve the convenience needs of business customers. Approach helps with examiners Regulators like seeing the process that’s in place, she said, and the committee structure enables bank staff to handle a number of administrative and governance tasks through this mechanism. The bank documents the deliberations over new products and other ERM issues through the agendas and supporting documents used by the committee. This written record has become a standard part of the bank’s first meeting with examiners. “And the examiner feedback has been great with that,” said Snyder. While this has been a general trend, the exercise of committee review and decision has also helped address initial objections by regulators to some of the bank’s new efforts. Case in point, not surprisingly, is the bank’s move into consumer deposit capture, still quite the leading-edge product. An examiner asked, pointedly, “Why would you do this?” As Snyder talked the issue through with the examiner, she was able to explain the bank’s rationale, and the pros and cons that had been considered by the ERM committee before giving the green light. “We looked at the risks and we were comfortable,” said Snyder to the examiner. She described the controls that the bank put in place to address the risks that had been identified. “I was able to make her feel comfortable,” said Snyder. The objection was dropped. Beyond the launch Of course, like humans, products have long lives after their debuts, and course corrections can become necessary. Every new service approved for launch by the bank’s ERM body serves a “probationary period” before it’s considered fully set. This period—which varies from one approval to another, depending on features and details—“is generally built into the plan,” as proposed by the sponsoring banker, said Snyder. “If not, we, the committee, will ask that it be put into the plan.” Snyder said that the committee has evolved over its four-year lifetime. But that is nothing new for Snyder. She initially joined the bank to head up its retail division. At the time Compliance was handled by committee. Post 9/11, said Snyder, “we recognized we couldn’t do compliance by committee.” She was put in charge of it, and over time the ERM approach to risk management was adopted. BJ [This article was posted on July 15, 2009 on the website of ABA Banking Journal, www.ababj.com, and is copyright 2009 by the American Bankers Association.] Set as favorite Bookmark
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Paul J. Jarosz
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| We have something similar, but we just call it the Product Committee. Whenever something is proposed, I do a Compliance Risk Assessment to make sure that we (hopefully) have the compliance bases covered before the product or service is rolled out. I think that the main thing is to have everyone in the bank realize that Compliance should be consulted before anything is proposed, as opposed to asking for compliance sign-off when the product is just about to go live. | |
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