Bank of America announced this week that they are accelerating the implementation of a new higher minimum wage to $20 per hour at the end of the first quarter 2020.

This equates to a full time salary of $41,000. In explaining this one year speed up of the increase, CEO Brian Moynihan also explained that the bank had reduced the cost of health insurance by half all with a goal of making Bank of America a great place to work.

The action also speaks to the increasingly competitive labor market at full unemployment described in my blog How Tight is Today’s Labor Market.

What Makes a Great Place to Work?

Starting salaries certainly matter, especially for a first job. But is salary sufficient to retain the people an organization relies upon to build a sustainable future?

Successful credit unions also create cultures in which people feel good about their work carrying out the organization’s purpose, what they do for and with members, and expanding career challenges.

Financial rewards are only one aspect of a dynamic and leading organization. Necessary, but not sufficient.

One of the critical qualities of leadership is the ability to rally support for vital issues through cooperation and example. When this leader is a regulator with the ultimate power of coercion, to see an approach based persuasion, logic and we’re-in-this-together is enlightening.

The FDIC Chair Jelena Williams outlined a new approach to innovation, not via a rule or policy statement, but rather in a public op-ed in the American Banker. I thought the following comments were powerful:

…if our regulatory framework is unable to evolve with technological advances, the United States may cease to be a place where ideas and concepts become the products and services that improve people’s lives.

At the FDIC, we want to foster innovation…By promoting and encouraging our supervised institutions toward a more advanced technological footing, the FDIC can help lead a transformation in the financial sector — one that results in easier access to banking products and services, brings more consumers into the banking fold, and makes the banking system safer and more stable…

We are looking for techies to join our ranks…

Should I Be Jealous of Bankers Over Their Regulator’s Appeal?

In this recent commentary, Randy Karnes outlined the leadership vacuum facing credit unions in the regulatory arena. He stated in part:

Does the credit union industry even have a process that is capable of placing a real leader of people, communities, and our CU stakeholders on the NCUA board today? Or are we doomed to a continuing future of cardboard, keep your head down, tactical players who only confirm the bureaucratic functions versus board members that could balance the need for a strong regulator with the passion for a strong credit union industry, and sell it?

Leaders Who Can be Assets, not Liabilities

In a dynamic, technology driven and competitive financial services market place, the soundness of the system is more than an aggregation of individual balance sheets and operating statements. For the cooperative system is interdependent in ways the banking industry is not. That means weakness in any leadership role can jeopardize the future of the industry. Jelena Williams shows how a proactive, positive focus can be an incalculable asset, not a liability or burden, in the ongoing arena of financial competition. Isn’t it time for credit unions to expect nothing less?

Amit Seru, a Stanford University Professor, presented his most recent data updates on the role of shadow banks and FinTechs at the FDIC’s 19^th Annual Research Conference last week.

The slides he used can be found here.

The trends show that more and more lending is originated by non-depository institutions in both the mortgage and consumer lending arenas.

Two of his slides (#10 & 11) illustrate this growing market penetration geographically by county between 2008 and 2015.

These alternative financial firms enter markets as depository firms withdraw primarily due to their lack of profitability.

FinTechs’ role

Seru was especially interested in the role of FinTechs firms, which he defines as firms relying on virtual channel operations that can be completed from beginning to end without human intervention.

The FinTech advantages of faster processing, use of broader data sets for marketing and decisioning, and a superior quality online experience, are well known.

But he also suggests their success is not because of a price advantage over banks. In some cases consumers pay more for online convenience and speed.

Why the loss of market share?

Seru concludes that the Fintech technical advantages account for only 30-40% of the shift in market share. He asserts the most important factor (60-70%) in this ten-year market share change is the impact of regulation on banks’ ability or willingness to continue serving specific markets. This regulatory burden has increased substantially since the 2008 financial crisis primarily as a result of regulations from the Dodd-Frank legislation.

Even with a lesser regulatory burden, FinTechs are not all-powerful. He points out they are mostly dependent on the secondary market for final loan funding. Importantly, the balance sheets of depository institutions gives them more flexibility in certain products such as jumbo loans. Should the secondary markets become more selective or volatile, then the banks traditional funding advantages may reassert themselves.

Credit union takeaways

For both traditional and new entrants in the consumer and small business lending markets, the key factor to long term growth and resilience is access to liquidity. Generally depositor relationships are more stable and often less expensive than wholesale and secondary market reliance. Convenience, not price, seems to be the primary reason FinTechs disrupt traditional service models. However this advantage in the digital channel is rarely permanent. An all-channel strategy is especially valuable for community institutions.

Credit union relationships based on loyalty and trust are a significant advantage versus competitors focused on transaction capture. For 110 years the cooperative model has followed a second-to-market innovation strategy that has resulted in growth and evolving business models. Cooperative design, aligning with members’ needs, would seem to be a continuing advantage regardless of where disruption may occur.

In an era when the longevity of an S&P 500 company is about two decades, the fact that IBM is still around from its 1911 initial combination of three businesses, raises the question of how it has survived. This is an especially challenging issue in an era of unending technology change in which the Internet has replaced the in-house main frame as the core of back office processing.

IBM began as the Computing, Tabulating & Recording Company (C-T-R). Their first large contract was to provide tabulating equipment for the tabulation and analysis of the 1890 US census.

Thomas Watson Sr. became CEO in 1914 and in the early 1920s the name was changed to International Business Machines (IBM). When he renamed the company, he put a plaque on his New York head office building in the 1930s reading, World Peace through World Trade.

From Machines to Intangibles

Following WWII, IBM became the world leader in providing computer systems for both business and scientific applications. The company continued to excel at inventing and making things (machines). In 1964, IBM revolutionized the industry by bringing out the first comprehensive family of computers (the System/360). This caused many of their competitors to either merge or go bankrupt, leaving IBM in an even more dominant position.

IBM’s historical role as a manufacturer of computer mainframes now makes up only 10% of the company’s revenue, even after 55 years of market dominance. 85% of the company’s revenue is from software and information management.

Its primary service is helping companies manage and transfer data. It is placing itself at the center of the “data economy” an intangible (compared with manufactured goods) network of information and transaction processing vital to every business. Its software and managed services are involved in 87% of the world’s credit card processing and service 90% of top 10 retail firms.

An Exploding Market

Today over 70% of the firm’s revenue is from outside the US. While global trade in goods and services is declining, the “trade” in data transmission and digital information is exploding.

The digital economy is a world economy, not limited by traditional physical boundaries and barriers. One estimate is that over 80 terabytes of information flow into and out of the US every minute of every day, a volume of information equal to eight Libraries of Congress.

The digital revolution is part of the service economy that today dwarfs the manufacturing sector in the US. Operating the “back office” of this growing information and processing activity is how IBM intends to build ongoing success.

The company, over 100 yeas old, was formed at the same the time as the first credit unions were chartered. Are there parallels in IBM’s evolution serving businesses, for what credit unions do for members? What might be vital information management needs in the digital economy that credit unions can provide members? Answering that question and designing services providing relevant data could be the key to the next 100 years of cooperative success with members.

A colleague of mine used to describe human nature thusly: People do what they do. Or the traditional observation that a leopard cannot change its spots.

The benefits of bureaucratic organization are many. Structured processes, experience and expertise, and explicit design. These organizational advantages replaced the arbitrary and unpredictable rule by all powerful leaders in authoritarian regimes. Bureaucracy is an essential component of government activity in a democracy.

But the strength of bureaucracy is also its weakness. It is stable, but rarely innovative; it is predictable, not situational in response; it is self-perpetuating even when the original circumstances may have long ago disappeared.

I was reminded of this bureaucratic paradox  when I received the Weekly National Rates and Rate Cap Report from the FDIC seen below.  After deregulation in the 1980s I thought government got out of the business of setting deposit rates.

No, as shown below, when the next big crisis came in 2009, the FDIC reactivated old habits. It passed a new rule setting the maximum rates that any FDIC insured institution could pay that was deemed to be “less than well capitalized.” Every kind of account at every level of maturity is listed. And the rate caps are reset weekly!

Regulatory responses to new events is to reprise old habits. This is definitely not isolated to the FDIC. The same is true of the NCUA. The difference should be that in a cooperative democratic system, the response should always be driven by what is in the members’ best interest, not the bureaucracy’s instinctive recall based on self-preservation.

Weekly National Rates and Rate Caps – Weekly Update

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On May 29, 2009, the FDIC Board of Directors approved a final rule making certain revisions to the interest rate restrictions applicable to less than well capitalized institutions under Part 337.6 of the FDIC Rules and Regulations. The final rule redefined the “national rate” as a simple average of rates paid by U.S. depository institutions as calculated by the FDIC. The national rates and rate caps for various deposit maturities and sizes are provided below.

For more information. see Financial Institution Letter FIL-25-2009

Weekly rate cap information for the week of June 3, 2019.

How do venture capitalists, or more importantly designers of new products, determine market interest in their idea or innovation—without going broke?

At the April FDIC sponsored FinTech conference, one approach to this learning was presented. The website Product Hunt was created in November 2013.  Users submit products which are listed linearly (https://www.producthunt.com/newest)  every day.

These designs are voted upon by viewers with those ideas receiving the most votes rising to the top.

Since launch the site has listed over 40,000 products in categories such as mobile apps, hardware, games, books, podcasts.

The voting is simple and transparent.  It provides entrepreneurs and investors an initial public reaction.  The voting and comments provide signals for both investors and founders about potential market demand.

The FDIC presentation focused on the topic of voter bias and whether a simple addition of votes is an accurate means of getting unbiased feedback.  In other words, how representative of market interest are the vote tallies?

The site overwhelms one on first visit. Multiple articles, multiple product concepts, and an endless inventory of articles for anyone thinking of launching a business.

What did impress me was the effort to “democratize” product and business development.  Might this approach have an application for cooperatives? Every year boards and CEOs make business investments with members’ funds.  These include distribution commitments (virtual, mobile, branches, call centers), service options, product, pricing and fee adjustments.

However well researched, the member or market reaction is determined after the investment is made.  Or more likely, the investment is copying what other firms are doing in the market.

Might credit unions seek member reaction as a part of the decision making, design phase to underwrite more effective service and product changes?

As a member, this approach would provide insight into what management is thinking as well as a channel for “grass roots” reaction. Would a Product Hunt application help credit unions identify the most helpful innovations that members value?