Where’s the Savings?

With the transitioning from traditional to electronic banking, one might ask where the savings are in my total banking relationship?

While the overhead costs of electronic banking versus that of traditional banking  (branches, checks, cash, etc.) have made banks more efficient and lowered transaction fees, the costs of complying with newly imposed federal regulations have added new levels of overhead requirements—on banks of all sizes.

The costs range from $3 to $4 billion for the top-tier banks, $250+ million for the big regional banks, and $200,000 to $1+ million a year for small community banks. And these are conservative estimates.

As we discussed in past blogs, the heavy burden of new regulations from the Dodd-Frank Wall Street Reform Act, the Durbin Amendment, and Basel III—coupled with the potential for errors due to a broad interpretation of so many regulations—banks have gone to extremes to create elaborate internal mechanisms to protect themselves from the risk of violations and facing heavy fines.

A couple months ago I talked to the president of a community bank with ten branches. Historically, they had one regulator conduct a single onsite audit visit each year. In 2015, with the same level of assets and branches, this bank was greeted with no less than 17 regulators for the same manual type of audit. The additional annual cost to this community bank in new expenses to manage such audit visits and meet new federal standards is over $200,000.

As a result of these added costs we see a continuing trend: the merging of community banks to create efficiencies in managing new levels in compliance requirements.

I do believe this is a swinging pendulum. Right now banks of all sizes are becoming very cautious and even paranoid to avoid violations or heavy fines. We’ve said it before in our blogs, federal regulations have created a new banking environment for both the banks and their customers. The pendulum will eventually find a balance between safety and efficiency, and that will lead to lower costs for banks and the public—unless new and more onerous regulations arise that will add to banks’ overhead burden.

Two points to remember. First, the increasing costs on your banking relationships are not the fault of your banks, but rather due to their increased overhead to comply with new federal regulations and audits. Second, you can save on your bank fees by switching from standard checks* to electronic banking which costs mere pennies. This may seem like a small step, but it’s one in the right direction—and it will produce immediate savings.

*Did you know the average cost to write, process, and mail a check is $1.44+ a piece!?

First, Do No Harm

First, Do No Harm

“First, Do No Harm” sums up the Hippocratic Oath, the one historically taken by physicians to ensure their patients’ overall health. Fulfilling this oath requires doctors to be mostly proactive yet sometimes be purposely inactive. Knowing that harm could be caused by either taking proactive steps or taking no action is part of what makes a physician’s job so difficult. And challenging.

Does this apply at all to today’s financial and regulatory environment? We believe it does.

Having fiduciary responsibilities mean you must first do no harm. The term used most commonly in operating Investment Policy Statements (IPS) is safety. According to the Merriam-Webster Dictionary, one definition of safety is “the condition of being safe from undergoing or causing hurt, injury, or loss.” To provide safety requires people in appropriate positions to know when to be proactive and when to be purposely inactive. It’s key that one must take great care that inaction is not causing harm.

How can inaction cause harm you may ask?

It happens when the real value of your deposits are not being realized. The Investment Policy Statement provides safety by listing the allowable investment vehicles. Typically the IPS will also state that cash flow analysis (to determine appropriate liquidity) be undertaken. Armed with these data, one is better positioned to take action and maximize the return on available dollars. Doing nothing ensures a negligible return, requiring taxpayers to carry a higher burden than necessary or taking budget cuts that could otherwise be avoided.

The financial services environment has changed drastically over the past few years. This means that you must be proactive in recognizing and responding to the new regulations the banks are under. The banks are not the only player in today’s financial marketplace; other investment options are available to you.

Now is time to proactively use your Investment Policy Statement to maximize the return on your dollars—and keep your budget and taxpayers safe.

We hope to see you at some upcoming events:
GFOA of South Carolina 2016 Spring Conference in May
GFOA Annual Conference of The United States in Canada in May

Have any questions or comments for the author? Reach out below!

Peter Forsgren
COO and Co-Founder