By Mark P. Dangelo
Innovative Relevance®
There is still much to be gloomy about across many segments within the U.S.A. — economy, housing, and finance to name just a few. It appears as though many of the ill-conceived ideas and financial innovations that propelled a decade of prosperity are now contributing to high levels of sustained unemployment, regulatory burdens, and historic deficits.
Looking forward, the next 15 months will still hold a vast amount of uncertainty and risk along with a substantial amount of political theatre. Yet, does that mean we do nothing or very little to prepare for the market events and consumer dynamics unfolding all around us? Is the new BAU really a retro BAU as some have projected?
Positively, indications from dozens of industry leaders point to converging themes and series of actions – although the transparency of these trends still has not been fully revealed. However, as clarity is achieved, nearly every organization can benefit from these solidifying trends during the remainder of 2010 and into 2011.
Yet, the evolving trends require the selective integration of financial processes across the spectrum of origination, servicing, and capital markets. No single idea or pure-play event is on the horizon to ensure that market intricacy is wrapped up in a plug-and-play offering or one-stop vendor solution. Such a rudimentary belief system is what materially contributed to misinterpreting systemic risks and creating unsustainable mortgage and finance models.
But trends are funny things and their advantages often multi-faceted. Let us examine just three of the most interesting and misunderstood.
Economic Reality
For an industry, now at one-third its 2007 size, is there life after a three year gutting of businesses and skills? Have we reached the bottom and market capitulation? Can technology be of any use, in a market that will be stagnant for the next 3 to 5 years, beyond efficiencies or traditional process improvements?
First, and to be very blunt, economic theory and those who practice it have demonstrated that their models, forecasts, and suppositions are not good predictors of future reality and the complexity of today’s financial markets. Moving forward, the discipline and rigor of economics will be called into question, resulting in organizations increasing their own business intelligence capabilities in an effort to control and predict future outcomes, risks, and liabilities. As some economists have indicated, economic disciplines need to undergo a rigorous self-examination if they are to regain public trust.
This void of confidence has spawned an unintended consequence. It has created a demand for internally vetted intelligence and predictive technology across several primary data taxonomies – consumer channels and behaviors, regulatory compliance, and (bespoke) markets directly linked to dependent products. Analytics will tie many of the interrelated entities and elements together via multi-dimensional or layered dashboards.
Since data volumes are doubling every 18 months across the enterprise, and supported by increased access to sophisticated mining tools, it is easy to understand why budgets surrounding the need for intelligence needs are projected to grow at over 25% per year.
The provisioning needed to support these management defined requirements is also changing. Considering a backdrop of nearly 10% unemployment now projected until 2012, while facing a hostile consumer base, offshore outsourcing for these knowledge process areas may have reached its peak. The mix of how to deliver intelligence (e.g., operational, competitive, consumer, financial, regulatory, risks, et al) to the organization has likely been permanently altered to concentrate on inward confidence.
Capital Markets
Capital markets are being reformed to deliver sustainable ABS products spurred on by pending SEC revisions, EC Article 122a, Basel III, and the clearing of derivatives with the Dodd-Frank regulations.
The need for resurgence of the private ABS market, standing at just over 40% or $350 billion of their 2007, size is clear. Without liquid and transparent private capital markets, lending cannot be sustained simply by increasing deposit base or via government guarantees. In addition, the demand and importance of straight-through processing (leading directly into the capital instruments themselves) with rigorous data integrity and standards cannot be underestimated.
Originators who design their loan processing and vetting from the start with private capital markets as the recipient, will benefit with improved basis point margins, reduced risks, and ensured regulatory compliance (e.g., as proposed for updated EDGAR filings surrounding REG AB revisions).
Why is this important now? Just ask RBS with their issuance of $4.7 billion in MBS’s last week, or banks across the globe, as they rapidly staff for an anticipated rebirth of the private ABS and MBS markets.
Yes, the first iteration of securitization is dead – killed by easy money, lax lending, speculation, and complex, derivative injected, layered securities. A second iteration has already begun for private ABS as demonstrated by the new market leaders like J.P. Morgan.
This trend will accelerate in 2011 spurred on by pending dispositions of the GSE’s. Without a functioning private securitization market, the workouts for the struggling GSE’s will never be politically achieved – nor financially sustainable.
Security
As noted by Maslow back in 1943, security and safety is principal to acceptable human behavior. This need is transferable into the demand by customers and consumers to be confident, absolutely confident, that the most private information, scores, ratings, and profiles are 100% secure.
Whereas data storage protection has increased markedly over the last three years, it is the vulnerability of the networks that is gaining increased importance and scrutiny. Examples of this include HP’s recent acquisition of ArcSight and Intel’s acquisition of McAfee – all at very significant premiums to market valuations.
This increased focus on the network and accessibility has been a direct result of mobile proliferation and sophistication of devices (e.g., iPad, BlackBerry, tablet computers). This changing technology-induced behavior has resulted in a complex layering of network points of entry and protections not just for consumer applications, but for enterprise offerings which start at the consumer and touching brokers, agents, loan officers, appraisers, vendors, servicers, and loss mitigation specialists.
To back up this trend is a one-third increase in budgets projected for FSI organizations specifically targeting network and mobile security over the next year alone. Factor in regulatory and compliance demands for data – from its originating source to its eventual disposal – and the budgetary impacts are even greater.
Analogous to the securitization markets being reset (i.e., waiting for “Securitization 2.0”), security is about to take a series of new twists and turns that will govern the next decade of IT skills, business offerings, and consumer protection.
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What is very clear is the dichotomy of beliefs and value systems that still must be reconciled in the face of polarized consumers and regulatory vigor. Stated another way, each market participant believes that the “new normal” will be similar to their accepted models of operation.
Still, trends frequently mutate as a result of market results and consumer behavior, while spinning a story – or a nightmare – regardless of principles and theories put in place to anticipate them or explain them away.
As noted recently in the Financial Times, the demand for housing by the consumer actually peaked six years before the market correction regarding ownership rates and housing prices. Yet, transactional technology focused on a need for greater scale and throughput dominated the industry and their back-office operations.
It is not atypical for market actions to be out-of-phase against the trends. Frequently trends were left unnoticed or discarded due to the fact they did not meet the expectations of those who needed to listen.
It is human nature to dismiss contradictory data when it is outside our traditional models. It is easy to dismiss ideas with foreign words or rebuke the trends as irrelevant because they appear foreign – beyond traditional understanding. Retrospectively, hasn’t that already been tried, and failed?
Regardless of beliefs – change will happen and retro Luddites will fail. So, who will be listening or adapting to market, consumer, and financial trends? Who will fail to recognize the signals too late – when the end is near? Who will heed the calls and profit from change?