Rick Morgan, news editor at Bank Innovation

Hello, everyone and welcome to this special preview episode of the new Bank Innovation Premium Plus Pulse of the Industry product. I’m Rick Morgan, a news editor at Bank Innovation and your host for today’s webinar. The bank innovation team is proud to be able to deliver actionable information and insights through our premier events presented regularly throughout the year. But we don’t want the conversation to end at the close of the event. In the coming months, we will roll out the full bank innovation Premium Plus product, which encompasses registration to all our live events, exclusive monthly webinars like this one, access to an archive of bi event recordings and a premium subscription to bank innovation dotnet each monthly webinar is designed to give you keen insights and into crucial industry trends and developments and be a reference for you as you move your business forward. Stay tuned for more information on the full launch of the bank innovation. Premium Plus service. It is now my pleasure to welcome our guest speaker Pam Perdue, Executive Vice President and Chief regulatory Officer of Continuity, Pam leads the company’s regulations regulatory Operations Center team, and acts as the company’s chief evangelist in the marketplace. Since its inception in 2011. The ROC has provided clients and Industry analysts alike with compliance economic data and forecasting, as well as written analysis and implementation recommendations for over 2000 regulatory rulemakings and answered more than 30,000 compliance questions from continuity clients. She also spent about three years as a senior examiner with the Federal Reserve Bank of Kansas City. Continuity, meanwhile, provides regulatory technology solutions that automate risk and compliance management for the financial services industry. By combining regulatory expertise with cloud technology continuity reduces the regulatory burden, and mitigates risks. Continuity solutions are designed to automate all aspects of risk and compliance Management, including interpretation of regulatory issuances, intuitive task delegation, risk assessment and vendor management. The company’s clients include Apple Bank, Affinity Credit Union and First National Bank of Germantown. That was a very lengthy introduction, Pam, thanks for joining us. And why don’t you go ahead and take it away.

Pam Perdue, chief regulatory officer at Continuity

Thank you very much, Rick. It’s my pleasure to be here. I’m going to share my screen because I do have a few slides that I think will be interesting. And then we’ll move into more of a discussion mode because I know there’s a lot on the minds of everybody out there. So, um, so this is me, My nickname is Reg Tech Diva, I like to say to people and this is me before the pandemic. I can’t remember the date of my last grooming process outside of my home. So it’s, it’s been an interesting time for all of us. I have been at this a while. I’ve been at a number of different FinTech and reg tech companies and, and I’m happy to share with this audience what it is, that is happening in the environment. So we’ll talk a little bit about not just the pandemic, but really more of the aftermath of the pandemic. So what’s the environment like right now? What kind of an operating context? Are we going to be moving into both on the banking side of the industry, but as well, those of us who are FinTech and reg tech providers, I think that it is, it has been overstated, but really can’t be that we have never been here before. We haven’t been in a space in time, where we had to make so many real time decisions that impacted not just our survival, but the survival of those who depend on us as an industry. So that’s been interesting. I want to shed some light on some of the changing concerns at financial institutions. We just got back from several virtual industry conferences where bankers were sharing their fears, their nightmares and then also sharing with us some positive things that have come out of the pandemic and their need to respond to it. But we’ll talk about mostly where they see the economy going in the months ahead and how they think their operations are going to be impacted by those developments. I also want to spend a few minutes of our short time together talking about the imperatives of that audience when they’re selecting vendors, and especially if they’ve got to do that under an accelerated timetable. So you’re looking for something really quickly, we, for example, about 20% of our customer base, switched to digital adoption, just at the beginning of the pandemic. So a lot of times when we’re over here on the tech side, we go, Oh, my gosh, what do you mean, they just switch like that? What does that mean? But there is still quite a fair number of institutions out there who were still operating in a very traditional mode so well, then we’re going to compare and contrast how larger institutions more sophisticated progressive, you know, Better capitalised are responding compared to smaller institutions that really have gone into more of a hunker down kind of mode. And then we’ll spend a little time as well, on what many are referring to as the Yes. And mindset, which in contrast to the Yes, but it just opens a whole new world of possibilities. And so how are we interacting with regulators with prospective clients and existing clients? With that kind of a mindset toward what’s possible, rather than being focused on what doesn’t seem possible or practical? Does that sound like a good set of discussion points for your audience? Right,

Rick Morgan   

That sounds like a great set of discussion points. I think that’ll be very interesting to all of us.

Pam Perdue

Great. Well, I know that a lot of folks haven’t spent the years and years and years that we have at continuity focusing on this. So I do want to share what has happened in the market that for though it looks kind of grim. When you only see it from this angle, right? It’s five times the normal velocity of new regulation and a lot of those were pandemic response, but many others are pandemic economic Aftermath response. So whether you’re talking about the very practical programs, like the Paycheck Protection Program, which has been riddled with deployment challenges and other operational execution challenges, but nonetheless, was in a needed Lifeline, all the way through to things like relaxing appraisal standards in bank so virtually every part of the operation was affected up to it, including HR, it right every area of the financial institution was impacted. So that led to five times the normal vault velocity four times the normal volume of these things. So we took our data, we went back in our time machine and said When else in history has this happened? Well, if we go all the way back to those of us just actors who were just being launched into the industry during this S&L crisis. That was the first time we really saw in our generation of people who are still living and participating in these things. We saw a meltdown of sorts, but it was confined to a single sector. We saw Y2k concerns. For those of you who might not have been born yet, that was a time when everybody was afraid that the computers turning over to the year 2000, when computers were invented in the 70s, and 80s. They didn’t think about the fact that the year 2000 was going to come and we thought that there was going to be this catastrophic meltdown of anything that was computerized, even though we weathered that okay, and it was much ado about nothing, a lot of that had to do with the preparation that led into it that made it about nothing. But that was still also confined to anything that you were doing that had a technological element to it. So now as the technology shifts, then we have this big blip, probably still fresh in the minds of anyone alive. At that time, and always will be emblazoned on our memories, the 9/11 incident, and how that transformed every industry simultaneously so that the 9/11 aftermath is the closest thing really, that we’ve seen to this kind of scenario that we’re in today, the mortgage meltdown, even though it had a touch point effects on other parts of our industry, it was still primarily confined to one sector of the economy. So here we find ourselves with COVID-19. Here’s the good news. And this, I don’t say this in an ambulance chaser kind of way, I say it to mean for those of us who can innovate and innovate responsively and responsibly, so we got to be responsive and responsible and take advantage of these things. So after every one of these peak periods, there is a resiliency that then results in new technology coming forward. So we see the crisis. We see a regulatory response to that crisis. And then out of that response is born other opportunities in the industry. So, you see here, this trajectory of we had that changed how we made loans. We had gramm Leach-Bliley that told us how we ought to keep things private and confidential and safeguard information patriot how we know and deal with our customers, Dodd-Frank, this whole its whole own body of work the rules around trid and, and qualified mortgages and all of these regulatory hurdles that you have to clear in order to make a mortgage loan. And now who knows what else is going to come from the CARES Act, I think that we can pretty effectively predict that most of this Aftermath is going to focus on preparedness, resiliency, security, things that we were already thinking about. And I think we’re going to have an overlay, like a Dodd-Frank plus, because I think our real problems out of this crisis. We’re going to center around commercial real estate and the significant impacts it’s going to have, as people decide not to gather in those places, as smaller businesses find themselves deeper and deeper in trouble. The longer that the rebound takes, the more distressed that sector is going to become. So we’ve got to keep our eye out on that. The other thing I think that our friends in FinTech need to understand is that there really hasn’t been any deregulation effect. We’ve already had more regulations this quarter, excuse me up to and including this quarter than we had in all of last year. So the regulators are not going to stop enforcing the rules. But I think that what you’re going to see from them is a more understanding attitude of things that happened during the immediate response period, maybe the first 60 days. To 180 days post pandemic, and we saw that we saw a trend in the decline in enforcement actions. But even though you as a FinTech might not be regulated, both the financial institutions are and they are also beholden to their customers. So I think you’re going to see also as people fall into as individuals, whether that’s a business or consumer, as they fall into greater economic distress themselves, they may turn to some of these avenues such as complaints, lawsuits, right? Social media, trying to really smear the reputations of certain companies. I think that that desperation will also result in an increase in those kinds of activities. So that’s what I wanted to lay as the foundation for our conversation, but I know that you’ve got a few questions that your audience is going to be interested in as well.

Rick Morgan

Sure, maybe we can exit out of the presentation here and just go back to gallery mode. And we can dive into some questions that. So that was a, you know, a very interesting way to lay it out. And you know, I think I’ll start with my main question, which was a question mark on your slide. And I know you mentioned commercial real estate is something that we should be keeping an eye on. But in terms of the cares act and other regulations that could result from the covid 19 pandemic? I mean, what do you see as some of the areas where regulations are going to really start to be a major factor? I mean, what are regulators going to have their eye on? And what do you think could be some lasting change that comes out of this?

Pam Perdue

I think, unfortunately, we’re going to see one more time a revisiting of the capital standards, I do think that we’re not going to have a choice in that regard. That you know, the pronouncements came out to say we’re going to relax these temporarily and so forth. Apple people are allowed to refer to the end of 2019 or mid 2020 figures in their call reporting to determine certain ratios and levels without getting into too much of an accounting deep dive there. But I think that, that the capital buffers, especially for the regional and below sized institutions, the capital buffers having been relaxed, I think they’re going to have to codify that into something more than temporary relief as we move ourselves through the, you know, the economic aftermath. I think there will be a fair amount of more prescriptive regulation around business continuity, disaster recovery, and those planning elements because I think they learned the regulator’s learned during this period, that many fewer institutions than they thought were actually prepared to make a fast pivot. And I think that the combination of the pandemic And the civil unrest. And now we’re seeing a lot of weather related impacts in many areas of the country, right? The climate is not cooperating with us either as humans, of course. And so I think that having those things be guidelines rather than prescriptions is something that I think the agencies are taking note of. I think there will also be some additional cyber regulation that’s more standardized across the country. Again, because it’s been guidance, rather than a you must have some of the states have had to step in New York and California being prime examples. They’ve had to step in and actually codify and regulate behaviors around those issues. So I think that we’ll see that trend trickle up, if you will, to the federal level.

Rick Morgan 

You mentioned that they might be a little bit forgiving in terms of what happened 60 to 180 days directly after the pandemic really started to take hold. But just in a bigger picture perspective. You know, this is a rapidly changing time. things, you know, people are trying to innovate to keep up and you know that the pace is just insane. How does a financial institution or a FinTech or whomever? Or how do they, you know, balance this need to both innovate quickly and also the regulatory standards?

Pam Perdue

The great news is that those who are doing it well have perfected a method for doing it. So I think, when you’re trying to innovate quickly in this kind of environment, whether that’s build a new product or build a new process, the key that you start off with is how do I know which regulations affect this thing that I’m thinking about? And so most operators, if they’re using modern technology, they’ve already found a way to map what they plan to what the regulations are that affect it. So continuity and many others. We’ve got these mapping processes where you go, Okay, this is the product, these 10 regs affected. We know when they change, so So that methodology of knowing ahead of time what the constraints are, but not over engineering, the process response, that’s the other real key to innovation is do some iterations of it, see how it works first, because too often in the traditional method, people start with a very long analysis of what all the potential outcomes are, and with no disrespect to our friends who are attorneys, and who operate in this traditional way. That’s a very slow, risk averse way to problem solve, I think the more modern way, which most technologists are familiar with is, let’s try it out. First, let’s see if our initial hypotheses can be borne out. And we’ve got a proof of concept and we have some data customers and then let’s, let’s now take that iteration and now let’s apply that real deep domain expertise to make sure we didn’t overlook anything. But why over engineer on The front end of risk assessing if you get through all of these iterations, and then there is no proof of concept or it doesn’t work the way you thought. So I think people are shifting that, that mentality to say, let’s give it some leeway, and see how it really performs in the marketplace. I think that’s one technique. I think the other technique is making sure that you’ve got a systematic way to interpret new regulatory requirements. So as you’ve mapped those things, you should have a way of knowing when something new comes out in the Federal Register or something is published by an agency, you should be able to turn exactly to the products and services that you have that are affected. And if you’ve got the right technology underpinnings to that process, you can do that fast. And you can get that in the minds and in front of the people who are the users of the products or the designers of the products, whichever side you’re on. So I think that if people are deploying that type of an approach, whether it’s homegrown technology that they built inside their bank or they’re relying on third party partners. I think that that allows you to deal with the volume and the velocity. And yeah, I would just one more thing. Regulators is make sure that you’re documenting your decision points along the way, because they can tolerate you making mistakes, as long as you’re able to identify. That’s where the mistake occurred, and we’re not going to repeat that mistake.

Rick Morgan 

In terms of what you said about being able to sort of know when the rules are going to change or like, what’s up, what’s on the docket in terms of when something’s going to get adjusted? How would an institution go about having sort of a systematic approach to that? I mean, is it having someone at the company or the bank or whatever that keeps an eye on that? Would it be going through a third party firm? And what are some of the ways that that these institutions can really make sure that they are keeping an eye on these regulations as they are due for change or do for tweaking or what have you

Pam Perdue

We see it done all kinds of different ways. So there’s their traditional method where there’s a human body in their building, that human body goes and scans the landscape. Maybe they subscribe to RSS feeds, they get newsletters, they go to training, they rely on their trade association. So that’s one method, obviously, probably the least, the least reliable because there’s a high degree of potential human failure that comes in that way. Then there are partners like us and others, we import the data from the federal feeds, we add some analysis to it. We distribute it out to our customers over a platform that they can configure and tailor to what their specific needs are, their product sets, their service offerings and what kind of staff they have. And then at a more at one level above that in larger institutions, you sometimes see a lot of experimentation with AI and machine learning to try to scan the entire landscape to say not just These data points that we have intentionally imported, but what’s coming from the whole landscape. And so a lot of the bigger GRC solutions or more globally focused firms will pull in all the data. And then they give that to a human to then screen through and filter and process as they will. So for global organizations, it takes a little different bent. But those are the most common and I would say, you know, all of them require some element of human and technology hybrid.

Rick Morgan  

Yeah, absolutely. And then the other thing I wanted to ask was, you know, it’s been a tumultuous, you know, year so far, what over the past six months has really surprised you the most outside of the obvious, what things that have happened in this pandemic, that that really kind of stood out to you?

Pam Perdue

One that shocked me that I heard about the other day was from a customer who explained that they’re consumer complaint volume had skyrocketed during the pandemic. And it wasn’t because of shortcomings on their part. The complaints were around things you wouldn’t expect, like you didn’t keep the branch open long enough or changing your hours really impacted like some of the weird traditional things that that we wouldn’t have thought would have been an issue. I was surprised at how smoothly the transition to remote work went for most financial institutions where I thought that they were going to be highly resistant in some certain pockets. That was not the case. People were responsive to it. And universally, everybody said that their IT departments were responsive and had already planned and had done tabletop testing. And in fact, a lot of them repeated their tabletop test early in January when news was coming, you know, from Asia and other sectors that meant it might have been headed our way So that was a pleasant surprise. not so pleasant a surprise front, I would say there are. I was shocked to see how few of the marketplace lenders and other and other VC backed lenders really didn’t have the sustainability that that we all had hoped they had. And then and that I think, in many instances, a lot of the general public and by way of their consumers thought that they had so that was an unpleasant surprise to see so many of them start to struggle so quickly. And that really peeled the veneer off a little bit of you know, that VC model where it’s really about getting to your next funding event, right and growing the company in the right way, but maintaining the balance sheet in a certain way. Yeah. That leads to growth. And when that screeching halt comes to that growth as it did in this instance, I think that was an unpleasant surprise for most of us in space.

Rick Morgan

Yeah, of course. I mean, when you say are you mentioning, are you referencing like the some of the SMB FinTech lenders that have struggled? OnDeck and Kabbage?

Pam Perdue

Yeah, without naming names, because I know Yeah, of course. They’re all good people, right? But yes, if the business model was around, or you know, are you even see another example of that in OnDeck where they had a great banking partner, and when that banking partner exited, it had to change their whole business model dynamic. So I think a good reminder to all of us. You know, diversification is important. It’s why banks for so long have had prohibitions against concentrations of credit because As the banking supervisors say, you know, if something goes belly up in this one sector, we can’t have the whole bank fail. And so I think that it exposed some of the chinks in the armor of that type of a business model. And many of those belief sets might be forever changed.

Rick Morgan 

Yeah, no, it’s certainly been kind of a very tough thing to watch, you know, seeing how a lot of those businesses have struggled. So, yeah, that is definitely something that

Pam Perdue 

because they were born at a time that they hadn’t weathered a bunch of cycles, right? So they didn’t have the same amount of resiliency built into the overall business planning, and whether they knew and could have done better if they had different kind of investor support or what have you. That that remains to be seen. But the fact of the matter was their business had not been exposed to a wide variety of economic conditions. And so it’s inevitable. As we harken back to that chart from the beginning. You know, there are going to be these roller coaster rides when you’ve been at it long enough. 

Rick Morgan

Yeah, some of the analysts that I’ve spoken to in the past have mentioned, you know, they, a lot of those online lenders have done such a good job of creating a frictionless process, but, you know, doing a lot of the credit analysis and a lot of the risk mitigation and, you know, balancing the portfolio is really what’s going to matter a lot during a downturn. And if you just focus all your time on making it easy to get a loan, then it’s, it could potentially backfire during a recession. So yeah, it’s been a tough thing to watch, but certainly something that will keep an eye on for sure. Pam, this was a lot of fun. I really appreciate you taking time to join us. We’re really excited to have you on the episode here today, we look forward to following the developments over a continuity and seeing what you guys are up to over there.

Pam Perdue

Thank you, Rick. It’s always My pleasure. And I look forward to our next opportunity to chat.

Rick Morgan

Yeah, we’ll do this again soon, I’m sure. And I want to thank all of our readers for joining us on this preview episode of Premium Plus Pulse of the Industry. With this video, you will see a full transcript of the conversation. We hope you enjoy this Premium Plus event. Please let us know how he did by emailing us at info at finainews.com. Or you can reach out to us via one of our social channels, LinkedIn, Twitter. We’re excited to share more information on the Bank Innovation Premium Plus product soon. Pam. Thanks again.

Pam Perdue

Have a great day. Thank you.