The banking industry is at an inflection point. Mounting compliance and requirements costs compounded by shrinking fees and evolving consumer preferences are impacting profitability and restricting growth. The numbers tell the story best. [paragraph] Since 2011, Congress has introduced a staggering 173 bills focused on bank regulation, according to GovTrack.us, a project of Washington, D.C.-based Civic Impulse LLC. The Durbin Amendment alone is projected to drive down revenue by $6 billion to $7 billion, according to Standard & Poor's (S&P), New York, while overdraft restrictions are forcing a 14 percent fee decline as compared with 2009, reports Moebs Services, Lake Bluff, Illinois. [paragraph] With banks struggling to manage dwindling net interest margins and rising efficiency ratios, operationally streamlined new competitors (less encumbered by regulatory pressures and expenses) are aggressively honing in on market share across core businesses from payments to mortgage servicing.
In just one compelling example, a Web-based retailer currently has 128 million active accounts in 193 markets and 25 currencies around the world and comprises 1.1 percent of global payments market share, reports Investor.com--and that number could surge to 2.8 percent by 2022, propelling deal dollars to $939 billion from the current $150 billion.
Pinned under the weight of these intersecting dynamics and new cost structure, return on equity (ROE) for banks has flattened to below 10 percent, according to Charlottesville, Virginia-based SNL Financial LC--significantly lower than its pre-2005 15 percent levels, despite a modest uptick during the last few years. And the capital markets are responding.
As skepticism regarding current bank business models reaches high tide, and with returns slipping below what many consider an acceptable threshold, investors are insisting on swift and substantial operational improvements. Within this overarching landscape, the mortgage industry is facing its own unique challenges.
As customer demand for credit continues contracting (residential loans declined at a 3 percent compound annual growth rate [CAGR] over the last five years), nearly 400 mortgage lenders have closed their doors since 2006, according to Federal Deposit Insurance Corporation (FDIC) data.
Loans are expected to decrease by almost SO percent from $1.75 trillion originated in 2012 to $1.5 trillion in 2013 and barely $1 trillion in 2014, according to PricewaterhouseCoopers (PwC) analysis.
Despite signs of slow improvement in the housing indicators, the industry is expected to continue churning as consumer credit demand is not expected to return to pre-crisis levels until 2020.
To complicate matters further, lenders are now subject to a litany of costly new regulatory requirements stemming from recent settlements, consent orders and Consumer Financial Protection Bureau (CFPB) servicing rules taking effect in January 2014.
And as with other aspects of commercial bank operations, seizing upon the weakened state of the industry, new entrants are clamoring for a piece of the pie. At the end of first-quarter 2013, the seven largest nonbank mortgage servicers accounted for $1.4 trillion of the $10 trillion mortgage servicing market--a 69 percent increase in just three months, reported a June 10, 2013, Reuters story.
Exempt from capital requirements that burden banks and focused on servicing as a core businesses, independent mortgage servicers are well situated to invest in the systems and staff needed to deliver efficient and profitable transactions.
Extraordinary times call for extraordinary measures
Absent a major economic turnaround, at current levels, recapturing historic profitability levels of 15 percent ROE would require banks to reduce their efficiency ratio by 11 percent, according to PwC estimates. This level of...