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If Dodd-Frank is flawed, innovation can make it better

July 22, 2014
By Charles Ellison

While it’s been four long years since the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed and signed into law, debate over its impact and future is ongoing. The jury is still out on whether the not the law also known popularly as the Wall Street Reform Act actually did just that. Nicknamed “Dodd-Frank” after a Senator, Chris Dodd (D-CT), and a House member, Barney Frank (D-MA), who conveniently retired shortly thereafter, the law is considered one of the more controversial and widely panned attempts to overhaul the largest financial services sector on the planet. 

A recent two-day conference of mostly banking industry experts and wonks on the on the state of Dodd-Frank put uncertainty over the law on full display. Questions abound regarding its mission and purpose, how it has performed and whether it’s truly achieved what it was crafted to do.

For certain, one consistent bug that nags sector practitioners is that the frantic race to build massive IT infrastructure and retain skilled IT talent to comply with the law is eating away at the spread, or the spot between the money made and the business unit money spent. “Institutions feel squeezed,” as one anonymous industry academic put it. “They feel, they see incredibly shrinking spreads and less budget as they are forced to spend more to comply more.”

This explains the Dodd-Frank hate: Financial service institutions feel they’re spending way too much on technology–just to comply. That nervousness could very well translate into lesser spend on compliance-related IT in the foreseeable future. Not only do many banking institutions describe the law as overly invasive and onerous, critics of it argue it has somehow reshaped or altered banks into something much different than their former selves. As one observer put it, “Banks aren’t really banks anymore.” Instead, some observers argue banks are bits of what they were before Dodd-Frank, with institutions unable to offer the same products and services while so-called “shadow banks” are filling old banking roles.

Still, in the broader industry attempt to clarify key pieces of the law and to apply a regulatory reset to the market, institutions recognize the critical need to encourage innovation in the financial services industry. Some analysts see it that way, as well. Forrester’s Renee Murphy sees both an opportunity for financial services firms to up their customer experience game while creating new opportunities for vendors that can enhance complaint and consumer response systems. “Customer complaint management does more than reduce an organization's regulatory exposure,” says Murphy in a July research note. “It gives companies a powerful data source to improve their business.”

“Use the information you glean from customers to reduce issues that hurt customer satisfaction, track reaction to new and existing products, and gauge marketing effectiveness,” adds Murphy.

Murphy is more than likely plugged into the tense banking sector conversation griping over Dodd-Frank. Her take: Embrace it. Hidden in what some industry practitioners describe as the deep, dark recesses of this scary regulatory world lies an opportunity to actually grow the sector. If banks, for example, are worried about emerging shadow banking, peer-to-peer (P2P) lending and social investing trends making them obsolete, compliance efforts could be flipped into a new channel to win over new customers—or win back old ones. Innovation doesn’t have to be a cost. It should be viewed as not only a way to offset what many perceive as the rigid Dodd-Frank regulatory scheme, but to replace various elements of it as a preferred economic growth model.

Incidentally, innovation is also being viewed by financial service sector experts as the pathway toward the eventual reformation and possible repeal of Dodd-Frank in the future. If technology can make institutions more efficient and responsive while mitigating risk, it could persuade policymakers to eliminate what banks see as onerous regulations. That’s a reality many in Congress, mostly Republicans, are salivating towards, including House Financial Services Chair Jeb Hensarling (R-TX) who’s slammed the law as part of an aggressive effort to end it.

Charles Ellison is a senior analyst relations strategist for TEKsystems. He keeps close tabs on changes and public policy shaping the innovation space. He is also a former congressional staffer, senior aide to state and local elected officials and an expert advocacy strategist. You can reach him with questions and comments @twoARguys via Twitter.

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