New Product Implementation

Sections in this Topic

Overview
Due Diligence/Feasibility
Financial Projections/Risk Analysis
Liquidity Considerations
Legal Opinions
Compliance Considerations
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Overview

Mature minority banks operating in a competitive market will need to consider how and when to introduce new products. This consideration will be even more important if the bank operates in areas where there is a large unbanked population or a large concentration of ethnic characteristics. As described in this section, a mature bank has numerous factors to consider before implementing a new product.

Due Diligence/Feasibility

Since new products require time and expense to implement, the first step is to ensure that the product is viable. This process entails developing a clear description of the product and determining its competitive advantage by identifying the type of customer that would benefit from the product to ensure compatibility with other products and services and alignment with the bank's overall mission and strategy. For instance, a bank that targets medium to small domestic businesses would be ill-served in rolling out a product appropriate for a large international company.

Recognizing that banking products generally require high levels of customer interface and advertising, marketing requirements associated with the product should also be considered. Existing customers are likely to be the first to become aware of and use a new product. This could actually have a negative impact on earnings, depending on the relative profitability of each product and the number of existing customers who merely substitute the new product offering for an older one. This is particularly important for mature banks that may have a diverse product line.

Financial Projections/Risk Analysis

A risk/reward analysis is important to evaluate the long-term benefit of a new product. Financial projections are a starting point, but intangible benefits must also be considered. For instance, offering trust services can be a loss leader but can enable a bank to market itself as a full-service bank and presents opportunities for cross-selling.

Care must be taken to ensure that a bank does not overly rely on these "soft" benefits, and it is important that each new product be profitable in its own right. Finally, the risks should be carefully considered to ensure that they are commensurate with the rewards. Many banks have profitably expanded a loan portfolio profitably with a particular product or market segment, only to lose those gains and more when the loans matured and failed to perform and were charged-off.

Liquidity Considerations

Since funding mismatches can expose the bank to interest-rate risk, the impact on a bank's asset/liability mix must be considered. Mature banks may be better prepared to develop and offer new products, but new loan products need to be funded, and fee-based services often require capital investment. Therefore, it is important to consider how new products will be supported both initially and on a continuing basis.

Legal Opinions

Mature banks may be positioned to take advantage of the Financial Modernization Act of 1999 , which authorizes banking organizations to offer a full range of financial products. Many banks, however, continue to offer such financial products and services through third-party networking arrangements. Under third-party arrangements, banks can refer their customers to securities and insurance entities in return for a fee. This enables banks to offer a full range of financial services while avoiding the additional regulatory burden and infrastructure expense inherent to other industries. This is an option for mature MOIs that do not have the economies of scale to offer a full range of services or that already have a full range of services but seek to add another product without the full overhead costs associated with the new product.

Compliance Considerations

Regardless of a bank's stage of development, the bank should conduct a review to ensure that new products are in compliance with consumer laws and regulations. This would include making required disclosures and safeguarding customer information. Review Consumer Compliance for additional information.