2011: More Bank Failures Expected

Christie Sciacca, a director with global economic advisory firm LECG, and who spent 13 years at the Federal Deposit Insurance Corp. overseeing bank rescue projects, estimates between 125 and 150 additional banks, thrifts and credit unions will go down before the New Year comes to a close. "I am hoping for some turn around," he says, "but overhang in troubled real estate, unemployment and debt levels are negatives."

The margin of failures between 2011 and 2010, at least, should move in a positive direction -- an upswing from the increased number of failures the U.S. experienced between 2010 and 2009, when bank and credit union failures totaled 171. Sciacca says signs suggest the United States is recovering from the three-year recession, pointing to increased consumer spending and an improving employment rate as indicators.

"Consumers are confident enough to have increased their borrowing a bit," he says. But "the numbers suggest a slow recovery."

What's more, the remaining U.S. financial institutions can expect more regulatory oversight. "There may be increased oversight because of the provisions of Dodd-Frank," Sciacca says. "The oversight will be on both the safety and soundness, and the consumer side."

Changing Consumer Behavior

Those changes in behavior may represent a paradigm shift, from consumption first to saving first. For banks and credit unions, the failures of the last two years may require a banking mind-shift; but that should not be looked upon in a negative light. In fact, industry consolidation may be just what the market needed.

Improved Fraud Detection?

"There's an initial period of confusion and service degradation, as the bank operates two or more fraud management systems in parallel under one brand," Wills says. "The upside, at this point, is that the bank can observe how the different systems perform, keep the best one and discard the others."

From there, the institution is in a much better position to begin integrating systems, "which typically takes from several months to a couple of years," he says. Over the long term, that integration and consolidation will lead to improved fraud management, from prevention and detection to resolution.

To date, systems and channel integration has been challenging for banking institutions, as results from the new The Faces of Fraud Survey prove. Thirty-nine percent of the surveyed institutions say cross-channel fraud accounts for less than 10 percent of all fraud incidents. But industry analysts say cross-channel fraud is a much bigger problem; banks and credit unions just can't see it. "Institutions have a hard time determining when cross-channel fraud actually occurs," says George Tubin, a senior research director for TowerGroup. "They may flag it as check fraud, when it was actually cross-channel fraud."

Criminals are exploiting that inability on the part of institutions to link channels. "They recognize that an institution typically works in a siloed environment," Tubin says. But banks and credit unions are not poised to change that siloed environment anytime soon. According to the survey's findings, 27 percent of banking institutions do not even have teams or defined plans dedicated to cross-channel fraud detection.

This is where the benefits of industry consolidation come in. Enhanced fraud detection and other ancillary needs brought on by consolidation may also open doors for companies in new markets, Sciacca says. "Companies are always looking to be more efficient. One way to do that is to leverage infrastructure by acquiring and merging," he says.

For consumers, Sciacca says, that efficiency and leveraging could lead to banking at a lower cost structure -- something every consumer would appreciate. "If someone can be a lower-cost provider through acquisition, it should, at least to some degree."