Friday, September 18th, 2009
Crowdsourcing for Community Banking
The requirements of regulatory compliance for community banks and credit unions are at an all time high, and getting more rigorous each year. From GLBA, to safety and soundness, each area is requiring increased focus, definition and work. Each area of the organization needs more detailed policies, procedures, check lists and audits. This increase in work, and its required resources, is happening at the precise time that it can least be afforded.
The position of this paper is that to address this problem, we must make the effort of the work a variable in the equation, and not a constant. The regulatory requirements are certainly not in your control; therefore the work that needs to be done is a constant. It is “HOW” the work gets done that must be variable, the effort. Traditionally each organization has used its own folks, manual methods and consultants to address these areas. The problem with attacking the challenge in this way is that there is no leverage. If you need to move enough dirt to plant a single seed you could use a spoon, but if you needed to plant a field of corn the spoon would simply not move enough dirt. The effort required for the work done wouldn’t make sense. The position of this paper is that there is a new way to attack these problems more efficiently, while saving money, but it’s all a question of HOW? This is a paper about trading that spoon of dirt for some real tools, and working the field with less effort.
Wikipedia, a crowdsourced application in itself, defines Crowdsourcing as:
Crowdsourcing is a neologism for the act of taking a task traditionally performed by an employee or contractor, and outsourcing it to an undefined, generally large group of people or community in the form of an open call.
While the term was coined in 2006 by Wired magazine’s Jeff Howe, who later wrote a book with the same title, its origins go back another decade or so. At its core, crowdsourcing is simply cooperative work done by willing, but non-paid participants. You could think of Amish barn raising as crowdsourced construction. Participants willingly engage in the work with no compensation for a handful of reasons. They are expected to; they know that by doing this for others, others will do for them; the camaraderie of it, or in the most typical crowdsourced situations; all of the above.
Most historical examples of crowdsourcing are defined by tight knit groups in one geographical area. At the core of this working is a bond, and common interest. Historically the applications were general; construction or farming, and not specialized, like the design of a cathedral. Due to the nature of populations there simply wouldn’t be enough specialists in a given location to do this. I make this point because it illustrates the importance of the Internet in the rise of specialized crowdsourcing.
To be able to engage modern problems, which frequently mean specialized problems, we needed the ability for specialists to come together easily. They needed to find each other, share information, divide tasks and have a place to work. Because these specialists were not in the same place, their “Place” needed to be virtual. It needed the Internet. With the Internet came a platform for all of this specialized work to be done that was virtually free, universally available, and was itself based on these ideals of shared work.
The largest and most ambitious project to be tackled so far, started as a university project in 1991 by a Finish student named Linus Torvalds. His project is something he called Linux, and it has changed everything.
Linux is a computer operating system just like Microsoft Windows. It is used as the base software to control how the monitor looks, the keyboard, hard disk, everything. What generated this, the largest project of its kind, was need. Folks needed an alternative to Windows that was smaller, faster and easier to use on computers other than very powerful PC’s. This need built a crowdsourcing community of over 100,000 computer programmers for the project. Each person took a relatively small part of the whole, and worked on it in their spare time because they, like the rest of the crowd, needed the whole thing.
Today Linux runs the majority of e-mail servers in the world, web servers, 20% of all cell phones, Tivo tv recorders, TomTom GPS, 85% of the fastest supercomputers in the top 500 list and the entire infrastructure of Google, Amazon and most others worth mentioning. The organization of free labor has eliminated billions of dollars of license revenue from going to Microsoft and Sun Microsystems and in turn, given birth to much of our modern computing environment. This is the power of the crowd.
The Crowd and the Law
While Linux is the biggest example, there are over 200,000 software projects that work in this crowdsourced model. As applied to software, it’s called Open Source. Open Source refers to the source code, the computer language files that make software work, being freely available. Traditionally the source code was the closely guarded ‘secret sauce’ for software companies. Software firms staked their value on their IP, or intellectual property, which was embodied in the source code. The Open Source movement, in contrast, left their source code out there for all to see, use and change. One of the challenges in doing this, however, was the law.
Most software source code was treated with a copywrite by the author. This provided the author a mechanism to protect the code. With Open Source you had many cooks in the kitchen, so to speak, so how could ownership be established? This is where something called GPL, or the Gnu Public License comes into play. The GPL was originally created by Richard Stallman, a software freedom activist.
The GPL is the most popular and well-known example of the type of strong copyleft license that requires derived works to be available under the same copyleft. Under this philosophy, the GPL grants the recipients of a computer program the rights of the free software definition and uses copyleft to ensure the freedoms are preserved, even when the work is changed or added to.
Open Source is free, but the power is not in the economics. The great quote on this point is, “it’s free as in free speech, not free beer”. The license gave the right not simply to distribute, like shareware, but the right to change, extend and improve the code itself. It is through this mechanism that 100,000 programmers could work on Linux without a single lawyer being involved. In all seriousness, the establishment of a legal framework for sharing has allowed for the control of legal actions against these projects. Because there is no corporate entity behind the projects there is nobody to sue, and the framework for freedom in the GPL.
The combination of the Internet as the technical platform, and GPL as the legal one created a comprehensive environment for this new Open Source model to thrive. And in its success we look for lessons for community banking.
The community banking industry is a fascinating one, and singular to the United States. With over 17,000 banks and credit unions, Americans have chosen a localized financial system for a great deal of their business. The entrepreneurial success of the US, is to a great extent powered by this localization. Decisions are local and have context that firms with headquarters in New York or London never would. It’s the practicality of scale, and the localization of context that has left them least impacted by our economic challenges. There is, however, a compliance conundrum. It is that the modest scale that is a benefit for the business is the root of the challenge for compliance.
If you look at a typical institution with $100 Million in assets you’ll find an organization with about 25 employees. If from those we take senior management, administration, tellers and lenders we see that there are very few folks left. For a typical community bank compliance is not a department, or even a position. It’s a set of tasks within one of the hats that somebody wears. And it’s a set of tasks that keeps growing.
So, as we look back to the requirements for crowdsourcing we see that the first one is a common need amongst a group of people. The community banking system is under ever increasing pressure from regulatory agencies of the FFIEC, or the Federal Financial Institutions Examination Council. The FFIEC is made up of its member agencies that oversee these institutions. There is the Federal Deposit Insurance Corporation or FDIC, the Office of Thrift Supervision or OTS and a number of others. The guidelines and procedures for the examination process are created by its members and published by the FFIEC for all of the agencies to use. This means that more than 17,000 people have the same need. They need to address these regulations in the course of their jobs.
The community banking industry must address their compliance requirements, while having material economic challenges of doing just this. Each provides their market, or members, with financial products that are very similar. To support those products you have business processes, departmental structures and job descriptions that are virtually identical. With identical regulations and virtually identical operations we have significant common necessity across a very large group of people. This sounds like fertile soil for crowdsourcing, but there are still a couple of missing parts for germination.
Community: A platform for the industry
Based on the lessons of crowdsourcing success stories from above, we know that we’re missing two things. Those are: a platform for folks to do the work, and a legal structure to allow sharing.
To address this missing platform, Continuity Engine has built Community. Community provides all of the tools needed to crowdsource work. There are a number of tools and factors that come into play.
The first, and most important, element to enable crowdsourcing is the price. For crowdsourcing to work all economic barriers must be eliminated. We need every person with a good idea to be able to freely come in and help. To charge access to the platform would force folks to do the risk/reward equation, and all too often come to the conclusion that the very evaluation of participating is too much work.
Community is priced in the only way viable crowdsourcing can be, it’s free.
The next element is the software itself. It allows folks to find each other. To that end Community has been built in the same way that Facebook, LinkedIn or MySpace has. The social networking model has rich profiles that allow people to find others with common interests. Through its rich profiles you can find folks working on FedLine policies, or HR procedures, or anything else. The social networking aspects also allow people to connect with one another. This is a powerful tool that allows for you to see your friends’ friends to create a web of interest.
Another of the critical elements is the set of collaboration tools. They allow for conversation, work and history to be shared with the crowd. Organized discussion areas can be focused on users work, and stored forever. Much of the lack of progress in less organized communities is due to the same question being asked by “newbies”, this is slang for those new to the community. Rather than re-answering questions, those new to the community can get up to speed by reviewing the history, searching it and finding the information they need to become contributors. There are also shared document repositories. These allow folks to organize around their work, policies for example, and each contribute to it.
The final enabler is the law. Community is built to place its shared work under a copyleft license like GPL. The specific license is the Creative Commons Attribution Non-Commercial license. This provides the framework for you to use and change any aspect of content. On Community, you will find policies that Continuity Engine has created, and they carry this license. By carrying this license on all of the work of Community, all of the participants will KNOW that they will have permanent access to the work and all derivatives. The only limitations are that the author has the right to specify how the original work is attributed to them, and that the work cannot be sold. The authors of this paper view this as a highly critical point. In this industry, much of this type of work has been handled by consulting firms, and has been seen as a closely guarded secret. This licensing strategy is like the old “tear down this wall”, to the firms that have viewed this as secret and proprietary information.
All of the factors for crowdsourcing to become a reality in community banking are here. We have the need, the common interest, the economic motivation, the platform and the law. As we have seen the software industry radically transformed, so too can the ways in which banks and credit unions address their respective challenges. So, with all of the necessary conditions met, we are left with the harder stuff, people. Things like this, by definition, start slowly. Think of one man in a computer lab in Finland going, “I have an idea!” In the early days the old guard would look at this new movement and deem it unviable. The hard truth is that the old guard will be RIGHT, but only for a while. These things always rely on pioneers to do the heavy lifting, to evangelize and to work! With the work of the pioneers the more skeptical will look on with curiosity, and then join. And it will grow.
There is likely around $1 billion tied up now in addressing these challenges the old way. Based on the growth of regulations, this figure will keep increasing. Crowdsourcing for community banking is the only viable way to cut the legs out from this, and move in the right direction.
The team at Continuity Engine would like to invite you on our wagon train.