The Looming Shortfall in Human Resources

Warren Mino of Webster Business Credit addresses the issues surrounding the potential human capital gap facing the industry.

The asset-based lending industry, as well as other industries, is facing a potential shortfall in experienced and skilled associates. In banking, over the past 20 years, there has been a major consolidation to the point where no one can determine the value of a banking franchise with all the uncertainty of banking regulations and reforms. Plus changes in consumer behavior and how they conduct their banking (technology/ Internet vs. brick and mortar) adds to this ambiguity. Justas machinists in our manufacturing sector stopped apprenticeships as jobs moved overseas, there is now a pending shortfall in tool and die specialists in our country today. As manufacturing moves back to the U.S. due to quality concerns, logistics and political environment challenges, which are becoming more evident in a global economy, there is a shortage of skilled and experienced workers. The banking industry also stopped offering training and career programs for their workers, and many young people did not come into the banking industry during the consolidation years. All of this is resulting in a "Human Capital Shortfall."

Demographics

Demographics are one of the challenges we face today.

Baby Boomers, born 1946 - 1964, population 81.5 million*: Members of this generation, if not already retired, are closing in on retirement age. The later Boomers may be holding the leadership positions and need to be grooming replacements. However, many of the 61 million* members of Generation X (1965 - 1985), who joined the banking industry, were displaced or did not stay in the industry during the consolidation period. The reduction in birthrate that followed the Boomers will cause a shortfall in positions filled as they retire. Baby Boomers may need to stay longer in the workforce to avoid an excess of open positions and train the younger generations for the jobs that need to be filled. Companies in manufacturing are paying the Baby Boomers a premium to stay and train the younger generation, while some machinists are taking Generation Y (1985 - 1994 population 85.4 million*) into apprenticeships to fill jobs that will be vacated over the next five to ten years.

The Generation Y population has the ability to replace the aging Baby Boomers; however, they lack experience and training.

Now let's look at who is still in the workforce: Baby Boomers 59-9 million, Generation X 49 million and the "upand-coming" Generation Y, 32 million. Guess what? When you do the math, there is not enough Generation X to replace the Baby Boomers. We need to wait as Generation Y continues to enter the workforce. Industry will have to incentivize the Baby Boomers to continue working as well as to train and develop Generations X and Y.

Over the next 5 to 15 years, human capital for positions, in many organizations will be a major challenge to fill and keep filled. Also with Generation Y, if they are married and wish to have a family, there is a tendency to have one spouse stay at home to raise the child from 1 to 10 years of age. They rebuff the idea of having others raise their children - what a change in attitude and direction! This has the potential of fewer resources in the workplace.

Training and Development

Over the years, with consolidation and cost-saving initiatives, training programs were stopped by the banking industry. Payment for higher degrees was pulled back. During my career, I had the banking industry pay for my MBA. This is not something that is often done today, but maybe it should be. Programs to train and develop the next generation help to make an employee more valuable to the banking industry. How are institutions going to pay for long-term investments when all publicly traded companies have challenges with short-term results? If institutions do not invest in systems, technology and people, they will lose their competitive edge and, most likely, their market share. You see this today with the large money center banks that are leaving the market to regional and community banks in core banking and lending products versus the capital markets/equity markets they chase after. In banking and lending, the people make the difference. You can have all the "branding," but if the people do not have the core values and culture necessary for the industry, you lose market share. When investment in systems, technology, and human capital lags, companies fall behind. Also, how you treat yourcustomers through good and bad times will be how you differentiate yourself in the marketplace. Many institutions learn this only after they lose market share.

Many money-center banks have already learned this the hard way, with legal settlements and claims from regulatory and governmental agencies, to investors or consumers who were hurt in the great recession.

Training and development of people is the key to this magic, but finding the human capital may be the toughest challenge of them all.

Career Teaching/Education

As mentioned, some of the human capital gap is due to lack of the proper higher degrees and education. Bankers and lenders need sound background in accounting, economics and business. Some folks can rise with other degrees, but without the basics, the industry inevitably suffers. Some of the subjects Generation X and Generation Y majored in during college were not specific enough for the applicable industry. We have a shortage of scientists, researchers, engineers, mathematicians and lenders. You have to ask yourself, why? Did we make it too easy to succeed, when everyone got a trophy at the end of the season? Or, did we glorify certain industries so that only a select few can attain success and everyone else is lost? Education is the key to building a strong workforce. America may have the largest college degree generation, but often the degrees are in disciplines that do not give them the necessary competitive edge. Go to Wall Street and see who has the top jobs and incomes. Most likely, you will find they went to top colleges, went to private schools, and were taught to be highly competitive and took advanced degrees. They also knew what they wanted to do, and, as they prepared for college, had a plan for their career. Long-term planning is necessary for achieving higher results. A strong foundational education is necessary, as is hard work. Without hard work you do not succeed. My hope is that the younger generations get this.

In addition, years ago in this industry associates were trained by working in different disciplines to learn all facets of a job. InABL, one would begin as a collateral analyst, then move to field examinations, then progress on to a junior account executive role, then senior account executive and then branch off into underwriting/structuring, or into a credit officer position, a marketing position, or a leadership role. Today, most banks outsource field examinations and have full-time career collateral analysts. Because there is no higher educational degree or training provided or financed to develop the next generation of lenders, prospective employees are less well-rounded, human capital shortage.

Financial Model/Regulation

One of the reasons for lack of investment in human capital in our industry is due to the changing business environment for yield and fee income for the products and services provided. This has eroded over the years. First, as larger banks wanted to amass market share, technology made it easy to handle larger volumes of work and data, and capital was provided for by the Fed to expand and contract the economy. But, no one lives in a vacuum. However, if profitability goes down, an institution often cannot afford all of the training and development that may be necessary. Budgets get cut and future investment becomes someone else's concern. The regulatory environment also has an impact, as regulators want talented and trained associates in the banking sector. Oversight and insurance costs have increased without the corresponding increases in yield and capital requirements are increasing. In the future, leverage by banks will be reduced, causing lower returns and reassessment of the value of products and services that were once large money-makers. The full impact remains unknown with the Dodd Frank Legislation Act still being rolled out. Lenders will need to understand the role of safety and soundness while still providing liquidity and capital to the economy and making an acceptable return to the institution's shareholders. This is another reason for the human capital gap.

What Do We Do?

* Demographics: Do we have the resources for the future? We need to find and train the right people.

* Training and Development: Who will provide the training and development? We may need to utilize third-party vendors, such as the CFA education programs andRMS or Omega training. In the work force, people need to take charge of their career and getting the proper education is key. Puta plan together and stay focused on it with milestones.

* Finance Model: Something has to give. The present trend is unsustainable. We cannot have yield and returns below the cost to provide safety and soundness in the asset-based lending platform, or banking industry.

I Additional Suggestions: Our Commercial Finance Association (CFA) needs to focus its education and career services on the individual as the banking and lending industry is no longer filling this need. The CFA has to service the individual within the industry. The trade associations, for most of their histories, have serviced the member, which is an institution. Years ago, there were many more entrepreneurial and privately owned asset-based lenders. Now most major ABL players are owned by big and regional banks. The big banks have become more focused in the "Capital Markets", which may be a loss leader to other financial products the large money-center banks want to sell (Bonds, IPOs, 2nd Lien Notes, etc.). The R/C, today, looks like the corresponding back-up lines of yesterday, as other capital tranches within an organization help finance companies differently. The CFA needs to move its focus to the individual to help him or her develop a career path and education. The CFA is a learning resource for the industry.

We need leaders and lenders for the future that can each play their part in filling the human capital shortfall. The way of the past is gone. We need to find new solutions to our challenges today and work together towards those goals for tomorrow. The world continues to grow and prosper.

Warren K. Mino is president of Webster Business Credit Corp. and a member of CFA's Executive Committee.

He has been with Webster Business Credit Corp for 15 years and has 37 years within the banking and lending community. He has been active within the CFA since 1980.