Last week’s Wall Street Journal featured an article titled, “Credit Unions Ramp Up the Risk.” The article discussed how Credit Unions “are loosening credit standards and piling into longer-term assets, exposing the firms to potentially significant losses if interest rates rise.” The article also notes that community banks are taking on more long-term risks with assets maturing in more than five years now at 34% versus 19% in 2007. The gist of the article is that these lenders will suffer when rates rise, as costs of fund will be higher than loan yields and the portfolio will deteriorate as borrowers are unable to pay higher rates, resulting in a “double-edged sword” for these players.

Maybe. The industry has been predicting higher rates for several years now. I have at least one client who has been predicting higher rates next year for three years; eventually, they will be right. But what if the Wall Street Journal and others are focusing on the last crisis not the next. Generals and politicians are said to fight the last war, hence, innovations like the TSA. What if the economy remains weak and rates remain relatively low. There is no doubt that many lenders are making unwise loan decisions today (not your bank, of course). But the artificially low interest rate environment allows many lending sins to be forgiven.

If, by chance, risk issues do not create the next crisis, what will? In fact the next crisis may already be slowly building. Perhaps this time the crisis will not be a bust but a slow boil resembling the story of the frog initially put into a pan of cold water and then slowly burned to death.

Wikipedia defines “death by a thousand cuts” as “creeping normality, the way a negative change, which happens slowly in many unnoticed increments, is not perceived as objectionable.” Right now, the banking industry may be exactly in that situation. No major crisis to shake it up and require a strong reaction, but rather multiple small issues none of which has reached crisis stage by itself but which together spell major trouble for banks.

What are some of the thousand cuts?

CUT: A Self-Reliant and Less Loyal Customer – Many banks want to offer personal service and one-stop shopping. More customers express comfort with their own decision-making and self-service. Baby Boomers, once the mainstay of bank growth, are less important because they are both disappearing in number and need fewer services as they shift to an asset protection mode. Gen X, Y, and Millennials do not have the same relationship with banks as their parents and readily express their willingness to work with nonbanks.

CUT: New Competitors – Banks are ignoring alternative lenders and payment initiatives at their own peril. On the lending side, banks have limited their credit appetite so severely that they have pushed customers toward alternative players, likely never to return.

Cut: Branded Competitors – Amazon, Paypal, and Square are all lending money to their customers from a privileged position of knowledge, access, and convenience against which banks cannot compete. Facebook and others are circling around the payments area, the fatted calf of banking.

Cut: Digital Reticence – Too many banks see digital as yet another channel rather than the foundation for change that it likely is. Some are starving this initiative, limiting resources and subjecting this area to a decision making process that may undercut its success due to it cumbersome and slow nature. As one consultant noted, “Getting rid of the old technology is far more a barrier to digital banking than competing with the new business models.”

Cut: Bank IT Systems- Banks are tied into big, slow-moving vendors and legacy systems that are difficult to change. These vendors are likely more focused on their own investment and bottom line hurdles versus the needs of their bank clients. Their goals and the bank’s goals may not be the same and yet the banks are largely subject to these vendor’s schedules and priorities.

Cut: Bank IT/Line Management – IT execs often speak a language that business line executives cannot or will not understand, often leading to subpar decisions and a failure to fully synch the business lines with their customers IT needs.

Cut: Aging Employees – 50+year-old employees are extremely reticent to take any chances that might put them at risk. Many are counting the days until they can afford to retire. Further, the executives who must approve digital and similar investments often do not truly appreciate or even use those technologies, a bad sign.

Cut: Bureaucracy -Bank meetings are both too frequent and too big as the desire for consensus overwhelms productivity and effectiveness. My best story to illustrate this involves two proposal meetings on the same day several years ago, one with a bank and one with a nonbank. The bank meeting has 15+ attendees and the nonbank…one. Both made decisions for a project, but think of the different costs involved in doing so. Today, in all likelihood that bank meeting would be bigger as added staff from legal, compliance, diversity, and other groups joined in.

Cut: Lack of Urgency –All these and other issues are exacerbated by a lack of urgency at most banks, even those that say they are acting quickly. The risk management, belt-and-suspenders culture that served so many banks so well during the downturn may be exactly what they do not need now. The dot coms I know work until they can make a decision and then act on it as soon as possible; sometimes they make mistakes and then learn from them. Yes, banks have more regulatory hurdles by far, but those often seem to serve as an excuse or convenient crutch.

Any one of these and similar issues outlined above can be rationalized and categorized as relatively minor; no one of them is likely to blow up a bank. But together, unless addressed, these and other issues will cause a bank to bog down under the weight of increased costs, slow decision making, reduced revenues, and declining importance with customers. To me rather than worrying about the next credit tsunami (or only about the next credit tsunami), banks need to consider how to avoid being subjected to a vortex that will suck them in and eliminate their ability to control their own fates. Some banks are already in the vortex, but just don’t know it. They will.