Getting ahead of risk
How to attract and serve commercial clients without burdening your back office
By Steve Bartels
With limited resources and technology, community banks must leverage automation to help them create efﬁciencies around fraud and risk management so they can better serve corporate clients. The right technology can help banks avoid back-ofﬁce bottlenecks and manage fraud more effectively, while also allowing them to offer a level of service that lets them compete with larger institutions for business accounts.
Put another way, community banks need automation to grow. It’s as simple as that.
How the fraud landscape drains resources and hampers growth
Check and ACH fraud combined account for nearly $10 billion in losses annually. With only a routing number and an account number, cybercriminals can do a lot of damage, particularly to businesses with growing numbers of transactions but no way to detect fraud at scale.
Banks that want to serve businesses need solutions that assess risk and manage fraud for their customers. But unless their solutions have the ability to scale, the operational lift required to manage fraud can quickly overwhelm both the institution and its customers.
This strain on resources not only limits community banks’ ability to attract and serve large commercial accounts, but also limits their ability to onboard new business customers without overwhelming their back-ofﬁce and support staff.
This makes growth problematic at best.
The need to compete
According to a Harvard report, “Community banks’ share of U.S. banking assets and lending markets has fallen from 41% in 1994 to 22% today, while the market share of the top ﬁve largest banks has more than doubled from 17% to 41%.”
To weather this downward trend in market share, community banks may consider diversifying out of consumer lending and into business products and services. Many, though, feel unprepared to manage the complexity associated with larger commercial accounts. But, despite limited resources, community banks can support advanced business services with the help of the right technology.
Risk and fraud management solutions are a perfect example of the technology gap often facing community banks. Large institutions have robust offerings that address risk and fraud; to compete for business customers, community banks need comparable offerings. To compete at the highest level, risk and fraud management tools have to be:
Community banks have to do a lot with a little. The more processes they can automate, the more time they can spend serving accountholders. Automation can also help reduce the errors potentially created in manual processes, as well as create audit and reporting trails crucial to compliance.
A solution that enables growth is only as good as its ability to scale with the growth it creates. Even with only moderate customer growth, the constantly increasing incidence of fraud makes detecting and managing it a heavy lift. The ability to easily scale fraud mitigation efforts will be crucial in the years to come.
A better experience
To date, non-ﬁnancial brands like Amazon and Netﬂix have been setting the bar high for seamless, intuitive user experiences. Financial institutions that aren’t meeting these expectations don’t inspire conﬁdence. They appear out-of-date, their end users are likely frustrated and they’ll ﬁnd it increasingly difﬁcult to compete with more tech savvy FIs.
The often-heard counter argument to this point is that slick user experiences fall within the purview of consumer-targeted technology; the expectations around commercial solutions, including fraud and risk management tools, are different. This may have been true a few years ago, but the expectation gap is closing.
Commercial users know what consumer experiences are like from their daily, personal interactions with best-in-class providers, and today they’re less forgiving of subpar usability in their commercial solutions.
At the end of the day, commercial solutions don’t have to be piecemeal; they should be comprehensive, integrated and easy to use. They should be user-friendly and aligned with need and expectations alike.
This is true of the experiences both within the bank and those they offer to their accountholders. Even if a solution isn’t customer-facing, if it has subpar usability, it will hurt productivity and possibly require additional or on-going training.
The cost of ignoring your back ofﬁce
In January 2018, Hawaii was alerted to incoming ballistic missiles. It was not, they were told, a drill. For half an hour the state believed it was under attack, until it was revealed that the intended communication should’ve indicated it was only a test of the system.
The culprit was clumsy technology. The choices for “test alert” and “real alert” were too similar in the warning system’s interface.
Translating this incident to bank operations, a poorly managed back ofﬁce and inelegant technology can cause problems with serious fallout. A bank may not be able to put the fear of a missile attack into its accountholders, but they can just as easily fail to spot fraud, make transactional mistakes or fail to maintain compliance if their back-ofﬁce tools are antiquated, clumsy or confusing.
This makes it difﬁcult to maintain the status quo, much less compete and grow.
The painful truth is that investing only in customer-facing solutions, while ignoring back-ofﬁce upgrades won’t do much good in the long run. Everything starts with the inner culture and back ofﬁce.
The 2018 World Economic Forum report by Bain & Company suggests that only about 1% of the over a trillion dollars invested in transforming digital banking will achieve the targeted return on investment.
Additional research by McKinsey & Company suggests that upgrades to back-ofﬁce technology and increasing automation can result in an improvement of more than 50% in both productivity and customer service.
Finally, the Boston Consulting Group reports that, in recent years, global banks’ revenues have remained ﬂat, while their costs have increased by nearly 10%. Their answer to this trend, which appears to be ongoing, is in part to digitize and simplify products, services and their underlying processes.
If community banks want to compete in the digital landscape, grow and scale their workload effectively, they need better tools, processes, and workﬂows in their back ofﬁces.
Automate, integrate and get comprehensive
The ﬁrst step to streamlining your back ofﬁce is to replace as many obsolete manual processes as possible. Trying to handle ﬁle mapping for check positive pay with an Excel spreadsheet, for example, is a laborious task, with a lot of back and forth between the client and your institution. Manual aggregation of originator data for annual risk reviews is also a difﬁcult, time-consuming and piecemeal process.
These kinds of tasks simply eat up too many resources. And manual processes aren’t just slower, but they also invite error and create little or no audit trail. They limit your ability to generate reports and, because they exist in isolation, with no real points of integration, they do nothing to contribute to a cohesive, holistic view of fraud or risk.
While no single system can handle all of your back-ofﬁce needs, combining a wide array of functionality under the same login and system can save money and streamline operations. The ACH and check positive pay system referenced earlier is a perfect example of this kind of comprehensive solution as it relates to transaction management and fraud detection. And a risk management system that oversees and automatically aggregates all kinds of transactions and originator activity can also make risk reviews faster and easier.
An efﬁcient back ofﬁce should have tools that include:
- A combined check and ACH positive pay solution that features:
- Full account reconciliation
- Advanced reporting
- Reverse positive pay
- Payee match functionality that compares payee names and check images
- Data mapping that lets banks accept check ﬁle formats native to their customers’ accounting systems
- Automatic generation of ACH return transaction posting ﬁles
- Automated notiﬁcation emails and text messages to clients when exceptions are present
- A comprehensive risk management solution. Financial institutions need streamlined ways to carry out comprehensive ACH and RDC risk assessments in order to better manage exposure and ensure compliance, including the ability to monitor and validate all ACH origination activity.
Many online banking systems do include some rudimentary origination rule validations. But a more effective payments monitoring system requires a robust and highly customizable rules engine with pre-authorized account list validation and dollar limit checks based on the ﬁle or originator. These validation checks should be available to all channels, whether an ACH ﬁle is submitted through an online banking platform or through an alternative means, like an SFTP server.
A comprehensive risk management portal should also be able to generate extensive reporting in a user-friendly manner. Some of the kinds of reporting banks need to adequately handle risk assessments for commercial clients include:
- Activity analysis by day or month
- High-risk originator monitoring
- Transaction analysis by SEC code
- Volume reporting
- Exposure reporting
- Exception reporting
- Trending charts and graphs
- Returns analysis
Traditionally, the risk assessment process is very labor intensive for ﬁnancial institutions. The amount of work involved makes it difﬁcult to grow and add a large number of ACH or RDC business customers unless the FI has a way to streamline the assessment process. To effectively scale, a risk assessment solution should provide the following efﬁciencies and features:
- The consolidation of data from disparate transaction channels should be automated (DDA, savings, COD, loans, RDC and wires).
- The user interface should provide a concise, easy-to-interpret view of the total relationship, including the details of the most recent reviews and when the next review will occur.
- The process should be paperless, to avoid wasted resources and manual errors.
- The tool should incorporate a workﬂow for altering/approving changes to exposure limits based on risk assessments.
- The solution should be customizable and ﬂexible. Each FI approaches assessments a little differently, so the risk review tool should allow the FI to choose data sources and elements based on their needs and processes.
Fraud management and risk management working together:
Combining the fraud detection of an automated, comprehensive positive pay solution with the customer-level details of a holistic risk management tool can help banks address exposure while streamlining their operations and reducing loss.
The importance of integration
- A seamless, single sign-on within your digital banking interface saves time and creates a better customer experience.
- Integration with teller systems can help keep your frontline engaged in fraud detection.
What would your ﬁnancial institution be able to accomplish if you were able to reduce the time spent on fraud and risk management? To compete, community banks need to be conﬁdent in their ability to scale their services as their customer base grows in size and complexity.
Fraud is unfortunately here to stay, and risk goes hand-in-hand with offering and managing ﬁnancial services. The ability to effectively handle these factors can make or break a bank’s ability to attract and serve commercial clients.
With increasing competition and shrinking market share in the consumer space, banks hoping to grow should consider extending additional business services and competing for larger commercial accounts.
With the right technology, it’s not only possible to manage your existing business accounts better, but it’s also feasible to grow and serve larger clients without adding a signiﬁcant burden to your back ofﬁce.