When 30% of banking institutions face challenges in data quality and are simultaneously tasked to comply with ever more stringent regulations, streamlining workflows to reduce error-prone processes becomes a necessity. Banks, credit unions and financial services organizations all face ever-more stringent regulations. They are required to do more to protect their clients and to perform with absolute certainty on their interactions and transactions.
Regulators expect banks to provide end-to-end data custody.
This end-to-end data custody means that the origination of certain items needs to be captured and accounted for correctly while being made visible to the whole system. For example, when an account is opened for a commercial customer or a new loan is applied for, the data about that transaction is received; the information about the individual is shared, vetted and reviewed by relevant parties before it is approved for processing or account opening.
These activities all require visibility into data transactions throughout the system. To truly identify the right data sets and associate those individual items to represent a true “data lineage” remains a huge challenge for many institutions. Questions must be answered such as:
- Where and when did the information come into the organization?
- How was it received?
- Was it modified between systems, or converted to a different reference or metric between exchanging parties?
Financial institutions must be able to answer these data questions to effectively review, demonstrate and prove compliance with today’s strict regulations. Instead of spending on top-line initiatives, banks have had to invest in ensuring compliance over the past five years.
Protecting Clients, Operations and Reputations
Faced with added pressure with Bank Security Act and Anti-Money Laundering (BSA/AML) regulations, along with heavy fines coming from the regulators such as FinCEN and the Financial Action Task Force (FATF), banks must remain proactive in protecting their clients, their operations and their reputations without impact to their profitability and customer-facing products. (Results from the 2018 Financial Services Industry Survey)
Unfortunately, the predominant approach has been to hire and maintain large teams to focus on all activities required to support compliance. An example of just a few banks illustrates this point:
- HSBC 3000 +
- JPMC 4000+
- BNP -1600+
And the cost is not going away: the overall spend associated with compliance-related work is increasing annually at around 20%. In five years, the costs will have doubled.
Addressing the Challenges
Adding human intervention is one way to address the problem. However, the more human operators are involved, the more human error is likely to be injected into the equation, not to mention the added costs and delays with processes and workflows. But there is a solution.
To avoid significant costs and operational impact, technology with Artificial Intelligence (AI) is being called upon to “learn the data”, and to facilitate those operations to do more with machine learning based insight, giving its users new tools to become more efficient.
Banking Engagement: Customer Onboarding
Let us first look at the initial areas of the banking engagement: customer onboarding. When customers are on-boarded as new accounts, the bank has to perform Customer Due-Diligence (CDD), as part of the Know Your Customer (KYC) protocols. This is to make sure that the individuals involved are not on any sanctions lists or OFAC lists and that general background checks are completed.
Once converted as a member, continued review is required, including checking the behavior of the customer in order to ensure they are good actors. The extension of CDD then becomes Enhanced Due Diligence (EDD). Challenges to the Compliance teams are centered on the collection of data, maintaining the data and knowing how to leverage the data to ensure quality work is supported.
All of these elements point to increased costs in handling the data. Financial institutions of $10 BN or more see on average $150MM in spend related to KYC-related work. At the same time, the bank cannot afford not to invest in this area, particularly when considering the reputational damage that can occur on top of potential fines that may be imposed by the regulators. (Digital Banking Trends 2018, Transforming Bank Compliance with Smart Technologies).
To underscore this risk, regulatory enforcement actions led to approximately $321 billion in penalties worldwide during the period from 2009 through 2016, significantly affecting earnings. (See Global Risk 2017: Staying the Course in Banking, BCG report, March 2017.)
Top spend in KYC relates to customer screening, transaction monitoring and onboarding.
Many banks are going forward with their digital transformation programs. This may impact risk management, particularly in customer onboarding, KYC and Credit functions. The digital transformation processes, when fully implemented, typically reduce the customer on-boarding time, collection of good data for KYC compliance, and reduce the risks and exposure to fraudulent activity. (McKinsey Report – The Future of Bank Risk Management). However, the data captured at the time of such transactions needs to be confirmed as being accurate, reliable data. Banks may also desire to identify and use historic data to verify and review client information. The existing information within the bank also has to be verified.
To aid with the efficiency of this data collection, many third-party solution providers are leveraging intelligent capture coupled with machine learning-based technology products to collect data and extend their services to financial institutions. By using data capture and review processes, banks can use internal data to review and verify their clients. (2018 Financial Services Industry Survey)
The work can be very cumbersome, and this is why more and more institutions are looking for outside help to do this necessary work. More than two-thirds of institutions rely on five or more sources of data from third parties, to complete their AML/KYC processes.
Many banks are looking to AI based technologies, or cognitive analytics tools, to help reduce the cost of KYC-related spend by leveraging their data between departments and to alleviate the manual processes. The advancements in such analysis helps institutions to efficiently analyze the data to catch anomalies.
AI can be applied to analyze the behavior of clients and staff, to review an institution’s client base and to spot opportunities for improvements. Identifying threats is made easier with the advancements in new technologies.
Dealing with the “Paper Problem”
Loans and credit products often lead back to paper-based processes. For example, the recent PPP loan processes amplified the problem of catching business, and truly understanding them. This was an example of Know Your Business (KYB). Here too we find opportunities where intelligent capture capabilities have a lot of impact. When loan documents are processed, the client’s data may be reviewed again; it is linked to the data which will have already gone through the KYC/KYB protocols and referenced to credit agency data. All in aid to ensure that efficient and reliable asset assessments are made to underwrite the risk or to reject a loan. While many institutions have invested in intelligent capture products, the next generation of capture solutions are making the leap towards cognitive automation solutions that make quick, reliable assessments are reality.
Next generation intelligent capture solutions are making the leap towards cognitive automation for quick, reliable assessments.
A rising focus of compliance is also on the non-financial risk (NFR) side that may be linked to employee misconduct as well. Scandals, such as the one in 2018, where Wells Fargo had falsely opened customer accounts, generate questions regarding whether such behavior could be spotted with better technology. (Deloitte Banking Regulatory Outlook 2020)
Can other internal fraud be spotted such as when an account is opened and the initial 90 days have passed for standard CDD review and KYC assessments? Come day 91 when the fraudulent work really hits, are the banks prepared for this as well as they can be? Reviewing the behavior and activity of its clients’ banks can gain great insight into their overall operations including client spend behavior. It can also predict both opportunities and threats involved within their membership. (Deloitte Banking Regulatory Outlook 2020). Coupled with technology, often training and education is needed to aid financial institutions to spot such risks.
What are other key operational areas where intelligent capture can assist with compliance? One area where banks are looking to better serve their clients and reduce their risk exposure is in the fight against check fraud. Often the scammers are looking to cash in fraudulent checks and initiate and close accounts quickly where they can, and move on to the next unsuspecting client. Recognition tools, coupled with better AI around the member client’s banking habits help curb the volume of check fraud. Learning the customer, including their patterns in transaction behavior, is necessary to better serve the customer; it is not just a risk management function. More specifically, channels and services have their own “compliance-enabling attributes” when it comes to intelligent capture.
Another area is with mobile interactions. The rise in popularity of mobile capture is evident with year over year growth in adoption and utilization. Mobile-borne customer engagements are growing with centralized processing in back-end systems. Assessing the transactions helps banking organizations to streamline the banking experience and mitigate certain risks to the banks. For example, the ability to analyze attributes of a deposited check during the transaction not only aids with reducing risk, but improves the user experience for instances where problems arise days after the account holder expected a deposit to be completed.
Within branch/teller and ATM channels, we are experiencing the rise of self-service solutions and the growing desire to drive member clients to the interactions that reduce actual teller transactions and to empower its users to do more at the terminal device. This generally leads to greater customer satisfaction, knowing that the transactions are completed at the bank, under personal control without having to depend on mobile devices. Here too, intelligent capture provides the ability to analyze a check or other document to ensure that all required data is present and verified, which is a fundamental enabling capability.
There are also opportunities in higher-touch transactions within wealth management. At the branch, or via web-based document capture services, information within transactional documents can be captured to comply with bank rules. Increasingly, there is also the desire to verify the correct approvals with signatures. At a minimum, the presence of signatures is required. There are also advantages in verifying that a customer’s signature is signed by them and not forged.
Centralized Services and Shared Operations
Bringing it all together, banks can leverage the variety of document and image analysis solutions to connect the dots to better support their customers. No single channel is enough to give you a rounded view of the client’s needs. Shared services groups are helping various lines of business to do more, to make the most of the data between departments.
Overall, the compliance challenge doesn’t have to be a cost of doing business. Rather it can and should be the opportunity to better serve the client as well.
The customer is probably better connected now than ever before to banking options. The landscape is very competitive and customers are demanding more from financial institutions. Even though the immediacy of mobile banking appeals to certain customer demographics, mobile app offerings still miss the personal touch, which often allows for more real-time compliance checks, so it is important for banks to look at how data is captured and analyzed across all channels.
Keeping the interactive element in service delivery is why branch and other operations have such a large impact on the brand of the Bank, and the extension to the wider community. Various channels including the ATM network, mobile, branch and Web, infused with intelligent capture capabilities can be positioned as convenient, interactive and compliance-friendly with the aid of intelligent capture capabilities. It can be a case of having your cake and eating it, too. All of these connections between the branch, the ATM, Mobile and on-line interactions offer an opportunity for success to truly know your clients and service them in a more personalized manner.
- Banking Regulatory Outlook 2020 | Data Capabilities in Banking: The Journey Continues
- Digital Banking Trends – Results from 2018 Financial Services Industry Survey
- Transforming Bank Compliance with Smart Technologies – BCG
Relevant Resources / Related Articles