7 Essential Elements to Integrate Financial Metrics and Risk Strategy

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Banks depend on their financial reporting and performance metrics — but often this data is scattered among multiple systems and spreadsheets at typical community and regional banks, and it is very rarely viewed in conjunction with risk data. As a result, bank executives do not have the visibility they need, while strategic opportunities slip by.

Bank’s risk data is often uncoordinated and confusing, stemming from disjointed risk management processes and poor communication flow. Employees may not have a view of their risk profile or have an established appetite for risk. They view risk as something to react to —not a strategic discipline operating across the entire enterprise.

Banks can no longer simply rely on financial metrics alone, any more than they should view risk as simply a credit issue. Financial data being viewed through a risk lens is necessary if any bank is to have the most accurate profile to make the most effective strategic and forward-looking operational decisions possible.

The largest banks have comprehensive tools, reporting systems and dashboards. Their approach allows several key leaders to pilot the enterprise in a coordinated effort. For the small- to -mid-sized bank seeking to be agile and innovative, the technology to make this possible has been either too expensive or difficult to implement.

This unification of finance and risk on a platform is now possible for banks of all sizes. Banks now can project a heads-up display of financial data onto a crystal clear windshield of risk visibility. Here’s what it’s going to take to see what you bank needs to see:

1. Strategic and Financial Management
Generate detailed, driver-based rolling forecasts to project financial performance over the short and long term. Streamline the budgeting and reporting process to incorporate branch, board and external reporting, complete with allocations and consolidating entries, to bring forecasting and strategic planning together.

2. Risk Appetite Definition
Specifically, the risk appetite framework objectives define and manage the levels and types of risk the board and management are willing to take in order to achieve the bank’s strategic objectives. Executives will want to represent the aggregate view of risk across all risk categories and lines of business and create a dynamic structure that allows for internal and external changes in risk profiles. Because every organization’s risk appetite is different, they should be sure to incorporate the bank’s core values, mission and objectives.

3. Top Risk and Key Risk Indicators
This is where risk appetite merges with financial analytics. Key risk indicators (KRIs) measure and indicate changes in the impact or likelihood of a risk against a risk tolerance range or threshold. Develop an enhanced key risk indicator inventory (KRI) aligned to the risk process structure of the corporation. KRIs not only define your bank’s risk capacity, they also provide early indication of changes to your risk profile. They measure performance targets and goals, and provide visibility to the key risk profiles of the corporation.

4. Expected Loss Credit Risk Measurement
Making loans is at the heart of what banks do. Visibility here is key. Banks need to accurately assess credit risk with scorecards that rate both the borrower and collateral, and quantify expected loss for risk rating, pricing and portfolio risk management. This lets executives see the potential impact on charge-offs and the provision for loan losses while identifying higher risk profile segments of the loan portfolio. Good credit portfolio analytics allow the bank to see the trends before they’re impacted by them, so the bank can act instead of react.

5. Stress Testing
This entails a consolidated risk tool set that includes credit and non-credit stress testing, based on prospective economic scenarios. Banks can simulate prospective economic scenarios and see the potential impact on capital and financial performance, while gaining visibility to the organization’s risk profile. They can also obtain visibility to the potential impact on charge-offs rates and the provision for loan losses, while identifying higher risk profile segments of the loan portfolio. If the bank grows too quickly, will it run out of liquidity and capital? What if earnings aren’t what’s expected? What if the economy slows and interest rates increase? What ultimately happens to credit risk exposure?

6. Monitoring and Visibility
Compare the bank’s risk appetite to its risk profiles across the enterprise, both real time and periodically, with your organization’s strategic plan and movements. This includes loan and deposits performance reporting, analytics and branch reporting. Capture instrument-level loan and deposit data to analyze profitability and activity by customer, product, loan officer and more. This will reveal the bank’s growth potential.

7. Real-Time Prospective Reporting
Where it all comes together: The ability to monitor and manage the business day-to-day using a highly graphical and intuitive interface for operating, performance and risk metrics. This is about making risk-adjusted decisions to optimize your organization’s strategic plan.

Embracing automation that unifies real-time financial optimization and risk quantification allows banks of all sizes to see much further, because the risk outlook and forecasting are driven by a shared and goal-oriented risk language and key risk indicators. Banks can finally look through a windshield that is crystal clear because their finance and risk metrics are comprehensive and true.

This all adds up to freedom, freedom to spend less time guessing, gathering and reacting, and more time executing strategy, optimizing risk and achieving goals.

Taking a Chance on the Unbanked

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Financial inclusion is a hot topic in our community, and for good reason. The banking industry faces a real challenge serving those people who don’t have access to traditional banking services.

According to the Federal Deposit Insurance Corp.’s latest annual survey on underbanked and unbanked, 7 percent of Americans didn’t have access to banking services in 2015. That represents nine million U.S. households. The number gets even bigger when you consider underbanked households, which are defined as those that supplement their bank accounts with nonbank products such as prepaid debit cards.

Some banks look at this market and only see the risks; others deem it outside of their target audience demographic. In either instance, the outcome is avoidance. Fintech leaders, by contrast, see an emerging opportunity and are proactively developing innovative solutions to fill the gap. Which poses the question: Is it possible for banks to do the same?

Deciding to move forward with this type of initiative must start with the data. One of the areas that we pay close attention to is application approval rates. We’ve been opening accounts via our digital platform since 2009, and we were initially surprised by lower-than-anticipated account approval rates. Why was this happening? As the number of consumers who want to open a bank account online increases, there are inherent risks that must be mitigated. From what we’ve learned, identity verification and funding methods for new accounts, for example, pose heightened challenges in the anonymous world of digital banking. As such, we have stringent controls in place to protect the bank from increasingly sophisticated and aggressive fraud attempts. This is a good thing, as security is not something we are willing to compromise.

However, we realize that not everyone we decline is due to potential fraud, and that therein lies a major opportunity. A large portion of declinations we see are a result of poor prior banking history. Here’s the kind of story we see often, which may resonate with you as well: A consumer overdrew their bank account and for one reason or another didn’t fix the issue immediately, so they get hit with an overdraft fee. Before long those fees add up and the customer owes hundreds of dollars as a result of the oversight. Frustrated and confused, the customer walks away without repaying the fees. Perhaps unknowingly, the customer now has a “black mark” on their banking reports and may face challenges in opening a new account at another bank. Suddenly, they find themselves needing to turn to nonbank options.

I am not excusing the behavior of that customer: Consumers need to take responsibility for managing their finances. But, shouldn’t we banks be accountable for asking ourselves if we’re doing enough to help customers with their personal financial management? Shouldn’t we allow room for instances in which consumers deserve a “second chance,” so to speak?

At Radius we believe the answer to that question is “yes,” which brings us back to my earlier point around opportunity. Just a few weeks ago we released a new personal checking account, Radius Rebound, a virtual second chance checking account. We now have a way to provide a convenient, secure, FDIC-insured checking account to customers we used to have to turn down. In doing so, we’re able to provide banking services to a broader audience in the communities we serve across the country.

Because of the virtual nature of the account, I was particularly encouraged by the FDIC’s finding that online banking is on the rise among the underbanked, and that smartphone usage for banking related activities is rapidly increasing as well. Fintech companies are already utilizing the mobile platform to increase economic inclusion; we believe that Radius is on the forefront of banks doing the same, and look forward to helping consumers regain their footing with banks.

Let me be clear, providing solutions for the unbanked and underbanked is more than a “feel good” opportunity for a bank—it’s a strategic business opportunity. A takeaway from the FDIC report is that the majority of underbanked households think banks have no interest in serving them, and a large portion do not trust banks. It’s upon banks to address and overcome those issues. At the same time, nonbank alternatives are increasing in availability and adoption. Like anything worth pursuing, there are risks involved and they need to be properly scoped and mitigated. But while some banks still can’t see beyond the risks, I think ignoring this opportunity would be the biggest risk of all.

Welcome to the Wild West for Small Business Management Technology

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Today’s small businesses are empowered more than ever by technology. Start-ups and emerging technologies are colliding with established financial institutions to create a true Wild West for business and financial management in the small and medium business (SMB) sector. But what approaches are different finance and technology players taking—and how will they impact the way small businesses manage their finances?

There’s no doubt that business owners recognize the benefits of technology—one recent survey found that 29 percent of all SMBs say technology is critical to improving business outcomes. The result is a mad dash by incumbents to catch up, keep pace and partner with innovators in the right ways to earn the loyalty of business owners.

Here are four different ways that financial companies are battling it out to help small businesses manage their cash flow, start to finish.

Integrating POS with Financial Management
In a recent report by technology provider Wasp Barcode, a majority of small business owners said that their number one priority for technology investment this year is to replace hardware. For a great many SMBs, this includes front end equipment like cash registers and credit card processing devices. Square was the primary innovator of integrating credit card swiping with iPads, but today the bar is much higher in terms of payment hardware technology design, performance and accessibility.

Take Bank of America’s Clover Point-of-sale (POS) solution, for example. As opposed to Square, which only allows for card swiping, Clover is a fully integrated POS, cash drawer and receipt printer. BofA supplements the basic hardware and software with an app store, where businesses can add extra layers of functionality and customization based on their unique processes. The POS software is then able to communicate and send data back to financial management software, so that the two are seamlessly integrated.

Offering End-to-End Cash Flow Management
Other companies are approaching small business management technology with the goal of providing complete, end-to-end financial management. This means that everything from payments, checking, savings, credit, insurance and investments are all handled by one technology platform. This is the logic behind Capital One’s Spark Program for small business finance, that offers a different Capital One Spark product or service for each of those areas, all tailored towards entrepreneurs.

That isn’t to say businesses can pick and choose from different products within the Spark ecosystem (such as checking, corporate credit Cards and 401(k) account management), but the goal is to have everything tightly integrated so business owners can access everything in one place. The ancillary part of the pitch is that it makes customer service that much more convenient, as you only have one partner to contact if multiple issues arise. The challenge will be for a medium-sized mainstay like Capital One to innovate on a pace with both fintech start-ups and mega-bank competitors that acquire or partner with these new players.

Creating a Best of Breed Ecosystem
Having an all-in-one suite is great in theory, but there are certain small business tools that will always be known as being the best at what they do. Accounting and financial management is an area that Quickbooks has traditionally dominated; it still occupies 80 percent of total market share for SMB accounting. But rather than building additional features onto the Quickbooks product, companies like Intuit are building out tightly integrated ecosystems consisting of first-class applications across the breadth of business management needs.

Intuit is an interesting case also because it owns another hugely popular brand, TurboTax. It has been in Intuit’s best interest to keep these successful brands, and add others like the hugely successful personal finance app Mint.com. The intent is to not only make the business easier to manage, but to handle the business owner’s personal finances as well.

SalesForce.com’s strategy is another great illustration of building out a comprehensive ecosystem under one umbrella. Any business that uses SalesForce.com can purchase proprietary financial management apps on the firm’s cloud platform, and perform multiple functions without leaving the SalesForce interface. Businesses can utilize the Financial Force app for payroll, Accounting Seed for accounting and so forth. In these cases, SalesForce often provides resources and guidance to these start-ups to make the software on their platform as competitive as possible.

Innovating the right way
Fintech startups have the stated goal of disrupting a financial services sector that has become known as overly traditional and lacking in personalization. But as startup technologies for small business management begin to scale, like the example of Mint.com, these companies often face a crossroads in terms of how and where to expand. Some choose to be acquired, as in the case of Mint.com, while others seek partnerships with big banks to gain additional marketing exposure while retaining control of their product.

David Gibbons, managing director at Alvarez & Marshal financial consulting, recently told CNBC that “Banks are partnering to keep in the game and keep relevant. I think they’ve caught up fairly well.” On Deck Capital is one of the foremost innovators in small business lending, using technology to gauge creditworthiness based on the performance of an entrepreneur’s business instead of personal credit score. But rather than be acquired, On Deck has partnered with JP Morgan Chase to build a new lending product for small businesses, under the Chase brand. This is a great example of some “quick win” technology partnerships taking place in the small business space that combine the benefits of innovation with the security and scalability of big banking to better serve SMBs.

And these are just a few of the innovations, technologies and trends that are constantly emerging in the small business sector. The bottom line is big banks now realize that adopting new technologies is critical to retaining SMB clients. With so many startups and established players evolving to offer more services with less hassle, it’s a pretty good time to be a tech-savvy small business owner.