Connecting with Millennials By Going Beyond Traditional Services


technology-8-28-19.pngBanks are at a crossroads.

They have an opportunity to expand beyond traditional financial services, especially with younger customers that are used to top-notch user experiences from large technology companies. This may mean they need to revisit their strategy and approach to dealing with this customer segment, in response to changing consumer tastes.

Banks need to adjust their strategies in order to stay relevant among new competition: Accenture predicts that new business models could impact 80% of existing bank revenues by 2020. Many firms employ a “push” strategy, offering customers pre-determined bundles and services that align more with the institution’s corporate financial goals.

What’s missing, however, is an extensive “pull” strategy, where they take the time to understand their customers’ needs. By doing this, banks can make informed decisions about what to recommend to customers, based on their major consumer life milestones.

Only four in 10 millennials say that they would bundle services with financial institutions. Customers clearly do not feel that banks are putting them first. To re-attract customers, banks need to look at what they are truly willing to pay for — starting with subscription-based services. U.S consumers age 25 to 34 would be interested in paying subscription fees for the financial services they bundle through their bank such as loans, identity protection, checking accounts and more, according to a report from EY. With banks already providing incentives like lower interest rates or other perks to bundle their services, customers are likely to view a subscription of bundled services with a monthly or annual fee as the best value.

Subscription-based services are a model that’s already found success in the technology and lifestyle sector. This approach could increase revenue while re-engaging younger generations in a way that feels personal to them. Banks that decide to offer subscription-based services may be able to significantly improve relationships with their millennial customers.

But in order to gain a deeper understanding of what services millennials desire, banks will need to look at their current customer data. Banks can leverage this data with digital technology and partnerships with companies in sectors such as automotive, education or real estate, to create service offerings that capitalize on life events and ultimately increasing loyalty.

Student loans are one area where financial institutions could apply this approach. If a bank has customers going through medical school, they can offer a loan that doesn’t need to be repaid until after graduation. To take the relationship even further, banks can connect customers who are established medical professionals to those medical students to network and share advice, creating a more personal experience for everyone.

These structured customer interactions will give banks even more data they can use to improve their pull strategy. Banks gain a more holistic view of customers, can expand their menu of services with relevant products and services and improve the customer experience. Embracing a “pull” strategy allows banks to go above and beyond, offering products that foster loyalty with existing customers and drawing new ones in through expanded services. The banks that choose to evolve now will own the market, and demonstrate their value to customers early on.

2019 Survey Results! Here’s How Banks Are Spending Money on Technology

The desire to streamline customers’ experience and improve efficiency is driving bank technology strategies across the industry, as most executives and directors believe their offerings are “adequate,” according to Bank Director’s 2019 Technology Survey, sponsored by CDW.

The survey, conducted in June and July 2019, reflects the views of CEOs, technology executives and independent directors. It seeks to better understand bank strategies, staffing and budgets around technology and innovation, as well as banks’ relationships with legacy core providers and newer vendors.

Seventy-eight percent of survey respondents say that improving the customer experience is a top objective driving their bank’s strategy around the investment, development and implementation of technology. Seventy-two percent say that fueling efficiency is a top objective.

These strategic objectives are driving where banks are investing in technology: 68% say they’re investing in automation in fiscal year 2019, and 67% are investing money to enhance the bank’s digital channels.

Most banks rely on their core provider to advance these goals. The cores are the primary providers for many of the technologies used by banks today, including application programming interfaces (68% say that API technology is provided by the core), business process automation (43%), data aggregation (42%) and peer-to-peer (P2P) payments (47%).

That relationship isn’t stopping many banks from searching for new potential partners; 60% are willing to work with newer fintech startups. The survey finds that the use of alternate providers is gaining ground, in particular when it comes to the cloud (57%), data aggregation (25%) and P2P payments (29%).

Despite the rise of the digital channel, 51% of respondents say the branch is equally important to online and mobile channels when it comes to growing the bank. More than half indicate they’re upgrading branch and ATM technology.

Just 30% say that driving top-line growth fuels their technology strategy, which indicates that most banks see technology as a way to save money and time as opposed to generating revenue.

Key Findings

  • Loyal to the Core. More than half of respondents say their core contract expires within the next five years. Sixty percent say they’re unlikely to switch to a new provider.
  • But Banks Aren’t Satisfied. Just 21% say they’re completely satisfied with their core provider.
  • Technology Pain Points. Sixty percent say their current core provider is slow to provide innovative solutions or upgrades to their bank, and almost half cite difficulty in implementing new solutions. These are major sticking points when 60% rely on their core provider to introduce innovative solutions.
  • It’s All on IT. Almost three-quarters point to the senior technology executive as the individual responsible for identifying, developing and implementing technology solutions. Almost half task a management-level committee to make decisions about technology.
  • Rising Budgets. Forty-five percent say their technology budget has risen between 5% to 10% for FY2019. Almost one-quarter report an increase of more than 15%. Responding banks budgeted a median of $750,000 for FY2019.
  • Where the Money’s Going. In addition to automation, digital enhancements and branch improvements, banks are hiring consultants to supplement in-house expertise (50%), and bringing on additional employees to focus on technology and innovation (43%).
  • Data Gap. Almost half describe their bank’s data analytics capabilities as inadequate.
  • More Expertise Needed. Fifty-three percent say technology is on the agenda at every board meeting — up three points from last year’s survey. Yet, 80% say the board needs to enhance its technology expertise. Forty-three percent say they have a technology expert on the board.
  • Cybersecurity Top of Mind. Protecting the bank from cyberattacks dominates board technology discussions, according to 96% of respondents. Many boards also focus on process improvements (63%) and implementing innovative customer-facing technology (46%).

To view the full results of the survey, click here.

How to Deliver a Full Customer Experience Over Mobile Banking


mobile-8-21-19.pngWith most banking activity taking place on mobile, banks must innovate in order to deliver the full customer experience straight to customers’ fingertips.

With more people using their phones to access banking services, banks cannot afford to miss out on the massive opportunity to go beyond transactions and offer the sales and service customers seek. A Citigroup study found that mobile banking is among the top three most-used applications on a consumers’ phone, increasing 50% from 2017 to 2018.

Many banks still have a siloed mindset, considering in-branch, mobile and online experiences as separate and distinct entities. But their customers don’t differentiate between channels; they view banking as an omni-channel experience.

Their expectations are the same, whether they go to a branch, visit their bank’s webpage at home or open an app on their phone. If they have questions, they expect the ability to ask their bank within the mobile app just as easily as they would in branch. And if they are interested in learning about savings accounts or loan rates, they expect to easily find that information within the mobile banking space.

Banks have long thrived by delivering seamless transactions, competitive and unique products and outstanding service. They have responded to the growing popularity of mobile banking by investing in technology to build out robust transactional experiences for their customers. From mobile deposit to transferring funds to bill pay, the ability to conduct fundamental banking transactions is available to and frequently used by customers.

Where bank mobile apps are lacking, however, is in providing the sales and service that they excel at delivering in their branches to the mobile devices of their customers. This is a huge opportunity many banks are missing. Based on our data, there are about 2,000 opportunities per every 25,000 accounts where a customer expresses an intent to inquire about how to do something or how to adopt a new product that is entirely uncaptured in mobile banking.

With the advent of digital transformation and more activity moving to mobile channels, the sales and service aspects of banking have gradually become more diluted. Banking has become less sales and service oriented and increasingly more transactional.

There is only one direction for banks to go: give consumers what they want and demand. Banks need to offer customers the ability to connect with them on their phone anytime, anywhere, and to receive the same level of sales and service they do at a branch. Mobile banking provides a plethora of opportunities to do just that.

Banks need to do more to provide the same support and service in their mobile channels as they do within their branches. There are three easy ways they can begin to leverage mobile banking to go beyond transactions to deliver sales and service to their customers.

1. Embed a robust help center within mobile banking.
Make finding and accessing digital support a breeze. Embed support content from your website within your mobile banking application to allow customers easy access to help content like resetting passwords and fund transfers. Make sure the most frequently asked questions are answered in a manner that answers the questions, provides additional information and creates a call to action.

2. Utilize chatbot to further engage customers.
Add live chat or an automated chatbot for an additional avenue to engage with your mobile customers. Banks can use chat to suggest relevant content or products and services, help point customers in the right direction and to learn more about their financial goals and needs.

It’s not uncommon for chat usage to double once it is added to mobile banking, which can put a sizeable strain on contact centers. Use support content in the form of a chatbot to allow customers the ability to self-answer common support questions, and offer live chat for more complex questions and issues.

3. Provide clear, concise product information.
Customers no longer consider mobile banking to be purely transactional. They think of it as an extension of a branch, where they’ve come to expect support and sales information. Providing links to your key products within mobile banking can encourage customers to explore your offerings.

When banks fail to go beyond transactions in mobile banking, they miss out on a vast opportunity to provide sales and service through the channel customers are the most present. The consequences of not doing so can result in greater contact center volume, and missed opportunities to increase wallet share.

Three Critical Strategies for Digital Wealth, Trust Success


strategy-7-31-19.pngThe robot (wealth advisors) are here.

The robo-advisor revolution promised to render legacy firms like broker-dealers, asset managers, and registered investment advisors obsolete.

The fear of being left behind motivated many companies across the wealth industry to respond with an open checkbook. BlackRock dropped $150 million to buy FutureAdvisor in 2015. Other firms, like JPMorgan & Chase Co., spent more than three years and millions of dollars building their own robo-advisors. And others, like Northwestern Mutual, spent $250 million to acquire and then ultimately shutter their offering.

Despite all the effort, money and time invested, these companies don’t have much to show for it. The amount of assets under management at these nascent efforts is underwhelming; when combined with ultra-low robo-fee rates, the revenue doesn’t come close to providing any real return on their upfront sizable investments.

What’s the real takeaway for banks? The problem isn’t the technology so much as it is the corresponding business strategy. When it comes to robo-advising, altering the strategy and deconstructing the technology will give banks the biggest returns on their investments. There will be benefits for the brokerage side of the bank, but even greater returns in the trust division, which typically relies on outdated processes based on paper and people.

If banks look at technology with a lens toward driving margin as well as revenue growth, the way they deploy robo-technology changes. Instead of launching robo-advisors and hoping customers stream in, a better strategy could be to become hyper-focused, using the technology in order to maximize its inherent value. Banks thinking about using digital solutions to improve their wealth and trust offerings can focus on three areas in order to get operational and revenue benefits:

  1. Eliminate paper-based trust account opening processes. Using digital trust account opening can dramatically reduce the total client onboarding time and begin the investing and billing processes sooner, accelerating the time it takes to generate revenue from a newly opened account. For example, the typical trust account takes about 40 days to get correctly opened and funded. Technology can reduce that time by 30 days, driving at least 8% more revenue with those extra days, while simultaneously decreasing the people- and paper-based costs.
  2. Automate existing smaller agency accounts. Automating processes like risk assessment, model management and rebalancing can significantly reduce the amount of time and people needed to manage those smaller, less profitable accounts. Banks can achieve higher customer satisfaction via the improved and streamlined process, as well as higher advisor satisfaction from the drastic reduction in operating time.
  3. Retain flight risk retail customers. Retail customers who do not meet the account minimums to utilize a bank’s wealth services often find wealth offerings elsewhere, taking their assets outside of your bank. By digitizing wealth offerings, banks can lower their operational costs and enable a profitable way to service smaller wealth accounts, retain more customers and increase revenue. The key is using technology to correctly segment customers to better predict when they are most likely to become a flight risk to consumer-facing robo-advisors like Betterment.

So, what should a bank do to digitize a wealth or trust offering?

Start by targeting efficiency. While you may be tempted by the siren song of new customers and revenue, the biggest short-term returns for technology always come through cost reduction and margin expansion. Find the areas of your business with the most friction and surgically target them with technology to notch meaningful gains. Once your operations are running faster and smoother, target existing at-risk customers. Yes, you’ll be repricing those deposits, but it’s always better to reprice, retain and ultimately grow deposits than it is to lose them to one of the consumer-facing robo-advisors.

How Community Banks Can Compete Using Fintechs, Not Against Them


fintech-7-15-19.pngSmaller institutions should think of financial technology firms as friends, not foes, as they compete with the biggest banks.

These companies, often called fintechs, pose real challenges to the biggest banks because they offer smaller firms a way to tailor and grow their offerings. Dozens of the biggest players are set to reach a $1 billion valuation this year—and it’s not hard to see why. They’ve found a niche serving groups that large banks have inadvertently missed. In this way, they’re not unlike community banks and credit unions, whose people-first philosophy is akin to these emerging tech giants.

Ironically, savvy fintechs are now smartly capitalizing on their popularity to become more like big banks. These companies have users that are already highly engaged; they could continue to see a huge chunk of assets move from traditional institutions in the coming year. After all, what user wouldn’t want to consolidate to a platform they actually like using?

The growth and popularity of fintechs is an opportunity for community banks and credit unions. As customers indicate increasing openness to alternative financial solutions, these institutions have an opportunity to grab a piece of the pie if they consider focusing on two major areas: global trading and digital capabilities.

Since their creation, community banks and member-owned organizations have offered many of the same services as their competitors. However, unlike fintechs, these financial institutions have already proved their resilience in weathering the financial crisis. Community banks can smartly position themselves as behind-the-scenes partners for burgeoning fintechs.

It may seem like the typical credit union or community banking customer would have little to do with international transactions. But across the world, foreign payments are incredibly common—and growing. Global trading is an inescapable part of everyday consumer life, with cross-border shopping, travel and investments conducted daily with ease. Small businesses are just as likely to sell to a neighbor as they are to a stranger halfway around the globe. Even staunchly conservative portfolios may incorporate some foreign holdings.

Enabling global trades on a seamless digital scale is one of the best avenues for both community banks and credit unions to expand their value and ensure their continued relevance. But the long list of requirements needed to facilitate international transactions has limited these transactions to the biggest banks. Tackling complex regulatory environments and infrastructure can be not only intimidating, but downright impossible for firms without an endless supply of capital earmarked for these such investments.

That means that while customers prefer community banks and credit unions for their personalization and customer service, they flock to big banks for their digital capabilities. This makes it all the more urgent for smaller operations to expand while they have a small edge.

Even as big banks pour billions of dollars into digital upgrades, an easy path forward for smaller organizations can be to partner with an established service that offers competitive global banking functions. Not only does this approach help them save money, but it also allows them to launch new services faster and recapture customers who may be performing these transactions elsewhere.

As fintechs continue to expand their influence and offerings, innovation is not just a path to success—it’s a survival mechanism.

How Innovative Banks Are Reimagining the Core


core-7-10-19.pngNew developments in technology have heightened bank customers’ expectations of speed, service and customization from their financial institutions—and cores are struggling to keep up.

Consumer expectations for banks are so high that it’s difficult—if not impossible—to meet them using existing core banking systems. Luckily, the landscape of core providers is growing rapidly too, and some banks are already taking the plunge.

The “Big Three” core providers as they’re known in the industry—Fiserv, Jack Henry & Associates and Fidelity National Information Services—serve just over 71 percent of U.S. banks according to data company FedFis. They’re criticized for providing poor service and lagging significantly behind smaller, more nimble fintechs when it comes to innovation. And their recent acquisition streaks have bank clients worried that it could erode service levels, reduce choice and increase cost.

James “Chip” Mahan III, chairman and CEO of Live Oak Bancshares, described the situation aptly: “It just seemed like every time we wanted to do something, it’s impossible. It’s ‘stand in line and write a big check.’ And it’s really, fundamentally, putting lipstick on a pig.”

That’s why the bank, based in Wilmington, North Carolina, invested in an emerging competitor—Finxact—and courted creators and industry veterans Frank and Michael Sanchez out of semi-retirement to take on the challenge of reinventing the core.

Finxact is an inventory management system that’s been architected from scratch on Amazon Web Services. Finxact and other alternative core providers offer three key features that banks should demand from a 21st century core processor.

Open Architecture
Nearly every core has some type of application programming interface (API) that allows its technology to connect to third-party applications, though the availability of those APIs is still tightly controlled in legacy systems.

Most challenger cores embrace open architecture—a quality that stands in stark contrast to the situation with incumbent cores. Deland, Florida based Surety Bank wasn’t able to negotiate with its legacy provider to use a third-party remote deposit capture solution.

CEO Ryan James says that was “a deal killer” because the bank does a large volume of deposits with that provider, had tailored it to their needs and had undergone examinations with it as well.

“It just was absurd that [our legacy core] didn’t even want to take that file, because they were greedy. They wanted to charge the [remote deposit] rates on that even though they couldn’t do what we needed,” he says. “That was an eye opener.”

Surety Bank eventually chose to undergo a full core conversion. It only took four months for the bank to launch on a cloud-based system from NYMBUS at the beginning of 2018.

Cloud Native
In addition to featuring open architecture, many challenger cores are cloud native. Although most legacy cores have some ability to run some of their system within a cloud environment, truly cloud-native companies offer banks greater advantages.

“There are different services that the cloud provides that will enable you to scale without drastically increasing your costs,” says Eugene Danilkis, co-founder and CEO of Berlin-based core technology provider Mambu. “That allow [cores] to have the best practices in terms of security, in terms of disaster recovery and also the sort of operations you can support.”

One of the operational advantages a cloud-native system provides is the ability to deploy updates within a day or two, Danilkis says.

Being cloud native is synonymous with scalability; a system can handle one hundred accounts as easily as it can handle one hundred thousand. This significant benefit means core providers don’t need to charge banks for each new account or service they add, and often use software-as-a-service models or other simple, transparent pricing schemes.

Configurable
Perhaps the most important hallmark of a modern core system is configurability. Modern cores give banks the ability to create their own ecosystems, workflows and bespoke financial products that differentiate them from competitors.

Banks on a core like Finxact could build a new type of savings account that automatically raises its interest rate when the balance reaches a certain level. In contrast, legacy cores only offer out-of-the-box products that can be tweaked to meet a bank’s risk appetite or other basic requirements, without changing the product.

Changing the Game
Modern core processors approach banking technology in radically different ways from legacy core providers. They’ve built new systems from scratch, instead of bolting on acquired products. They run in realtime instead of overnight batches. They look and feel like websites instead of flat green screens. They’re open, cloud-native and highly configurable—and they’re finally coming into their own. Innovative banks should explore these options now so that they can leapfrog their peers in the near future.

Potential Technology Partners

Finxact

Currently in limited use at Live Oak Bancshares and engaged in discussions with several other U.S. banks.

NYMBUS

The SmartCore platform is powering at least one community bank, and its SmartLaunch product uses SmartCore to support digital-only brands for additional institutions.

EdgeVerve

The Infosys Finacle core is used in over 100 countries and made waves in the U.S. when Discover Financial Services left Fiserv to use this core for its direct banking business in late 2014.

Smiley Technologies

The SIBanking platform is currently in use in several U.S. banks with assets up to $1.3 billion.

Thought Machine

This London-based company wrote its cloud-native Vault core from scratch. The company states that it has clients in the U.S., but is unable to identify them publicly.

Mambu

Mambu has bank clients in 15 countries. In the U.S., current clients include non-bank lenders, and the company is planning to use its latest funding round, in part, to grow its footprint in the U.S.

Mbanq

The founder of NYMBUS just joined this operation to help the company expand into the U.S. They currently serve 15 banks primarily in Europe and Asia.

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

A Former Regulator Shares His Advice for Boards


regulator-6-13-19.pngDeveloping a positive relationship with regulators is important for any bank. How can banks foster this?

There’s no one better to answer this question than a former regulator.

Charles Yi served as general counsel of the Federal Deposit Insurance Corp. from 2015 to 2019, where he focused on policy initiatives and legislation, as well as the implementation of related rulemaking. He also served on the FDIC’s fintech steering committee.

In this interview, Yi talks about today’s deregulatory environment and shares his advice for banks looking to improve this critical relationship. He also explains the importance of a strong compliance culture and what boards should know about key technology-related risks.

Yi, now a partner at the law firm Arnold & Porter, in Washington, D.C., spoke to these issues at Bank Director’s Bank Audit & Risk Committees Conference. You can access event materials here.

BD: You worked at the FDIC during a time of significant change, given a new administration and the passage of regulatory relief for the industry. In your view, what do bank boards need to know about the changes underway in today’s regulatory environment?
CY: While it is true that we are in a deregulatory environment in the short term, bank boards should focus on prudent risk management, and safe and sound banking practices for the long term. Good fundamentals are good fundamentals, whether the environment is deregulatory or otherwise.

BD: What hasn’t changed?
CY: What has not changed is the cyclical nature of both the economy and the regulatory environment. Just as housing prices will not always go up, [a] deregulatory environment will not last forever.

BD: From your perspective, what issues are top of mind for bank examiners today?
CY: It seems likely that we are at, or near, the peak of the current economic cycle. The banking industry as a whole has been setting new records recently in terms of profitability, as reported by the FDIC in its quarterly banking profiles. If I [were] a bank examiner, I would be thinking through and examining for how the next phase of the economic cycle would impact a bank’s operations going forward.

BD: Do you have any advice for boards that seek to improve their bank’s relationship with their examiners?
CY: [The] same thing I would say to an examiner, which is to put yourself in the shoes of the other person. Try to understand that person’s incentives, pressures—both internal and external—and objectives. Always be cordial, and keep discussions civil, even if there is disagreement.

BD: What are some of the biggest mistakes you see banks make when it comes to their relationship with their examiner?
CY: Even if there is disagreement with an examiner, it should never become personal. The examiner is simply there to do a job, which is to review a bank’s policies and practices with the goal of promoting safety and soundness as well as consumer protection. If you disagree with an examiner, simply make your case in a cordial manner, and document the disagreement if it cannot be resolved.

BD: In your presentation at the Bank Audit & Risk Committees Conference, you talked about the importance of projecting a culture of compliance. How should boards ensure their bank is building this type of culture?
CY: Culture of compliance must be a focus of the board and the management, and that focus has to be communicated to the employees throughout the organization. The incentive structure also has to be aligned with this type of culture.

Strong compliance culture starts at the top. The board has to set the tone for the management, and the management has to be the example for all employees to follow. Everyone in the organization has to understand and buy into the principle that we do not sacrifice long-term fundamentals for short-term gain—which in some cases could end up being [a] long-term loss.

(Editor’s note: You can learn more about building a strong culture through Bank Director’s Online Training Series, Unit 16: Building a Strong Compliance Culture.)

BD: You served on the FDIC’s fintech steering committee, which—in a broad sense—examined technology trends and risks, and evaluated the potential impact to the banking system. Banks are working more frequently with technology partners to enhance their products, services and capabilities. What’s important for boards to know about the opportunities and risks here?
CY: Fintech is the next frontier for banking, and banks are rightly focused on incorporating technology into their mix of products and services. One thing to keep in mind as banks increasingly partner with technology service providers is that the regulators will hold the bank responsible for what the technology service provider does or fails to do with regard to banking functions that have been outsourced.

BD: On a final note: In your view, what are the top risks facing the industry today?
CY: I mentioned already the risks facing the industry as we contemplate the downhill side of the current economic cycle. One other issue that I know the regulators are and have been spending quite a lot of time thinking about is cybersecurity. What is often said is that a cyber event is not a question of if, but when. We can devote volumes of literature [to] talking about this issue, but suffice for now to say that it is and will continue to be a focus of the regulators.

Arnold & Porter was a sponsor of Bank Director’s Bank Audit & Risk Committees Conference.

How Innovative Banks Keep Up With Compliance Changes


compliance-6-5-19.pngBankers and directors are increasingly worried about compliance risk.

More than half of executives and directors at banks with more than $10 billion in assets said their concerns about compliance risk increased in 2018, according to Bank Director’s 2019 Risk Survey. At banks of all sizes, 39 percent of respondents expressed increasing concern about their ability to comply with changing regulations.

They’re right to be worried. In 2018, U.S. banks saw the largest amount of rule changes since 2012, according to Pamela Perdue, chief regulatory officer for Continuity. This may have surprised bankers who assumed that deregulation would translate to less work.

“The reality is that that is not the case,” she says. “[I]t takes just as much operational effort to unwind a regulatory implementation as it does to ramp it up in the first place.”

Many banks still rely on compliance officers manually monitoring websites and using Google alerts to stay abreast of law and policy changes. That “hunt-and-peck” approach to compliance may not be sufficiently broad enough; Perdue said bankers risk missing or misinterpreting regulatory updates.

This potential liability could also mean missed opportunities for new business as rules change. To handle these challenges, some banks use regulatory change management (RCM) technology to aggregate law and policy changes and stay ahead of the curve.

RCM technology offerings are evolving. Current offerings are often included in broader governance risk and compliance solutions, though these tools often use the same manual methods for collecting and processing content that banks use.

Some versions of RCM technology link into data feeds from regulatory bodies and use scripts to crawl the web to capture information. This is less likely to miss a change but creates a mountain of alerts for a bank to sort through. Some providers pair this offering with expert analysis, and make recommendations for whether and how banks should respond.

But some of the most innovative banks are leveraging artificial intelligence (AI) to manage regulatory change. Bank Director’s 2019 Risk Survey revealed that 29 percent of bank respondents are exploring AI, and another 8 percent are already using it to enhance the compliance function. Companies like San Francisco-based Compliance.ai use AI to extract regulatory changes, classify them and summarize their key holdings in minutes.

While AI works exponentially faster than human compliance officers, there are concerns about its accuracy and reliability.

“I think organizations need to be pragmatic about this,” says Compliance.ai chief executive officer and co-founder Kayvan Alikhani. “[T]here has to exist a healthy level of skepticism about solutions that use artificial intelligence and machine learning to replace what a $700 to $800 an hour lawyer was doing before this solution was used.”

Compliance.ai uses an “Expert in The Loop” system to verify that the classifications and summaries the AI produced are accurate. This nuanced version of supervised learning helps train the model, which only confirms a finding if it has higher than 95 percent confidence in the decision.

Bankers may find it challenging to test their regulatory technology systems for accuracy and validity, according to Jo Ann Barefoot, chief executive officer of Washington-based Barefoot Innovation Group and Hummingbird Regtech.

“A lot of a lot of banks are running simultaneously on the new software and the old process, and trying to see whether they get the same results or even better results with the new technology,” she says.

Alikhani encourages banks to do proofs of concept and test new solutions alongside their current methodologies, comparing the results over time.

Trust and reliability don’t seem to be key factors in bankers’ pursuit of AI-based compliance technology. In Bank Director’s 2019 Risk Survey, only 11 percent of banks said their bank leadership teams’ hesitation was a barrier to adoption. Instead, 47 percent cited the inability to identify the right solution and 37 percent cited a lack of viable solutions in the marketplace as the biggest deterrents.

Bankers who are adopting RCM are motivated by expense savings, creating a more robust compliance program and even finding a competitive edge, according to Barefoot.

“If your competitors are using these kinds of tools and you’re not that’s going to hurt you,” she says.

Potential Technology Partners

Continuity

Combines regulatory data feeds with consultative advice about how to implement changes.

Compliance.ai

Pairs an “Expert in the Loop” system to verify the accuracy of AI summaries and categorization

OneSumX Regulatory Change Management from Wolters Kluwer

Includes workflows and tasks that help banks manage the implementation of new rules and changes

BWise

Provides impact ratings that show which parts of the bank will be impacted by a rule and the degree of impact

Predict360 from 360factors

Governance risk and compliance solution that provides banks with access to the Code of Federal Regulations and administrative codes for each state

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

Avoiding Unnecessary Unclaimed Property Forfeitures and Keeping Customers


risk-5-27-19.pngUnclaimed property issues are complex, but there are steps banks can take to help their customers maintain claims to their assets and keep their funds within the institution.

“Escheatment” is the legal term for the transfer of abandoned property to the state. Once a customer’s property is considered “abandoned” after a specific waiting period, state laws require that the bank turn over the asset to the state treasury department for safekeeping. Dormancy periods can be as short as one year, but vary by state or jurisdiction.

Banks can take four key actions that can reduce the risk that unnecessary escheatment could have on their customers’ accounts, and keep assets and deposits within the institution.

Institutions need to design processes and systems that can prevent unnecessary escheatment. Many banks lack the internal processes and technology solutions that would help minimize the risk of escheatment and often do not formalize their approach until faced with an audit, compounding an already-stressful situation.

Banks can create a culture of compliance by having policies and procedures for this process in place. They can also use technology to mitigate escheatment risk, lower the cost of the process and increase the efficiency of mitigation efforts.

However, many financial organizations lack robust systems to aid this process. For example, banks might allow certificates of deposit to be escheated because of inactivity, even though the CD owner has actively made deposits in or withdrawals from another account type. Linking customer accounts together allows the bank to assess contact activity across all holdings.

Banks can also educate their customers on the importance of maintaining accurate contact information and regular activity, which could prevent accounts from becoming dormant. Effective ways to help clients accomplish this include:

  • Providing customers with educational information when they open an account—one of the best times to educate them.
  • Adding messages on customer communications.
  • Establishing online alerts if mail has been returned as undeliverable, prompting customers to update their address when they log into their accounts.
  • Training bank employees about the risks of unnecessary escheatment so they are well-versed about unclaimed property compliance and can guide customers appropriately.

Banks should also proactively identify their customers who might be at risk for escheatment. All jurisdictions, except for Puerto Rico, have basic due diligence requirements that require banks to make a final attempt to contact owners of dormant accounts and uncashed checks towards the end of the dormancy period. But there are several steps that banks can take to identify customers at risk of escheatment ahead of the dormancy period:

  • Monitor which accounts have been inactive for 12 to 18 months and note the relationship with these customers.
  • Begin outreach campaigns early and allow sufficient time for communication, rather than waiting for the mandated due diligence process.
  • Identify deceased customer accounts that appear to be inactive, which can happen when family members are not aware that the account needs to be transferred or overlook paperwork when settling an estate.

Banks should communicate early, often and effectively with at-risk customers well in advance of the due diligence escheatment process. This process generally occurs late in the dormancy period: accounts have often been dormant for three to five years, making it difficult to find and communicate with their owners.

The process typically involves a single mailing sent to the last address of the dormant account’s owner, in hopes that they will respond. Most jurisdictions do not require due diligence mailings if the address on the account has been deemed inaccurate.

Owners that do receive and open the due diligence mailing may miss the window to reactivate their account if they do not act immediately. Customers may also think these letters are potential scams because they do not perceive themselves to be inactive or lost.

Effective ways to communicate with at-risk customers include:

  • Calling customers directly and explaining the situation before incurring the expense of a due diligence mailing
  • Using colored envelopes and company logos in customer communications.
  • Using direct mailings when time, budget, resources or the volume of accounts prevent telephone efforts.

Varying the communication techniques, changing the appearance of each mailing and customizing the specific details of the communication to the customer’s unique situation may also accelerate and increase the response rate. Proper documentation is critical–banks should retain all correspondence for control and audit purposes.

The key to preventing unnecessary escheatment is being proactive long before the state dormancy periods begin. These methods will help banks reduce the cost of compliance and retain assets and customers.

The Great Payments Opportunity


payments-5-20-19.pngBanks have an opportunity to deepen relationships with their corporate customers facing payment challenges. One promising product could be integrated receivables solutions.

While most business-to-business payments are still done through paper check, electronic payments are growing rapidly. Paper checks remain at about 50 percent of business-to-business payments, according to the 2016 Electronic Payments Survey by the Association for Financial Professionals. But Automated Clearing House payments grew 9.4 percent in 2018, according to the National Automated Clearinghouse Association — a trend that is forcing businesses with high receivables volumes to look for ways to process electronic payments more efficiently.

Electronic payments create unique challenges for bank corporate customers. While the deposit is received electronically at the bank, the remittance and detailed payment information are typically sent separately in an email, document or spreadsheet. The corporate treasurer must manually connect, or re-associate, the remittance information to the deposit, which creates delays in crediting the customers’ account. As electronic ACH volumes increase, treasurers solve this problem by hiring more accounting staff to reconcile these payments.

Corporates also face added complexity from payment networks, which are becoming a more common way for large companies to pay their suppliers. While more efficient for the payer, this process requires treasury staff to log onto multiple payment network aggregation sites and download the remittance information. These downloaded files require manual re-association to the payment in order to credit the customer’s account, which requires adding more staff.

Corporates are also using mobile to accept field payments, like collecting payment on the delivery of goods or services, new customer orders or credit holds and collections. However, mobile payments again force treasurers to manually reconcile them. Moreover, most commercial banking mobile applications are designed for the treasurer of the business, with features such as balances, history and transfers. Collecting field payments needs to be configured so that field representative can simply collect the payments and remittance.

The corporate treasurer needs increased levels of automation to solve these challenges and problems. Traditional bank lockbox processing was designed for checks and relies on manual entry of the corporate’s payments and delivery of a reconciled file. This paper-based approach will be insufficient as more payments become electronic.

Treasurers should consider integrated receivables systems that match all payments types from all payment channels using artificial intelligence. A consolidated payment file updates the corporate’s enterprise resource planning system once these payments are processed. The integrated receivable solution then provides the corporate with a single archive of all their payments, rather than just a lockbox.

Right now, corporate customers are looking to financial technology firms for integrated receivable solutions because banks are moving too slowly. This disintermediates corporate customers from the banks they do business with. But almost 73 percent of corporate treasurers believe it is important or very important for their bank to provide integrated receivables, according to Aite.

This is an opportunity for bankers. The integrated receivable market offers many software solutions for banks so they can quickly ramp up and meet the needs of their corporate customers.

Bankers have a wide range of fintech partners to choose from for integrated receivables software and should look for one with expertise and knowledge of the corporate market. The solutions should leverage artificial intelligence and robotic process automation to process payments from any channel, include security with high availability and be easy for the bank and corporate customers to use.