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Challenges of Small and Medium Financial Institutions (FIs)

Financial Institutions (FIs – e.g., banks and credit unions) of all shapes and sizes have been burdened with compliance requirements, like those in the Bank Secrecy Act (BSA), that are onerous and costly. Smaller FIs are particularly hard hit with high costs for BSA qualified employees when actual workload cannot justify these costs. The common alternative is to train someone who shares the BSA responsibilities with other functions, which can often produce a higher risk of compliance audits.

Our research also shows that human capital costs also take a big chunk of their budget allocation. Read the full article on Real Human Capital Costs of Financial Institutions. The government (i.e., Federal Reserve, FDIC, FinCEN, NCUA, OCC) issued an “Interagency Statement on Sharing Bank Secrecy Act Resources” in October 2018. It said, “The cost of meeting BSA requirements and effectively managing the risk that illicit finance poses to the broader U.S. financial system may be reduced through sharing employees or other resources in a collaborative arrangement with one or more other banks. These arrangements may also provide access to specialized expertise that may otherwise be challenging to acquire without the collaboration.”

The process of new customer-member acquisition and onboarding is one area where modern technology, driven largely by the internet and mobile systems, can deliver faster, more accurate, flexible and less expensive processes. Using inexpensive webcams, cloud-based browser applications, mobile devices and expanded access to public verification data, the new account creation process can be more flexible, more accurate, less expensive and most importantly – faster. The process can include the verification of essential ID elements as well as the inclusion of anti-money laundering Customer Identification Program risk information, previous adverse banking relationships, etc.

Using modern Artificial Intelligence and Machine Learning methods, risk assessment and decision processes can be guided with ‘organization-unique’ scoring and recommendation aids – for both the ID verification and AML/CIP risk assessments. Because of the architecture of these systems, new opportunities for sharing both processes and information are possible. We can consider three areas where sharing can reduce costs and increase management of risk.

  1. Small FIs within a local community – or even organizations spread geographically – can easily share the onboarding ID verification process, using the same server with separate authentication and access controls to partition proprietary data.
  2. The CIP function and particularly follow on risk assessment for Enhanced Due Diligence can easily be performed by a shared third party, using a common system, that can provide full BSA support up to but not including external audit.
  3. The use of a common system by FIs in a specific region (e.g., county, state) can benefit by sharing non-attributed AML risk information that provides a geographic risk assessment to aid in guiding risk management strategies and for use in annually required BSA risk assessments.

Modern technologies, like those being introduced by a ClayHR/IIMS (Integrated ID Management Services) partnership, have the potential of shared processes that improve customer risk management while delivering affordability to small community FIs. For many of these FIs, sharing costs for functions like new customer/member risk management should be a strategic goal.

A major question for smaller FIs is how to stay ahead of both increasing fraud risks and compliance requirements while finding ways to mitigate costs. Installed processes are often based on decades-old technology and manual processes which do not take advantage of the improved efficiencies and lower costs of rapidly evolving technology.

At ClayHR, we are committed to providing AI-enabled highly cost-effective solutions for Financial Institutions to stay on top of the changing nature of the customer due diligence landscape. Join the happy group of customers who use our account opening, verification, and risk monitoring solutions. Contact us for a custom demo, or simply schedule a no-obligation consultation appointment.

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