Do Tough Times = A Rise in Employee Fraud?

Do Tough Times = A Rise in Employee Fraud?
Tough times bring about some pretty unfortunate acts. Disgruntled employees are a huge risk as they can do quite a number on bank assets and customer information. There is no doubt, the number of internal fraud incidents we are hearing about these days are on the rise. It’s unfortunate but true. However, internal fraud is not a new challenge – it is a problem even in the best of times. We just don’t hear about it as often when times are good. Insider fraud accounts for approximately 60% of bank fraud cases where a data breach or theft of funds has occurred. That is a staggering figure. No bank is immune to the risks presented by disgruntled employees and professional criminals. There are however, multiple steps that banks can take to better protect themselves and stay a step ahead of fraudsters. Given how serious the consequences of fraud can be, banks have to be quite particular about the policies and procedures they put in place. The breadth and depth of fraud solutions are of the essence, as banks must protect their physical and logical assets. In order to block and prevent potential internal fraud, banks should limit the use and display of social security numbers. They should also set policies regarding the use of personal digital storage (e.g. MP3 players, digital cameras, etc.) at the workplace, in addition to developing and adhering to a sound and timely notification process, and requiring ongoing security awareness and training. I have spent a fair amount of time researching this subject, and as you may imagine, have heard some pretty wild stories about insider fraud at banks (confidential of course). I invite you to read my report “Internal Fraud: Big Brother Needs New Glasses” if you would like to learn more about this subject and what banks can do to protect themselves.

Did Anyone Catch The Tail-End of President Obama’s Address?

Did Anyone Catch The Tail-End of President Obama’s Address?
UPDATE: I posted to the Celent blog while eating breakfast this morning on the West Coast. Evidently, great minds think alike, as the NYT also put out a related article today (I swear I didn’t know the NYT piece was out). The NYT provided a much better description of USAs: http://www.nytimes.com/2009/03/07/your-money/07money.html?hp Last week, I’m sure that many of you watched President Obama’s Address to the Joint Session of Congress (i.e., his de facto State of the Union Address). Toward the very end of his speech, the president made the following statement: “To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. Comprehensive health care reform is the best way to strengthen Medicare for years to come. And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans.” Tax-free universal savings accounts? Intrigued, I did some web research. Most details about universal savings accounts (USAs) originate from the early-2000’s and suprisingly come from conservative/libertarian sources (e.g., The Cato Institute). The main components of proposed USAs include the following:
  • Eligibility for all U.S. citizens, regardless of employment status
  • A contribution limit of the greater of $10,000 or 50% of taxable income
  • Distributions can be made tax-free after 3 years
  • Savings can be invested in stocks, bonds, money market accounts, etc.
To put it simplistically, a USA is basically an un-shackled IRA, designed to ease the pain of the impending Social Security crisis. I can’t help but think that President Obama “channeled” the Bush Administration when he mentioned USAs. Nonetheless, banks need to keep their eyes on any USA proposals, as there are certain to be implications and opportunities in terms of deposit growth, investment management, distribution tools (e.g., payment cards), customer service, reporting, etc. Interestingly, the health care policy space has proposals for its version of a USA; a Universal Health Account, or UHA. More on that in a future blog post…

FFIEC RDC Guidance

FFIEC RDC Guidance
The Federal Financial Institutions Examination Council, FFIEC, issued its long-awaited guidance on remote deposit capture risk management in January 2009. In our view, the guidance provides prudent measures for financial institutions to consider as they seek to fully-leverage RDC for deposit growth and customer convenience. Importantly, the guidance contained no surprises, and did not impose fundamental limitations on what banks could do with RDC. We welcome this outcome.

That said, we found two aspects of the guidance disappointing.

The guidance introduces remote deposit capture as a “deposit transaction delivery system” not simply a “new service”. We couldn’t agree more. But the guidance equates all forms of distributed image capture, branch capture, teller capture, ATM capture and merchant/client capture as RDC. While all forms of distributed capture share a common technology, the risks associated with each vary considerably. The focus belongs on distributed capture taking place by untrained ordinary non-bank employees. Financial institutions have been managing check image capture for well over a decade with good success. Guidance for those operations likely weren’t sought or needed.

The other troubling aspect of the guidance in our opinion is that it failed to recognize the many operational benefits of distributed capture. Arguably, the work process improvements enabled by modern image workflows can reduce risk, not elevate it. For example, instead of relying on tellers as a first defense against check fraud (e.g., 100% manual inspection) and antiquated day-2 rules-based fraud systems, RDC enables a highly automated and efficient set of deposit review and risk management tools that can be applied in near real time. Suspect items can be routed (via image) to trained operators for review well before posting.

With the sensible guidance issued, banks can now breathe a sigh of relief, and get busy leveraging this immensely popular technology instead of being paralyzed by highly over stated perceived risks.

Integrating Fraud and AML: The Holy Grail of Compliance?

Integrating Fraud and AML: The Holy Grail of Compliance?
Financial institutions are overloaded with a panoply of onerous and expensive compliance regulations, from Basel II to IAS to BCP (one might also mention an overload of acronyms). The anti-money laundering (AML) programs required by regulators in the US and many other countries is a particular headache. Banks have invested many millions of dollars in AML technology alone, not to mention the personnel costs for the compliance teams and front-office staff training. Naturally, this has got banks to thinking about ways they can leverage this investment in compliance. One way forward could be to integrate their AML and anti-fraud efforts.

Banks complain a lot about the burden of AML compliance. But at the same time, they invest in and build anti-fraud systems (really not much different in kind than AML systems) quite willingly, since they naturally want to stop people from stealing money from them. In other words, anti-fraud is a business activity, with direct benefits to a bank’s bottom line. By combining anti-fraud and AML systems, therefore, banks could potentially get a business benefit from the “AML burden.” Indeed, a number of banks are moving in this direction, beginning with combining their faud and AML departments. A smaller number have started to integrate the technology systems as well.

Software vendors have for some years promoted the idea of using one technology platform (theirs, of course) for both AML and anti-fraud. In particular, a number of the larger AML vendors have developed anti-fraud products using their core behavior detection technologies. This potentially holds out the promise for banks of a sort of compliance holy grail: leveraging the compliance investment in AML for their anti-fraud efforts, and producing some tangible business results from the investment.

PFM Meets Social Networking?

PFM Meets Social Networking?
There was an interesting article this morning in American Banker called, “E-Banking, Meet Social Networking.” After reading the article I came up with 2 conclusions: – Banks need to improve their personal financial management offerings (PFM). The article talks about how Geezeo is offering a white label version of its PFM software to banks. While many banks have PFM tools that they make available to their customers, they pale in comparison to those offered by non-banks in this space (e.g. Mint.com, Wesabe, Geezeo). I would like to see a few banks come up with more competitive offerings (either on their own, or using a 3rd party). Customers really value these tools and they are being demanded, particularly in tough economic times when folks carefully track their spending. – Social networking can be an interesting component of PFM but is not an absolute requirement. This is a nice to have feature, but not one that will keep customers coming back, particularly in the short term. Basic community features would be nice, or at least some spending stats from the overall user base. However, I see customers gravitating more towards the functional component of PFM as opposed to the social networking aspect. In fact, some banks may be scared off if they have to deploy PFM and social networking features in one swift motion. Banks will want to have the option of choosing the features they want to turn on or off.

Can the villagers spell A-T-M?

Can the villagers spell A-T-M?
Gone are the days when only the rich withdrew money from ATMs in India. India has seen exponential growth in ATMs, with a cumulative annual growth of about 70% since 2000. During 2007-2008 alone, the number of ATMs grew by 28.4%. However, there has been a clear lack of symmetry in their spread. The ATMs in India are concentrated in urban areas, and penetration into the rural market has been slow and lethargic. Around 70% of India’s population, with a literacy rate of about 60%, lives in the rural regions. To access the unbanked population, banks are looking to expand into the rural and semi-urban areas. With many of the rural population unable to read or write, how are banks tackling the problem of making the ATMs accessible to them? The Celent Report The Dragon and Tiger of the ATM Markets: China and India touches upon the usage of innovative channels like Biometric ATMs (with authentication through face, iris, and fingerprint recognition technologies) and handheld PDAs. As an update to the report, State Bank of India, the largest public sector bank, announced that it will be installing 150 biometric ATMs in the country by the end of March 2009. Other banks have installed biometric ATMs as proofs of concept at different villages all over the country. Most of these biometric ATMs work on fingerprint technology as the means of authentication. NCR and Diebold are the major players providing biometric ATMs in India. Other products like Grammteller, a low-cost ATM developed by IIT-M TeNet group and Vortex, have also entered the market and promise to significantly reduce the cost of operations for the bank. Despite such advances, some issues remain for the banks to sort out.
  • Connectivity. Without proper broadband penetration, banks will have trouble setting up ATMs in remote villages.
  • Energy. With many villages receiving less than eight hours of electricity per day, uninterrupted power is something that the banks need to think about
  • Maintenance. Remote villages will lack technical expertise to handle ATMs.
  • Security. Both the network security and the physical security of the ATM booths need to be handled.
The silver lining is that the rural population has been showing technological affinity for mobile and e-commerce. The process would be slow, but the banks should be able to reap the benefits over a period of time. How long? We will be there to find it out.

HSA Benchmarking, The Recessionary Version

HSA Benchmarking, The Recessionary Version
As financial institutions in the healthcare banking space know well, Celent launched its semi-annual HSA benchmarking exercise in 2008. We initiated this benchmarking in response to the lack of truly meaningful HSA performance data — i.e., data that would enable banks to assess their own HSA programs vis-a-vis those of their peers. The first benchmarking round took place in the Spring, and was certainly ground-breaking in its scope. As the HSA market began to mature slightly and consumers’ experiences became more of a concern, we improved the benchmarking in the Fall 2008 by gathering data about customer service performance; e.g., calls per account, % of calls directed to live customer service reps, first-call resolution rates, etc. Then came the recession. Just after our last benchmarking questionnaire was sent out in August, the stock market tanked, monthly lay-off numbers began rolling in by the hundreds of thousands, and the U.S. government declared that we were “officially” in a recession. This and the banking sector’s focus on deposit growth/retention has had a definite impact on our HSA benchmarking design. To design our next (Spring 2009) round, we spoke with many benchmarking participants, asking them about changes/additions that they’d like to see, given the current economic environment. Based on these discussions, it became clear that HSA account profiling and retention data are in much higher demand. As such, the next benchmarking round will collect an expanded set of data that will result in the most relevant HSA information yet, including account aging, account closures, spenders vs. savers vs. investors, etc. Once the results are in, it won’t be surprising if we learn that HSA balances have stagnated or dropped, given unemployment and deteriorating investments. For those HSA custodians/banks interested in Celent’s next round of HSA benchmarking, there’s still time to participate — please contact Steve Nawrocki for more information.

Working Capital is not a dirty word, is it?

Working Capital is not a dirty word, is it?
There is no dispute that one of the hardest organizational barriers to break is the one between Finance and Operations. Accountants and treasurers do not go very well with manufacturing, logistics, and procurement. They have different tasks and different (if not necessarily divergent) objectives, which exacerbate the gap. It is often said, to explain such behavior, that neither side had a real reason to “mingle” and cooperate beyond the basic courtesy of being employees of a same company. But “today” is making things quite different, and models of the recent past will hardly apply to the future scenarios, as soon as the recession dust settles down. “Cash is king” is the refrain in today’s economy, and working capital is the most direct, and effective, metric that measures the health of a corporation. While Treasurers are very familiar and comfortable with the intricacies of what it takes to improve the value of the figure, operations people are not. Just yesterday I was at a meeting of logistics and supply chain managers. I was impressed to listen the presenters mention “working capital” quite a few times. My initial enthusiasm to listen logistics managers finally speaking the finance vocabulary came to a halt, however, when I heard comments along the lines of ”The benefit achieved from this project is that we increased (italic intentional) our company’s working capital.” After an unavoidable shiver, I calmed and realized that they wanted to express something quite different. As a matter of fact, the increase was in the final result of the corporate financial statement, thanks to a reduced need for working capital. Moving away from the semantic analysis of the various other statements heard on the subject of working capital, one item appears clear: operations people are still far away from confidently handling matters that traditionally belonged on the other side of the wall. It should be a priority for corporate decision-makers to ensure these barriers eventually tumble down. When definitions are mis-communicated, they surface an inherent lack of understanding of the subject. In a world continuously revolutionized by changing dynamics and paradigms, it is not an option to fumble for results. The first barrier to break down is the one of corporate language, and operations people should not shy away from terms that sound “financial” and, therefore, out of scope. Understanding of working capital, and of the levers needed to impact its value, should be the first practical test-bed where finance and operations meet to produce positive results for the corporation they both work for.

BAI Transpay

BAI Transpay

Going … Going … Going but not yet gone.

Greetings from BAI Transpay where bankers and vendors gathered to discuss payment issues. Check volumes are dropping and banks are racing to drop costs as quickly as customers are dropping volume. Checks are being imaged, converted to ACH and replaced by debit so that paper check handling is dropping dramatically.

Banks are making mighty efforts to drop costs in line with these decreases. JPMorgan Chase (plus WaMu) has dropped from 3200 people to 1400 in check processing and gone from 21 processing centers to 13.

BB&T has moved to 99% image exchange for sending and receiving images and has branch capture in 400 out of 1500 branches. Frost Bank has dropped head count in check processing by 30%. All banks are racing to reduce costs.

The most painful part of the process will be deciding when volumes get really low. A bank will need to decide whether to:

– Stop working with paper all together

– Keep what little remains in house

– Outsource the remainder

We aren’t there yet, but even the largest banks will soon get there.

Get ready for Model Bank 2009!

Get ready for Model Bank 2009!
It’s that time of the year again! Our judging committee has reviewed the submissions we received during the course of 2008, and we will be contacting the winning banks next week. For those of you who don’t know what the Model Bank report is, you can learn more about it by reading about last year’s report. In addition to having their best practice case study publicized in the report, each featured bank will receive an award at our annual Celent Innovation and Insight Day in New York (exact date and venue to be announced shortly). Our 2008 event was a smashing success with insightful presentations and panel discussions. We invite you to submit a nomination for the 2010 Model Bank report. We will be accepting submissions throughout the course of 2009. Our online nomination form is at http://www.celentmodelbank.com.