Let’s admit that we all just went through an incredibly challenging year. In discussing mental health issues recently with a good friend who I met when we both worked at a top 10 bank, he made the point that people are rethinking large swaths of their lives. They are rethinking where they live, their relationships, career paths, and what is important to them in general.
If you are a credit union leader, you might be stymied by contemplating the delivery of cost reductions while still satisfying member demands. You must also figure out the most important costs to tackle keeping in mind the unrelenting competition from other traditional credit unions and banks as well as new digital banks.
Big data analytics (BDA) and artificial intelligence (AI) are about understanding patterns, predicting outcomes, and improving processes. These revelations can improve customer experiences as well as reduce costs for financial institutions in myriad ways.
Almost all of us already have AI in our everyday lives. There are two ghosts that live in our home, and our little dog, Pietro, is absolutely terrified of them. Their names are Alexa and Siri. Every time Alexa or Siri respond to one of our questions or commands, Pietro gets out of his comfy bed and runs into the other room. What he doesn’t realize, of course, is that they become more powerful with each passing month. Today Alexa controls not just some of our deliveries, the front doorbell, news and weather reports in addition to music in our home, but the lights, too! Try saying, “Goodnight Alexa” and listen to what happens.
As the Internet of Things and AI become even more of a presence in our lives, it is also affecting the neobank and challenger financial services industry in a very positive and exciting way. Challenger banks are small retail banks that compete with legacy banks and credit unions. A neobank is a bank that only exists online. Digital banks are the online counterparts of an existing financial institution, or legacy bank.
Compared to other industries with higher adoption of online payment options, community association management often suffers sluggish paper-based processes. As a result, back office staff members spend countless hours each month reconciling check payments with those received electronically.
The association management industry faces unique obstacles in managing all of their resident payments. These consist primarily of various types of dues and assessments paid by homeowners on a monthly, quarterly, or yearly basis. While homeowners’ payment preferences are shifting toward digital methods, many continue to mail checks with paper payment coupons to an association’s designated lockbox provider.
In the years leading up to 2020, divestment in automated teller machines (ATMs) ran parallel to the waning belief in the continued use of check payments as mobile deposit, digital wallet, and card use continued to mount. Then the unexpected happened—a public health crisis and social unrest drove businesses including bank and credit union branches to shut down either temporarily or permanently, reinvigorating the long-established method of interacting with one’s bank via ATM.
Banks have a need for enhanced security and risk mitigation across the new customer journey, but this should be a frictionless experience with the ability to access payment tools 24/7 across various channels. This experience is important for both financial institutions and customers be they consumers or businesses.
Several years ago, my 20-year-old daughter visited a friend in New York City. After a week of fun and merrymaking, she took a cab to the airport only to find that her debit card (her only non-cash method of payment) didn’t work to pay the driver, and she didn’t have any cash. The cabbie became increasingly upset. It was early in the morning in New York, so calling her Los Angeles-based bank wasn’t an option. To her credit, she tried everything even offering the driver a gift card that she received for Christmas in lieu of the amount due. Her cab ride that cost about $65 wasn’t even close to her $200 gift card so in theory it was a good deal for the cabbie. The only problem is that it was from Victoria’s Secret. He was not amused. He drove her back to the city where her friend’s father paid the bill to and from JFK. She missed her flight. It was expensive to re-book, and frustrating to her that the bank, in all its careful wisdom, shut her debit card down to prevent fraud—not very customer friendly. When I called the bank to complain they said she should call customer service before she travels to let them know. This was not a frictionless customer journey. Literally. The good news is, things have improved a lot since then.
Clearly there are factors driving the need for enhanced security and risk mitigation across the customer journey, including expectations for a frictionless experience and the ability to access payment tools 24/7 across various channels including IVR, text, mobile app, website, office, or branches. Solutions for ensuring end-to-end security must be able to: address a variety of fraud scenarios from those most commonly known to ones specific to an organization; be able to integrate with existing systems; and provide robust data reporting for compliance purposes as well as bolstering the security of the overall business by mitigating risk.
One of the most important components in anti-fraud measures is authentication. Joris Lochy in a recent article in Finextra puts it best: “For the financial services industry, having a secure but user-friendly authentication process is no longer a nice-to-have, but a necessity. The current authentication methods, which are typically based on passwords, meet however neither of these objectives, i.e. passwords give a poor user experience and are not at all secure.” A large part of authentication involves technology and its increasingly important impact on the problem.
The Fraud Landscape Today
Current legacy bank solutions for fraud detection can often lead to high false positives, friction, and operational inefficiencies. And, they don’t really do a great job at fighting fraud. According to Arkose Labs Q3 Fraud and Abuse Report, one in every 10 transactions is an attack.
Moreover, an Aite Group survey has revealed that fraud rates for financial institutions are eight times higher in the digital channels compared to the branch. My recent article for CheckAlt, “Connecting In-Person and Digital Experiences at the Branch” states, “Although many customers still bank in branches, the majority of these individuals still use online banking.” Digital security is paramount.
Another critical area to be mitigated is application fraud. When an applicant applies for a new financial relationship with a bank or credit union, there are three general types of fraud that can be used:
• Identity theft. The attacker steals and uses the full identity of a victim;
• Synthetic identity fraud. Fraudsters either create a new identity from scratch or with bits and pieces of stolen data;
• First-party fraud. An individual has no intention to repay his or her obligations.
It has become vital for financial institutions to authenticate across all channels. By implementing more advanced technology and methods to fight fraud, banks and credit unions can realize three important advantages: maximizing revenue, reducing fraud loss, and reducing operational costs.
Solution Ideas
1. Set triggers with alerts.
The world is ready for real-time payments and CheckAlt is ready to lead this transition. The acquisition of U.S. Dataworks in September 2020 sets CheckAlt apart with a technology platform proven to accept any of the existing real-time payments options or the ones soon to be announced.
It is always in a credit union and a member’s best interest to reduce loan delinquencies. This has become especially important during the pandemic due to the high unemployment rates of the last 12 months. Presently, there is an interesting trend in delinquencies. What are financial institutions doing to keep their delinquency rates low? And, is it working?
Spanish philosopher George Santayana is credited with the aphorism, “Those who cannot remember the past are condemned to repeat it.” As we navigate our current economic challenges, looking back at our most recent economic downturn, the Great Recession in the late 2000s, might provide some helpful lessons.
In early 2009, I attended an economic forum with guest speakers from the banking, real estate, stock brokerage, and economic industries. I was actively looking into investing in real estate. The stock market was in a free fall, interest rates were anemic, and the real estate market bubble had burst. In a stroke of impeccable timing, my partners and I had just sold our company. We had money and weren’t sure where to put it.
At that time, there were many real estate properties in foreclosure, but the banks didn’t seem very interested in selling them. We would make offers at the reduced market value and nothing happened. My favorite part of the forum is when the banking executive told me why. Banks had such an excess of properties in foreclosure on their books, that to sell them at their market value (about 40% less), and write-off the losses, would render the financial institutions insolvent. So they were playing a waiting game by taking offers, not accepting them and waiting until the housing market recovered. Their risk was juggling a huge portfolio of homes that were in foreclosure, not to mention other loan delinquencies. They foreclosed and sat on their loans and took a big hit on the loss of revenue. In addition, many of the foreclosed assets fell into disrepair.
Today, the latest unemployment rate from the Bureau of Labor Statistics shows both the unemployment rate at 6.2 percent, and the number of unemployed persons at 10 million. Although it is much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5 percent and 5.7 million, respectively).
However, loan delinquencies are down—even with the high unemployment rate and the strong historical association between the unemployment rate and loan defaults.
A recent article in Fortune Magazine, based on a study by business schools of Columbia University, Northwestern University, Stanford University, and the University of Southern California, found that in the Great Recession, mortgage delinquencies jumped from 2% to 8%. But in the pandemic’s first seven months they fell from 3% to 1.8%. “This is especially striking,” the researchers note, “given an unprecedented increase in the unemployment rate that reached almost 15% in the second quarter of 2020." And, they found that the explanation went beyond just stimulus checks.
Here are six strategies financial institutions, including credit unions, are now deploying with positive outcomes that you can consider as well:
1. Utilize forbearance. Instead of cracking down on delinquent borrowers, offer forbearance. That way, borrowers can delay loan payments without you declaring the borrower delinquent. It also improves your borrower relations by not diminishing the borrower’s credit rating. You will still take a hit on revenue, but only temporarily, and you don’t have to worry about a portfolio of foreclosed assets to liquidate.
CheckAlt is the engine that powers payment processing for thousands of financial institutions and businesses across the United States. As such, you may be curious to know what’s actually running "Under the Hood." In this new series, we detail CheckAlt's products and services that are accelerating digital transformation for our clients today, as well as the payments solution innovation our Product Team is building in the race toward a faster-payments future.
The death of the branch has been talked about for decades. Bank and credit union branches have been closing at an accelerating rate, now made worse by public health, social, and economic challenges. At its core, however, there are deep-seated emotions attached to money which require trust—and trust is more easily established through human interaction.
In this fourth and final installment in our series covering the capabilities of Payment Case Manager (PCM)—the only end-to-end tool for secure communication of payment disputes (read Part 1, Part 2, and Part 3)—the focus shifts from the features of PCM and its advantages to FIs of all sizes and types to how PCM can interact with other systems. The more PCM interconnects with third-party systems, the more positively impactful PCM’s level of automation and subsequent cost savings becomes.
This is the third in a series of articles on how Payment Case Manager (PCM) securely automates payments disputes. If you have not already read the first two articles, you can read them here and here. Let’s turn our attention to how PCM positively affects small banks and credit unions.
Now that we have identified the root cause of the $96 million problem affecting financial institutions across the U.S., as noted in my previous article, let’s explore how Payment Case Manager (PCM) provides financial institutions with the ability to safely automate payment disputes.
Imagine a scenario in which there are thousands of individual businesses that are in the same industry, some of which are small mom and pop shops; others are giant Fortune 500 members. Periodic disputes ensue within this industry involving a client of one business having an issue with the client of another business, and the only way for these disputes to be resolved is for the two businesses to exchange non-public information about their clients. However, there is no secure system to which all of these businesses are connected so faxes become the only secure method that these thousands of businesses can communicate. The manual effort needed on either end to create, transmit, process, and remediate disputes seems nearly impossible to eliminate, plus there are operating rules governing the process with increasing fines for substantial non-compliance.
The postal delays and security concerns heightened in 2020 have further driven tens of millions of consumers across the U.S. to choose to pay homeowner’s association dues, tuition fees, trash bills, and other one-time or recurring payments to billers electronically instead of by check.
