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The Risk of Risk
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Thursday, August 13, 2009 (Goldleaf Financial Solutions Inc. / Brian Geisel)
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Will renewed focus on the management of risk in the remote deposit industry prevent financial institutions from achieving projected success?
By Brian Geisel, Executive Vice President, Goldleaf Financial Solutions Inc.
The Risk of Risk
With the recently released FFIEC Guidance, Risk Management of Remote Deposit, the remote deposit capture (RDC) industry has experienced an increased focus on the management of risk. The subject of RDC risk is not new, as financial institutions have grappled with various concerns since the inception of RDC, fundamentally stemming from their loss of control over physical checks in the deposit process. Historically, these concerns have contributed to many financial institutions taking a conservative approach to rolling out RDC.
Unfortunately, the risk of such conservative risk management practices is that these institutions are unlikely to be in a position to see meaningful results from RDC in driving core deposit growth, which is arguably the most important benefit available to them through the solution’s deployment. There are other factors, of course, that also inhibit financial institutions from taking a more aggressive approach to rolling out RDC, such as a focus on product P&L over the value of incremental deposits. However, a markedly cautious approach to remote deposit risk management is one of the key reasons financial institutions today are incurring a huge opportunity cost.
This is bound to change, however, and soon, as the increased focus being placed by financial institutions on core deposit growth, ongoing technology advancement related to RDC and even the regulatory environment will all contribute to inspiring them to tackle more pervasive remote deposit strategies in the near future.
Deposits in Vogue
Not that deposits have ever been out of fashion, but financial institutions today have core deposit growth clearly in the crosshairs. This renewed focus on core deposit growth has already driven a variety of leading financial institutions to invest heavily in RDC, recognizing it as a low cost, strategic offering that can be leveraged to increase deposits and retain customers across a variety of market segments.
These financial institutions are paving the way, proving that RDC can be successfully deployed more broadly while still maintaining an acceptable focus on risk. Given projections for increasingly dogged competition for deposits intensified by new market entrants such as online banks, brokerage firms and financing companies, financial institutions that wait on the remote deposit sidelines too long will risk not being able to take advantage of the same opportunities available to their more aggressive counterparts.
Technological Advancement
At the same time, technology has changed the risk profile of RDC. Technology is now commonly available that can be applied to not only effectively manage the risk of remote deposit, but also create an arguably less risky environment with RDC than existed with the previous paper-based system.
Traditional paper-based transaction processing involves a certain amount of risk. Checks can be lost, stolen and photocopied. MICR ink cartridges are also commonly available that can be used to create checks. Additionally, the paper-based system is prone to significant human error in requiring bank tellers to validate checks, perform signature verification, ensure complete endorsements exist, apply funds availability rules and so forth. And there is no audit trail available to verify that these tasks were performed.
By comparison, the latest RDC technologies manage risk much more effectively than the paper-based processes and controls currently performed by financial institutions. Not since the MICR line was introduced in the early 1960s have we seen such a leap forward in risk management competencies.
RDC’s risk management capabilities include the ability to automatically identify problematic items in real-time, guarantee the consistent application of business rules and make callouts to fraud systems. Through the use of access controls, check image analysis, duplicate detection, encryption, user tracking, deposit limits, review capabilities and more, RDC has become an exceptionally secure channel for taking deposits. Additionally, RDC provides a full audit trail, maintaining a record for the financial institution of not only the identity of the depositor, but also the details of the deposit and all the controls that were executed by the solution. RDC also eliminates issues with a ‘lost bag’ of checks and reconciliation differences between the financial institution and the depositor.
These technology advancements help to assuage financial institution concerns with RDC risks and are driving more aggressive customer selection criteria and movements to offer RDC in completely self-service environments. In fact, with these advancements in place, financial institutions may ultimately treat RDC as the default for the best, lowest-risk method for accepting deposits, with additional scrutiny placed on deposits made through traditional channels that lack similar controls such as mail, branch, drop box and ATM deposits.
FFIEC Guidance “Opportunity”
The January 2009 FFIEC Guidance, Risk Management of Remote Deposit, could potentially be seen as an argument to maintain a conservative approach to rolling out RDC. However, one key aspect of the guidance that may have the opposite effect is the risk assessment, which requires the financial institution to conduct and document a thorough evaluation of its RDC initiatives. This provides a forum to review its RDC strategy, as well as to assess any incremental risk undertaken through deployment of the solution. The risk assessment determines and documents appropriate risk mitigation techniques and justifies, with management’s approval, some amount of risk based on projected returns.
Through the risk assessment and subsequent examinations, financial institutions can document and present what their chosen remote deposit solution does, what controls are in place, what is done on a real-time basis, how it manages authentication (e.g., single sign-on through Internet banking, which identifies who exactly is making the deposit) and how it manages the user’s deposit limits and required authorizations by the business and the bank.
Completing this assessment will not only help the financial institution comply with the FFIEC Guidance, but it will also help it consider opportunities to take a more aggressive approach to rolling out remote deposit capture. For example, an understanding of what risk management procedures are performed by the software – not by financial institution personnel – will be particularly useful in gaining a comfort level with a broader remote deposit offering. Risk mitigation techniques provided by the software may include real-time enterprise duplicate detection, image quality and usability analysis and signature and endorsement verification. “Know your customer” (KYC) policies, controls over account opening procedures, funds availability schedules and withdrawal mechanisms, as well as standard check deposit review control processes on the image deposits, should also all be leveraged to mitigate risk and justify the expansion of remote deposit initiatives.
What the Future May Hold
Now more than ever, there are definitive reasons for financial institutions to reconsider their existing RDC strategies and initiatives in light of the need to generate core deposit growth – ongoing technology advancement related to RDC that is making it easier to mitigate risk and changes to the regulatory environment. There are considerable opportunities available to financial institutions to take a more aggressive stance with RDC to meaningfully and positively impact financial results and secure long-term, valuable customer relationships while appropriately managing risk.
There are widely held expectations for the tremendous growth in client adoption of remote deposit solutions in the coming years. Will renewed focus on the management of risk in the remote deposit industry prevent financial institutions from achieving projected success? I don’t think so.
About Goldleaf Financial Solutions
Goldleaf Financial Solutions, Inc. (NASDAQ: GFSI) offers a strategic suite of integrated technology and payment processing solutions to global financial institutions of all sizes. Goldleaf’s products and services enable financial institutions to succeed in today’s competitive market, solidify their trusted financial relationships, expand their community presence and improve profitability through the efficient use of technology.
Goldleaf is a leading provider of remote deposit capture solutions, ranked No. 1 in end-user deployments by Celent, a prominent global research firm. Goldleaf helps financial institutions of all sizes succeed with in-house, ASP, browser-based, commercial and retail remote deposit applications. Visit the company’s RDC Resource Center at www.goldleaf.com/remotedepositexpert.
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