Midsized financial institutions must pay close attention to anti-money laundering
Midsized financial institutions (with $1 billion - $10 billion in assets) play an essential role in our financial system, especially in the U.S. where banks with less than $10 billion in assets represent 14% of
the market and 97% of the total number of banks.
Unfortunately, midsized banks are no less vulnerable to money laundering than larger banks. While cases of money laundering at midsized banks may not be as heavily reported on as those at larger banks, it does happen, and midsized banks do face fines and
reputational damage. Thus, an effective and efficient anti-money laundering system is crucial, even for a bank that may only file 10 SARs per year.
Here, I explore three key challenges that an anti-money laundering system must address for a midsized bank, and how to turn these challenges into opportunities.
Trend 1: Larger financial institutions have upped their anti-money laundering game
The trend of money laundering shifting to smaller financial institutions has been discussed for a number of years - the unit chief of the financial crimes section of the Federal Bureau of Investigation’s criminal investigative division discussed
the trend back in 2014. More recently, the risk to smaller institutions was raised in 2018 by the head of the Danish Financial
Supervisory Authority, who claimed that smaller institutions should prepare for an assault by money launderers as larger banks react to intense regulatory scrutiny and improve their defenses. Following a series of high-profile anti-money laundering scandals,
he said, “What’s changed now is that clearly the bigger banks have upped the[ir] game, and water flows where it’s easiest.”
Anti-money laundering opportunity: Separate the good from the bad
While many large financial institutions have increased their controls, in some cases, they may have gone too far in a practice called “derisking” where some financial institutions
have executed mass exit strategies of certain business relationships to decrease their overall risk and better comply with changing regulations. This creates an opportunity for midsized financial institutions to onboard good customers that were let go by larger
institutions that mistakenly perceived them as too risky.
But how can midsized financial institutions separate good customers from those that are truly risky? To start, if you have the opportunity to capture new types of customers that you haven’t served previously, you’ll need to make sure that you can accurately
assess their risk. One way to do this is by using external data sources to enrich and create a more informed risk score, and by making sure that you have a data model that can process and analyze all this data, both structured and unstructured, from external
sources alongside your internal sources.
Trend 2: Industry consolidation
Every industry changes from year to year, but midsized banks are changing rapidly, particularly due to acquisitions. Over the last two decades, the average number of announced bank
M&A deals has hovered around 250 to 280 deals per year, and banks with less than $10 billion in assets represent the vast majority of that activity.
Anti-money laundering opportunity: Consolidate systems for better insights
After a merger or acquisition, a midsized bank will have two or more compliance systems and must decide what to do with them. If the bank decides to allow multiple systems to remain, the exact process must
be documented as to how aggregation and reporting will occur. But, our view is that the bank will be better served if it works to consolidate its BSA/AML systems. A consolidated system will help you aggregate your data so you can fully leverage it for
better, more comprehensive customer risk scoring and insights. It will also help your employees be more efficient, as they only have to stay proficient in a single system and will be able to avoid the issues and gaps that come with patchwork systems and siloed
work. And it will help your IT department be more efficient, as they only have to manage one system, especially if that system is delivered as a cloud service.
The good news is that while anti-money laundering system consolidation may seem like a daunting undertaking, it doesn’t need to be done all at once. The key is to have a long-term vision and a plan, paired with an implementation strategy that allows for
near-term wins over the course of your consolidation journey. A great way to start this journey is with case management. When selecting the single vendor you want long-term for your entire anti-money laundering system, choose one that offers a case manager
that is compatible with other vendors. That way, you can start getting the benefit of having all your case information in one place immediately, and then switch your other applications over to that vendor when it’s right for you. This can help you get up and
running quickly while getting closer to your long-term goal of eventual seamless consolidation.
When consolidating systems, think carefully about the sourcing of data. Look beyond the information needed to produce an alert. Instead, think about the information necessary for effective investigation and what external data sources can be used for enrichment.
Not only will this provide better insights, but it will also lay the foundation to start applying advanced detection technologies like machine learning to large amounts of data. This technology is now within reach of midsized banks thanks to more cost-efficient
cloud-based delivery services.
Trend 3: A Focus on customer experience
McKinsey’s research suggests that “community connection is not a major factor in determining where people
bank and the importance of local branch presence has been steadily declining.” According to Cornerstone Advisors’ What’s Going On In Banking 2020 report, 72% of 300 community-based financial institution executives
expect that the number of bank branches in the U.S. will decline significantly in the decade ahead.
Instead of relying on community connection, McKinsey suggests building a segmented niche or driving productivity in a disciplined way, and growing deposits to gain customer mindshare through digital maturity, the share of voice, and customer experience –
in addition to the physical footprint. Many midsized banks are prioritizing just that – 77% of bank respondents in the What’s Going On In Banking 2020 report said that improving customer experience was a
top priority. Interestingly, only 36% said that expanding the product line was a top priority – the overall trend appears to be one of evolution, not revolution.
Anti-money laundering opportunity: Use AML to enhance customer experience
While in the past, compliance hasn’t typically interfaced with customers and has been viewed as a cost center, that is changing, and compliance staff are starting to be involved with the business more often. It’s great to see this alignment develop, as compliance
can contribute to the bottom line by supporting a great customer experience with seamless customer onboarding that is quick and informative, and with minimal disruptions due to verifications and holds related to suspected fraud or money laundering. This is
especially critical as customers demand a superior experience from banks of all sizes.
To achieve all this, you’ll need the right controls in place that mitigate the age-old anti-money laundering problems of low detection and high false positives. Think of it like having good brakes on your car - they enable you to go faster because you know
you can stop when you need to. Look for a technology vendor that offers out-of-the-box tools to address these issues.
You’ll also want to take a look at your onboarding process. Today’s customers want to open accounts quickly, they want a low-touch approach, and they want to be kept informed. So, how can you move onboarding from a week-long activity to something that happens
in a number of days? Having an end-to-end, integrated anti-money laundering system with an open architecture can help in a couple of ways. First, a system with seamlessly integrated customer due diligence and case management is more efficient and can help
staff work faster, even when onboarding volume spikes. Second, an anti-money laundering system that is integrated with your general onboarding platform can reduce the number of customer touches.