Accurately Assessing Financial Crime Risk at Midsize Banks in 2021

By John Edison

Mid-sized financial institutions—defined as those with $1 billion to $10 billion in assets—play an important role in our financial system. In the U.S., banks with less than $10 billion in assets represent 97 percent of the total number of banks and 14 percent of the market.

Despite operating at a lower profile, mid-sized banks are just as vulnerable to money laundering as larger banks, and a scandal could bring fines as well as long-term reputational damage. This is why an effective and efficient anti-money laundering system is crucial, even for a bank that may file just 10 Suspicious Activity Reports per year. With that in mind, here are a few ways mid-sized banks can address common anti-money laundering challenges and create a more efficient and impactful system.

Prepare for more money laundering events as criminals shift their attention

In 2014, the unit chief of the financial crimes section of the Federal Bureau of Investigation’s criminal investigative division noted money laundering was shifting to smaller financial institutions. More recently, larger banks have upped their AML defenses in the wake of some high-profile money laundering scandals, leading even more criminals to shift their attention to smaller banks.

However, as part of their response, some large financial institutions have gone as far as executing mass exit strategies of certain business relationships to decrease their overall risk and better comply with changing regulations. For mid-sized banks, this unique trend creates an opportunity to onboard good customers who were mistakenly perceived as too risky and let go by larger institutions.

To accurately separate good customers from the truly risky, mid-sized banks must start by making sure they can accurately assess their risk. This can be done by using external data sources like social media to create a more informed risk score. From there, banks need to be sure they have a data model that can process and analyze this external data, both structured and unstructured, alongside their internal sources.

Use industry consolidation as a driver to streamline AML systems

Acquisitions are dramatically reshaping the mid-sized bank market. 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 those deals.

Completed M&A deals present mid-sized banks with an opportunity to consolidate their Bank Secrecy Act/AML systems. This helps aggregate the banks’ data in a way that creates a better, more comprehensive customer risk score and customer insights. It also ensures AML employees only need to be proficient in a single system, creating efficiencies by avoiding the issues and gaps that come with patchwork systems and siloed work. Additionally, IT departments also only have to manage one system, creating additional efficiencies.

Fortunately, AML consolidation does not need to happen all at once. With a long-term vision and plan, banks can create an implementation strategy that allows for a series of near-term wins over the course of the entire consolidation journey. Typically, a good place to start the consolidation journey is with case management as this ensures all case information is in one place immediately.

When consolidating systems, think about the information needed for effective investigations and what external data sources could be incorporated in the new system for greater insight. This paves the path for mid-sized banks to deploy more advanced detection technologies such as machine learning, which can process large amounts data efficiently and is becoming increasingly more viable for mid-sized banks thanks to cost efficient cloud-based delivery services.

Enhancing the customer experience with improved onboarding

In the digital world, the community connection long touted as a differentiator of small and mid-sized banks is becoming less of a factor for customers. In fact, McKinsey’s research found that the importance of local branch presence has been steadily declining. According to Cornerstone Advisors’ What’s Going On In Banking 2020 report, 72 percent 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.

Looking ahead, McKinsey suggests mid-sized banks focus less on community connection and more on creating a segment niche or growing customer deposits through digital capabilities, share of voice and a superior customer experience. According to the same Cornerstone Advisors report, banks are beginning to follow this advice, with 77 percent of bank executives stating improving the customer experience is a top priority.

Although long viewed purely as a back-office function, compliance can contribute to customer service efforts. Customers today want to open a new bank account quickly—within hours, not days—and they want the experience to be a low-touch digital approach that still keeps them informed. Compliance departments can help create a seamless customer onboarding experience that is both quick and informative, and devoid of disruptions due to verifications and holds related to suspected fraud or money laundering.

By addressing age-old AML problems such as low detection and high false positives, banks can move faster while still knowing when to stop. This starts by integrating customer due diligence and case management platforms, which allows staff to work faster and more confidently. By further integrating this AML system into the bank’s general onboarding platform, banks can reduce the number of customer touches, even as ”know your customer” regulations continue to evolve in the U.S.

Between the threat of more money launderers, greater industry consolidation and evolving customer expectations, mid-sized banks face no shortage of challenges in the year ahead. However, by streamlining their anti-money laundering operations, banks will not only maintain their defenses, but also their market share.

John Edison is vice president and global head of financial crime and compliance products for Oracle.