The Common Pain of Credit Unions and Community Banks Cured by the Cloud

I spent the last few weeks talking with directors of credit unions and community banks about AML/BSA compliance at the recent Credit Union National Associat​ion (CUNA) and The Independent Community Bankers of America (ICBA) trade shows. The good news is that community banking and credit unions remain strong and sizable members of our financial system, covering a significant need in our communities. If you want to get out of the Northeast bubble and see what most of America is all about, hang out with these financial institutions to learn about a whole new approach to the world of banking – and some significant issues facing them that often hinder their continued efforts in fighting financial crime.

Some things I heard while in San Antonio and Washington DC included:

Many community bankers stopped me at the show to talk about the operational burden AML compliance has been causing at their institutions. Community banks usually have a lot of data to sort through, but with only one or two people to do so manually. The Directors at these banks are worried about this situation for several reasons. First, they aren’t sure how to get the work done, sorting through all this data, and they know they don’t have the bandwidth to hire more people. They are well aware that manual processes cause more work and more errors. And while eyeing technology, they rightly muse, “Are we big enough to invest in installing a new software platform – it is so expensive to own and maintain.“

My job at these events was to introduce these bankers to the world of cloud. And of course while doing so, I fully expected to face down the classic resistance to adopting a software-as-a-service cloud deployment. This resistance is usually driven by the IT staff who fear they may lose control over their operation. For a director of a financial institution, that control usually includes owning and maintaining an IT infrastructure that has no reason to scale. They have to build the same base infrastructure and operations team to maintain one or many operations. Why maintain those operating costs for an operation that can service many clients for just one? Cloud service providers can provide that scale and spread the cost savings back to the institution.

Then came discussions about efficient AML investigations. Efficient AML investigation work is not just dependent on the best detection, but how well the cases are organized and aggregated. A lot of the issues I discussed with show attendees were with firms that were already using an AML system, so usually they highlighted the volume of work that piles up for compliance staff to investigate repeat or multiple hits. The same person or entity may trigger multiple alerts or hits for suspicious activity from a single transaction or false positives.

With a lot of solutions out there, an investigator would have to look up each and every one of those alerts, even though they are all related to one party, and this process drives operational efficiency down. Then there were those that aren’t using a dedicated AML system at all, and are taking a look at their transactions one by one on a spreadsheet on a monthly basis. Talk about an operational burden. Those poor folks are probably going blind as we speak.

Although credit unions and community banks are very competitive with one another, they both are looking to Washington to reduce their compliance burden. Many believe that they are unfairly burdened with the same constraints intended for much larger financial institutions, and I see their pain. Unlike the focus on reducing consumer and small business lending burdens, financial crime and terrorist financing is still a top focus of the government. Similarly, Dodd-Frank reform for financial institutions is likely an 18-month process. But one thing that they are realizing rather quickly, is the fact that regulators will not reduce the cost of compliance; it’s really up to the industry itself to find ways to reduce operating costs.​

Fraud is also top of mind among credit unions and community bankers alike. Many don’t see it, but only now are finding out how badly fraud is affecting them after they have been victimized. And as new payment schemes evolve, these guys are getting hit with greater frequency.

All these issues – the regulators, AML compliance, and those fraudsters – bring us back to the topic that initially brought me to credit union and community banking events to begin with, and that is how the power and efficiency of the cloud can tackle these operational and cost related issues, but with an approach that doesn’t overburden them staffwise or budgetwise. Even more important, moving these functions to the cloud enables them to scale their operations as they grow – and many of them are growing rapidly. Like any member of a new community, you want to offer something helpful to the neighborhood.

We think offering financial crime solutions, which are based in the cloud, to credit unions and community banks will help them to streamline their operations​ and focus on tackling money launderers and fraudsters quickly and more accurately.