Retail banking is undergoing change, from increased regulatory oversight to challenging economic conditions, making it harder to identify and capture potentially profitable households. Gone are the days when banks offered cash bonuses to anyone who opened a checking account. Regulatory changes impacting fee income have put an end to that era, leaving less demand for checking accounts in its wake. In addition, a weak economy has resulted in fewer consumers looking to move their demand deposit account (DDA) relationships.
With data, banks are not only able to better accept or decline a potential customer for a new account, but also accurately determine other products suitable for that customer to help solidify a lasting relationship. This is especially important during the first 90 days of on-boarding.
Notably, there is an estimated 60 million consumers in the United States that either do not have a bank account or maintain minimal relationships with a bank, and many of these consumers lack in-depth credit histories. Also notable is that nearly 47 million of these consumers actually have good payment histories for non-credit related bills, making increased data an opportunity for banks to better seek additional relationships.
Financial institutions looking to boost new account acquisition rates at the point of sale and more accurately predict DDA risk should utilize alternative data and expand upon traditional credit files. For instance, gathering information on a consumer’s payment history for cable TV, cell phone and utility bills combined with traditional credit sources can better determine the consumer’s potential and risk. Through this 360-degree expanded view of payment history, financial institutions can increase new account acquisition rates.
Fraud is also an increasing concern. According to Javelin Research & Strategy’s recent annual fraud report, overall identity theft affected 5.3 percent of U.S. consumers, compared to 4.9 percent the year before. The report found that much of that increase was driven by new account fraud, which may very well continue to grow as consumers increasingly engage in behavior associated with a higher incidence of fraud, such as using smart phones and social media.
Despite using multiple fraud mitigation tools at account opening, losses from misuse and theft of identity information are still a problem. And more importantly, the expense associated with manually reviewing applications for fraud is typically the single largest operating expense line item. This also does not consider the loss in revenue associated with putting additional requirements on potential new customers.
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For a global bank looking to grow its DDA business but reduce fraud charge-offs and manual reviews costs, a solution was found without negatively impacting the customer experience. The DDA industry generally has low charge-off exposure but relatively high fraud rates – this bank had a fraud rate of 1.8 percent. With the current fraud tools in place, the bank had an average false positive rate of 53:1, meaning they were manually reviewing (and irritating) 53 good applicants for every one fraudster they caught. An analysis on historical fraud data was performed, showing the bank could dramatically decrease the amount of costly manual reviews and still improve fraud capture by using fraud pattern and velocity checking. Using a real-time fraud solution helps detect fraud patterns that are occurring across many institutions and industries – and are indicative of suspicious identities “in play.”
Data, analytics, proprietary matching logic and software, combined with credit risk and fraud expertise, provided significant lift in fraud detection and identification of false positives. The result was a reduction in the false positive rate from 53:1 to 15:1, or a 72 percent improvement, and the projected savings for that bank is $500,000 each year. By leveraging unique data and analytics software, the bank was able to capture additional fraud beyond what the current tools were capturing. Based on industry averages, the bank is on track to save $700,000 a year.
Banks may never again be able to open as many accounts as freely as they did in the days before regulatory changes curbed fee income that subsidized charge-offs. But at least tools are available to help them decrease fraudulent accounts and maximize profitable ones.