The Efficiency Factor
Automation Affords this Century
What the Assembly Line did for the Last
by Lori Moore, Director of Compliance, ATTUS Technologies Inc.

July 21, 2010, a day just like any other summer day except for the fact that President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law.  Is it a day that will live in infamy?  Given that this historic legislation supposedly harkens 533 new, expanded and updated compliance obligations on the regulatory horizon, it most likely will.  Exactly when or how the bill’s mandates will go into effect are still unknown. What is known is if your financial institution is already struggling to maintain its current regulatory compliance due to lack of staff, budget or manageable processes – it is in for a lot more trouble.  Unless that is, changes are made and soon.

From Assembly Line to Automation
In 1913, the innovator Henry Ford introduced the moving assembly belt into his automobile factories in order to increase efficiency and lower costs.  The immediate result was Ford’s ability to significantly increase production of his cars without sacrificing quality or spending more money to do it.  The long-term result was that it forever changed the way all products are manufactured.  Today, the U.S. economy is more service oriented as manufacturing jobs have shipped overseas.  Now is the time for service industries, financial services included, to incorporate innovative ways to create efficiencies and lower their costs in order to be successful.  The introduction and evolution of service-related process automation through software is the twenty-first century’s efficiency factor. 

The High Cost of Continuing to Comply the Manual Way
In a financial institution, as well as other businesses, compliance obligations, if not handled correctly, have the potential to significantly slow down processes, ultimately impacting the ability to satisfactorily serve customers and conduct business in an efficient manner.  Those relying on manual methods to perform compliance requirements put themselves at a distinct, and unnecessary, disadvantage: 

• Greater incidence of process error, leading to customer dissatisfaction and non-compliance
• Increased time to perform the compliance function, wasting staff resources
• Higher cost per transaction, impacting overall profitability
• Less overall control of the process, breeding undue risk
• Longer staff learning curves and more educational needs, increasing training costs

These disadvantages have been further exacerbated by the recession which has left many organizations with limited staff and slashed budgets.  Yet regulatory compliance certainly didn’t go away.  And with the Dodd-Frank Act now in play, the cost of manually performing compliance obligations is only going to rise.

Debunking the Myths about Automation
The challenge for any financial institution facing compliance issues is to figure out how to accomplish more (compliance) with less (staff and dollars).  The use of software to automate compliance processes has been around for awhile but not all organizations have taken advantage.  Why?  Most likely they are afraid the cost is too high, or they are skeptical of the software’s ability to effectively fulfill compliance functions or integrate into existing infrastructure. 

It’s time to debunk those myths. 

• Myth - The cost of automation is too high for our institution: The truth—the introduction of web-based/software as a service (SaaS) compliance solutions has significantly reduced the initial investment required to incorporate software throughout an organization.  Gone is the need to install software on every computer or to buy licenses that go unused.  When comparing the cost of automated compliance solutions with manual compliance, the increased time, staff and risk involved, inevitably tips the cost/benefit scale in favor of automation.
• Myth – Automation is unable to actually comply: The truth—today’s generation of compliance solutions is better equipped to more fully meet compliance needs than ever before.  Many can be customized for an institution’s specific needs, and the SaaS delivery model makes upgrades hassle free, so functionality additions or regulatory changes can be accommodated and implemented more quickly than in the past.
• Myth – It’s too difficult to integrate such automation into our institution: The truth—the leading software service providers build their solutions to be flexible and adaptable so that integrating them into your existing core processor, and other systems and procedures is fully achievable.     

Achieving More with Less
With the myths debunked, let’s consider just how much more automation lets you achieve with less -  less staff, less time per transaction, less budget dollars, and less impact to your customers or your bottom line.  With automated compliance solutions you can achieve:

• Greater efficiency with less staff or dollar resources
• Stronger compliance with less hassle or struggle
• Easier training with less time away from the job
• Shorter learning curves with less complicated processes
• Real process control with less human interference
• More transactions in less time

Compliance Automation in the Real World
Skeptics might think the efficiency possibilities of automated compliance solutions sound good in theory but still believe their manual processes are adequate for the real world.  Let’s take a look.     

OFAC:  Between January 1st and June 30th, 2010, the OFAC SDN and Blocked Persons List was updated on twenty-eight different days¹.  On some days the list was updated two or three times, and one day even saw four updates, amounting to a total of thirty-seven updates in the first half of this year.  Updates can be the addition, removal or change of one name or hundreds of names.  To make matters more complicated, there is no set schedule for updates; they occur when OFAC deems it necessary.  In February, this was just two times but for June, it was nine. 

Now consider the number of transactions that a financial institution performs in a day that should be scanned for OFAC compliance. And, that a single transaction will often have multiple parties (e.g. wire transfers, mortgage loan documents) involved. Even if it’s only a few, the time required for a staff member to check the latest list manually (i.e. without interdiction software) significantly bottles up his or her workflow, costing time and money. Additionally, because names on the list are commonly spelled in a variety of ways and are often associated with known aliases, there is a very high probability that a manual check will miss potential or actual matches. This doesn’t even factor in other watch lists your institution might need to scan. 

An automated solution, with the ability to scan all of your transactions against multiple watch lists, reduces a time consuming manual, error-prone process down to a few split seconds. And with a highly sophisticated search algorithm, the number of false negatives or false positives is significantly reduced.

Reg CC:  How many deposits does just one of your tellers process on an average business day? Let’s estimate the number is at least one hundred. When he or she is manually calculating the appropriate hold time, the amount of the hold, and completing the funds availability notice, how long is it taking? And more importantly, are they accurate? Although the elimination of the non-local check category simplified case-by-case holds, exception holds are most often used and are also most often the source of violations.  The possibility of at least one error per day, resulting in customer dissatisfaction, and non-compliance with Reg CC, is almost a given.

Now multiply that scenario times the total number of tellers at your institution times the total deposits for each per day.  The potential for error grows exponentially in just one week.  Then imagine a new teller on the line; the errors continue to mount.  However, an automated Reg CC solution removes the guess work as well as the time that goes with it.  It allows a financial institution to protect itself while the deposit is being collected without violating Reg CC.        

Reg E:  By the end of 2007, the Federal Reserve Board estimated that more than two-thirds of all transactions in the United States were processed electronically.  That percentage has surely risen in the last three years. Now consider the simultaneous increase in identity theft and card related fraud.  The likelihood that an error (i.e. unauthorized transaction) could be posted to your customers’ account has also increased.  Once discovered, customers want the error fixed quickly and Regulation E requires that you do so accurately. 

How can you be sure that all of your branch and telephone customer service representatives and operations staff are handling the claims appropriately? Are they documenting claims when notice is received? Are they asking questions that are imperative to your investigation and determining whether an error did or did not occur? And, are they also accurately calculating the customer liability?  Even if everyone is properly performing all of those steps, are they meeting the multitude of applicable timeframes required by Reg E?  A significant number of violations occur when customers verbally notify institutions about an alleged error.  Does your institution have an effective process for documenting and tracking such claims?  The truth is if your institution is handling electronic funds transfer-related (EFT) error claims manually, there is no way of knowing if they are being performed correctly by individual staff members, let alone institution-wide. 

Automated software that drives the Reg E error claim process from start to finish provides greater assurance that all claims are handled accurately, uniformly and equitably.  With lower processing costs and greater confidence that the customer’s liability is calculated accurately, institutions can often raise the threshold for which claims are paid without investigation, thereby reducing the amount of undue losses.

Facing the Future without the Efficiency Factor is Unimaginable
The above, real world examples are just the tip of the iceberg.  Automated compliance solutions that increase overall efficiency, cut costs and strengthen compliance, can be applied to many other current laws and regulations, such as the Bank Secrecy Act, Anti-Money Laundering Laws, the Red Flag Rules, the USA PATRIOT Act and more.  In order to survive the Dodd-Frank Act’s almost certain compliance implications, financial institutions need a leg up; they need the efficiency factor.  Because even in the present but definitely in the future, imagining financial institutions without automated compliance solutions is a lot like imagining Detroit without assembly lines. 


Sources:
1  Office of Foreign Assets Control, Changes to List Specially Designated Nationals and Blocked Persons Since January 1, 2010, http://www.ustreas.gov/offices/enforcement/ofac/sdn/t11sdnew.pdf


Lori Moore is a Certified Regulatory Compliance Manager and currently serves as the director of compliance for ATTUS Technologies Inc. Lori has 26 years of experience in the financial services industry previously serving as IT coordinator, VP of internal audit, VP of risk management, VP of operations, BSA Officer and Compliance Officer for both small and large community banks. Lori has extensive training in bank operations, audit, risk management and compliance.  She received the Outstanding Graduate designation from the Texas Bankers Association (TBA) Operations School and served as an honorary member of the TBA Operations Committee.