Balancing New Account Growth and Risk Mitigation
Although financial institutions (FIs) have been screening new account applicants for decades, guidelines for how to best utilize that decision-making data has become increasingly scrutinized in an effort to ensure consumer fairness and financial inclusion. Not only have the variety of data sets available to FIs today versus even five years ago advanced significantly, but so too has the sophistication of the consumers applying for new accounts.
As FIs seek to balance fostering new account openings and growth (often in a faceless environment) with fraud and risk mitigation, we are seeing account declinations related to account abuse significantly decline and the reliance on industry collaboration and advanced technology increase. The goal is to help FIs become more inclusive to provide access to the traditional financial system, helping unbanked and underserved consumers.
Today, only 36% of FIs refrain from opening accounts for applicants with a history of account abuse, according to Aite Group’s report titled New DDA Strategies: Balancing Risk and Regulators. This shift can be attributed to regulatory bodies, such as the Consumer Financial Protection Bureau (CFPB) and state Attorney Generals, that have expressed concern around the way applicant screening is conducted. Regulators are strongly encouraging banks to decrease reliance on negative data for declinations.
In the past, if a consumer’s banking history was incomplete due to a thin-file or reflected previous account mismanagement, he or she may not qualify for a traditional DDA account under the bank’s risk thresholds. However now, in alignment with the CFPB, FIs are working to ensure those consumers are now offered the right products and services.
This places a greater importance on risk screening for tailored account offerings and account privileges. Screening solutions should not be used for binary “yes” or “no” decisions on accounts, but should be effective in evaluating a consumer’s complete financial history to decide what type of account to offer based on an appropriate level of risk.
Offering the Right Financial Product to Meet Consumer Needs
Because of this, “safe” or second chance accounts are providing consumers an important and often essential banking relationship. These types of accounts are enabling consumers to access the financial system with features such as lower dollar thresholds for account opening, online bill pay and payroll direct deposit. Second chance accounts may eventually qualify the customer for a traditional DDA account and open up other lending options through the bank. In return, these accounts limit risk to the bank by removing overdraft capabilities, issuing ATM or prepaid cards rather than debit cards, and limiting mobile remote deposit capture.
Earlier this year, Richard Cordray of the CFPB offered concern that 10 of the nation’s top 25 banks were not offering overdraft-free accounts, and that seven banks in the same group were offering the product, though not featuring them in their main product offerings online. In the future, we can expect a greater emphasis on financial inclusion through second chance accounts.
The quality of the data utilized to support new account openings has never been more important. As banks continue to expand their product and service offerings to meet the needs of consumers, regulators agree and support FI initiatives to reduce the risk of fraud. In addition, banks are critically evaluating the currency, accuracy and delineation of the data they rely upon, and the role of advanced predictive analytics is becoming increasingly more important to ensure the most informed decisions regarding access to the financial system.
About the Author:
Robin Love is Vice President of Product Management for Identity solutions for Early Warning, a leader in payments and risk solutions. She focuses on the company’s suite of solutions that address authentication, risk and fraud concerns throughout financial services and other industries. Ms. Love joined Early Warning in 2003 bringing to the company more than 20 years of experience in innovative new product development, product management and business development.