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Risk WATCH with Alberta Quarcoopome: Avoiding painful customer exits (Part 1)

“Your most unhappy customers are your greatest source of learning” ~ Bill Gates

The bank and customer relationship or the contract terminates by closure of the account at the request of either party. This can be by mutual agreement, or after a customer has transferred the balance on the account.

However, by law, an account can be terminated due to three reasons: Death, insanity/Lunacy or bankruptcy of the customer. In some limited circumstances, however, a bank can close an account without giving any notice, especially where warning letters have already been sent to the troublesome account holder. In summary, the determination of the banker-customer relationship can be for positive or negative reasons.

Customer Service in a Digital World- The New Paradigm

A customer service revolution is occurring in financial services. It is dynamic and being driven by consumers who are embracing digital and mobile channels as never before. The digital age is changing the way consumers research, shop and buy products and services and how they share their experiences after each purchase. Exiting a bank these days is very easy, thanks to digital banking.

Now we realize that customers do not even have to bother to enter the branch and issue a big cheque to make a teller suspicious to ask the reasons. They can just gradually transfer their funds into their own account held in another bank, or through their mobile banking funds if they do not want the bank to know. Eventually, they empty their account and leave the original bank’s account with a few cedis, which gradually dries up after charges, and end up with overdrawn balances!

Why are my Customers Leaving?

Customers may leave for positive reasons – for example they might have outgrown the size of the loans that the bank can offer and be graduating to be a bigger corporate customer in a bigger bank.
They may also leave for negative reasons, such as business failure or a bad experience with the bank. Furthermore, some customers who leave may decide to return at some stage in the future. Customer exits can affect the bottom line and the success of a bank. A rising exit rate may indicate major problems for a bank and even threaten its survival.
Some may be unhappy with terms and conditions, or relations with staff.
They may be switching to competitors.
Perhaps the demand may be falling due to a change in the economic climate.

Therefore, if you do not research and address exit rates, this can have a serious effect on your bank’s financial performance. I always describe the banker-customer relationship as a financial marriage. When one party’s loyalty wanes, there is a likelihood of termination, which can sometimes be painful. Loyalty is a key requirement in the survival of the banker-customer relationship.

According to Hirschman in his famous book, “Exit, Voice and Loyalty: Responses to Decline in Firms, Organisations and States” in 1970, he argued that people have two different ways of responding to disappointment. They can vote with their feet (exit) or stay put and complain (voice). A customer’s complaint behaviour is determined by Psychographic variables. These are attributes relating to the customer’s personality, values, attitudes, interests, or lifestyles.

Customer Complaints Behaviour in Banks

This can be influenced by three Psychographic Variables: Exit, Voice and Loyalty. When customers perceive a decrease in service quality, they can exit (withdraw from the relationship); or, they can voice (attempt to repair or improve the relationship through communication of the complaint, grievance or proposal for change). However, the interplay of loyalty can affect the cost-benefit analysis of whether to use exit or voice.

While both exit and voice can be used to measure a decline in an organization, voice is by nature more informative in that it also provides reasons for the decline. Exit alone, only provides the warning sign of decline. Exit and voice combine to provide better opportunity for feedback and criticism, exit can be reduced. The general principle, therefore, is that the greater the availability of exit, the less likely voice will be used.

Customer Loyalty Ladder is a systematic way of classifying customers of an organization into five different categories depending upon the business level engagement of customers with the organization. It takes at least 30 times as much marketing budget to attract a new customer via traditional forms of advertising as to re-attract a repeat customer. Most business owners spend less than 5% of their marketing budget on their existing customers but they spend 95% of their marketing budget trying to find new customers.

Know your Customers’ Ladder of Loyalty

The error that some banks make is that they invest more in attracting new customers in the first stage, rather than keeping the already existing customer satisfied and happy. A good marketing company should invest at least 30% of their marketing budget in keeping the customers and clients happy.

The study of the customer loyalty ladder concept is to help banks to invest in developing satisfied customers. Banks should identify and analyze which customers belong to which stage of the customer loyalty ladder. The best customer is the most recent satisfied one, as well as, the best word of mouth advertising comes from the same source (the most satisfied customer).

Banks have to acquire the skills which allow them to act in a way that moves people up the ladder.

When you examine the diagram on the ladder of loyalty, you will realize that it seems a lot goes into making a prospect become a partner. Seems like a tall ladder, but in reality, it is not. There are some customers who become partners for life depending on their level of sophistication, expectation, trust and loyalty. There is a limit to what a customer can withstand or tolerate. However, with the barriers to account opening becoming so low and determined by market demand and aided by technology, the competition has become very fierce, and banks are leaving no stone unturned to stay afloat.

The Covid 19 pandemic era comes with challenges as well as opportunities. This is the best time to do a self-audit of your service. Customers going through business decline will obviously show decline in their turnovers but without asking, there comes a communication block. This is where Relationship Managers come in. Customers rely on their emotional experiences with salespeople more than any of the traditional factors, according to research by the Peppers & Rogers Group. It showed that:

60% of all customers stop dealing with a company because of what they perceive as indifference on the part of salespeople
70% of customers leave a company because of poor service, which is usually attributed to a salesperson
80% of defecting customers describe themselves as “satisfied” or “very satisfied” just before they leave, and
Customers who feel their salespeople are exceptional are 10 to 15 times more likely to remain loyal.

Attitude and Emotion

These statistics show the important role that attitude and emotion play in determining whether customers leave or stay. It is critical for salespeople to understand customer attitudes and regularly collect feedback. The research further explained that “Most salespeople can answer the “who, what, when, where and how” of a business relationship. The missing element is “why.” Why do your customers do business with you? Is it because they feel valued, protected or informed? These “why” factors have a definitive impact on customer loyalty.”

Bank Self Audit

A bank’s self-audit will answer the question about customer exits even though it is always inevitable in the long run. No bank can retain a customer forever. Poorer customers may not be protected against crises or shocks. Richer customers may choose to leave a bank whose products and policies are not appropriate for them. However, as this worsens and remains unchecked or investigated, high levels of customer exits can seriously affect both the financial and the social performance of a bank.

Some exits are actually good riddance, while some can be painful. Next week, I will examine some basic self-audit topics that can give insights into how banks can avoid more painful customer exits. Banking is becoming a survival of the fittest but the fittest may not necessarily be from having the latest technology and clout. It comes in various ways, and mostly known by the customers!

TO BE CONTINUED

For more insights into banking, please book a copy of my new book, “THE MODERN BRANCH MANAGER’S COMPANION” which involves the adoption of a multi-disciplinary approach in the practice of today’s branch management. It also shares invaluable insights on the mindset needed to navigate and make a difference in the changing dynamics of the banking industry. Call 0244333051 for your doorstep delivery.

ABOUT THE AUTHOR

Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21^st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.

CONTACT

Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: Loan monitoring – A panacea for loan default? (2)

According to the Central Bank’s Domestic Money Bank’s Income Statement, a total of GHS2.086 billion was written off as bad debt by banks operating in Ghana. The total bad debt stock was 4.7% less than that of 2020 which was GHS2.183 billion.

Dear readers, last week, I shared some sentiments about how regular loan monitoring can be optimized as a risk management tool in the traditional lending process. I concentrated on how customer visits and face to face meetings with borrowing customers could reduce loan defaults to a minimum. Visiting customers’ premises is very key from day one of the loan process. Early warning signals could be seen and nipped in the bud. Various financial institutions have developed ways of monitoring commercial loans granted to customers. It is always advisable to have a standardized format for uniformity in reporting. These help loan officers identify both healthy loan account operations as well as early warning signals.

Pressure on Relationship Managers

Under tremendous pressure to grow loans and revenues more efficiently in a highly competitive market, much of the average Relationship Manager’s effort and technology spent is focused on getting the loan approved and on board. Borrower assessment and loan monitoring technology can sometimes be a lower priority. When a bank underwrites a new loan, it conducts a full credit assessment on the borrower, including the borrower’s ability to pay back or refinance the loan at the time of maturity. The bank expects the borrower’s credit profile to remain the same as, or better than, at the time it extends the loan. It puts in place covenants and other requirements to ensure that a minimum set of standards are met for a borrower’s future conduct and financial performance. Most covenants establish benchmark metrics that are intended to ensure that the borrower remains financially healthy, and the bank’s investment is protected. These restrictions are based on the borrower’s specific balance sheet, income statement, and cash flow characteristics, most commonly expressed in the form of financial ratios. Other covenants monitor reporting and disclosure, to set a minimum standard of communication with the bank.

Challenges in Loan Monitoring

As stated last week, several scenarios encountered by Relationship managers during loan monitoring makes loan monitoring quite daunting.

While remote monitoring using the systems might seem the best, many SMEs still perform largely cash transactions without channelling all proceeds to the bank account. Some monies would also be on the mobile wallets while some are held with debtors without a structured bookkeeping. Checking inventory can also be only scratching the surface.
Under covenant monitoring, many banks do not have the appropriate tools to generate timely alerts on when these items are due for receipt.
For many commercial borrowers, the collection of information requested by banks is an onerous task that can sometimes be seen as intrusive to the actual running of the business.
Reviewing borrower financials, determining the risk rating, and preparing the credit write-up is time consuming. It takes almost the same amount of time as performing a full credit assessment.

Standard Commercial Loan Monitoring Formats – The Traditional Method

Standard loan monitoring is a combination of both manual and technological processes. Due to the limitations encountered in relying solely on technology, loan officers use a generic question and answer format as a guide under the following structure:

Compliance:

Was the facility used for the stated purpose?
Has customer complied with the agreed post-disbursement conditions?

Account operations: Is the account operation on course?

Is the loan repayment schedule on course?
Are any standing orders or cash build-up on course?
Is customer involved in dud cheque issues or frequently calling the bank not to honour some cheques issued?

Business Operations:

Any relocation of the business?
Business operations on course?
Are there any idle resources?
Are business records being documented?
Are sales on track?
Are stocks in the line of the approved business loan?
Any sign of diversion of funds?
Availability of business owner at business premise?
Has customer’s internal control system deteriorated?
Is customer repeatedly absent from the premises during visits?
Is the business closed during normal working hours?
Are turnovers in line with expectations in the loan appraisal?
Are cashflows in line with the budgeted cashflow submitted?
Are funds generated adequate to meet the loan repayments?
Has customer complained about the insignificant nature of facility granted?
Does customer frequently refer to the interest rate as too high?
Has customer requested for additional funds during visits?

SECURITY/COLLATERAL

Any change in the state of security provided?
Any change in the neighbourhood that may affect the value? E.g change from residential to commercial neighbourhood?
Is there any encumbrances on the security offered?
Current value of security?
Has the customer requested for a change of collateral?
Are there enquiries from third parties or the owners of the collateral about the customer’s business operations?

SOCIO-POLITICAL

Any change in borrower’s lifestyle?
Is customer’s level of influence within the community significant?
Is customer actively involved in local politics?
Does it have any significance to the type of business being undertaken?

REGULATORY

Is customer’s business likely to be affected by new regulatory decisions? Eg, Ban on some commercial activities, relocation of certain businesses or infrastructure, new levies and taxes.
Is there a major determination of the general micro-economic trends on customer’s business?

There are more items depending on the borrower’s nature of business.

The Use of Technology in Loan Monitoring

Let us look at some benefits of using an integrated solution in addition to the manual loan monitoring

A robust system that can track requirements under the loan agreement and internal policy requirements is critical.
A good system can also alert the banker when items are due from borrowers, or certain tasks need completion internally, such as an annual review or a client due diligence visit.
Covenanted information when posted onto a customized system can pool the data, and using it in various meaningful ways beyond merely compliance, for example tracking and comparing borrowers across a variety of financial metrics, including revenues, cash flows, and leverage levels.
AI and machine learning can capture the borrower’s information onto the Banks database without manual data entry, for easier decision-making.

Redefining Loan Monitoring – Making the best of both worlds

Many traditional lenders still rely on manual methods of borrower information gathering and human analysis to underpin their credit portfolio monitoring. However non-traditional lenders already employ near real-time data to assess and monitor credit risk effectively. Some banks, for example, rely on the information it captures continuously from its commercial customers to make credit risk decisions in lending money to these customers. It captures data such as daily or monthly sales, payment terms, product returns, and even customer satisfaction ratings to inform those decisions. With these, the customer obtains working capital finance from the bank. In reality, many customers still rely on cash transactions, making bank transaction history monitoring very difficult.

The use of non-traditional data for credit risk assessment is gaining traction in banking. With the appropriate technology, the use of a loan monitoring system that applies machine learning techniques to borrowers’ financial data, alongside macro and micro economic information, behavioral metrics, and relevant industry key indicators to identify which borrowers might face financial distress is becoming very beneficial to Banks. These can only be successful when most customers are also onboarded with improved payment systems which would support the data gathering by AI to reduce the time spent on fieldwork. With video conferencing, loan monitoring and statistical data gathering would become an enjoyable experience and no more a chore.

For more insights on this topic, please book a copy of my new book, “THE MODERN BRANCH MANAGER’S COMPANION” which involves the adoption of a multi-disciplinary approach in the practice of today’s branch management. It also shares invaluable insights on the mindset needed to navigate and make a difference in the changing dynamics of the banking industry. Call 0244333051 for your doorstep delivery.

ABOUT THE AUTHOR

CONTACT

Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: Loan monitoring— A panacea to loan default? (Part I)

The issue of problem loans is an albatross that keeps rearing its head in the affairs of financial institutions in both and advanced and less advanced economies. Granting loans is one of the core functions of banks.

What are the effects of bad loans?

A bank with high percentage of bad loans has cause to worry. While liquidity and profitability faces decline, there is an erosion assets and capital causing insolvency, and an eventually run on the bank and collapse.

Risk Watch with Alberta Quarcoopome: Loan monitoring— A panacea to loan default? (Part I)

The Banker’s Duty of Care

Many loan defaulters have an easy playing field when they are left to themselves after the funds have been disbursed. When this happens, loan officers are unable to detect early signs of default. Whether as an investor or a borrower, regular customer contact is key in a banking relationship. Investment/Sales Executives sometimes desert their customers after the deal is closed.

We don’t know that subsequent visits or calls can make the customer feel a greater sense of belonging and can even bring more funds from offshore to be added to the existing funds. Some Loan Officers also neglect their customers when the loan is approved and disbursed. In both circumstances, we should know that customer visits or calls as well as face to face meetings go a long way to impact the bank’s profitability. How do we minimize the risk of default of bank loans and customer attrition?

Supervision and Follow-up of Loans

The basic objective of supervision and a follow-up system is to ensure that the advances granted by the bank are safe. The funds lent by banks belong to the depositors and the bank staff have responsibility in safeguarding the interests of millions of depositors. Supervision of loans starts right from the stage of selection of a borrower whereas follow-up of loans starts immediately after disbursement of the loan.

The branch is the unit from which the proposal is made for any advance and disbursement channeled through. The borrowers’ maintain accounts are with the branch, operations are conducted through the account, reports, and returns are submitted, by the borrower to the branch and loans officers. Success therefore depends on how effectively the branch and loans departments ensure supervision and follow-up of the credit.

Visits by Loan Officers

Let me share some real-life cases:

Case One: A key distributor for Unilever products who benefitted from a guarantee to his supplier (Unilever) diverted the sales proceeds into building a warehouse. The bank which had guaranteed payment of cheques had to continue the misfortune of honouring the cheques until the amounts were crystalized into an actual loan, running into several hundreds of thousands of cedis.

Didn’t the Loan Officer make regular visits to the shop(s)? What about the account operation? Were there no evidence of reduceds turnovers, diversion of payments to builders or suppliers of building raw materials? Dear Loans Officers, please do not leave the monitoring of account operations to the branch operations staff alone. In banks where the loan processing rests only at the Business or Retail departments, they sometimes may not have the full details of the loan agreement and will only honour cheques that are funded!

Case Two: A customer who has been financed to sell alcoholic beverages suddenly displays a variety of other items such as rice, sugar, oil etc. A loan officer may admire customer’s ingenuity and business acumen but for all you know, he/she has defaulted in paying the supplier of the beverages and has therefore diverted to try other items whom he or she has no experience to deal in! Mr. Loan Officer, please visit your customer, check their books, as well. It falls within your right. Perhaps the loan repayment proceeds is being diverted to build up a good track record at another bank for bigger loans!

Case Three: A customer who was financed to complete a government building contract suddenly moved house into a posh residential area, “acquired a new wife” as well as a brand new luxury car! The building site was deserted. He put 90% of the blame on non-payment by the government because he is not a “card bearing” member of a ruling government’s party! This one too, they bring politics inside! Haba!

Case Four: How do you check your borrowing customers’ standing in the community? One does not need to work in the Bureau of National Investigations to find this out. There is a tendency for some customers to offer ten percent of bank loans disbursed, as tithes!! Can you imagine? Yes, the tithe-giving message has been taken to the extreme levels. I have seen contractors take their cheques to their pastors to be prayed over, with some of the funds being siphoned away by the charlatan pastors!

Funds meant for business should be used for business to enable them make profit and repay the loans and pay genuine tithes! Please make it a point to monitor the account operations, call your customers and visit them. If you are good at a little psychology, you can read in between the lines when customers are edgy and not able to explain certain expenditure patterns. Don’t behave as if you are a know it all, but do it in a very discrete way and make your suspicions known to your supervisor.

Sometimes face to face meetings within the bank premises make them see the seriousness of the situation. I remember decades ago when I used to monitor customers who had been assisted with the purchase of huge consignments of imported frozen fish at the Tema fishing harbour. I had to go to there every other day to monitor their transactions. At a point in time, the bank vehicle meandering its way between the small lanes in the harbour as well as the cold stores became notoriously known as Madam Fish.

There were times I found it difficult but eventually it became mutually satisfying for both the bank and the customers. Even with my eagle eyes, a few of them managed to divert some sale proceeds into buying other types of fish for sale, before eventually repaying the loan. Entering various cold stores in the harbour, without a jacket, to check customers’ stock balances, were some of the unforgettable experiences.

Case Five: Sometimes a call or visit can even help identify sick or even deceased customers! Relatives of borrowing customers are usually the last to inform the bank about his or her death. You may not know but a family member may be operating a deceased account’s sole proprietor’s account without the knowledge of the bankers. The KYC on customers should be continued until the account is terminated.

Dear bankers, despite this era of digital banking, artificial intelligence and Big Data Analytics, the human touch can never be replaced. Make banking great again in this new decade.

I will pause here. Next week, we shall examine the early warning signals that loan monitoring officers should identify easily and take action to avoid the deterioration of their loan portfolio.

(TO BE CONTINUED)

TO BE CONTINUED

ABOUT THE AUTHOR

CONTACT

Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

BANKING 101: The segregation of duties–Part 4

Segregation of duties in the traditional lending process

Despite the innovation and technological advancements in Banking, the SoD policy still runs supreme in all its operations. Banking depends on trust, but it is not absolute. It is better to say “Trust, but verify.” Many friendships have been broken because they took the trust of friendship in business to an “impossible” level.

Lending as a core banking operation

Lending is one of the core businesses that banks are licensed to do. There can never be a return on customers’ deposits held in banks if they are not invested in one way or another. Of course, lending is one of the most profitable operations of a bank business if conducted well enough for the monies to be repaid.

A bank can have all the structures in place in credit delivery, with all the principles of lending being applied. However, we admit that “to err is human” and the segregation of duty is one basic rule that reduces the operational risk in the process of lending.

The Lending Process

The lending process remains the lifeblood of their business. Lending is a straightforward series of activities involving two parties which involves loan requests, loan approval, its disbursement and loan repayment. Most of these functions are interdependent in the value creation chain, and therefore segregation should be the must-have during the whole credit delivery and administration process.

Let us look at the typical personal or sole proprietorship lending processes: It starts at the branch. An officer or relationship manager has to ensure the Know Your Customer (KYC) issues are complied with. This involves proof of identity, proof of residence, employment, confirmation of collateral submitted etc. In the case of account receivables and payables, the loan department expects confirmation of the ageing analysis of inventory and receivables. Where approval is granted at the head office, the appraisal staff also require some additional checks, to be convinced about the genuineness of the loan request.

This simple and straight-line process can still be fraught with problems if one person performs all these tasks. It becomes easy to lend to ghost or fictitious names and non-existent businesses. With loan administration, an increase in fictitious or unauthorized loans result when both the approval and the disbursement are handled by the same employee. To minimize exposure, banks must separate the loan approval and the disbursement functionaries.

Some loan officers use the advantages of technology as another outlet to commit fraud. Sometimes, data processing facilities are made easily accessible to unauthorized persons. Although the truth can be traced through an audit trail and to the individual data entry personnel, they are sometimes detected too late.

In bigger financial institutions, the loan process involves credit administration staff who ensure the various steps are confirmed, the amount granted are set up in the computer system, and all such prior approval conditions are met. Credit monitoring teams also come in to ensure that disbursement conditions are abided by, and the loan used for the intended purpose.

Breakdown in Segregation of Duty during Credit Delivery small financial institutions:

Kwame Donkor is a Loans officer who is asked to process a loan for Adwoa Enterprise, an SME in the central business district of Accra.
The owner of the enterprise, Madam Adwoa is a thirty-five-year old lady, semi-literate who is supposed to have experience in the “buy and sell” business for about five years.
She needed an overdraft of GHc50,000, to expand her business.
Her main stock-in-trade is cosmetics.
She does not perform any book-keeping, recording of transactions such as sales, purchases and other expenses. She mixes the business funds with her personal funds.
She has a savings account in the same bank, where she places part of her profits.
Kwame Donkor visited the shop, the residence and prepared his own statement of affairs of Adwoa Enterprise, as well as a cashflow projection; he manipulated the figures to window dress the business operations.
Kwame overstated the stocks and receivables to make the business look very credit worthy.
The appraisal was sent to the Head office for further appraisal and eventually an amount of GHC50,000 was approved for the business.
Kwame kept the documents covering Madam Adwoa’s landed property, for which a search was not conducted at the Lands Department for authentication.
Disbursement of the funds was made by Kwame through the set-up in the banking software system.
Madam Adwoa received the credit in her account, withdraws GHC49,000 and travelled out of the country the following day.
A search at the Lands Department shows that the documents are fake. Madam Adwoa is only a girlfriend of the main business owner, who is a drug dealer, currently in jail in Thailand. All the business registration documents submitted to the bank were fake!

Preventive Measures

A regular review of data processing and nonfinancial reports can help discover any discrepancies.
Avoidance of fictitious or unauthorized loans when loan approval and disbursement are handled by the same employee.
Changes in an interest rate or a payment due date should not be done by one official without authority.
A compulsory ten –day block leave forces staff to relinquish their duties to someone else at which time irregularities or unauthorized manipulations may surface.
A rotation of duties, to prevent the exclusive power over some accounts by Relationship Managers.
Annual audits, both internal and external personnel help verification of facts and objectivity in the process.

With its benefits of speed and accessibility, technology can still be another outlet to commit fraud. Therefore, prevent data processing facilities from becoming easily accessible to unauthorized persons and create more internal control problems.
Loan documents and custody of collaterals for loans should be maintained by staff not involved in the loan process.
Staff responsible for disbursing loan payments should not initiate and authorize loan transactions.
Activity in loan accounts should be reviewed and approved by someone other than the staff responsible for recording transactions in this account.

Perhaps sudden changes in lifestyle of some staff may be red-flags and managers need to stay in tune with all staff to see if their behaviour, personal situations or other red–flags are being waved. In fact, if managers take enterprise risk management to heart and implement credit policies and procedures that include SoD, it will reduce the risks of losses in credit delivery and administration. A country’s people and businesses cannot do without credit facilities, so financial institutions should take good care of their depositors’ funds and keep the economy alive.

I will pause here and continue next week

TO BE CONTINUED

ABOUT THE AUTHOR

Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21^st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.

CONTACT

Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: BANKING 101 – The segregation of duties (Part III)

“Explanation is not half as strong as experience, but experience is not half as strong as experience and understanding.”… Mark Z Danielewsky

Welcome to Part 3 of this series. Segregation of duties is a key principle in financial control, aiming to reduce the risk of fraud and error. It involves breaking down processes so that no single person is responsible for every stage in a process.

When a single individual carries out all stages in a process with no checks, the potential exists for errors to be made or for fraud to occur. There are some areas where segregation must be achieved, for example expense claims must always be authorised by someone other than the claimant.

There are, however, some areas where smaller departments may struggle to achieve segregation. Where segregation cannot be achieved, as an alternative it is important to consider what monitoring controls can be put in place to pick up possible errors and discourage fraud through likely discovery.

Cheque books and withdrawal booklets

Sometimes the cheque book can be described as a “double-edged” instrument. It can make or unmake an account holder. When it falls into wrong hands, all the funds of a customer can be withdrawn with the use of one or two cheque leaflets! All cheque books should also be under lock until it is delivered to the customer. To prevent the cheque books from falling into wrong hands, it should be handled by specific officers.

Tellers and other personnel who can generate financial transactions on accounts should not handle cheque books. They should usually be handled by the customer service personnel, who are responsible for receiving the orders, sending the orders for printing and delivering them to the customer. To prevent internal fraud, managers and supervisors are expected to do regular snap checks of all cheque books in the branch whether in the vault, cabinet, etc.

The reason? To ensure the ones received in the branch, including over-stayed ones not collected by the customers, are still intact and no fraudulent pull-outs have been done. When was the last time you did a snap check on the cheque books in your system? How is reconciliation done? Remember, calling customers to collect their over-stayed cheque-books is an avenue to revive dormant accounts.

Best Practices to resolve Segregation of Duties conflicts

Internal Audit would need to work collaboratively with the business and the IT teams to segregate these duties wherever possible and assign an appropriate mitigation control in cases wherein it is not feasible to do so. In addition, these controls would need to be monitored on a regular basis and the results reported to senior management.

Segregation of Duties in Cash Transactions

Since the banks’ stock-in-trade is cash, the segregation of cash duties is a policy to reduce the risk of accidental and intentional money loss by employees. Proper segregation of duties in a cash business requires authorization, custody, recording and reconciliation. A good combination of all these steps involved in dividing and overlapping duties is a great way to reduce the chances of human error and fraud.

The following process shows that the segregation is complete when the cash management goes through the following four main activities:

Authorization

Authorization is the first step in the chain of custody. Only one person is authorized to perform such a duty. For example, a teller receives cash, but he or she should not retain the cash in his or her custody.

Custody

The length of custody depends on the duty. For example, a cashier handling money for an eight-hour shift in most cases should count and record his or her end-of-day totals, but a supervisor should reconcile the totals to verify the cash against receipts. This ensures that all money is accounted for and none is missing.

Recording of transactions

Recording requires a teller or supervisor to physically and electronically record a cash total in the system. This cash duty ensures a paper trail that follows the money. When multiple people are handling cash, it is essential to segregate duties throughout the chain of custody.

Reconciliation

Reconciliation is the final step in the segregation of cash duties and chain of custody. It ensures that everyone who handled the money accounted for the cash correctly. When a teller reconciles the cash totals for the day, it provides an opportunity for the branch to detect any errors in accounting or discover potential internal theft. The bank should always have a different person to reconcile than the one who received, handled or recorded the money.

Finally, let us look at cash-in-transit. It is not done by one person. In fact, due to security reasons, the team includes a police guard.

Cases of Absolute Trust and the Resulting Betrayal

Two Friends were vault custodians. One went out shopping and left his key with the other. That day’s cash was not reconciled. Three days later, the cash in vault was short by GHc10,000. There was no CCTV coverage in the vault.
A teller left her cubicle open and went for lunch. Various functionaries went in and out of her cubicle in her absence. A shortage of cash was detected at the end of day. One bundle of GHc20 notes was stolen. The CCTV in the branch was faulty on that day.
A branch manager, who was a key holder, decided to leave her keys with one of her “trusted” officers for her use the next day. The officer did not sign for it in the key holding register. There was a shortage of one GHc5 bundle. (GHc5,000)
A specie transaction was not accompanied by a police guard. The teller was left alone with the driver, who at a point left the car to buy a bottle of coke at a filling station. There was a shortage detected at the end of day.
The tellers in the bulk cash counting bay (where bulk cash is checked) went out for lunch leaving only one teller. The cash boy was also sent to purchase food for the branch manager. A shortage of GHc5,000 was recorded at the end of day.
A cash collection exercise from customers’ premises was delayed causing the police guard to abandon the specie team mid-way, when it was 5.00pm, leaving only the teller and driver. They were accosted by armed robbers.

I will pause here and continue next week

TO BE CONTINUED

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Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: BANKING 101 – The segregation of duties (Part II)

“Learn everyday, especially from the experiences of others. It is cheaper’… Jim Bogle

Dear Reader, I hope my last article refreshed your memory of some basic banking concepts which can never be replaced or done away with. The fraud case involving the American banking officer happened in a traditional banking set-up. Although most banking transactions have been replaced with digital ones, the segregation of duty (SoD) principle is always embedded in all transactions.

Why is it important to have segregation of duties especially in transactions involving money?

By separating duties, it is much more difficult to commit fraud, since at least two people must work together to do so – which is far less likely than if one person is responsible for all aspects of an accounting transaction.

Standardization of Branch Procedures

Whatever the size of your financial institution, from the smallest microfinance company, to the savings and loans company, or even the biggest universal bank, the SoD principle is still a necessary evil that should be adopted, and not done away with, even during cost reduction programs.

As a manager branch expansion, therefore, becomes a real test of the structures of the systems in place. If there is a loss of control and the systems vary among the branch network, it becomes an avenue for disaster. Virtual monitoring of the systems is key to risk management.

Even if your eyes are not everywhere, the risk triggers should track down any lapses in the system, for easy correction. The absence of control in some outstation branches of some banks breeds indiscipline and lapses for misappropriation of assets. The success of branch expansion programs depends closely on the success of the head office systems.

The Colorado Bank Teller Fraud case (Within Traditional Banking Set-up)

Let us look back at the publication of the case of the Operations Officer of the Bank of Colorado, USA and examine the causes of the massive fraud by this “trusted” worker. I wonder what the bank thought about her prior to the detection of the fraud. Obviously, she would have been a star worker and a darling of the bank; playing the part of the utility player in the branch, doing everything from A to Z with very little supervision. Once again, I quote William Shakespeare: “There is no art to find the mind’s construction in the face”.

Fraud is no “respecter” of persons. Anybody can, and has the ability to commit fraud. The lady in question had been promoted from the head book-keeper to the operations officer. Did you also notice the length of time it took for the fraud to be detected? Four solid years!

Let us examine some of the red flags in the case, which illustrates a good example of the lack of segregation of duty in the branch concerned, leading to a loss of $565,000. We shall take some extracts from the case and question the structures in place:

FACT:

She performed unauthorized electronic transfers by means of block entries from customers’ accounts into her own accounts as well as accounts of family members and other customers.

QUESTION:

What measures were there in the branch to cross check transactions being executed? Whom did she report to? Was she too “big” to be checked? In these days of “voucher-less” transactions, how are electronic transactions effected and checked? Are there any electronic built-in systems to ensure block entries are checked before being posted into the accounts and its effect on the general ledger.

How do these appear on the general ledger in the system? Were there no reports to check when an official conducts transactions on his/her account? Is it even allowed? Were there no triggers in the system?

FACT:

The woman avoided detection by developing elaborate means of re-crediting those accounts before the end of their statement cycles, Concealing the unauthorised transfers, and creating and distributing false monthly statements.

QUESTION:

The same questions apply here too. What elaborate means can one create to re-credit accounts? Who is checking who? Are there no snap checks by Internal Control staff? Were there no suspicious transactions seen during the four years?

What is the process of printing and distributing statement like? Who has the rights to print statements? Is there no segregation? How can one person print and distribute? Of course, statements can be suppressed or diverted by internal fraudsters.

Does your bank receive occasional complaints from customers about non-receipt of statements? If your company uses e-statements, what controls are there to prevent manipulation and suppression of these e-statements?

Do the personnel who receive cash and cheques (Marketing and Sales staff, Tellers, etc) also have system rights to print and send statements? Who controls the statement printing and the dispatch process? Even in these days of e-statements, there should still the “Maker-Checker” effect. Emails of customers should be accurate to avoid mis-direction, causing reputational damage when the bank is sued for breach of confidentiality!

FACT:

She was in charge of customer inquiries, and bank employees were instructed to direct complaints to her.

QUESTION:

Is there a central pool for complaint management in your bank? Who is in charge? Is it automated and logged for monitoring purposes and for the avoidance of suppression of customer complaints? What are the benchmarks for complaint handling and resolution? Is there a segregation of roles to ensure that complaint resolution is dually owned by both the front and back offices?

Is it monitored centrally from the Service Quality/Assurance department? Does the complaint management system not generate reports indicating the trends in complaints investigated to know the sources and hot spots? Are there departments/branches registering many complaints? If yes, ask the Internal Control to check up on them and run snap checks. For all you know it could be a leadership problem in the branch leading to cracks in discipline and a target for fraudsters (both internal and external)

Next week, I shall continue to explain more aspects of the segregation on banking, for a better understanding of the reasons behind certain rules and regulations in transactional banking. Stay tuned.

TO BE CONTINUED

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Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: BANKING 101 – the segregation of duties (Part I)

“…I say, that Power must never be trusted without a check.”
― John Adams, Adams-Jefferson Letters

This article is an extract from one of the chapters in my book- “The Modern Branch Manager’s Companion” published in March, 2021. Segregation of duties is an ever-ready principle in banking that sometimes get under-rated. Please read on………

There is one policy in banking that has never changed. Whatever happens in any bank, whether during change management, product development, staff recruitment, technological improvements, this is a policy that is always constant. It is the segregation of duty or functions.

This separation or segregation of duty or functions in banking connotes some perception among some staff that it is a retrogressive policy and should be done away with. It is sometimes regarded as retrogressive because of the slogan that banking depends on trust.

Definition and general description

According to Wikipedia, – “A Separation of Duties (SoD) is the concept of having more than one person required to complete a task. In business, the separation by sharing of more than one individual in one single task is an internal control intended to prevent fraud and error. The concept is alternatively called segregation of duties.”

Though it is basic, it is by far the most potent as it ensures that errors or irregularities are prevented or detected on a timely basis by employees in the normal course of business.

Segregation of duties provides two benefits:

A deliberate fraud is more difficult because it requires collusion of two or more persons; and
It is much more likely that innocent errors will be found.

At the most basic level, segregation of duties means that no single individual should have control over two or more phases of a transaction or operation. Management should assign responsibilities to ensure a crosscheck of duties.

If a single person can carry out and conceal errors and irregularities in the course of performing their day-to-day activities, they have generally been assigned or allowed access to incompatible duties or responsibilities.

Broadly, any financial institution’s organizational structure is usually separated into “Front Office”, “Middle Office” and “Back Office” departments and functions. The branch banking function is a one-stop banking with several activities going on at the same time.

It includes account opening, receiving and paying cash, cheque processing, issuing bank drafts, cards, digital banking, issuing cheque books, processing loans, giving financial advice, marketing for prospects, attending to customer enquiries, reconciliation of books and supervision by managers.

These branch banking activities are a combination of the front and back offices, which support each other and blend together to enhance the banker-customer relationship.

Given the above scenario, you will think all the staff are working in a maze. It would have been so if the structure is not made for control mechanisms to be in place to avoid one person starting and ending a transaction. This is where the Segregation of Duty comes into force. This policy is also embedded in all banking applications and in digital banking.

Negative perceptions among some bank employees

Here are a few negative perceptions among some bank employees.:

‘When the customer is in a tight position and needs help, and the staff are also being bench-marked for every activity they perform, who needs segregation?”
“As for this policy it retards progress and its advocates are backward in their thinking. We need a break”
“Who needs segregation with all these new technologies, and inventions? After all, banking depends on trust and we trust each other. Even my counterpart is a close friend and I have no qualms about him doing anything behind my back!”

In this article, we will explore the reasons why the segregation of duty policy is always embedded in any bank activity and keeps on haunting every banking functionary. An examination of various banking activities that involve separation or segregation of duties (SoD) will eventually prove to both customers and bank staff that it is a “necessary evil” that should be endured.

Actual job titles and organizational structure may vary greatly from one organization to another, depending on the size and nature of the business. With the concept of SoD, a business’ critical duties can be categorized into four types of functions: Authorization, Custody, Record keeping, and Reconciliation. In a perfect system, no one person should handle more than one type of function.

Segregation of Duty in Branch Operations

It is a well-known fact that Segregation of Duties (SOD) is a top contributor for prevention of fraud activities. The lack of SODs is an acute problem in many small financial institutions due to the lack of advanced tools or the expertise to manage this risk effectively. Let us look at a real- life case in USA, during the days of traditional banking, taken from the Internal Auditor publication:

“A Colorado woman has been sentenced to 40 months in prison for defrauding the Bank of Colorado’s Craig branch of US $565,000 during her employment as head bookkeeper and later as the operations officer, according to a CRAIG DAILY PRESS article.

Court records show that over a four-year period, the operations officer made unauthorized electronic transfers by means of block entries from customers’ accounts into her own accounts as well as accounts of family members and other customers.

The woman avoided detection by developing elaborate means of re-crediting those accounts before the end of their statement cycles, concealing the unauthorized transfers, and creating and distributing false monthly statements.

Moreover, she was in charge of customer inquiries, and bank employees were instructed to direct complaints to her. She also included false descriptions of transfers and back-dated electronic entries.

Lessons Learned

Control frameworks for organizations that rely on electronic transactions are built on automated controls. In this case, the head bookkeeper, who later became the operations officer, was not deterred from committing fraud by any preventive control. Without an adequate segregation of duties policy, the operations officer was authorized to process transfers, create and distribute monthly statements, and handle customer complaints. Weaknesses also existed in the preventive controls around transfers, which allowed her to have unsupervised access to customer accounts and make:

Transfers from customer accounts to her personal account.
Transfers just before the end of statement cycles.
Unauthorized transfers

Source: Internal Auditor

We shall examine the lessons learned from the case later on, but before someone quickly reminds me that this does not happen in a bank, let us face it. Between 2014 and 2017, many microfinance companies in Ghana did not recruit the proper caliber of staff, and some staff were seen to be performing a variety of functions similar to the case of the Bank of Colorado official.

It seems rather harmless when a multi-tasking employee is described as very hardworking, reliable, has the ability to work under pressure, an all-rounder and honest”. In some cases, these “all-rounders” are family members who have gained the trust of the CEO. Management must not always use the excuse of lack of funds for recruitment. Lack of enforcement of the segregation of duty due to inadequate resources is an avenue for disaster.

Having adequate separation of duties in a financial institution means properly assigning the handling of financial processes or control procedures among two or more competent and qualified individuals. This in a way provides reasonable assurance that transactions will comply with the internal controls or standards.

In these days of branchless banking and the reduction in “brick and mortar” structures, the segregation function is even more important. There is extra reliance on the computer systems to ensure that all controls are embedded in the evolving computerized processes in banking.

Next week, we shall delve deeper into reasons why segregation of functions is embedded even in digital banking and all other non-traditional banking services. So far as banking gives assurance to customers that their finances are safe, so shall the segregation of functions continue to be in force. Stay tuned.

TO BE CONTINUED

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Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Risk Watch with Alberta Quarcoopome: Self-reflections by leaders of today

“Self-reflection is the school of wisdom” – Baltasar Gracian
“Ambitious New Year’s resolutions often end in disappointment. So instead of setting unrealistic goals in 2022, business leaders should consider making smaller, simpler changes—and they just might see better results”, says Harvard Business School Professor Hirotaka Takeuchi.

Even before changes can be made, I strongly recommend a period of sober reflections by leaders of today. Knowledge plays an important role in the productivity and prosperity of economies, organisations, and individuals. Therefore, learning from direct experience can be more effective if combined with sober reflection and knowledge of the key lessons taught by experience. Indeed, reflecting on what has been learned makes experience more productive, and builds one’s confidence in the ability to achieve a goal.

Who is a leader?

In simple terms, a leader is someone who can see how things can be improved and who rallies people to move toward that better vision. For purpose of this column, I will concentrate on personalities in the corporate world. Are you a Board Chairman, a CEO, Management staff, Head of Department, a Supervisor or Line Manager, a Front Desk Manager, a Branch Manager, Area Manager, Marketing Manager? The list goes on. Anyone placed in authority over another, or others has a duty to rally them round and constantly improve on the status.

Why should leaders reflect?

Self-reflection in leadership means carving out time to review yourself as a leader. This is critical for your leadership development. It involves examining your current level of skills, your strengths, weaknesses, behavioural patterns and how you seek to influence others. Self-reflection allows for an increased awareness of problematic performance traits, creating avenues to develop solutions on how to adjust those aspects of your leadership style. This action paves the way for action while developing you as a leader. Be aware of the impact you have on other people through your interaction with them and understand how your own behaviour and actions can drive effective outcomes forward.

Leading from the Heart

The fourth revolution has come to stay. Despite the strides made in artificial intelligence, some roles will always be immune to this new ground-breaking technology. Dear Leaders, do you realize that great leaders are the ones that exhibit a skill set that is not easily replicable? In fact, they lead from the heart and know the hearts of their team members. Passion, drive, and commitment to quality are all important, but a passionate commitment to your team is what will determine your success, effectiveness and enthusiasm.

The Closing Bell

My last article in this newspaper for 2021, was on “The closing bell”, that is, how leaders evaluate and re-strategize their operations at the end of the year, to prepare for the approaching new year with better and more achievable goals. Jack Ma, Founder of Ali Baba conglomerate in China, has a quote which always resonates with me. “You’ve got to make your team have value, innovation and vision.”

Self Questions

As a leader, do you have what it takes to improve your Teams for more value-creation, using innovative and visionary ideas?

As we enter the new year, a self-reflection can reveal your strengths and weaknesses. This period of self-audit can be done through a simple but effective self-questioning exercise of your leadership as well as the status quo of your business. At the end of this simple exercise, you may end up knowing whether your institution is on the right path, policies are working, processes are relevant, staff are well trained to do the right things, supervision by managers are on track, controls and regulatory issues are on track, and last but not the least, whether you as the leader are also doing the right things!

Profitability

The core mandate of your company is obviously to make profit. Is your company making profit or losses?

Has there been a positive or a negative trend?
Are the profits real or window dressed and what are the main facts behind the figures?
Is there a concentration risk in the sources of your income or profits, making the situation volatile?

The nature of the business

Is your company facing stagnation? What is its position among your peers in the industry?
Is the industry also facing stagnation and over-regulated? Have you thought about diversifying into other ventures?

The People- Your Human Capital

Do your staff feel valued?
Are the working conditions appropriate for the jobs being performed?
What about staff placements? Are there any square pegs in round holes?
Have you considered a skills audit of your staff? A “non-performer” in one department or unit can eventually become a star performer when transferred to a place where he or she best fits.
What about the staff attrition rates? is it average for the industry or greater?
Are your line managers giving you the right information?
What is your leadership style like? Are you involving your Team in decision-making?
Are there proper lines of authority in approvals and controls? Are you finding signs of ethical breaches by some of your line managers?
How do you handle personality conflicts in the workplace?
Are you a fearful person, surrounded by “yes men” only, and not easily approachable? Beware, “Yes men” have an agenda.

Controls

How often are controls reviewed?
Are you using the same techniques to solve new problems?
Are the inspection and audit functions performed by routine or risk-based?
Do your internal auditors understand the activities and functions that they are auditing?
Do you take audit reports seriously and get a root-cause analysis done on incidents reported? You may be sitting on a time bomb. Some line managers may be acting as tin gods in their jurisdictions and not transparent in their reports to you.
How are incident reports handled? Are they used as lessons for sharing and training?

Does your Organisation have a Soft Skills Gap?

When your workforce has many technical skills but an absence of soft skills, you have a soft skills gap. Soft skills are what accompany the hard skills, and help your organisation use its technical expertise to full advantage.

If you’re really good at getting clients, and not so good at retaining them, chances are you have a soft skills gap.
If you have a high staff turnover and have to keep retraining people, chances are that you have a soft skills gap.
When you have a high number of managers who are not leaders – that’s a soft skills gap.

As a Leader, are you able to capitalise on the wealth of knowledge, experience and proficiency within your team? Please assess the level of communication and interpersonal skills that are present in your organisation. Soft skills are increasingly becoming the hard skills of today’s workforce, including the leaders. It’s just not enough to be highly trained in technical skills, without developing the softer, interpersonal and relationship-building skills that help people to communicate and collaborate effectively.

It’s important for you to recognize the vital role soft skills play within your team and not only work on developing them within yourself, but encourage their development throughout the organisation.

Use Self-reflection as your Personal Exam

Dear leaders, please use this period of the new year to look within yourself as well as around you. Please never underrate the soft skills. In this day and age, if this is practiced throughout the organisation you can build a better workforce and better culture. This time is specifically focused on questions about your goals, your behaviour, and your general state of mind. By using this process, it gives you an insight as to who you really are.

Final remarks

Dear leader, I am not a guru in organisational behaviour and my opinions are based on reading, studying, observing as well as my personal experiences in some leadership roles that I have been involved in during my professional career. This is my wish for you in 2022 – that you will use self-reflection in your quest to chalk bigger successes in your leadership journey. May your self-reflection open meaningful ways to remain competitive and be more productive in the years ahead.

HAPPY STAFF= AWESOME SERVICE = DELIGHTED CUSTOMERS = GREAT BRAND = HAPPY LEADER!

Have a good and prosperous new year.

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Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

Lessons to learn from BoG fraud reports of 2019 and 2020 (Part 3)

“Cyber is not something you can separate from the core business. All of our businesses are digitally dependent now, and all of them deal with digital threats.”

David Ferbrache, Technical Director for cybersecurity at KPMG U.K. (2017)

This week we continue to share lessons learnt from the Bank of Ghana Fraud Report of 2019 and 2020. We shall concentrate on correspondent banking and e-money frauds today. Once again, here are some extracts from the report:

Correspondent Banking Fraud

“The significant increment in reported values is as a result of increased 49% – 51% Staff Involvement-Jan-Dec 2019, and 56% – 44% Staff Involvement- Jan – Dec 2020 values in attempted correspondent banking fraud. In some instances, single incidents reported values as high as €100,000,000. Even though attempted fraud values increased significantly, loss incurred through fraud reduced by 24.0%.”

E-Money Fraud

“E-Money fraud recorded 14 cases in 2019 and 126 cases in 2020 showing a year-on-year increase of 800.0%. E-Money Fraud recorded a loss value of GH¢ 1.04 million for 2020, as compared to a loss value of GH¢ 0.37 million for the same period in 2019. Banks recorded the highest loss values for E-money Fraud. Banks lost GH¢604,755.65, representing 57.7% of total E-money related fraud recorded in 2020. Rural and community banks followed with a loss of GH¢ 398,883.59 representing 38.1% of total E-Money related losses reported in 2020.”

“Even though Savings and loans companies recorded negligible E-Money related losses, the sector recorded a 100.0% success rate of E-Money related fraud. This may be an indication of the absence of security systems in the sector to forestall E-Money related losses.”

“Microfinance companies follow closely with 83.09% success rate in E-Money related fraud. This is followed by rural and community banks with success rate of 75.9% and 44.8% respectively. The data indicates that sectors with less stringent security measures record higher success rate of E-Money related fraud.”

Cause for concern

The above extracts from the 2020 report gave me much concern. The main reason is that while Bank of Ghana is doing its best to encourage the public especially small- scale entrepreneurs to go cash-lite and use the banking system in their foreign transactions, the fraudsters are also taking advantage of system and human lapses to negate these efforts.

Through correspondent banking relationships, banks can access financial services in different jurisdictions and provide cross-border payment services to their customers, supporting international trade and financial inclusion. E-money has also come to stay to reduce physical interaction, time and resources in financial transactions, while making payments for goods and services hassle-free.

Cybercrime

Cybercrime is a major concern for banks around the world. Until recently, the focus of attacks has tended to be on banks’ customers through card and account detail compromises. But as criminals have become more sophisticated, they have raised their ambitions, and in a change of focus are now directly targeting banks themselves.

In light of these threats, what steps can financial institutions take to protect themselves from cyberattacks, detect suspicious activity more readily, and improve their chances of recovering quickly from any cybercrime attacks? As a layman on this subject, I intend to share more of the awareness and preventive parts, which can help reduce the impact on our banking systems as well as the customers’ businesses.

Sophisticated fraudsters are now mounting focused high-end attacks. Organized crime groups have begun directly targeting bank systems. Unlimited cash-out attacks, for example, have seen criminals compromise the networks of card-issuing banks, enabling them to modify withdrawal limits and clean out groups of ATMs in coordinated assaults.

In 2016 an attack on the Bank of Bangladesh, resulted in the loss of $81 million. This is of particular concern to correspondent banks. Can you imagine that while the attack itself took place in early February 2016, the ultimate beneficiary accounts in the Philippines had allegedly been opened a year earlier, which is likely to have been when the attackers began their initial reconnaissance.

Software on the bank’s interface server was modified, not only to enter fraudulent payment requests, but also to conceal this activity so that fraudulent transactions would not appear on daily logs. If this happens to a bank in Ghana, you can imagine the effect on our banking system?

Education and Awareness for both Staff and Customers

A word to the wise is enough. Bankers and customers alike are prone to cyber crime, and the effect on correspondent banking and e-fraud is massive. Fraudsters typically start with commoditized attacks, whereby organized crime groups send millions of emails containing phishing links to malware. Customers and staff should continue to be re-educated and reminded not to click on strange emails that can result in the system being compromised and the potential for money to be extorted by ransomware demands.

Using the banks email for personal correspondence should always be a no, no.
Banks “SME Clinics” to create awareness, should highlight the following:
Education about the fact that compromising the customer’s environment, introducing malware using techniques such as phishing or email compromise scams.
Capturing valid operator credentials, typically through access to password files or by putting keyloggers in place to capture password details, and thereby gaining an understanding of the payment environment and associated behaviours.
Regular caution to both staff and customers not to share passwords. The temporary “convenience” in doing that can lead to a catastrophe for both businesses and banks.
Knowledge of fraudulent credentials which can be used to attack the back office; for example, by sending fraudulent MT 103 payment messages.
Fraudsters can hide transaction activity. For example, by removing payment information from local databases, and thereby delaying the discovery of the attack and increasingly the likelihood that funds will be settled.
Customers should not sign blank forms for foreign currency transfers. Some unscrupulous Relationship Managers have been sanctioned for altering the amounts that their customers’ originally meant to transfer.

Taking Control

There are other actions financial institutions can take, to detect fraud more readily and respond more effectively to any threats. These include:

Timely reconciliation of accounts, provide payment confirmation and have policies in place around payment amendments.
Institutions should also know how to cancel payments rapidly, should the need arise.
Require counterparts to send confirmation messages. While these messages are not currently mandatory, they provide additional transparency between counterparties.
Review the MT 940/MT 950 statement messages that they receive in order to check that the amounts and balances recorded on their statements match their own records of transaction activity.
Monitoring Transaction Data to detect any concealment of identity both to prevent fraud and to detect attacks that do take place.
Activity monitoring: By obtaining an aggregated record of daily activity, banks can gain a clearer understanding of their payment activity and identify any significant changes in activity.
Risk monitoring: By monitoring risk in their transaction environments, banks can counteract fraudsters’ efforts to hide their transaction activity, as well as identifying unusual single or aggregated transactions.
Institutions should source and store such information separately to ensure that it cannot be compromised in an attack that disables or damages their own payment systems and records.

Response and Recovery

It is also important to have robust processes in place so that financial institutions can respond quickly and effectively if they detect a cyberattack. This may involve canceling fraudulent messages or taking steps to facilitate business continuity if transactions cannot be canceled.

Disaster Recovery/Business Continuity

As the final stage of defense, financial institutions need to have measures in place that enable them to respond appropriately to cyberattacks and restore usual business operations as quickly as possible. This requires a strong link between cybersecurity and business continuity/disaster recovery, as well as an understanding that cybersecurity is intrinsically connected to the core business.

They also need to have a plan in place stating how they will bring the business back online quickly and securely.

Conclusion

To conclude this session, let me quote from Tony Wicks, head of AML initiatives, SWIFT, London, UK. in an article in ACAMS TODAY, “Combating Cyber Fraud in Correspondent Banking”:

“As cybercriminals turn their attention deeper into the banking world, it is imperative that financial institutions take appropriate steps to secure their environments. There are a number of areas in which actions can be taken both to prevent attacks, as well as to increase the likelihood of an attack being detected in time. Last but not least, institutions need to have a clear business continuity plan in place covering the steps to take in the event of a successful attack”.

TO BE CONTINUED

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Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

RISK WATCH with Alberta Quarcoopome: Obstacles can be blessings in disguise!

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” Winston Churchill

When one hears the word “risk”, the immediate reaction is “Aw…problems”. This word seems to have a negative perception and is mostly avoided. Seasoned professionals however know that risk does not always have to be negative. Risk can also create opportunities for progress and improvement as well as a competitive edge. In today’s business world, risk poses threats but also provides opportunities to create new competitive advantage and ways to satisfy customers.

“Why Conflict Can Actually Be A Good Thing” – 4^th Dec 2017 article by Imeyen Ebong, Forbes Contributor

This article is a must read:

“A large European bank’s executive committee gathered for a two-day meeting to work on a plan to turn the company around. The stakes were high. The bank was not performing well and was nearing the limits of its permitted capital ratios. A full turnaround would be required, and everything from redefining the business strategy to restructuring the company, and even exiting whole lines of business, was on the table.

Yet instead of quickly jumping into financing options or other operational decisions, the meeting began with an unfamiliar series of exercises with an unusual goal: to help the leaders in the room get to know one another personally.

Many had worked together for years, but prior to this meeting, something about the executive team had felt wrong, the CEO said. These people would have to lead the bank’s transformation, and while they seemed to get along, executives complained about a lack of trust and collaboration. Decisions jointly made rarely seemed to be implemented.

In the workshop, the group spent a full day learning basic details about one another for the first time, like the names of their children, where they had gone to school and their family histories. They also engaged in a discussion of personality types and gave open feedback about what they appreciated about each other, and which behaviors they found problematic.

Given the company’s dire outlook, this kind of work might seem beside the point, but after the meeting, members of the group reported a different level of trust. Rather than making assumptions about what team members were thinking, as they once had, they said they were now willing to open up and disagree about some things.

The payoff was a much healthier debate, essential as they mapped out the bank’s transformation.

The turnaround is still in its early days, but already the leadership team members credit a more open environment and willingness to share conflicting ideas with improved results. The worst-case scenarios for the bank are no longer on the table.”

Obstacles – A Part of life

Opportunities hide behind obstacles. Not all obstacles are bad. According to John Mason, an opportunity’s favourite disguise is an obstacle. You will always meet obstacles in the road of your answer because no one is immune to problems.

Being a diligent person does not remove you from the world and its problems, rather it positions you to live in it productively and victoriously. I remember the case of a very diligent banker who overlooked a wrong transaction which nearly caused a heavy financial loss to the bank.

What did people say? What! How come? We thought she was a very diligent banker. Was she not the one always hammering the due processes into our heads?” What a world! What a world indeed. That event was taken very seriously by the bank’s management and serious efforts and procedures were implemented to reduce errors in those transactions. Yes, everybody is vulnerable to risk. Your life will be much more productive if you understand that obstacles are a part of life.

Opportunities roll on the wheels of adversity

The door to opportunity rolls open the wheels of adversity. Problems are the price of progress. The obstacles of life are intended to make us better, not bitter. Obstacles are merely a call to strengthen, not quit. Successful people are those who solve the biggest problems. When you encounter obstacles, you will discover things about yourself that you will never know.

TURNING RISKS INTO OPPORTUNITIES – Improving business Performance

Let us look at a few examples of how we can turn risks into opportunities:

Account Opening Errors: The Window to Fraud

Have you been searching for a customer who has perpetuated some kind of fraud? Whether there was loss to the bank or not, reputational damage can cause customers to shy away from doing business with you. Go back and examine the account opening documents. Shoddy work, wasn’t it? It is now time to tighten the screws. Find time to check on what kind of customers are coming on board. Your obstacles? The untrained sales and customer service staff. Seize the opportunity to coach and mentor these staff on best practices.

The Computer Frauds Obstacle and Skills Gap

With the advent of e-banking, e-transactions are sometimes perceived to come with zero-errors. We sometimes forget that garbage in, garbage out. The big obstacle here is Fraud, both internal and external. To clear this obstacle, why don’t you design short courses/seminars/focused – group discussions with SMEs and customers who are not very computer-savvy? Be honest and transparent with them and educate them on computer skills and fraud prevention.

This can be done with minimum costs. The results? ..Customer Loyalty! Don’t worry about the frauds that you have experienced in the Bank. It is the sign that the door to accuracy lie in transactions by your systems, guided by improvement and efficiency in supervision. The risks of losing customers create opportunities to increase profits.

Risks of Loss of Knowledge

Knowledge is power. How do you feel when some valuable and experienced staff leave the bank? Some of them leave a big vacuum difficult to fill. Institutional knowledge loss leads to loss of productivity and increase in the risk of adverse events.

Without an established and well documented credit history, the exit of loans and recovery officers creates a challenge and some loan customers can be difficult to trace. Institutions need to establish a repository of valuable knowledge for future guidance.

This include documented processes, history of events, causes and lessons learnt. History and archiving should not be looked down upon. An institution that forgets history creates opportunities for history to repeat itself!

Words from the grapevine: Social Media Risks also create opportunities

“They say the chief Teller at ABC bank has vanished with GHC590,000. Don’t mind them, the Manager is always out and hardly checks up on what’s going on in the branch”

“I heard that they hardly evacuate excess cash to their head office. …After all, they were trading with the cash”

I hear they don’t have any checks and balances in the branches…..They think they can use logic to work. As for me I am closing my account tomorrow”

How would you feel if you read such messages about your bank? Don’t worry. It is an opportunity to defuse the situation using this same medium of communication to correct and clear your bank’s name.

The speed with which complaints travel across the internet, is enough to make service providers sit up and devise error-free services and ways to provide less or near zero tolerance for errors. Social media increases reputational risks when service delivery fails.

Banks are now becoming more social media-friendly since a scandal can affect customer loyalty and retention within a short time. In such circumstances, banks can use the same social media platform as an opportunity to appreciate what stakeholders are saying, respond immediately and clarify the impressions created and reduce loss of business and reputational damage.

Seize the Moment!

Doing your best at this moment, puts you in the best place for the next moment. All the flowers of tomorrow are in the seeds of today. Seize the moment, opportunities are constantly either coming to you or by you. In everyday of your life write it on your heart that everyday is the best day of the year, to unlock every opportunities hidden behind the obstacles you are facing.

Dear bankers, we hope you take risk management to a different level and see how obstacles can be turned into opportunities and gold mines.

Meanwhile please book a copy of my new book, “THE MODERN BRANCH MANAGER’S COMPANION” a 440 paged book with 29 chapters of technical as well as soft skills in banking. It involves the adoption of a multi-disciplinary approach in the practice of today’s branch management. It also shares invaluable insights on the mindset needed to navigate and make a difference in the changing dynamics of the banking industry. Call 0244333051 for your copy.

ABOUT THE AUTHOR

CONTACT

Website www.alkanbiz.com

Email:alberta@alkanbiz.com or albique@yahoo.com

Tel: +233-0244333051/+233-0244611343

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