By Toni Molinari, CPA, CIA, MBA
Cash management services for commercial customers are an expanding area in most financial institutions and can be used strategically to attract deposits and as a means of building and retaining customer relationships.
Most community banks live off the spread between the money they pay on deposits and the interest they receive on outstanding loans, and until recently, have not focused on offering commercial cash management products. However, with mortgage rates at record lows and NIMs continuing to compress, community banks are rediscovering cash management products and the associated commercial deposits as a low cost source of funding and a means to increase revenues. Community banks may successfully use cash management products to diversify fee income, reduce deposit costs, increase profits, build and retain commercial customer relationships, and relieve deposit migration concerns. However, institutions need to understand the risks involved in offering cash management products and implement appropriate controls to effectively manage those risks to ensure success of the program.
Institutions should develop comprehensive risk assessments for their cash management programs to identify and manage risks and set risk management objectives consistent with their risk tolerance. The risk assessment should be periodically revaluated for changes within the cash management program and the external environment. Risks inherent in cash management programs include credit risk, liquidity risk, operational risk, and fraud risk.
Credit risk is an important consideration in offering cash management products due to the short-term extension of credit involved in cash management products such as ACH and remote deposit capture. Credit risk arises as the institution clears, settles, and records payments and other financial transactions and must be managed. Each customer’s financial condition should be evaluated at least annually to ensure the bank isn’t unknowingly extending credit to a less than credit worthy customer and to reduce the risk of loss to the Bank. Customers known to be experiencing financial hardship, such as those with past due commercial loans, should be evaluated more frequently. The ability to place transaction limits on customers, systematically monitor cash management activity, and receive alerts when a customer attempts to exceed a limit are effective methods for mitigating credit risk.
Operational challenges to successfully offering cash management products include training staff to market cash management products. Branch personnel and loan officers should be educated on cash management products and trained to identify customers that would benefit from using such services. They also should be knowledgeable about the products to educate customers on how cash management services may benefit them. Customers biggest concerns are the security of cash management products such as business online banking, wires, and ACH originations. Staff knowledgeable of the bank’s security program and protections within the business online banking system may help put customers’ fears at ease.
Payments frauds involving core cash management products- business online banking, wires, and ACH, have been steadily increasing each year. Fraudsters’ methods are continually evolving and are becoming more and more sophisticated each year. Institutions need to perform comprehensive fraud risk assessments of their cash management products at least annually and should adjust their controls in response to newly identified risks.
Customer awareness and education is also an essential component in preventing cash management fraud. Institutions must continually educate their customers on recent trends in cash management fraud so they may help in identifying and preventing potential attacks.
Cash management agreements with customers should be periodically reviewed and updated to ensure they evolve with cash management program, limit the Bank’s liability, and are reflective of the Bank’s current products and security processes. For example, agreements that reference old cut off times or allow payments to be transferred via email or fax request when the Bank no longer permits email and fax requests may result in a customer service issue or in a liability issue for the Bank in the event of a fraud incident. Additionally, payments initiated by email and fax should be limited to an exception only basis and consistent with the institution’s insurance policy.
The opportunity to boost revenues through cash management certainly exists, but to do so at a profit requires managing the evolving risks and continuously reviewing controls to ensure they are adequate and effective.
M&M performs comprehensive cash management risk assessments and audits of cash management services.