Three Steps to Good Bank Account Management
Although much of the banking world is rapidly moving online, many bank account management processes still need to be completed manually. However, banks can facilitate the process with advanced security, automatic elimination of irregular payments, and closer relationships between front office, back office and the client. Rabobank sees a lot of positive developments in this process. Having a close relationship with the client and having a high quality process internally can make life a lot easier for both parties. According to Rabobank, three steps are important in this client-bank relationship and the services provided.
Bank accounts reveal all financial activity and they come under the close scrutiny of regulations such as Sarbanes-Oxley in the US, or the Tabaksblat code in Holland. To comply with these regulations, corporates are required to go through a process of due diligence with their bank before opening an account.
Within the financial institution (FI), this process is known as Know Your Customer (KYC). FIs have an obligation to know who their clients are, what they do and if their business is legal. The customer due diligence (CDD) process is twofold: it includes checking the client and also checking the client’s payment transactions.
Documents that the bank needs to obtain include authorised signatures and passport details from the company’s board members, Chamber of Commerce papers and also the company’s holding structure. Rabobank takes a proactive role in this process. A checklist of required documentation is provided and the bank stays in close contact with corporates to lower this paper-burden as much as possible.
Once the initial CDD process has been completed and the customer has opened its account with the bank, the bank needs to update this information periodically. Chris Sunderman, sales manager for Rabobank Financial Logistics, says: “The challenge for banks is to obtain this information from the client without excessive disruption.”
There are ways of reducing the burden on the corporate and banks can facilitate the CDD process by filling out forms on the corporate’s behalf. Sunderman adds that: “Having a close relationship with both front and back office makes it easier for the bank to communicate with the client and reduce the paperwork.”
In turn, companies also need to look at their relationships with suppliers and buyers, and this process is comparable to the CDD conducted by banks on prospective customers. Part of this process involves establishing credit limits for buyers in order to control their risks.
Implementation is the second step. The client has accepted the bank account offer and the CDD is completed. A team has to be put in place to manage the bank account implementation, which includes the bank’s implementation manager, a back office coordinator and a representative from the corporate, for example the treasurer or someone from administration.
The bank account requirements of each corporate need to be assessed and summarised in a service agreement. The corporate’s criteria for this agreement will include particulars of tariffs, fees, speed of service and cut off times of payments.
According to Eelco Kaan, head of corporate operations at Rabobank, sensitivity to the client’s needs is very important. He says: “The bank account organisation will vary depending on the company’s structure and its activities – for example importing, exporting or domestic activities. It also depends on a centralised or a decentralised treasury structure.”
For example, a corporate in the food and agricultural industry trades in products that have a limited life span and the payment needs to be made so that the goods are shipped the same day. Therefore the bank has to ensure that those payments are a priority.
Security and user identification play an important role in the payment process for large corporates, even more so compared with small corporates or retail payments. Large payments mean high risks, so there are severe auditing restrictions. In large companies there can be many people involved in payments, so authorisation may require several levels and can be complex. For example, a holding company can have several hundred accounts with a number of officers authorised to make payments on each account. Banks are obliged to check that the authorised corporate employees are making the payments.
On the wholesale side, token and signature verification are the two most recent developments in payment security. Tokens that generate unique one-off passwords and numbers can help to prevent fraudulent payments. On the retail side, banks are starting to use mobile phones for identification.
In western Europe, most payments are highly automated and cheques are in decline. However, some payment contracts, such as bulk payment orders, are still authorised with a physical signature, and this could pose some security problems for the bank. Physical signatures are high maintenance because they need to be updated and verified regularly. Sunderman says: “It’s the obligation of the bank to go back to its client on a regular basis and check that the authorised signatures are still valid.”
The risk of fraud for large corporate payments is hard to quantify; the likelihood is small but the impact is huge. The impact of payment fraud for smaller corporates, for example those in the retail sector, is lower because the volume and value of their payments is relatively low.
With regards to client transactions, regulations such as OFAC in the US and the European sanctions list help banks with checking the client’s payments. OFAC and the sanction laws state that irregular payments have to be reported to the regulators. This does not normally affect the corporate and the payment is not usually interrupted.
Most irregular transactions can be picked up automatically. However, many large corporates have irregular payment patterns, so it is a challenge to spot payments that are genuinely irregular. A close client-bank relationship, both on the sales and on the administrative side, is very helpful in this process.
If an employee or ex-employee does successfully execute a fraudulent payment, it is unclear whether the liability for this payment will fall on the bank or the corporate. It depends on what action the company took to prevent the bank executing that payment. For example, the company needs to keep its files up-to-date and it needs to inform the bank when an employee who had authorisation to execute payments leaves the company. The bank must also take responsibility and be pro-active in this process of keeping all files updated.
Segregation of functions within the bank is important in order to prevent fraud – good practice states that no single employee is responsible for two different steps in the process. Although having one group of people dealing with the customer means the most efficient communication, the mitigation of operational risk means that segregation of duty is necessary. Functions that would be segregated include the verification of manual payments and the subsequent execution of that payment. Kaan says: “It is important that every bank employee involved in processing payments and documents understands the customer’s needs and good communication within the process is vital.”
Opening and managing a corporate account should be a straightforward process, but this depends on the corporate’s needs and the structure of the accounts they require. The process involves many security measures – maybe more so now than ever before, given the strict regulations on banking and corporate governance, and compliance with anti-money laundering and financial crime prevention legislation.
These regulations provide a lot of chances and opportunities as well. Good communication between the corporate and the bank’s front and back offices, as well as user identification tools, such as signature verification and tokens that generate unique passwords, are helping to make the bank account management process as smooth as possible for corporates. The strengthened client-bank relationship will improve this process even more; a beneficial outcome for both parties.