The new frontier for account opening is online. Whether a consumer is reaching out to a bank through the web browser on their laptop or an app on their mobile phone, the trend is clear. Changing demographics, new consumer preferences, and the proliferation of internet-enabled devices are all driving an increase in online banking interactions and a decrease in branch banking interactions. When evaluating their online account opening processes, banks need to balance the requirements of their standard, enterprise-wide origination processes with the unique requirements of online account opening.
On an enterprise level, the account opening process needs to answer three fundamental questions about each potential customer. Is this person who they say they are? Is this person someone the bank is allowed to do business with? Is this person someone the bank wants to do business with? In this blog post, I will explore these three questions in more detail and discuss the specific challenges that these three questions pose for the online channel.
Are You Who You Say You Are?
The first step in any account opening process is to rule out fraud. This really boils down to a simple question—is the consumer who they say they are? Banks, for obvious reasons, don’t want to do business with people who are pretending to be someone else. The challenge of verifying a consumer’s identity is especially difficult online. The reasons for this are simple. First, identity fraud (the theft of a legitimate identity or the manufacture of a synthetic identity) is more common online than it is in a branch. From the fraudster’s perspective, this makes sense. It’s more efficient and less intimidating to log in to 12 different banks’ websites than it is to walk into 12 different branches. Secondly, it’s easier to commit identity fraud online than it is in person. There are easy steps that customer service representatives (CSRs) in the branch can take to verify the consumer’s identity, like asking to see their driver’s license. These verification steps have not traditionally existed online. Many banks that have “tested the waters” of online account opening have been surprised by the volume of fraudulent applications. This is discouraging, but the problem can be addressed.
To address the unique challenge of identity verification in the online channel, banks need a couple of things. They need to have access to the data sources and analytic models that can help them detect identity fraud. For example, synthetic identities are traditionally very hard to distinguish from legitimate identities for thin file or no-hit consumers. Both types of identities may appear legitimate at first glance (names, addresses, SSNs) and both types of identities will not have standard credit histories. However, legitimate underbanked identities will have a depth of non-traditional identity components that synthetic identities usually lack. By incorporating alternative data sources that include non-traditional identifying information (DMV records, background checks, hunting/fishing licenses), banks can filter out fraudsters without losing any legitimate customers.
Once banks are able to identify any applications that might be fraudulent, they need to be able to verify whether or not they actually are fraudulent. An ideal verification process would be something quick, easy, and relatively foolproof. For potential identity fraud in branch banking, the most common verification process is to examine the consumer’s photo ID (usually their driver’s license). It’s quick and easy for the CSR at the branch to match the photo and physical description on the ID to the consumer standing in front of them. For online account opening, the verification process is not so easy because the bank doesn’t know what the person submitting the application looks like (or for that matter what they’re supposed to look like). One option for online identity verification, which banks are increasingly adopting, is out of wallet questions. These are questions based on data about the consumer which only the real consumer (not someone pretending to be them) would know the answers to. Out of wallet questions online have many of the same benefits of checking photo IDs in the branch. They are painless for the consumer, extremely challenging for fraudsters, and they both occur in realtime during the transaction which allows the bank to quickly and seamlessly originate all legitimate applications. Unfortunately, out of wallet questions are less effective for fraudsters who are related to the victim, such as a spouse, parent, or child. Many institutions will add another layer of protection with tools that consider the reputation of the device and linking the device’s location to other aspects of the consumer’s life.
Are You Someone I Am Allowed to Do Business With?
Once fraud has been ruled out, banks need to establish if the consumer is someone who they are allowed to do business with. The definition of “allowed to do business with” is somewhat amorphous, but is generally based on two components—legal restrictions and policy restrictions. Legal restrictions include things like the requirement not to conduct any financial transactions with individuals named on the OFAC list or the restriction on entering into legally binding contracts with individuals under the age of 18. These legal restrictions generally apply to all financial institutions and products. On the other hand, policy restrictions are based on each bank’s institutional risk tolerance. One common policy restriction is bankruptcy. The idea is that consumers who have declared bankruptcy are so risky that, as a categorical imperative, most banks refuse to do business with them.
For online account opening, it is important that disqualifications based on legal or policy restrictions can be made quickly and cost-effectively. The incorporation of cheaper, alternative data that can be used to make these disqualifications before more expensive, traditional data is pulled for the decisioning process can dramatically reduce costs. If this least-cost routing process is implemented in an automated system, the account opening process can not only be cheaper, it can be faster. This is essential for meeting the “instant gratification” expectations of the younger generations who are more likely to use the online channel.
Are You Someone I Want To Do Business With?
The third and final question that banks need to answer during the account opening process is in many ways the most critical—is the consumer someone the bank wants to do business with? There are two ways banks look at this question—from a credit risk perspective and from a profitability perspective. From a credit risk perspective, banks are focused on opening accounts with consumers who pose a low risk of default. From a profitability perspective, banks are focused on opening accounts with consumers who are likely to become profitable, long-term customers. Both perspectives require predictive analytics to understand how the consumer is likely to act in the future. Based on these analytic models, banks can then develop their own optimization strategy that balances their credit risk and profitability goals.
It is important, for the online channel, that the speed of the account opening process is not substantially slowed by this last question. As previously stated, consumers (especially those who prefer using online banking) expect a quick response time in all of their online interactions including account opening. Every step in the online account opening process that can’t be done automatically will slow down the interaction and reduce customer satisfaction.