Managing Risk in Treasury Management

Managing risk in Treasury Management (TM) services is crucial, akin to credit management. TM services can pose credit risks similar to those encountered in loan facilities offered to business customers, among other risks. It's essential to perform risk assessments of these services and verify the creditworthiness of the businesses utilizing them.

Beginning this process involves identifying which TM services present risks and ensuring their use is secure and prudent. This involves asking questions like those posed when extending a loan to a business: Is the institution likely to be repaid after the funds are disbursed? Can the business sustain the debt, especially if the transaction proceeds without sufficient funds? It's important to closely analyze these services to address these concerns.

Wire Transfers

Wire transfers represent one of the most significant risk-rated services you offer. It's crucial that employees adhere strictly to established policies, processes, and procedures. Once the "submit" button is clicked for a wire transfer, the transferred funds cannot be easily retrieved. To minimize liability, especially in cases of fraudulent wires, adherence to these procedures is mandatory. Furthermore, the systems used for initiating and approving wire transfers should incorporate multifactor authentication and establish clear authority levels, both for customers and internally among staff, who should only approve transactions within their designated limits. Offering wire transfer services to business customers involves various risks, including operational, technological, compliance/regulatory, and credit risks.

Automated Clearing House (ACH)

The Automated Clearing House (ACH) system, particularly for Direct Deposit of Payroll, is a widely used service by businesses. Increasingly, businesses prefer ACH for bill payments due to its cost-effectiveness compared to checks or wire transfers and the added benefit of controlling cash flow by specifying payment dates. However, from a risk management perspective, once a payment batch is processed, you have a limited window to recall funds according to strict ACH regulations. If the business' account lacks sufficient funds, your bank may incur a loss. Thus, ACH services effectively act as an open line of credit, requiring your bankers to evaluate and approve them with similar diligence to credit facilities. Like wire transfers, offering ACH services entails operational, technological, compliance/regulatory, and credit risks.

Remote Deposit Capture (RDC)

Remote Deposit Capture (RDC) entails risks akin to those associated with other financial services, albeit operating differently. Its primary risk arises from the potential for customers to deposit the same check multiple times across different institutions.

Modern scanning technology can detect details such as the payee name, routing and account numbers, check number, and both printed and handwritten amounts. Despite this, there remains a risk of checks being fraudulently deposited at multiple institutions within a short timeframe, evading immediate detection. To mitigate this, the service requires that you set both daily and cumulative deposit limits for RDC, approving business customers for specific thresholds and managing each deposit as if it were a line of credit.

However, the manual review of checks deposited through RDC, based on thresholds set by each institution, renders the service both expensive and inefficient. Moreover, immediate fund access post-deposit amplifies the risk. Therefore, businesses must be credit-approved before leveraging RDC, typically obtained through the credit approval process or separately for those without loans, ensuring all customers have undergone credit evaluation before using RDC.

Mobile Deposit Capture

Mobile Deposit is predominantly used by consumers and very small businesses, sharing similar risks with Remote Deposit Capture (RDC). The primary criterion for deciding between RDC and Mobile Deposit for a business is the volume of deposited items. RDC is exclusively designed for business use, while Mobile Deposit is available to all customers. Typically, the daily deposit limits set for consumers (retail) are lower than those for businesses.

Managing risk in treasury management services is a crucial component of your bank’s comprehensive risk management strategy - just as vital as managing credit risks. Ultimately, these risks, if not managed properly, can impact your bank's reputation.

The appropriate question to consider, especially with a deeper understanding of the additional risks these services pose, is whether to charge for them or not.

We suggest charging for them. Your bank needs to get paid for the risks involved.