How Financial Institutions Can

Prepare for 2021

White Paper
 How Financial Institutions Can Prepare for 2021 2

How Financial Institutions Can Prepare for 2021

Since the COVID-19 pandemic began hammering the global economy in early 2020, financial
institutions have been at the center of a brewing economic storm. Not only have they been
pressed into service by the federal government to help distribute trillions of dollars in stimulus
money, financial institutions everywhere are fighting a widespread economic depression,
managing a remote workforce, dealing with disgruntled customers, and guarding themselves
against an increasingly aggressive and sophisticated network of fraudsters and cybercriminals.

As the pandemic continues to rage, an equally serious epidemic of uncertainty clouds the
economic outlook for 2021. No one knows how the pandemic will play out. Will there be an
effective coronavirus vaccine or not? Will the economy rebound or not? Will next year bring a new
era of continuous economic turmoil and social unrest? Or will we somehow adapt and innovate
“Resiliency” is the our way to a brighter, more sustainable future?
new watch-word of In short, anything could happen in 2021.
global capitalism, and
for those who want to That kind of open-ended uncertainty is of course what financial institutions and businesses work
survive the pandemic, hard to avoid. But with so many unknowns in the equation, leaders everywhere now have no
choice but to ruthlessly assess their vulnerabilities and plan for a multitude of possible futures.
finding ways to “Resiliency” is the new watch-word of global capitalism, and for those who want to survive the
withstand repeated pandemic, finding ways to withstand repeated shocks to the system has become an existential
shocks to the system imperative.
has become an
Despite these uncertainties, many dynamics of the coming financial future can be anticipated, and
existential imperative. there are many steps financial institutions can and should be taking to prepare.

Operational Challenges/Data Security

For example, even if a coronavirus vaccine is available by the end of the year, it will take months
to inoculate enough of the world’s population to allow for a sustained economic rebound. That
means financial institutions can expect their current operational challenges to continue until at
least the summer of 2021.

“Many financial institutions may have developed business continuity plans, but only for a short-
term disruption, not an extended event like we’re seeing now,” says Gabriel Hidalgo, managing
director of K2 Intelligence FIN, which specializes in financial-crime compliance and investigations.
Few institutions ever imagined having to run their operations remotely for months on end, Hidalgo
says, so now is the time to re-examine remote security protocols and plan for a largely remote
workforce into the foreseeable future.

“When you have a completely distributed workforce working remotely from all over the world,
especially multinational institutions that have hubs in various countries, their data controls
platform and cybersecurity programs become paramount,” Hidalgo says. Each spoke in those
remote hubs represents a potential security risk, and cybercriminals know it, Hidalgo warns, so it’s
important to take all the steps necessary to ensure network security.
 How Financial Institutions Can Prepare for 2021 3

Those steps include:

Using a secure VPN for communications

Making sure data and communications are fully encrypted

Training remote workers to guard against phishing and spoofing scams

Not using work computers for personal use, and vice-versa

Upgrading tech systems that weren’t designed for a remote work environment

Empowering Chief Information Officers (CIOs) and Chief Technology Officers (CTOs) to
create and implement a technological adaptation plan for both in-office and remote
working environments

Revising Know Your Customer (KYC) protocols

Rise of Mobile
Another entirely predictable by-product of the pandemic is expanded use of remote and mobile
banking services. Fidelity National Information Services reported that in April, mobile banking
registrations doubled at the world’s fifth largest banks, and mobile banking traffic rose 85%. But
no matter what happens with the coronavirus, the trend toward remote/mobile banking is likely
to be a more-or-less permanent transformation, Hidalgo says, so investing in mobile platform
stability and security is a no-brainer.

“The apps on people’s phones have become their lifelines,” says Hidalgo, and remote payment
platforms such as PayPal and Venmo “have become essential.” Businesses are also using remote
banking and payment platforms to pay vendors and employees, keep track of payroll, and execute
other basic business functions. Consequently, banking apps need to be upgraded to provide a
more robust and seamless customer experience, because websites and apps are in most cases the
primary touch point banks now have with their customers.

Compliance
Operating financial institutions remotely for an extended period of time also introduces the
danger of falling behind on mandatory compliance reporting. Any backlogs piling up now need to
be addressed as soon as possible in order to avoid even larger backlogs if current work conditions
persist in 2021.

“From a compliance standpoint, financial institutions need to have the ability to make sure
that all of the work compliance teams would normally do in the office can be accomplished
remotely, and that these remote workers have the same through-put as they would have had in
the office,” Hidalgo says. That can be difficult if remote workers are overloaded at home dealing
with family matters and child-care issues, he acknowledges, but “regulators will not accept
problems associated with the coronavirus as an excuse for missing reporting deadlines,” so the
infrastructure for meeting them needs to remain intact.
 How Financial Institutions Can Prepare for 2021 4

Money Laundering
For fraudsters and cybercriminals, the federal government’s rush to distribute $2 trillion in
stimulus relief through the CARES Act and Paycheck Protection Program has created a “perfect
storm” of bureaucratic bottlenecks and confusion, says Debra Geister, CEO of Section 2 Financial
Solutions. If, or when, some version of the proposed $3.4 trillion HEROES Act is approved, it too
will be exploited by criminals around the world. Unfortunately, most financial institutions are
“woefully ill-equipped” to deal with the onslaught of fraud to come, she says, particularly when it
comes to sophisticated money-laundering schemes.

“Currently, more than 90% of AML transaction alerts are false positives because most money
laundering is not done by individuals, it is done by sophisticated international crime syndicates
that operate more-or-less like multinational corporations,” Geister explains. “They know how to
stay below the transaction thresholds that trigger alerts, so they tend to fly under the radar.”

Geister specializes in an area of financial investigation called Hybrid Threat Finance (HTF), which
involves analyzing money-laundering typologies used by networks of state and non-state “threat”
organizations such as the Sinaloa Cartel, Hezbollah, or Iran. According to Geister, the pandemic
has directly impacted these networks by depriving them of trade-based money-laundering
opportunities, so they are exploiting the U.S.’s stimulus programs by, say, laundering money
through bogus healthcare-related shell companies.

Among the questions “We’re seeing all kinds of nefarious groups try to get involved in the sale of Personal Protective
Equipment (PPE), for example,” she says. “So instead of laundering a million dollars here or there
financial institutions through a restaurant or hotel, they can place an order for $250 million worth of PPE and sell it at
in 2021 should be a margin, without much overhead. It’s a highly effective way to launder those funds.” According
asking themselves: to Geister, trade-based money-laundering through products such as PPE is just one of the ways
these groups are taking advantage of the global pandemic.
What are the key
industries we want to Because criminals are targeting government spending programs, thorough due diligence on
new customers and staying alert to anomalous deposits and spending patterns is crucial. But
back?
in general, financial institutions hoping to detect or prevent these types of schemes are fighting
What industries an uphill battle using conventional procedures and protocols, Geister says. And going into 2021,
the economic churn from so many businesses trying to adapt and survive all at once “is going
and businesses are to create a whole new playing field” for fraud, she says — one financial institutions need to
in demand and understand as they re-calibrate their own risk/reward metrics and investment strategies.
exploding?
Who is going to be Investment Opportunities
rebuilding and need Banks are among the businesses that will be trying to adapt in 2021 as well, so mitigating risk will
investment? of course be a top priority, especially if credit-card, residential mortgage, and commercial real-
estate defaults begins to pile up. Calculating those risks will likely be more difficult in 2021 as the
economy struggles to gain traction, but for financial institutions, a roiling economy can also yield
promising investment opportunities, says Geister.

American capitalism has no choice but to radically restructure itself in response to the pandemic,
Geister says, and that activity will definitely create opportunities. At the same time, she warns,
financial institutions everywhere need to keep in mind that international crime organizations
and rogue nation states will be trying to exploit these same volatile business activities to launder
funds and cloak their operations in the guise of legitimacy.
 How Financial Institutions Can Prepare for 2021 5

At the Cliff’s Edge

Aside from worries about ongoing internal operations and security threats, many financial
institutions in 2021 will likely be facing existential questions of their own. According to one
estimate reported by Fortune magazine, big bank profits could nosedive as much as 60% in 2021
— a decline several magnitudes worse than any worst-case scenario envisioned in even the most
pessimistic of business-continuity plans.
“We are truly at the
edge of a cliff when it Indeed, according to Jim Richards, founder of RegTech Consulting and former head of financial
comes to retail credit, crimes risk management at Wells Fargo, many banks are already perilously close to imploding,
and 2021 could usher in an historic wave of bank closures and consolidations.
unsecured credit
cards, commercial “We are truly at the edge of a cliff when it comes to retail credit, unsecured credit cards,
real estate, and commercial real estate, and residential mortgages,” Richards says. The cascading effect of all
residential mortgages. that debt going south at once could be “apocalyptic” for the banking industry, he says, “unless
the federal government is willing to keep propping up the economy and injecting liquidity into the
The cascading effect market.”
of all that debt going
south at once could
be ‘apocalyptic’ for Trouble for Small Banks?
the banking industry, No matter what happens in 2021, big banks will find ways to weather the storm, Richards says —
unless the federal partly because they have more resources to offset loan losses, and partly because, unlike during
the Great Recession, the federal government during the COVID-19 crisis has given banks the
government is willing responsibility of distributing stimulus money in order to maintain some semblance of economic
to keep propping up stability.
the economy and
injecting liquidity into Rather, it’s the small- and mid-sized banks already working in the margins that may suffer the
most in 2021, Richards says, particularly if funds from the Fed dry up.
the market.”
“If the COVID-19 crisis drags on through 2021 and into 2022, there won’t be 5,100 banks in the
– Jim Richards U.S. (as there are now), we will see more like 2,100 banks,” Richards says, as troubled banks either
Founder, consolidate or go out of business. Richards expects many players in the FinTech space to follow
RegTech Consulting suit and consolidate or disappear as well.

Much of what happens in 2021 will of course depend on how the 2020 presidential election and
congressional elections play out. Until then, “everyone is just guessing,” Richards says — but there
are several things banks can and should be doing now to prepare.

“Banks should be doing what they should always be doing,” Richards says, “which is continuously
reviewing their risk profile and adjusting accordingly.”

That means continuing to ask basic questions like:

What are we doing now?

What should we stop doing?

What should we start doing?

What should we continue to do?

Considering the potential stakes, however, “this might also be a good opportunity to take that
bold step that you wouldn’t otherwise do, whether it’s consolidate, divest, restructure, cut
spending, or whatever,” Richards says.

After all, treading water in the middle of the ocean only makes sense if you believe someone is
going to rescue you, he says. “Otherwise, it might be time to start swimming.”
 How Financial Institutions Can Prepare for 2021 6

Checklist: What should financial institutions be doing to prepare for 2021?

Re-think the need for physical infrastructure

Assess (and upgrade) usability of websites, apps, and other remote solutions

Make sure enterprise security is airtight

Don’t allow personal devices on the network

Make sure BSA/AML compliance teams are keeping up with their workload

Work to reduce “false positives” in compliance reporting

Communicate frequently with regulators for guidance

Report any changes in business continuity plans to regulators

Manage operations using risk-based analysis techniques

Educate and train staff to recognize spoofing, phishing, and other scams

Conduct thorough due diligence on new customers (even if it takes more time)

Remain alert to strange transaction patterns (even if they don’t meet the usual thresholds)

Guard against bad debt (credit cards and mortgages, especially)

Look for promising investment opportunities

Hold on tight, because 2021 is going to be a rollercoaster ride, no matter what

About the author

Tad Simons is an award-winning technology journalist who writes about communications,
workflow issues, corporate efficiency, artificial intelligence, government administration,
and ethics.

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