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Exceptions are part of every operation in all businesses, but they are a source of particular concern for financial institutions (FIs). Regulatory examinations concentrate on exceptions to regulatory requirements and exceptions to best practices. The fiduciary responsibility that banks have concerning their clients’ money means that operational exceptions carry risk for financial liability and brand integrity. Exceptions to data security in mobile payments or online banking carry potentially dire consequences.

Technology has long been applied to loan document exceptions. Most loan origination systems, whether part of a core system or a third-party application, provide some capability to identify exceptions with at least basic prompts. Some solutions are full featured with notification to lenders, comment history, escalation, multiple statuses and a capability to upload corrected documents. Given the importance of meeting loan compliance and regulatory requirements, and the complexity of the origination process, it is no surprise both FIs and vendors have determined that an investment in software to manage loan document exceptions is worth it.

Ad Hoc Approach

While loan document exceptions are the most visible and perhaps the most critical type of exception, all FIs must deal with a myriad of other kinds of exceptions in back office and branch operations. These may include:

  • Loan policy (as opposed to loan documents);
  • Internal audit exceptions (branch and departmental);
  • Teller cash;
  • General ledger reconcilement;
  • Deposit and returned items;
  • Exceptions noted by regulators;
  • Data security;
  • Controlled documents;
  • Wire transfer;
  • Operational and procedural exceptions.

Of necessity, all FIs have implemented methods for dealing with different types of exceptions. Typically, this involves a collection of ad hoc or departmental solutions including spreadsheets, paper forms, calendars, email forms, perhaps some database automation, or whatever someone at some point came up with. Each solution is independent of the others so there is no ability to see the total picture. Improved capability in one department does not carry to any other, employees may have to learn and support multiple procedures and there may or may not be reliable tracking or escalation.

This kind of environment translates directly into higher overhead and reduced management control. Worse, it generates the kind of productivity leakage that is not easily seen unless a big problem is not addressed for so long that it finally blows up and becomes visible. Each area is handling its issues one way or another, so none individually look like a problem that justifies developing a better solution.

Instead, what if all exceptions, regardless of type or area, could be entered, tracked, managed and resolved using one consistent system? What if the person identifying the exception and the person who needs to address it were connected, even if they work in different departments or physical locations? What if some problems could be detected and automatically generate an exception that is assigned and tracked? What if exceptions still outstanding beyond certain periods automatically generated reminder emails to the assignee and/or an escalation group? What if management and users could quickly pull reports on any department’s, or individual’s, outstanding and completed exceptions?

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The benefits would be significant. Exceptions represent all the ways in which an operation is not working as it was meant to. Obviously, the sooner exceptions are identified, assigned and resolved, the sooner any given operation is back on track. Shorter time to resolution is an obvious benefit, but is not necessarily the most important benefit to applying technology to exception handling. Here are some others:

Awareness. A less obvious but significant benefit is increased awareness at three levels: operational employees who cause the exception conditions; employees who identify and track exceptions; and management. Awareness is the key to reducing exceptions over time. When operational employees are made aware of exceptions quickly, the relationship between cause and effect is much stronger. The longer the time lapse, the more the work to resolve it looks like a completely separate task to the employee.

Efficiency. While increasing the efficiency of resolving exceptions should reduce the time to resolution, there are other important benefits. Automation provides a way to actually make identifying, tracking and resolving exceptions simpler and easier. Employees tend to avoid tasks that are more time consuming, especially if it is not a central aspect of their job responsibilities. For employees who identify and track exceptions, automation can create them quickly and make it easier to see what is outstanding. This lets them focus more on finding exceptions and their causes, over the process of creating and tracking. An employee assigned to resolve an exception might get an email identifying it, click a link to access it, add a comment or upload a document, and be done with it. The idea is to reduce effort and barriers, so there is less of a tendency to procrastinate.

Measurement and Trends. It is simply not possible to see patterns or trends if many different non-automated solutions are being used to handle exceptions. This is a serious deficiency, because it is through trends that root causes can be identified. In many cases, exceptions can be reduced or eliminated by modifying the process in which they are occurring. Sometimes it can be a matter of training. Some employees may cause a higher percentage of exceptions because of how they approach their jobs.

Many, perhaps most, employees view dealing with exceptions as a “necessary evil.” Fair enough. However, they are also an opportunity. Exceptions provide a direct view into how well policies and procedures are being followed, and in some cases whether policies and procedures are the problem. Automation of exception management provides an opportunity to make an unpleasant task more palatable and efficient. That leads to a shorter time to resolution and helps bend employees’ perceptions in a positive direction. More importantly, it gives management the tools to get and stay ahead of the requirements and to better evaluate the underlying policies and procedures.

The trick, of course, is to do this cost effectively. Some third party software solutions dealing with loan document exceptions and/or compliance support other kinds of exceptions. In theory, any process/workflow automation tool can be adapted to provide at least some of the functionality discussed here. Some workforce optimization applications include process automation that can be adapted. Whatever possible solution you look at, it is important to take a holistic view of exceptions across the enterprise.

Mr. Basri is president of Mathews, N.C.-based Point Enterprises, Inc. developers of branch office management software solutions. He can be reached at [email protected].