In the world of banking, technological advances are revolutionizing the way financial institutions market their services and expand their brand presence. The use of data analytics has provided banks with sophisticated tools to identify and target their ideal customers and/or target specific products to their existing customer base. However, alongside these opportunities come significant risks that institutions must carefully consider and navigate.

HARNESSING DATA ANALYTICS FOR TARGETED MARKETING

Data analytics has emerged as a key element of bank management, including driving the development of marketing strategies and initiatives. For years, financial institutions have gathered sizable amounts of data on customers, purchasing and transaction trends, lending activities and other behavioral data points.

Leveraging this data allows management to create personalized and tailored marketing campaigns that are more likely to resonate with their target audience, with the goal of increasing growth and enhancing customer acquisition efforts.  For example, by analyzing correlations between demographic information, transaction histories and behavioral data, financial institutions can identify patterns and predict preferences, allowing them to tailor product offerings to individual needs which can then be incorporated into their marketing efforts.

RISKS OF DATA ANALYTICS & DIGITAL MARKETING

While data analytics offers tremendous potential, it also introduces a variety of risks that banks must address to avoid potential pitfalls. These risks span several key areas:

1. Fair Lending: The use of data analytics must be carefully managed to ensure compliance with fair lending laws and concepts. There is a risk that complex, and oftentimes black box, algorithms could inadvertently lead to discriminatory practices, even if it is unintentional. Banks must ensure that they understand the types of data used to make model decisions and should confirm that their marketing efforts do not result in disparate treatment of certain groups based on race/ethnicity, gender, age, or other protected characteristics.
2. Community Reinvestment Act (CRA) and Reasonably Expected Market Areas (REMA): Digital marketing initiatives must also align with CRA and REMA requirements. Banks are expected to serve the needs of their entire community, including low- and moderate-income neighborhoods. Careful planning and documentation are required to demonstrate that marketing efforts are inclusive and that the bank is meeting its obligations.

Separately, examiners evaluate a bank’s redlining risk using the REMA, which is determined by where the bank is receiving loan applications and originating loans, as well as where marketing and outreach efforts are occurring. Management should verify that any digital marketing efforts are aligned to strategic marketing areas.

1. Reputational Exposure: Missteps in digital marketing can lead to significant reputational damage. In the age of social media and instant communication, negative perceptions can spread quickly and are difficult to manage. Keeping a pulse on consumer complaints and feedback is more critical than ever. Banks must remain vigilant in their marketing practices to avoid any actions that could harm their reputation. For example, management must ensure that product qualifications are not based on customer characteristics and that the bank’s products are readily accessible and available to its entire customer base.
2. Third-Party Risk: Many banks rely on third-party vendors for digital marketing services. While these partnerships can provide valuable expertise and capabilities, they also introduce additional risks. Banks need to verify that their vendors understand and comply with regulatory requirements, in addition to ensuring that robust risk management practices are in place.  Management should understand how the third party uses any data provided by the bank as well as publicly available data and how that data drives various campaigns. If your institution is providing sensitive data to this third party vendor, confirm that they have secure IT and cybersecurity protocols in place to protect this information.

THE IMPORTANCE OF RISK ASSESSMENT DOCUMENTATION

Documenting risk assessments is a critical component of a robust risk management strategy. Banks should maintain detailed records of their risk assessments related to digital marketing initiatives, including:

• Identification of Risks: Clearly identify and document the risks associated with digital marketing and data analytics. Risk identification should be inclusive of technology risk, operational risk, compliance risk, reputational risk and financial risk, amongst others. Management must determine if risk assessments should be performed at the marketing strategy or campaign level.
• Implementation of Risk Mitigation Strategies: Outline the approaches and controls in place to mitigate identified risks to a level that is in line with the bank’s risk appetite.
• Continuous Monitoring and Review: Document ongoing monitoring activities that are developed to address the results of risk assessments. Risk assessments must be reviewed and updated regularly to reflect changes in the risk environment. If marketing strategies change significantly, management should restart the risk assessment cycle to make sure all levels of risks have been considered.

MANAGING THIRD-PARTY VENDORS

Third-party risk management practices should be robust and customized to the services performed for the financial institution.  Effective third-party vendor management is crucial in mitigating the risks associated with digital marketing and whether these services are performed by a third-party. Banks should implement comprehensive oversight mechanisms, including but not limited to the following:

• Vendor Selection and Due Diligence: Carefully select vendors with a strong track record of compliance and performance. Conduct thorough due diligence to assess their capabilities and risk profile. Determine if policies, processes and internal controls support the performance of the service to the level and standards of the bank.
• Contract Management: Ensure that contracts with vendors include clear terms and service level agreements (SLAs) regarding compliance, data security, and performance expectations. Contracts should also outline the consequences of non-compliance.
• Ongoing Monitoring and Assessment: Regularly monitor vendor performance and compliance with regulatory requirements. This can include periodic audits, performance reviews, and risk assessments. Management should also determine if models used to develop digital marketing campaigns have been validated and tested for potential fair lending risks.
• Governance and Oversight: Establish a governance framework to oversee third-party relationships. Ultimately, management will be responsible for any digital marketing campaigns developed by the third-party, so the governance should follow internal controls utilized for any internal bank processes.  This should include clear roles and responsibilities, approval requirements, reporting lines, and escalation procedures for addressing issues.

MERCADIEN: YOUR PARTNER IN RISK MANAGEMENT

The integration of advanced technologies into banking marketing strategies presents both significant opportunities and challenges. By leveraging data analytics, banks can enhance their marketing efforts and better serve their customers. However, they must also consider and mitigate complex risks by implementing sound risk management practices and maintaining diligent oversight.

Our team of experts at Mercadien is available to help evaluate your digital marketing strategies to help ensure that your bank is compliant with regulatory expectations. We are nationally recognized for our expertise in audits, compliance, BSA/AML and risk management. Contact us today to learn more about how we can help your institution effectively manage risk and maintain compliance.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.