Bank Statement Analysis: A Complete Guide

Rising interest rates and economic uncertainty has many banks and financial institutions bracing for a credit squeeze. In this landscape, it is more important than ever for organizations to make sound decisions about who they onboard as customers, the amount of credit they extend, and the terms of lending agreements.

While lending may often seem like an extremely personal and, at times, even subjective process, technology plays an important role in accurately assessing the creditworthiness of an applicant or customer. In this post, we look at the specific role of bank statement analysis during the onboarding and underwriting process and how advanced digital tools and technologies can help organizations improve the accuracy of decisions and reduce risk.  

What Is Bank Statement Analysis?

Bank statement analysis is the process of reviewing and interpreting a bank statement to gain insights into a borrower's financial health. It is a critical step in the loan application process, helping lenders assess the creditworthiness of the applicant and identify signs of fraud or other financial irregularities that may increase risk.

Bank statement analysis provides valuable information about potential borrowers, such as:

• Liquidity: The availability of liquid assets (i.e., cash) for a person or business
• Solvency: The ability to repay debts, usually through possession of assets that exceed liabilities
• Authenticity: Confirming that the customer’s identity and financial details match the information they present

If done well, bank statement analysis gives an organization an accurate overview of an applicant’s assets, liabilities and financial habits which helps institutions decide how much money they are willing to lend to borrowers. By understanding the full financial profile of an applicant, lenders can make more informed decisions about who to accept as a customer, whether to approve or deny a loan or line of credit, and how to set appropriate terms – all of which can help mitigate risk.

Strong risk mitigation in lending, including the use of bank statement analysis, benefits everyone involved. It promotes responsible lending, reduces default risk, supports economic growth, enhances financial stability, and fosters trust among stakeholders. By making the lending ecosystem more robust and reliable, it contributes to the overall health of the financial sector and the economy as a whole.

How Does Bank Statement Analysis Work?

Bank statement analysis is the process of reviewing and interpreting a bank statement data to uncover insights about a borrower’s financial profile that can help lenders assess an applicant’s ability to repay a loan. The steps involved in bank statement analysis can include:

• Assessing financial stability: Lenders examine bank statements to gauge the financial stability of the loan applicant based on factors such as having a consistent source of income, their existing monthly expenses, and current savings.
• Income verification: Lenders review deposits into the account to confirm that the applicant earns enough to cover the loan payments.
  
• Expense analysis: Lenders look for recurring expenses, such as rent or mortgage payments, utilities, and other obligations, to determine the applicant's ability to manage additional debt.
• Creditworthiness: Lenders want to attract customers who have a history of responsible financial behavior.
  
•  Risk assessment: Lenders identify any signs of financial mismanagement, such as overdrafts, bounced checks, or excessive spending, that may challenge the applicant's ability to manage additional debt.
• Fraud detection: Bank statement analysis, along with other fraud detection tools, can help detect any account irregularities, suspicious transactions, or altered information, that may indicate fraudulent activity within the account.
  
• Statement authenticity: Given the rise in bank statement templates available online, organizations should also take steps to ensure the authenticity of the bank statement and that it belongs to the applicant. 
  

Why Do Banks & Financial Institutions Need to Analyze Bank Statements?

Bank statement analysis serves as a valuable tool for making informed decisions. It is done for a variety of reasons by banks and other financial institutions throughout the customer lifecycle. A few examples include:

Onboarding

Bank statement analysis plays an important role during the customer onboarding process. During this activity, banks will use bank statements to determine the applicant’s authenticity and creditworthiness and determine if they want to accept the person or business as a customer. 

Underwriting

In insurance and mortgage underwriting, companies may use bank statement analysis to assess the financial stability and risk profile of individuals or businesses. This helps determine premium rates and coverage limits. For example, a person with a history of missed payments or financial instability may be considered a higher risk and therefore offered a lower loan amount.

Lending

Lenders offering business and personal loans use bank statement analysis to assess an applicant's ability to repay the loan. This includes verifying income or company cash flow, evaluating existing debt obligations and profitability, and ensuring the applicant's financial stability and ability to service the debt. 

Tax purposes

Bank statements can serve as evidence for tax deductions and credits for both businesses and individuals. They help substantiate expenses and provide a financial trail for tax reporting purposes. Tax authorities may also request bank statements to help verify reported income, expenses, and transactions, ensuring compliance with tax laws.

Preventing fraud

Bank statement analysis can be used to detect and prevent various forms of financial fraud, such as identity theft, account takeover, and fraudulent transactions. Bank statement analysis also plays a crucial role in anti-money laundering (AML) efforts by identifying patterns consistent with illegal activity. 

In each of these fields, bank statement analysis serves as a valuable tool to verify that the financial picture is an accurate and complete one.

What is Bank Statement Analysis Software?

For decades, organizations relied on the human eye to perform these bank statement reviews. Skilled document analysts would manually review statements to verify accuracy and detect irregularities that were potential flags of fraudulent behavior. Today, these checks are largely considered obsolete as fraudsters have become more adept at forging documents and the time involved in manual review can bog down the lending process. 

By improving the accuracy, speed, and comprehensiveness of loan decisions through automated bank statement analysis, lenders can make more informed decisions, cut down review time, and reduce the risk of human error in the loan review process.

Here are some specific examples of how automated bank statement analysis can improve loan decisions:

• Parse and process statements faster and more accurately.
• Identify patterns and trends in bank statements that may be difficult for humans to spot.
• Detect potentially fraudulent transactions, such as counterfeit checks or unauthorized withdrawals.
• Quickly and accurately analyze data to generate useful and actionable insights about a borrower’s financial health.
• Identify document edits or other signs of manipulation within the transaction details or account owner information that challenge the authenticity of the document.  
  

What to Look for in Bank Statement Analysis Software

Imagine a world where you can instantly scan, analyze, and gain deep insights from bank statements using cutting-edge machine learning technology. With automated bank statement analysis, organizations can not only save time but also significantly reduce the risk associated with lending decisions. Here are some key features to look for when evaluating bank statement analysis software:

• Data classification: Does the tool seamlessly classify data found within the bank statement to help generate accurate insights about the applicant’s liquidity, solvency and authenticity? 
• Speed: What is the average turn around time of a document review using the automated review? What is the maximum capacity of the tool within a given period? 
•  Customization: Can the document review tool be configured to align with specific processes, lending policies, risk tolerance, and underwriting criteria of each financial institution?
• Scalability and flexibility: Can the document review software handle a high volume of documents simultaneously? Can it process a variety of document formats and styles?
• User-friendly interface: Does the tool provide an intuitive interface that helps speed adoption and build trust among teams?
  
• Transparency: Does the system provide clear and specific documentation of where and how the document has been altered?
• Adaptability and evolution: What processes does the vendor have in place to ensure the tool is continuously adapted to address the latest threats and respond to new fraud techniques?
  
• Customer support: What level of support does the vendor provide to customers? Is there additional support available during the onboarding period or when making updates?

Inscribe’s automated bank statement analysis enables financial institutions to quickly and accurately classify documents, customize processes, detect potential fraud, and generate an accurate financial picture in seconds. 

“When a document comes through and Inscribe says that it's trustworthy, I am able to use that data to say with a high level of confidence that we can lend to that applicant.” — Sara Vozeolas, Sr. Operations Analyst at VIVA Finance

Benefits & Challenges of Bank Statement Analysis Tools

There are many benefits of investing in bank statement analysis software. To choose the right tool, consider your unique needs and the value you’d get from automation. Some benefits include:

• Improved accuracy and efficiency: Bank statement analysis software can automate the process of extracting and analyzing data from bank statements, which can help to improve the accuracy and efficiency of loan decisions.
• Reduced risk of fraud: Automation can be used to detect fraudulent transactions, such as counterfeit checks or unauthorized withdrawals, or the use of fake bank statements. This can help to protect lenders from financial losses.
• Reduced bias: Document review tools provide objective, data-driven recommendations during the customer onboarding and underwriting process. This is important for ensuring a fair and equitable lending environment for customers. 
• Personalization: AI-powered analysis software can be used to develop more personalized loan products that meet the specific needs of borrowers. For example, using such a tool may give analysts the insights they need to recommend a loan with a lower interest rate to a borrower who has a good credit history and a stable income.

That said, implementing any new solution has an impact on workflow and process. Some things to consider before investing in bank statement analysis software:

• Cost: Bank statement analysis software often adds upfront cost to the underwriting process, especially for small lenders. These costs can generally be offset over time through efficiency gains and avoided risk.
• Complexity: Some tools can be complex to use, which can require additional training for lenders and borrowers.
• Lack of transparency: A tool that produces a result without documentation may lead to doubts or mistrust among human reviewers since they cannot tell where or how, specifically, the statement has been altered.
• Data privacy concerns: Document review platforms collect and analyze sensitive financial data. Lenders need to make sure that the software they choose has adequate data security and privacy measures in place.

Overall, the benefits of investing in bank statement analysis software far outweigh the potential challenges. It can help lenders make more informed and efficient loan decisions, reduce the risk of fraud, and offer more personalized loan products. However, lenders need to carefully consider both their needs and the tool’s capabilities before investing in a solution.

Final Thoughts on Bank Statement Analysis

Bank statement analysis is a vital part of the lending process. Traditional manual analysis is slow, error-prone, and can't keep up with the pace of modern lending. That's where automated bank statement analysis comes in. It’s a valuable tool that can help lenders to improve processes to increase efficiency, reduce risk, and fuel healthy growth.

Automating bank statement analysis with Inscribe

Fraud tactics constantly evolve, making it nearly impossible to spot a fraudulent application document or alterations within a legitimate document, like adjustments to pay stub amounts or bank statement balances. 

Inscribe uses AI-powered, rules-based fraud detection capabilities to generate a full analysis of the legitimacy of an application document in a fraction of the time manual review takes.

With Inscribe, you’ll know with certainty if a document is fraudulent and why. See exactly where fraudulent alterations were made in a document and get a detailed explanation of any fraud found.

To learn more about how Inscribe can help your company automate time-consuming and complex document fraud reviews, improve the speed and accuracy of reviews and reduce loan write-offs, contact us to schedule a personalized demo today. It’s the one step in the document review process you can’t afford to miss.