The value of analysing bank statements
A bank statement is the most accurate record of a business’ recent income and expenses. It is one of the cornerstones of assessing a business’ creditworthiness.
Financial statements, especially of SMEs, often provide inaccurate and outdated information. Signed financial statements are usually at least 6 months old, while bank statements provide correct, up-to-date financial information.
Problems with manual analysis
Interpreting bank statements manually is a tedious task which takes up an excessive amount of time. There are several underlying reasons:
- The transactions on bank statements are arranged in chronological order, which has very little relevance for credit analysts.
- The more data a bank statement contains, the higher the possibility that important or irregular transactions can be missed.
- Banks don’t use consistent formats and layouts – every bank appears to be different.
- A particular bank may have several different formats and layouts for different business units.
Not many people possess the skill and experience to analyse a bank statement properly. Very few people actually have the attention to detail and accuracy required to analyse bank statements without any digital assistance: some use elementary spreadsheets to support them.
Even the most experienced and thorough analysts may miss the odd extraordinary transaction, outlier, anomaly, calculation error or formatting discrepancy which digital bank statement analysis can pinpoint.
Digital bank statement analysis
Digital bank statement analysis (“BSA”) software converts the data to a standard format, interprets it and highlights important transactions, outliers, anomalies and actionable indicators or “red flags” in the applicant/borrower’s recent banking history, with a degree of accuracy which is just not possible for most humans.
BSA creates multiple reports for the credit assessor which provide critical financial information about the applicant/borrower’s cash flow management and meaningful insights in the pertinent issues to support decision-making with the highest degree of accuracy. Potential fraudulent transactions and irregular transactions are also brought to the attention of the credit assessor for further investigation.
BSA can be used for the initial screening as well as the ongoing assessment of a borrower. Less human effort increases turnaround time, reduces costs and improves credit risk assessment. It is a low-cost and reliable tool for banks, alternative lenders and fintech companies.
Based on the lender’s criteria, algorithms can be developed to automate, or semi-automate, the decision-making process.
BSA Norton, a division of Norton Capital (Pty) Ltd, has developed software for analysing bank statements.
An overview of the reports provided by BSA Norton
- Period covered: opening-, minimum-, maximum-, average- and closing balance.
- Monthly transaction analysis: opening balance, total amounts paid in and out, maximum amounts paid in and paid out, closing balance, number of transactions.
- Information about account management: the estimated overdraft limit, number of dishonoured payments, total amount of dishonoured payments and number of days below the estimated overdraft limit, potential alternative funder transactions (compares and lists all transactions with pre-loaded alternative funders).
- Information about recurring debtors and creditors: number of payments in and out, total amount received from or paid to each recurring debtor and creditor.
- Information about potential fraud detection: confirmation that the calculations on the bank statements provided are correct, all opening and closing balances match, all amounts are presented in a valid format, the amounts are in accordance with Benford’s law, all dates are in chronological order, there is no material gap in the statement data, all dates were presented in a valid format and all potential circular transactions are highlighted.
- Table of cash deposits and withdrawals per month, as a percentage of total deposits and withdrawals.
- Graph depicting daily cash movements (balance at end of every day).
- Graph depicting cash management trend over the period (average every 10 days).
- List of the high value transactions – amounts received and paid (5,10 or 15).
- List of the high value recurring transactions – amounts received and paid (5,10 or 15).
- List of the high value amounts received and paid with recurring descriptions (5,10 or 15).
- List of the high value non-recurring amounts received and paid (5,10 or 15).
- List of dishonored payments (if any).
- List of similar amounts paid in and out – potential circular transactions.
BSA Norton’s future development
BSA Norton’s software was initially developed to analyse the statements of the major South African banks. It can be expanded to analyse the statements of any bank in any country.
Currently BSA Norton’s software reads bank statements in csv format, since most OCR readers are not yet intelligent enough to identify unstructured data in pdf format. We are closely following new developments. Once OCR readers can read pdf with 100% accuracy, we will add the ability to analyse bank statements in pdf format.
Other potential uses:
Accounting: Due diligence reviews
Tool for reconciling debtor and creditor age analysis, payments received and payments made.
Forensic investigations (fraud etc).