Client data is the most critical resource for financial services businesses, so taking steps to manage it efficiently should be a priority. In 2022 we would expect most companies to have adopted a more digital approach to managing data. However, unfortunately, many large financial firms still rely on archaic paper-based systems that drain human resources and open firms up to significant risk.
Shocking news recently broke of the IRS destroying 30 million pieces of paper returns after being unable to tame the overwhelming volume of physical data amassed. So how did this happen?
The IRS productivity drain
Despite scanning technology and digital data management systems available, the IRS relied on a primarily obsolete data process involving employees manually sorting, filing, and transcribing every return. Handwriting and numbers were frequently misread and entered into the system incorrectly, meaning that these manual processes would often need to be repeated. With some returns going beyond a thousand digits, this was a hugely time-consuming task. According to the Taxpayer Advocate Service, approximately 22% of paper returns included transcription mistakes.
Eventually, the human mistakes began to compound with the tax service announcing that they were experiencing a backlog due to a “significantly higher error rate” the previous year. This meant that most staff and resources had to be redeployed to help clear the ever-growing backlog of paper.
For taxpayers, this meant a reduction in other crucial services, meaning it was tough to reach the tax office by phone to help with any queries or resolve issues. Those who filed paper returns were advised to face a wait of up to nine months when a digital return would be completed within 21 days.
The IRS issued a statement saying, “We continue to consider and pursue additional relief measures while balancing the many other demands for our time and limited resources”.
The paper tsunami
In addition to this, further chaos ensued when taxpayers who had completed and filed their returns complained of receiving warning notices due to their returns sitting unacknowledged in the paper backlog. After a wave of complaints, the IRS decided to suspend the sending of messages where they had no record of a return being filed.
The results of what goes wrong when relying on a paper-based system have been far-reaching. At best, the IRS has caused frustration with tax papers, but at worst, they have caused financial hardship for those waiting for much-needed tax refunds. The knock-on effect has also meant taxpayers have been unable to provide proof of a tax transcript which has affected all types of personal and business-related loan applications.
What lessons can financial firms learn?
Financial firms and accountancy businesses still using paper filing to manage records should see this news as a cautionary tale of what their future holds. Compounding paper-based errors can quickly turn into a data tsunami that can have devastating consequences for a business and its customers.
- Lesson 1: Paper filing compromises your data integrity
The key to getting the most value from your data is dependent on how effective the data management process is. Unfortunately, no matter how well managed, paper data management has no place in the modern digital world. This outdated system cannot provide the same benefits a digitised system can bring.
As seen with the IRS, once the volume of the data increases, the risk of error and irregularities will start to widen, compromising the data until the point it becomes useless. Add in the strict regulatory requirements that financial services must operate to, and a paper-based system soon becomes a critical risk to the business.
- Lesson 2: The substantial costs of a paper-based system
With the future becoming more digital, this is only the tip of the iceberg (or databerg). In the future, we will increasingly see a gap between businesses that were quick to adopt a digital way of managing their data and those that were slow to embrace the inevitable. Paper-based systems are clunky and incredibly costly in storage, as well as the manual labour required to manage and maintain the system.
- Lesson 3: How to protect your business from risk
The IRS has highlighted the risks that can befall a financial services business reliant on a paper-based storage system. Unfortunately, having lengthy manual processes leaves room for inconsistency and mistakes, which will compromise the data held and could result in legal action for firms failing to manage confidential personal data safely.
It is wise to make the most of solutions that can digitally file and organise your data to ensure consistency in processes. This frees up staff to work on other productive tasks in the business and provides a consistent and reliable process.
- Lesson 4: Data is your business’s most valuable resource
Data is a business’s most valuable asset. Therefore, an effective data management strategy should be a business priority. Companies that can manage their data can extract insights that will benefit how firms operate, provide a greater understanding of their customers and help the business make informed decisions for their future.
- Lesson 5: Prepare your business for a digital future
Making the most of digital opportunities means businesses must prepare themselves now. The problem is that many organisations don't know where to start. One of the benefits of today’s software solutions is that they can take the headache out of what would typically be a laborious administrative task.
You can learn about the benefits of taking your paper trails digital in this helpful download, Digitising Paper Trails: Moving to a virtual back office.
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