What is Bank Statement Analysis?

Prathiksha Shetty
Prathiksha Shetty
September 28, 2022
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What is Bank Statement Analysis?

Key Highlights:

  • Bank statement analysis refers to examining financial statements to uncover an individual’s or organization’s financial health.
  • Key components in the analysis include transaction history, account balance, and inconsistencies. Bespoke elements can also be set.
  • Applications of the analysis range from loan approval and underwriting to fraud prevention and tax audits.
  • Modern AI-powered tools like Arya AI's Bank Statement Analyser App automate and streamline the analysis process.
  • This analysis is essential for informed financial decision-making and risk assessment in various sectors.

Before onboarding or partnering with a vendor/organization, financial institutions assess if there are any liabilities – reputation or credit-wise. For instance, lending institutions assess customers’ creditworthiness for fraud prevention and minimizing the chances of loan default.

In this context, Bank Statement Analysis becomes a crucial aspect of onboarding, providing a comprehensive overview of the financial health and risks. Let’s learn what Bank Statement Analysis is and how to perform it with efficiency and minimal manual intervention.

What is Bank Statement Analysis?

Bank statement analysis is the process of reviewing and interpreting financial statements of an individual or organization. It involves scrutinizing transaction histories, account balances, and other financial data to draw meaningful, data-driven conclusions.

What the Analysis Reveals?

Bank statement analysis provides a comprehensive view of the inflow and outflow of funds to detect patterns:

Financial Health

One of the most important things that bank statement analysis reveals is the overall financial health of an individual or organization. This means overall inflow and outflow of funds over a specific period. Regular income patterns, such as salaries or business revenues, are identified alongside routine expenses. The analysis highlights trends, such as an increase in spending, consistent savings, or irregularities in income, providing a snapshot of financial stability.

Liabilities & Risks

Bank statement analysis also reveals potential liabilities and risks. For instance, the presence of frequent overdrafts, returned checks, or excessive debt payments can signal financial stress or mismanagement. Lenders or auditors can flag these instances to assess the creditworthiness and financial responsibility of the account holder.

Components Covered in the Analysis

Here are the components covered in bank statement analysis:

  • Transaction History: A detailed look at all financial transactions, including deposits, withdrawals, transfers, and payments. This history provides insights into spending patterns and income sources.
  • Account Balance: Tracking account balances over time helps in understanding cash flow management and financial stability.
  • Inconsistencies: Analysis can flag unusual transactions or patterns that may indicate errors, fraud, or changes in financial behavior.
  • Cash Flows: Identifies the top funds received and transferred, along with detailed analyses of cash deposits and expenses, providing a clear picture of cash flow dynamics.
  • Fraud Analysis: Preliminary fraud analysis for identifying anomalies that may indicate fraudulent activities.
  • Bespoke Components: Depending on the purpose of the analysis, specific components can be tailored to focus on particular aspects of financial behavior or transactions.

The Applications of Bank Statement Analysis

The following are the most common types of applications of bank statement analysis:

1. Loan Approval

One of the most common applications of bank statement analysis is in the loan approval process. Lenders scrutinize bank statements to verify the financial health and stability of loan applicants. This analysis helps them determine the ability of the applicant to repay the loan, assess income stability, and identify any potential financial risks.

2. Underwriting

In insurance and lending, underwriting involves assessing the risk of providing coverage or a loan to an individual or business. Bank statement analysis plays a crucial role here, as it offers an in-depth look at the applicant’s financial behavior. Underwriters can make the right decision about the level of risk involved by understanding cash flow, liabilities, and overall financial management.

3. Fraud Prevention

Bank statement analysis is also an essential tool for fraud prevention. By closely examining transaction patterns, inconsistencies, and any unusual activity, financial institutions and businesses can detect and prevent fraudulent activities. This proactive approach helps in safeguarding assets and maintaining the integrity of financial transactions.

4. Due Diligence

In mergers and acquisitions, investment opportunities, or any major financial decisions, due diligence is critical. Bank statement analysis is used to verify the financial health of an entity to ensure that there are no hidden financial issues that could pose a risk. This thorough examination is essential for making informed and secure financial decisions.

5. Tax Purposes/Audit

For tax purposes, bank statement analysis helps in preparing accurate financial reports and ensuring compliance with tax regulations. Auditors use bank statement analysis to cross-verify income declarations, detect unreported income, and identify any discrepancies that could lead to penalties or legal issues.

How to Perform Bank Statement Analysis?

Most organizations face common pain points when it comes to analyzing bank account statements: Manual inspection, data entry errors, and poor customer experience. At Arya AI, we are resolving these challenges using AI. Through Arya AI’s Bank Statement Analyser App, the analysis becomes as easy as 1-2-3:

Step 1: Use a Bank Statement Analyser

To streamline the process, start by using a Bank Statement Analyser. It automates the extraction and analysis of data from bank statements, saving time and reducing the potential for human error.

Step 2: Upload Bank Statements

The next step is uploading a bank statement (individually or batch upload). If the statements aren’t digitized, another step will need to be added to first digitize the statements.

Step 3: Set Components for Analysis

If applicable or depending on the applications, configure the API to focus on specific components or metrics relevant to your analysis goals.

And that’s it! The platform processes the information and provides a comprehensive analysis report, saving time and reducing human error.

Here’s a snapshot of the analysis performed by Arya AI-

bank statement analyser

Click to try out the Bank Statement Analyser app for yourself or integrate the App to your systems.

Conclusion

Bank statement analysis is an indispensable tool in the contemporary financial world. It offers deep insights into financial behaviors for better decision making in various financial processes. Modern tools have simplified and automated it where manual inspection is required to only read the statement and make decisions. Newer decision-making models are taking this up a notch where intervention is needed to only review the decisions and for fairness.

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