One common theme in many of the new banking regulations and standards is the requirement for banks to collect, analyze and store more data on their activities and customers. But rather than viewing this as justa compliance exercise, savvy banks are transforming these mandates into an opportunity to learn more about their clients to drive new revenue opportunities, writes Steven Lewis
Few can argue that the relationship between a bank and its customers is not strained. Banks of every size are more focused than ever on rebuilding this relationship around trust and loyalty. To achieve this objective, banks must meet the modern customer’s expectations and deliver services that are convenient, integrated and accessible. To do that profitably and consistently, banks need to be much more connected. Without effectively collecting, aggregatingand analyzingcustomer data, they will struggle to reduce costs across the institution and better serve customers.
Moving forward, banks are expected to gather and integrate more data on clients to comply with regulations ranging from anti-money laundering and Know Your Customer (KYC) to FATCA.While this is a daunting and expensive proposition for most banks, they should view this not just as a costly compliance exercise, but also as a strategic opportunity.
As banks are redesigning their customer data systems and processes, they should do so creatively, with plans for using this data to serve multiple masters. This information cannot only satisfy regulatory compliance needs, but also, with the right analytical tools and techniques in place, help banks understand more about their customers, anticipate their future requirements and personalize product offers.
Sharing the wealth
However, the key for banks to take full advantage of vast amounts of customer data lies in developing their ability to share it and the insights gleaned from it. Over the past few decades, banks have become adept at gathering data but are not adroit at sharingthis information effectively across their organizations. This is due to the presence of long-standing system and organizational silos, as well as cultural norms that restrict or inhibit data sharing. Moreover, many institutions are struggling with legacy systems that are not able to interact or communicate with each other. Banks that have grown through mergers and acquisitions often find themselves with incompatible systems and processes.
From the outset, banks should be revamping their structures, systems and culture to minimize silos. Reorganizing the business around the customer instead of products and redesigning systems to deliver a single view of the customer will help. As far as data protection and regulation will allow, rewarding different teams for sharing customer insights will also break down barriers. According to EY’s latest Global Consumer Banking Survey, more than 70% of respondents around the world are willing to provide more data on themselves if they receive tangible improvements in the suitability of products and services they are offered.
Where there is a reluctance to share this important data, due to traditional fiefdoms, lack of trust or because management fails to support its own directives to share, the cost can be lost revenue. On the contrary, given the cost of system redesigns and the multiple demands on scarce investment funds, these changes need to deliver financial benefits to the bank. Thus, banks must take a two-pronged approach to these changemanagement projects:
1. They must overcome their own inertia, make the various data owners comfortable about sharingand not offer the not-to-share option.
2. They must do this with return on investment on top of their minds, and not treat it as another compliance exercise.
Classifying true customer value
Customer data can be divided into two categories: one, collected just to comply with regulations, and the other that can also be used to support sales and relationship management. In the latter case, for data management and analysis to be effective, the business unit must take ownership. With business lines under ever more pressure to strengthen their competitive position through a better understanding of customers, adding just a few new questions to the customer onboarding process can help banks obtain potential new insights about client behavior. For example, asking behavioral questions about a new customer’s future plans – funding a college education or buying a home – can help a bank design and sell more targeted products.
This data can also help banks identify their most profitable customers. Institutions have traditionally sought to boost profits through volume, but have learnt that an increase in customers does not necessarily correlate with an increase in profitable customers. Faced with today’s revenue and capital challenges, banks should look to redesign their current systems with powerful analytics to enable them to determine the true value of their relationship with each customer – a task that most banks struggle to accomplish now. Analytics should also provide insight on how relationships with different types of customers evolve over time, so that the bank can evaluate how a customer’s initial product choices may be a predictor of subsequent requirements.
To gauge customer value requires an aggregate measurement of every product and every margin for a client, whether corporate or retail. When a bank can gain a view of the capital it allocates to each client, and collectively to all clients, the business can make a judgment about its effective use. For example, some banks have already found that offering certain customers particular products that may be unprofitable in the short term – such as a no-fee current or checking account – will likely lead to a more profitable relationship with the customer in the long run, e.g. a consumer loan. Sharing information across the bank on trading and hedging products might also provide an opportunity to reduce capital if they are matched effectively.
To make these determinations, banks need a single, enterprise-wide view of each customer, their interactions with the bank, behaviors and needs. Few institutions have that capability today and, exacerbating the problem, new customer data is being generated at great speed, making it necessary for banks to implement systems and processes that can not only manage this data, but also manage it quickly.As a result of increased commentary and interaction via social media, the systems also need to be capable of synthesizing and analyzing the unstructured parts of "big data." Partnering with technology firms or joining forces with other banks to share infrastructure may offer an alternative to those unable to match requirements with investment funding.
Banking customers are already providing reams of data on their behaviour and preferences as they move toward online banking, mobile banking and greater use of digital self-service tools. In effect, many customers are beginning to segment themselves. Utilizingthe insight gained from this information and other data, the goal for banks should be to create a complete, front-to-back view of each customer. This can then be used to drive decision-making on allocating capital and providing capital-intensive products to particular customers. This will ultimately lead tobetter segmentation andto initiatives that helpretain key current and emerging clients by offering them the right products at the right prices and at the right time.
Steven Lewis is a lead analyst at the Ernst & Young Global Banking and Capital Markets Centre