Tuesday, October 7, 2014

Enhancing Compliance & Oprisk Management through Analytics

Post the financial crisis, banks in the US have faced increased regulatory scrutiny that has resulted in broader and tougher regulations. Bankers are fully aware of the investments and efforts they have to put in to comply with these regulations. Consequently, compliance function in banks is evolving towards a broader risk canvas that is now seeking tighter coordination between the first and second lines of defense. This poses new challenges to banks – from being compliant to getting the optimal returns from their investments.  The million dollar question on everybody’s minds is  - How are banks rising up to this challenge?

Recent studies have highlighted the enormity of the challenge this has created for banks. For example one study by Accenture shows that 92% of banks will be compelled to increase their compliance spend in 2014. In another report by Continuity Control, the new regulations have imposed an additional financial burden for just the last quarter (Q4) of 2014 is $241 million.

Enhanced regulatory scrutiny may be a necessary evil to watch over the much-maligned banking sector, but has spawned its own unintended consequences.  The huge anxiety of banks to be compliant and avoid penalties and the resulting hike in compliance spend has and will continue to impact ROE and profitability of US banks for years to come.

How are banks responding? A whole ecosystem of changes is taking place in this area.  Banks are deploying analytics to help them meet the challenge and enable them to make the right data driven decisions. Three important changes are on their way.

 First, bulk of the new spend has gone towards upgrading technology platforms. Banks are integrating extant analytical and compliance platforms so they can deploy data mining and analytics to get the right insights.  For example, analytical models are being deployed to proactively identify and monitor UDAAP compliance in customer engagements / acquisition.

Second, Banks are bringing new structural alignment between first and second lines of defense.  Compliance is now a broad based enterprise activity that will report to the Board or CEO and will include operational and business risk professionals. This is a significant change because in my view, it facilitates wider & deeper use of analytics to help banks stay compliant and out of regulatory trouble.

Third, data silos – the usual suspects - are posing roadblocks for banks in their new quest to be compliant. Incorporating structured and unstructured data for analytics is also an urgent initiative at banks. Banks are aware of these challenges - these are known devils anyway for some time now; but a renewed urgency backed by fat budget approvals is evident.

Banks need to keep a watchful eye on the expanding compliance management function. Technology upgrade and structural changes, while necessary, are only part of the solution and not a panacea by themselves. Banks need to look at compliance as an enterprise wide culture that every associate lives by 24/7. In an era where changes are swift, where disruptive innovations are continuous and almost a way of life, the best insurance for the banks is an open mind to change and adapt to win the customers’ heart. In a way, it is the same old wine, but in a new fancy carboy.

Sunday, October 5, 2014

Cloud based Analytics Service – Future of Analytics?

In the last few weeks we have seen new products launched by IT majors that have the potential to greatly influence the fortunes of the Analytics and Insights business. IBM’s Watson Analytics and Oracle’s Cloud based Analytics are just two new solutions/ platforms that have hit the market. We can rest assured that many more such offerings will be launched in the coming weeks. As the products keep coming, they raise some important questions for the analytics industry. What impact they will have? Is the Analytics & Insights business ready for these changes at all?

Big Blue recently launched its Watson Analytics. It is a natural language-based cognitive service that can provide businesses instant access to powerful predictive insights and cool reports. Launched as a freemium service, it will provide predictive insights for a small fee and hopes to leapfrog user base.
Watson Analytics is all set to take full advantage of IBM’s acquisitions - SPSS will provide the horsepower for predictive analytics while Cognos will supply the visualization. It will enable business users to upload data to their cloud. Once data quality is established, the user can input his/her requests via an interactive screen and in return obtain predictive insights and reports via pleasing visualization.

Oracle also has just announced its Analytics Cloud services with similar capabilities. The product features and details may vary but at a high level they will help business users get their insights easily and quickly.

These products promise to be game changers because the business user does not require the intermediation of modelers to build predictive models or coders to write the code for the models. Across industry verticals, they will empower business users to make well informed decisions with ease and speed. They hold the promise of greatly widening user base. While the platforms are slick, it remains to be seen how the market responds. Ultimately, the revenue performance will determine if they are successful.

From a Banking and Financial services (BFS) perspective, many banks have long been seeking similar tools. In the past few years many have invested top dollars in similar solutions tailored for their specific requirements. However, a huge majority of banks do not have such a tool / product. For now, IBM and Oracle being early birds, clearly are way ahead of competition and will reap full benefits for their investments and efforts.

These products have not emerged overnight. It is obviously the result of powerful research / understanding of customer requirements backed by significant investments. Business user communities across industries and particularly at banks are asking the logical question – why did it take so long for such a product to hit the market? We don’t have easy answers to these questions.
For IT vendors and outsourcing majors these products have created new challenges and opportunities. How can they help their clients derive maximum value from these innovations?

IT outsourcing vendors who have a stake in the Analytics and Insights business should quickly develop a game plan to address these challenges. In my view these new products have pushed the majors, willingly or unwillingly, to a cross road. Many of these majors have a lot of homework to do – they still have to get their house in order and bring in the correct leadership. Running the Insights business as an extension of IT data warehousing shop will not cut ice. If past experience has taught anything, it is that domain experts with hands-on business expertise may have better odds of success at this business. Those who are prepared and have the right combination of leadership and domain expertise will be the ones to meet and take advantage of the opportunities. The rest, as they say, will miss the bus again.