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.

Succeeding in Banking Analytics – Choosing the right business model

Also available here

What is an appropriate business engagement model for succeeding in the analytics business?  This is a great question, but has no simple answer. This question seems to be on the minds of leadership in analytics service providers. What engagement model do you choose to build long term trusted relationships with your clients? What is unique in banking analytics space?  In fact, this question also came up recently, rather unexpectedly, when I was having dinner with two old friends in beautiful Los Angeles.

Professional services provided by the vendors range from staff augmentation on one end of the spectrum to high-end solutions consulting that seeks to solve complex business problems.  All this emanates from the thought construct insiders refer to as the engagement maturity model.  This model tracks the morphing of provider-consumer relationship as the two embark on their journey over time. High-end consulting offers higher and obviously desirable ROI. Hence vendors strive to attain this utopia in each of their relationships. In an ideal world, if you can design solutions / offerings that will move clients up on the value chain - from staff augmentation to high end consulting, you have a winning recipe that will make you the top vendor with an enviable revenue stream.  All this is an ideal world. But, how do we work this magic in banking and financial services space in the real world?

Businesses that serve banking and financial services clients face hidden challenges.  It is well known that analytics is what differentiates successful banks. Large, well-run institutions have star-studded analytical teams that have the depth and skills to crunch through well-organized data and come up with insights to make the right decisions.  That is the upside. The down side is that, these teams may sometimes engage in dueling analytics in an effort to be one up on the other, an avoidable waste of resources and talent horsepower. Smaller institutions on the other hand, have smaller talent pool, less organized data and limited capability to undertake complex analytical projects on their own.  

Another key dynamic is that the outcomes of analytical projects impact the banks’ core decisions.  Hence banks often prefer to work with the crème-de-la crème in the business that they can trust. This provides the vendors a great window of opportunity to showcase their excellence in domain expertise, execution and delivery to win the trust of banks. Winning the trust of banks is a prerequisite for deeper, long-term engagements.  

In other words, the analytical ecosystems in these institutions are very different – ranging from the highly competitive and sometimes counterproductive to those with less sophisticated analytical infrastructure. Understanding the extant analytical ecosystem is critical in choosing the right business model for banking analytics providers.

But in the real world what engagement mix should we choose?  Seriously it depends on the prevailing analytical ecosystem of the banking customer. My personal view is that emerging and growing businesses tend to generate a significant proportion of their revenue via an on/off site staff augmentation model. Smaller boutique vendors have successfully demonstrated this as a key entry strategy in a very competitive business.  On the other hand, there seem to be fewer examples of providers choosing high end solutions as the dominant component of their mix. But I think an understanding of the nuances of this industry and the interplay of analytical ecosystem is fundamental to succeeding in banking analytics. This understanding helps discover the right mix.

Social Media Intelligence – A Disaster?

Just read this piece on Bloomberg about how retailers are shutting down their Facebook shops.  I have written in the past about how many companies are using social media to glean actionable intelligence about customers. Very specifically I had discussed how social media has the potential to provide risk intelligence to credit risk managers in banks and financial institutions. While there was flicker of interest, it has not actually picked up for several reasons.

For starters, social media sites like Face book are more an online venting of personal idiosyncrasies and little nonsense we all like to indulge ourselves when our guards are down. Personally I think it is more akin to street corner gathering of teenagers who hangout more for social companionship rather than any serious discussion. Of course, there are serious discussions at these hangouts, but they are heavily outnumbered by the day-to-day sharing of simple trivialities. That is the nature of Facebook transactions.

The most obvious reason seems to be the inability of many leading companies / brands to monetize their huge followings or “likes” on Face book. Many companies opened Facebook stores because they did not want to lose out. However, these initiatives have not provided the expected return on investments and many leading brands -  JC Penny, Gamestop, Gap, Nordstrom, just to name a few – have shut down their Facebook stores. See article for more details.

Banks and financial services, on the other hand, have been more cautious in their social media strategy. Credit Risk Managers were not blown off their feet by Facebook’s ability to provide risk intelligence. While collection agencies are using Facebook to locate delinquent customers, it is a far cry from replacing Credit bureaus as a primary source of customer data. I think we have to wait and see how this evolves in the coming months.

Current social media strategy has hurt companies in other ways too. Many companies that bet on Facebook and have invested heavily are already seeing negative returns. Poor revenue streams from these strategic decisions will show up in the balance sheets of many software companies as early as 1Q of 2012. It will be interesting to see how the markets respond to the poor results.

I am not prognosticating a complete failure of social media strategy. Rather, it is a time for introspection and realignment for future course of action, given what we are learning. As always, I believe failure is a great educator and leads to innovation; innovation is the key distinguisher in a competitive business environment. I believe when the dust settles, it will lead companies to engender a more compatible and sustainable social media strategy.  Definitely, the current social media strategy a.k.a “Facebook Strategy” of many companies does not seem to be working.  Stay tuned folks.

Moody's Downgrades 3 French Banks

In a continuing march of gloomy news from Europe, Moody's have downgraded 3 French Banks - 

1. BNP Paribas
2. Societe Generale and 
3. Credit Agricole SA

All of them had exposure to Greek bonds...

It took action a day after a regulator said European banks have to raise about 115 billion ($154 billion) more than expected to meet a new standard meant to shore up the lenders against market turmoil. 

Read more  

Are bank branches becoming obsolete?

http://www.americanbanker.com/bankthink/Are-bank-branches-becoming-obsolete-Brett-King-Movenbank-1043219-1.html

Great article by Brett King;  But I dont fully agree ; Here are my thoughts

Brett - I think as you have pointed out internet and mobile technology have greatly changed customers' banking experience. Yes , there has been a big drop in customer traffic as also banks have closed a lot of their branches. But I am not sure that this is due to customers moving away from branches. Here are some of my thoughts -
a) BoFa, HSBC and JPMC have closed their branches or have put off plans for branch expansion; this is largely due to the economy ; Branches are the first casualty in cost reduction;

b) In Europe and UK in particular, the conditions are not that different. Overall bank profitability is in the dumps.

c) Overall branch activity in the last 3 years or so has been on the decline due to a variety of reasons - most important being credit contraction. 

d) Branch traffic is also geographical; warmer states see more people going to branches to transact business

e) As you have pointed out, branches continue to provide great cross sell opportunities to the banks.

I think given all this, I certainly do not believe branches will be history; Yes , banks will continue to close them in poor economy; Will they open more branches if the economy improve - well I don't know; But certainly we have not seen the last days of branch banking;

Mobile Banking hits Critical Mass

This week industry observers saw Mobile banking reach key milestones. According to Javelin Strategies, consumer adoption of mobile banking jumped 60% in 2011. This is because a large number of banks and financial institutions launched their mobile apps for their customers.  Bulk of these apps has been in retail banking – helping customers manage their checking and savings banking. The chart below shows customer used their mobile devices for checking and savings transactions – like viewing their balances, bill pay and simple fund transfer.

The second important milestone is that in 2011, 50% of US cell phone users will switch to Smartphones. This is a very key development because it offers unprecedented opportunities for banks, credit card companies and other players in financial services to reconfigure their service offerings to their customers.

Expansion in Mobile banking is also happening globally.  According to TNS MobileLife, global use of mobile finance surged in the past year as the spread of new technology and mobile banking infrastructure drove a huge increase in take-up rates around the world. In the UK the proportion of people using mobile banking increased from 9.7% in 2010 to 20.4% in 2011, while in the USA the rates from 11.4% to 21.9%. In Sweden it was greater still: 8.1% to 20%.

What is the takeaway for Banks, Financial Services and other key players in the sector?  What are the implications for technology companies that offer mobile technology and sell solutions to their financial services clients?

My personal view is that the data that we have seen above is only the tip of the iceberg. We are witnessing a paradigm shift in Banking and Financial services offerings.  Mobile banking offers a big opportunity for small and mid-tier banks to leapfrog into big league by offering better customer experience. Banks that do not provide mobile services or are late to hit the market will be left behind.  

For technology companies, this represents a golden opportunity.  Companies like MicroStrategy who have invested in mobile solutions - both financially and built key vertical expertise to scale - are in the sweet spot to exploit the huge surge in service opportunities. 

As the saying goes, success happens when preparation meets opportunity.