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"He say, 'I know you, you know me,' Come together, right now...over me." – The Beatles
Joo-joo eyeball. Walrus gumboot. Mojo filter. In their hit from the early ‘70s, the Fab Four brought together everything but real data. The possible exception: “One and one and one is three.”
Thirty-five years later, though, there’s a different tune being sung in the global financial services industry, where business risk, customer and regulatory data are converging in massive quantities to fulfill a growing array of international compliance mandates (“I know you, you know me”). More interesting still, many banking, financial markets and insurance firms are asking the next logical question as all of that cleansed and updated information is compiled: Why not turn what essentially is a required compliance cost into an investment, and use the same data to deliver greater business value?
Truth or consequences
At the base of their businesses, all financial services firms face common challenges when it comes to meeting risk and regulatory requirements and managing capital and operational costs. Besides staying abreast of those requirements, banks, financial markets firms and insurers also would like to be able to forecast regulatory and risk-management changes to some extent, and build a sound, enterprise risk- and data-management infrastructure to provide a single version of the truth—whether that truth has to do with a snapshot of the whole business or an assessment of a single customer.
One financial markets executive summed it up nicely when he asked a supplier to “Make me business bumpers, so I can sell more-safer.” That, in fact, is what every financial services business would like: a way to sell more, but with less exposure to risk. As it turns out, those “bumpers”—maybe risk-management airbags would be a more suitable analogy—come in four dimensions that are part of the protective business model with which every modern financial services company surrounds itself: customers, products, channels and regulatory mandates.
Risk and compliance requirements (the USA PATRIOT Act, Basel II, Sarbanes-Oxley, HIPPA, Graham-Leach-Bliley and Federal Rules of Civil Procedure, to name a few) are forcing banks, investment firms and insurance carriers to implement more effective information systems to manage customer data, naming procedures and uniform reporting frameworks. Customers, meanwhile, are taking advantage of information technology (IT) to structure their own demands for new banking, money-management and insurance products and services. At the same time, continuing mergers and acquisitions within the industry add to the economic goulash, leaving financial services companies to resolve the complexities caused by different IT infrastructures and multiple versions of data files.
Slowly, financial institutions have come to the realization that successfully competing in an accelerated, data-clogged business environment requires an enterprise capability that permits them to quickly access, integrate and deliver data that can be used to make lightning-fast decisions related to regulatory compliance, risk management, customer retention and profitability. The trend is called convergence, and it refers to an enterprise-wide alignment of governance, policies and processes to enable the quick and efficient sharing of business information among multiple stakeholders.
Outright insight
It’s all about managing the business on a risk-adjusted basis, and extends past one-dimensional regulatory and anti-fraud issues to encompass credit, market and operational risk as well. And while it most certainly addresses compliance needs, convergence is driven by greater potential benefits associated with improved data quality, business processes and customer relationship management—all of which can lead to a higher level of predictability and business insight.
Ultimately, the goal is master data management (MDM) that allows a financial services organization to anticipate change and quickly reshape company processes, products, customer channels and governance policies to adapt to it.
MDM of the sort afforded by convergence can help banks, financial markets firms and insurers to leverage all the business information at their disposal—customer, market, regulatory, competitive, channel and even geopolitical—to generate a single view of the enterprise at any given time and facilitate fast management decisions. In addition, the same wellspring of information could be utilized to generate a single view of the customer, including comprehensive portfolio assessments, daily transactions across a multiplicity of channels and personal lifecycle events—graduations, retirements, career changes—that could offer opportunities to generate new business.
Benefits can include:
- Event-based marketing at the transaction level
- Risk-based pricing
- Common business-measurement systems
- Channel-specific marketing communication
- And customized fee schedules for individual customers
In essence, data convergence can help financial services institutions link their overall business strategies to their enterprise risk-management strategies by offering a graduated path from basic information-based regulatory compliance to a tighter management of business processes and risk, and then to fully optimized performance and value creation.
And the payback can be significant. One example of value-added data convergence, for instance, involves leveraging Basel II regulatory data to help determine early capital allocation requirements. At the same time, using the right strategies and applications, Basel II information and performance management data can be combined to support a viable system of risk-based pricing at the loan level. The potential results: greater revenue and a more efficient value-based loss mechanism.
Another example of leveraging data convergence could involve capitalizing on government mandated anti-money-laundering data—records of large deposits and withdrawals, for instance—to support event-based marketing programs. Not all unusual activity turns out to be malicious, after all. Large withdrawals could suggest a career change or a move from one location to another, lifecycle activities that could lead to new mortgages, money-management strategies or additional insurance policies.
Filtering regulatory data using an MDM approach also can prove to be an effective way to improve underwriting and reduce customer attrition. The same data stores can be mined to adjust fee schedules, reduce overall time to market for new products and retire costly legacy files and repositories that are no longer required.
Results will differ from one institution to another, of course, but the combined value of potential revenue growth, greater customer retention and reduced losses linked to the strategic use of converged data could range from tens of millions of dollars to hundreds of millions.
Convergence caveats
From an organizational standpoint, meeting the potential governance, business and technology challenges of convergence generally requires an integrated IT infrastructure, shared applications and an enterprise-wide management approach that encompasses finance, risk management, compliance and marketing functions. As they begin to plan and implement new business models based on convergence, banks, investment firms and insurance carriers in particular need to be on the lookout for internal cultural barriers, siloed lines of business and data quality issues. When business enterprises depend on convergence to provide everything from streamlined processes to greater productivity to faster market response and a sharper competitive edge, clean data is a must.
The trend is for data from all points of the financial services compass to come together to provide a differentiating advantage based on, among other things, the capacity for quick-look executive reviews; a composite, enterprise-wide picture of risk; correlation of market and customer events; analytics-based business insight; improved efficiencies and virtual realtime exceptions monitoring.
What happens when a financial services company puts all those strategic benefits together? Well, in the words of one famous ex-Beatle... Imagine.
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