"Follow the money!" is a phrase that came into the popular consciousness during Watergate, but it also describes the financial services industry. After all, financial services as an industry is all about money. It includes banking (savings and loans, commercial banks, mortgage banks, credit unions), securities and exchanges (brokerages, investment banks, investment advisors) and international finance (currency exchange, foreign investment). In these businesses, the use of business intelligence (BI) has been focused on finance, rather than business operations.

In general, use of BI in financial services has provided value. A recent Gartner, Inc. survey evaluated responses from banks, insurers and nonfinancial businesses. The survey found that more than 95 percent of banking respondents agreed that BI is a strategic initiative driven by senior management, and more than 90 percent agreed they received the value expected from their BI investment. This compared very favorably with nonfinancial respondents, where both categories were approximately 20 percentage points lower.

Even though there has been success with BI in the financial services industry, it has been primarily at the departmental or line of business level. Financial services companies, as a whole, struggle with enterprise-wide solutions. These companies are typically focused on individual lines of business or departments. This is common because business performance is based on financial results for each line of business. There is still a significant opportunity to improve the business with BI. This article looks at three key aspects that define BI in financial services: regulation, use of BI and BI opportunities.

Regulation and Financial Services

The regulatory environment for all companies has been dramatically affected by two major pieces of recent federal legislation: the USA Patriot Act and the Sarbanes-Oxley Act of 2002. These legislative acts place new burdens on all companies, and financial services companies need to use enterprise-wide BI for compliance.

A section of the USA Patriot Act (Section 326) requires companies to verify the identity of all company customers. Companies must also verify the identity of non-customers added as signatories on accounts. In addition to verifying identification, in some cases companies must also keep copies of the documents used to verify each customer's identity. Financial services organizations must be able to reconcile all customer information to create complete and accurate profiles of customers. In addition, they must be able to compare these profiles against lists of specially designated nationals and blocked people (known drug dealers, terrorists and other enemies of the state) distributed by the Office of Foreign Assets Control (OFAC) and report matches to the federal government. Also, financial services organizations must set up anti-money-laundering training programs and independent audit functions to test these programs. Clearly, this level of identification and accountability for knowing customers and, in certain cases, their affiliations is unprecedented.

There are a few driving forces pointing to BI as the approach for responding to the USA Patriot Act. First, the business is at stake ­– not complying with the law or having inadequate anti-money-laundering controls is a costly risk. The penalties for companies are significant, including $1 million in fines for civil or criminal violations, complete forfeiture of loaned money and fines for company executives.

Second, compliance must be enterprise-wide, not by individual department or line of business, and all parts of the organization must comply in the same manner. Enterprise-wide breadth and data from every customer account and product system fits the profile of an enterprise-wide BI solution. In fact, the USA Patriot Act may be the greatest initiator for truly integrating customer data in financial services and breaking down departmental and line of business barriers.

Finally, the ability to analyze customers' transaction patterns is essential. With severe financial penalties at stake and the need for compliance and audits, the ability to analyze customers' patterns across the business is essential. All of these factors point to a centralized solution as critical for success.

The Sarbanes-Oxley Act of 2002 was a direct response to the financial and accounting scandals that emerged in 2001 and 2002. The law requires public companies to implement procedures that ensure their audit committees can document underlying financial data to validate earnings reports and meet demands for accuracy in pro forma numbers. The Act raises the maximum penalty for securities fraud to 25 years and to 10 years for destroying key financial audit documents and e-mails. It also requires CEOs and CFOs to certify that financial statements fairly represent the financial conditions of the company.

META Group reports that many Global 2000 firms are concerned that they do not have appropriate financial management reporting processes in place to comply with the Sarbanes-Oxley Act. As META observes, complying with this regulation requires solutions that enable visibility into financial transactions and the accounting and operational details needed to ensure accuracy and consistency.

Both the USA Patriot and Sarbanes-Oxley Acts will require enterprise-wide financial and operational information integration and analytics combined with management of documents, e-mails and company content for full compliance. Too often, however, the focus is on reporting and records management alone. The information integration and analysis component is a typical BI application, which is why virtually all of the major BI analytics vendors quickly introduced functionality and marketing materials designed to help create the financial transparency required for Sarbanes-Oxley compliance. The major challenges to a BI solution for these regulations are providing the necessary ability to rapidly drill down into details embedded in enterprise resource planning (ERP), contract management and other back- and front-office systems, and integrating information and analytics with records and document management processes as directed by a corporate compliance officer.

Use of BI in Financial Services

BI solutions in the financial services industry have been delivered most effectively within individual lines of business. BI has allowed individual financial products and lines of business to use integrated information for financial analysis and customer service. BI is used to consolidate information, support sales and marketing, and manage risk.

Information Consolidation: Financial services may be about money and finance, but it is mostly an information business. Of course, tracking and managing money and assets are central to the business, but other than contracts and customer items such as plastic cards and checks (usually manufactured by a subcontractor), financial services companies produce statements and financial reports. This concentration on tracking and information has made company operational areas a natural focus for applying BI.

Consolidating operational information is a common BI solution. In financial services, customers make applications, the applications are processed or underwritten, a contract is issued, accounts are set up and serviced, and customer problems are handled. As with most businesses, these various activities are supported by many disparate application systems that make it difficult to obtain consistent, correct, consolidated or synchronized information from them. Using BI to consolidate customer account information can save considerable time for staff. One RCG IT client reduced a single information gathering process from several business days to minutes through a BI information consolidation solution. This solution also provides a consistent data environment for the many departments that use its information for their work, resolving many of the interdepartmental data problems that had existed previously.

Consolidated information can also support financial analysis, another important use of BI in financial services. Financial analysis focuses on product profitability, portfolio performance and scorecards or dashboards for a line of business or profit center. In the spirit of "follow the money," the focus of BI in these cases is typically on financial performance rather than operational effectiveness or customer analysis.

Consolidating customer account information can also support customer self-service with the use of a centralized data warehouse (DW) or operational data store (ODS). However, the focus on individual lines of business common in financial services companies more commonly provides customer self-service through Internet portals. Access to individual account or product information uses a customer information file that contains the customer name, address and a list of the customer's accounts. Creating a customer information file is an information integration challenge. According to Gartner, Inc., "The top five data integration vendors report that the one consistent problem plaguing their clients is the difficulty of determining their true number of unique customers." While a centralized customer information file is an important step to understanding customers, the ability to analyze customer profitability, overall transaction patterns and trends can best be supported by a complete and fully integrated customer data BI solution.

Sales and Marketing: Every financial services company has many products and services to offer its customers and several different marketing channels to reach them. Customers do not always know all that is available to them, and every company wants to expand its business with each customer. This makes cross-selling (the practice of selling customers additional products and services) a top sales priority in every financial services company. Currently, the common practices are mass mail solicitations, notices stuffed into envelopes with account statements and telemarketing. That is to say that best practices for targeted selling using BI, which are well-honed in the retail industry, are not yet applied in the financial services industry.

Customer segmentation is grouping customers based on certain characteristics. In retail, segmentation uses a broad range of demographic data (age, marital status, number of children, ZIP code, purchasing patterns and so forth). Customer segmentation is based on the belief that people with similar demographics will respond, in general, to offers tailored to their characteristics. Retail experience has demonstrated that this practice can work. The financial services industry generally segments customers based on a single financial measure: the amount of money in the account or the size of the policy or contract. Marketing effectiveness is limited by this lack of customer information. Equally important is the need to analyze the effectiveness and costs of sales channels used in the business.

Every financial services company must establish a more sophisticated view, substantiated with data and analysis, of their customers and sales channels. This needs to include data on customers from external sources and data on costs of sales and distribution in order to determine customer profitability and sales channel effectiveness. Each of these requires an enterprise-wide rather than a line-of-business perspective in order to be effective.

Risk Management: Risk in financial services comes in two forms. The first is the risk to lending institutions of default on payments such as mortgage payments. Defaults are a problem because they disrupt cash flow, affect securities issued by the financial institution that are backed by loans and can affect (as one of the rating factors) the rating agencies' evaluations of the financial strength of the company. BI data mining and statistical modeling are being applied successfully to the problem of managing risk associated with defaults on loans. These tools help to identify patterns in data that correlate with loan defaulters so that the process of underwriting or approving loan applications can screen out applicants with these data patterns.

The second area of risk is the evaluation of the company by rating agencies. Evaluations are meant to provide an assessment of the stability of the financial institution, its ability to fulfill its obligations to customers and its relative (compared to other companies rated) strength for investors. Relative strength is a risk factor because an agency's rating can affect the cost of capital to the financial institution, and the cost of capital is the "raw material" of financial products and services. It determines the operating margin (the difference between costs and gross revenues) of the company because rates for many financial products and services (such as mortgage rates) are set by the market. A lower cost of capital (due to a better rating) can increase the operating margin and provide an advantage over competitors with lower ratings.

Agencies ask for reports and data to use in their evaluation and monitoring processes. RCG IT clients using BI solutions to consolidate information and monitor risks such as defaults have been able to meet the information needs of rating agencies easily and demonstrate their ability to respond to changes in the business environment. Consider the question, no longer hypothetical, of assessing the impact of a terrorist attack such as that of 9/11 on your business. An effective BI solution can help answer this question quickly and easily.

BI Opportunities in Financial Services

The major opportunity for BI in financial services is clearly for enterprise-wide integration of customer, product, channel and operational data. After all, the financial services business is largely about information, and most financial services companies have used or experimented with BI technology successfully. Such companies should value their information assets and use them to improve products, services and business operations. Too much information is locked in the wide array of application systems including those for departmental and line of business products, customer relationship management, enterprise resource planning, financial management and e-business.

There are challenges to creating a truly integrated, enterprise-wide information environment in financial services companies. I have met decision-makers in large financial services organizations that believe that their data volumes are too great, their information processing needs too specialized, and their end users too set in their ways for a BI solution to be effective. I encourage them to look at the retail industry where many BI best practices have been developed. In retail, the volume of transactions processed, the wide range of BI analytics used and the variety of end users who employ BI results are all greater than those found in financial services.

The challenges are not technical. Rather, organizational issues present the greatest challenge for financial services companies. In particular, the management culture of financial services companies is focused on financial performance and profit. This culture comes from the entrepreneurial moneymaking that is at the heart of the financial services industry. Currently, it is the rare executive who is willing to invest in an enterprise-wide solution and all that it entails; but there are more such executives appearing every day.

RCG IT is working with financial services companies that are creating a centralized, integrated information facility to perform in-depth customer analytics. The intents vary, including developing a better understanding of customer behavior, providing better performing cross-selling capabilities and identifying new opportunities to improve products and services. In each of these cases, the drive for enterprise-wide information integration comes from a high-level executive.

One financial services client, who was dissatisfied with the results of its five-year experience with in-house developed BI, outsourced its BI function. The company did this in order to get results needed from its operationally mission-critical use of BI without continuing to invest in learning and experimentation with the technology. As BI solutions become as important to the financial services industry as they are in retail and other industries, more executives will be making decisions to integrate information on an enterprise-wide basis and ensure that the right skills and experiences are in place to deliver high-value business results.

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