"Business intelligence" is not an oxymoron.
In the current economic climate, "business intelligence" actually has the air of redundancy. Especially in financial services, businesses that have not extracted strategic advantage from their informational assets-data about customers, employees, service channels, lines of business and competitors-are lucky to be around.
As a software category, business intelligence refers to the data warehouses and statistical analysis tools that enable users to generate useful insights out of raw information. From predictive patterns in data, new business opportunities emerge to improve customer service, achieve better marketing results, mitigate global risks and sharpen corporate strategy.
The results can be breathtaking. Business intelligence tools not only help small banks to maintain competitive parity with much larger competitors, but they also are permitting diversified global banks such as Wachovia, CIBC and Citigroup to embrace new regulatory and competitive challenges on a scale unmatched in banking history.
Below, four case studies illustrate the ways in which business intelligence has become a competitive advantage in financial services:
LOCAL LEADING LIGHTS
In sports, it's considered newsworthy when a team finds a way to compete despite having only one-third the payroll of its direct competitors. (See "The Closing Line," pg. 42.) But that's hardly remarkable in banking, where, thanks to savvy technology deployment, a $100-million-in-assets community bank can compete successfully with banks more than a thousand times its size.
One such player is First Community Bank and Trust, based in Beecher, Ill. "I've got customers that literally have got businesses in downtown Chicago that use us as their primary financial institution because of our technology initiatives," said Greg Ohlendorf, First Community's president and CEO.
Established in 1916, First Community has been an early adopter of technologies such as ATMs, debit cards, imaging, Internet banking, and business cash management capabilities. "We want to offer a high-touch, high-tech, community banking experience," said Ohlendorf.
Behind the scenes, First Community relies upon integrated systems from Information Technology, Inc., a Lincoln, Neb.-based subsidiary of Fiserv, running on a core Unisys platform. "We've got a very integrated technology solution," said Ohlendorf. "Our folks have the ability to see an entire client relationship on their desktop."
That's one of First Community's main advantages over larger competitors. "A lot of the big banks have very specialized systems-they can't go to one system and see a complete client snapshot, like we can," said Ohlendorf. "That gives us a one-up from the very beginning."
The single-view capability translates to a more intelligent allocation of a scarce resource: personal attention. "We can take and rank our entire customer base from the most-profitable to the least-profitable customer," said Ohlendorf. "It helps us to understand who those people really are."
When Ohlendorf eyeballed the list of the bank's most profitable customers for the first time, he was familiar with 85 names out of the top 100. "But that meant I didn't know 15 of them," he added. Further down the list were even more unfamiliar-yet-profitable names, who had desirable combinations of account and loan balances, rates, and products. "I didn't realize they were that profitable for our institution," said Ohlendorf. "So we started to look at what products and services put them into that kind of ranking."
Also surprising were the names that Ohlendorf had mistakenly assumed were profitable using "off-the-cuff" analysis, but were then revealed as laggards. For example, some high-profile customers had large holdings of CDs at above-average rates, thus making them a drain on the institution's profitability. That's a good thing to know when a customer asks for a fee waiver. "It's utterly amazing information," he said. "Then, you start making decisions based on things that really matter."
Timely access to information also helps the bank to rank-order the performance of its own branches and operating units. "It gives you a much better indication, over time, of what the real-life branch performance is," said Ohlendorf. "You can see this month and last month, compared to budget, all in a very user-friendly report, which has been a great benefit to my board of directors."
Furthermore, decision support tools from Atlanta-based BancIntelligence helps the bank's management to judge its own performance within the industry. BancIntelligence supplies the comparative operating results of banks in a similar financial position to that of First Community. "It allows us to benchmark against peers that are very much like us," said Ohlendorf. "They look at the type of balance sheet that you have, instead of finding comparable banks from towns that are the same size."
THE CHANGING HOUSEHOLD
Wachovia also realized the benefits of having a single view of the customer-but the $342 billion institution didn't stop there.
Building a post-merger "bridge" between the legacy systems of Wachovia and First Union was one of the first initiatives taken by the combined entity. "We did that right at the onset, so that the field understood who their customers were, where they banked and which of their customers banked at both," said Guenther Hartfeil, director of corporate data management and governance, Wachovia Corp., Charlotte. "We really wanted to contact the customers as often as possible, ahead of any changes that occurred with them."
The goal, as articulated by CEO Ken Thompson, was to manage the customer as a single organization, rather than a collection of silos within a larger entity. "We were also able to treat the customer more holistically, and therefore more intelligently from their perspective," Hartfeil added.
But a single view of the customer wasn't enough for the size and scope of an organization such as Wachovia. That's why the bank came up with "multiple views" of the customer by rethinking the concept of "householding." To be sure, Wachovia didn't invent the concept of grouping accounts into households. "It's really saying, 'Joe is married to Denise, and they have two kids,' and that's a household," said Hartfeil. "Or maybe Denise owns a small business, and so we'll include that small business into that household picture."
From that starting point, the bank took it a step further. "We're recognizing pretty explicitly that there are a number of ways to view that relationship," said Hartfeil. "If you're a small business banker, you may not be as interested in the kid's accounts."
So, to continue the above example, the "household" from the perspective of the small business banker would include Denise's small business accounts, and perhaps an equity line of credit cosigned by her mother Likewise, the branch platform employee selling a college fund would see the "household" from the child's perspective.
For each employee, incentives can be customized based on the contents of their household views, rather than on aggregated data beyond their control. "It's all put together in an enterprise view of the client, and that can be cross-cut in a number of different ways for a number of different purposes," said Hartfeil. "It marries together the need to view the customer at an enterprise view with the need to manage the customer within your sphere of influence, or your core competencies."
Along with aligning employee incentives with their direct spheres of influence, Wachovia has also developed systems to give its sales force the best information it possibly can, using information that it has to collect anyway for anti-money laundering purposes. "From a sales perspective, wouldn't it be great to know that somebody just deposited $50,000 into the bank because she received a bonus?" asked Hartfeil. "Somebody could follow up on that, real-time."
Behind the scenes, Wachovia's customer data warehouse resides on an IBM (Armonk, NY) platform with Informix databases in a massively parallel processing environment. Microsoft (Redmond, WA) software helps to distribute information to the branch network. The bank's risk management databases use Hewlett-Packard (Palo Alto, CA) hardware and an Oracle (Redwood Shores, CA) database. SAS (Cary, NC) provides the bank with numerous data-analysis tools, including those that detect and prevent money laundering while simultaneously identifying likely sales prospects.
Just as the USA Patriot Act has increased the scrutiny that banks have had to place on their customers' transactions, the Sarbanes-Oxley Act has made companies more responsible for what occurs within their own organizations. Accordingly, banks have pointed inward the tools of business intelligence in the service of investor protection.
For the past five years, Toronto-based CIBC, a US $195 billion bank, has used separate data warehouses for GAAP-compliant general ledger information, management reporting and financial statement reporting. The bank's financial analysts use Sunnyvale, Calif.-based Hyperion's Essbase on-line analytical processing engine to access these data sources. Now, the management reporting application will be extended to comply with the requirements of Sarbanes-Oxley. "We've been rolling out a number of additional reporting solutions to meet recent regulatory requirements," said Alkesh Sood, chief technology officer, administration group systems, CIBC.
With the presence of a robust data architecture, the bank was able to respond to the new regulation when the need arose. "From the technology side, we were fairly well prepared" for Sarbanes-Oxley, said Sood. "We didn't have to reinvent the wheel in terms of being able to deliver the information."
Along with the increased demand for data warehouse information, CIBC has taken steps to secure the availability and growth of its information resources. "In the past we'd basically have independent Hyperion Essbase applications on their own Intel-based servers, so you'd have one Intel server supporting one application," said Sood.
Now, CIBC's finance area is moving from the Intel-Windows NT platform to a cluster of Santa Clara, CA-based Sun Microsystems servers running the Solaris operating system. "As someone has a demand for an Essbase-type application, we can grow it relatively easily, as opposed to buying new hardware every time," said Sood. "It's more efficient capacity utilization because you're spreading the load evenly across multiple servers. You have more capacity to actually add new applications, as well."
Although CIBC is a Hyperion shop for financial reporting at the corporate level, individual business units within the bank have their own approaches to business intelligence. For example, CIBC Insurance relies upon tools from Cognos (Burlington, Mass.), to increase its cross-sell ratio of creditor insurance products for banking clients. The system consolidates data from the bank's mortgage, lending and credit card systems, along with information about the CIBC organization itself. "Banks always close branches, open new branches, amalgamate clusters of branches, and change definitions," said Kal Omran, general manager of business operations, IT/MIS, CIBC Insurance. "We have to keep up with all these changes."
Prior to deployment of the Cognos data warehouse, the IT department had to handle numerous requests from the business side. That's no longer the case. "The business users end up doing their own queries and looking up the information they want," said Omran. "When we deployed the marketing 'cube' last month, there was one product manager who said, 'You know what? I have seven requests that I've had in the queue for MIS, and I don't need them anymore.'"
Equipped with information about product distribution trends by demographic and geographic criteria, the marketing team at CIBC has been working in concert with branch managers to craft promotions and incentives for creditor insurance sales to existing customers. "We'll look at ways to help support the products with them through this tool," said John Paul da Silva, manager, sales effectiveness, CIBC Insurance. "They can make an overall impact in their sales results."
As a next step, the MIS team will make the same data available to actuaries and financial analysts. "We're going to share our learning," said Omran.
A BIG-ENOUGH UMBRELLA
Citigroup has some sharing of its own going on, with the firm beginning to extend to the consumer bank some of the financial controls and risk management models used by the corporate bank. "We have a model for the corporate finance piece and we've been able to demonstrate that to the various risk managers on the consumer bank side," said Ed Ruppman, director of credit risk reporting for New York-based Citibank's corporate bank, and a 30-year veteran of the organization.
The firm's global risk reporting system already acts as a repository for more than 200,000 corporate finance transactions per month. Now, the data warehouse is being extended to include data from the private bank, the consumer credit card portfolio, and financial data from Citibank's banking operations around the world.
The data warehouse, which uses Cognos software on a Windows NT platform, takes feeds three times daily from various processing centers around the globe. Even so, it's not meant to be a real-time reporting system. "We don't necessarily spend a lot of time evaluating the daily feeds," said Ruppman. "We have a monthly close process that allows us to vet the data to some extent."
Since significant exposures are rarely built in a day, the availability of accurate, consolidated data has more strategic value than the ability to make instant, hair-trigger decisions with the corporate balance sheet. "By the sixth or seventh business day, we have access to our database that allows us to answer questions like: How much risk do we have in Argentina globally? How much has been approved locally?" Ruppman said. "If some of that risk has been approved and granted outside of the country, how was that done, and by whom?"
The consolidated bird's-eye view helps to bring perspective to Citibank bankers who might otherwise overemphasize their own recent experiences during the decision-making process. "As business comes in over the transom, it's pretty hard to digest and collectively aggregate all that information in your head as you approve a credit," said Ruppman. "But lo and behold, you see you've grown your portfolio, or are overly concentrated in one aspect of the business relative to another."
Indeed, without adequate business intelligence tools, it's quite a slog to figure out whether you're under- or overexposed in an industry sector or geographic region. An even greater challenge had been delving into the details to figure out if and why a particular trend was desirable or not. "In the early '90s, we killed a lot of trees answering questions like that, and every question led to three or four more questions," said Ruppman. "Now, I don't have to deal with that."
To be certain, Citigroup still takes risks with its balance sheet-but at least it does so with its eyes wide open. "It was readily apparent that telecommunications back in 1998-99 was growing by leaps and bounds," said Ruppman. "At least it was a relatively straightforward question I could ask the risk managers: 'How much is too much?' "
"We did, in fact, have a review of the portfolio, which led to some change in behavior," added Ruppman. "Not dramatic enough, frankly, as we all learned through the shakeout of that whole industry." However, reviews of this type did lead Citigroup to focus on specific company relationships within both the telecom industry and the energy business. "Relative to our peer group, we did not do as badly," Ruppman said.
Just as Citigroup protects its overall balance sheet using business intelligence, it has also found ways to monitor the lending process for individual credits, even when they involve complex financial instruments involving several business units within the firm. "We set some triggers in place that basically say, 'If you lend beyond this point to a customer with the following credit rating, you need to get special approval.' "
By automating the process for these "obligor exceptions," the bank has established enforceable guardrails for acceptable lending practices for the entire bank. "The risk manager and the banker are actively involved with managing the account," said Ruppman. "That's not to say that they can't get that special dispensation, but the recognition is that it's a temporary extension of credit, and the challenge is to manage it back down to within limits."
"We've gone from a situation where we've had annual reviews and a quarterly interim review of the exposures, to where we're actively monitoring exposures daily to get within limits," added Ruppman.
While it's hard to isolate the marginal return on investment of a business intelligence data warehouse for a global bank, there's at least one measure that points to its importance. "I know I've architected something effectively when I get a call from a senior executive, and he wants to know why he can't get into the system today," Ruppman said.