Beyond risk and compliance: Driving customer value (page 1 of 5)

According to the TowerGroup1, the global financial services industry could save up to $9 billion in total IT spending by blending risk management and customer initiatives. By 2008, the global financial services industry's total IT spending in Risk Management and Compliance will mount to $23.8 billion, while investments in Customer Knowledge will reach $21.2 billion (see figure below). IT spending in Risk and
Compliance - the single greatest driver of IT transformation over the next decade according to the TowerGroup - should be unleashed to drive customer value. Gartner said through 2007, companies that choose one-off solutions for each regulatory challenge they face will spend 10 times more on IT solutions for compliance than their counterparts that take a sustainable programmatic approach.


Proactive blending of Risk Management and Compliance and Customer Relationship Management initiatives yields visible customer value: delivering the right product at the right time, through the right channel and at the right price.

In today's economic climate, financial institutions have to find the optimal balance between containing operational costs and increasing customer retention and loyalty. Analysing transaction and customer profile data stored in Risk Management and Compliance systems, can offer very interesting pattern recognition resulting in a whole new approach to understanding customers. The data show whom they do business with, the amounts exchanged, where their money goes, how they pay and when. This information, when fed into a CRM application, can be used for customer profitability analysis, customer segmentation and marketing.

RISK MANAGEMENT AND COMPLIANCE

The biggest risk facing financial institutions, according to a survey of global risk managers by the Economist Intelligence Unit, is regulatory risk. With regulatory pressures only increasing, it is no surprise risk officers see regulatory risk as their greatest concern. Compliance with these regulations requires considerable time, money and effort by financial institutions. Failing to comply with these regulatory
provisions, financial institutions not only face the risk of ruining their reputation and integrity, but may also face severe criminal and civil penalties. A study among financial institutions ranking risks by concern, ranked 'Too much regulation' as the number one risk in 2005, up from number six in 2003.

An important facet of risk management and compliance is Customer Due Diligence. The Financial Action Task Force on Money Laundering (FATF), the Basel Committee on Banking Supervision, and the Wolfsberg Group all provide guidelines for identifying new customers and verifying their identity at account opening. 'Knowing your customer' cannot stop once the account or relationship has been established. According to the FATF and the Basel Committee, financial institutions should conduct ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship.Ongoing monitoring ensures that the transactions being conducted are consistent with the institution's knowledge of the customer, and their employees, business, and risk profile. The purpose of monitoring is to understand the normal and reasonable account activity of customers so unexplained changes or inconsistencies in the behavior of a customer can quickly be detected.

Risk management and monitoring are becoming even more critical with Pillar 2 of the Basel II Accord, which requires banks to have processes and systems in place for assessing their overall capital adequacy in relation to their risk profile and for monitoring and ensuring compliance with regulatory capital ratios.