Beyond risk and compliance: Driving customer value

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. Clearly, there is recognition of the correlation that exists between the amount of capital required to adequately address banks' risks and the strength and effectiveness of their risk management and monitoring processes.

An intelligent monitoring and detection system can contribute to the bank's understanding of its risk exposures. A monitoring system automatically builds up customer profiles, recording the behavior of a customer with respect to specific characteristics. It is capable of detecting changes in account activity or changes in the usage pattern of banking products and channels. In addition, such systems should be capable of comparing the customer's behavior to the behavior of that customer's peer group (e.g. customers that have similar characteristics, for example residence location, product type, and lifestyle details), and provide link or network analysis tools to identify the customer's business relationships. In other words, monitoring systems contain a wealth of information about customers' activities.

Effective monitoring systems should cover a full range of processes to monitor, identify, track and report illegal activities across multiple crime areas, including money laundering, fraud, and market abuse. In addition, these systems can be used for monitoring and assessing a bank's risk exposure and risk profile. While there are many tools that can manage a small piece of the puzzle, very few can provide a consolidated, enterprise view of risk prevention and management.

CUSTOMER RELATIONSHIP MANAGEMENT

To offer personalized service and targeted, profitable offerings, financial institutions need consistent customer and account data available at all touch points - ATMs, online portals, phone centres, and retail branches. Consolidating the wealth of customer data that resides in back-office systems ensures the creation of a complete profile of the customer's assets and liabilities. When personnel of the institution leverage this information, it helps them to target and sell the right products to the right people at the right time through the right channel.

For financial institutions to compete, they will respond to these market forces with a shift in strategy focused on customer relationships that combines selling with personal financial consultation. Financial planning, portfolio allocation, and advice tailored to the individuals' risk tolerance and life stages will become the hallmarks of the new full-service orientation for brokers, bankers and insurance agents.

Today understanding a person's total financial picture, including investments, debts, insurance, credit and lending affairs is the key to driving that customer relationship.

DRIVING CUSTOMER VALUE

Proactive blending of Risk Management and Compliance, and Customer Relationship Management initiatives yields visible customer value: delivering the right product at the right time, place and price. It gives financial institutions the opportunity to minimize risks and costs while at the same time maximize customer service and revenue.

In the current environment of intense competitive and regulatory pressures financial institutions want to increase profitability and improve market position. One aspect of profitability rarely looked at is the expense of losing customers. Institutions that recognize the cost of losing customers make the necessary investments designed specifically around retaining customers. Unfortunately, today's accounting systems do not capture the value of a loyal customer. Most revenue systems focus on current period costs and revenues and ignore expected cash flows over a customer's lifetime.

Surveys have shown that it costs eight to ten times as much to attract new customers through marketing as it does to retain them. And it's a given that the more services a customer has with a bank, the less likely that customer is to leave. But just as important is the fact that the longer a bank keeps a customer the more money it stands to make. Banks with long-time customers then can charge more for their products or services. Yet another economic benefit of long-time customers is the free advertising they provide.

By combining the risk compliance and CRM efforts the financial services institution can yield the following benefits with respect to acquiring and retaining customers:

360 Degr. Customer View

Creating deeper relationships with customers starts with getting a deep understanding of your customers, including their needs, value, behavior and relationships. This enables financial institutions to focus their resources on the most important customers, e.g., those customers representing high value and low risks/costs for the company.

Integrating the customer profile information and risk analysis tools provided by monitoring systems in a financial institution's CRM platform, will give companies a complete view of their customers.

For example, the following information stored in monitoring systems is very valuable once made available to the CRM system:
• Customer's risk score,
• Customer's behavioral profile,
• Profiles of the peer group(s) the customer belongs to,
• Customer's network of business relationships (based on transactions)
combined with the relationships stored in the CRM system (e.g., spouse,
children, business associates), and
• Any alerts or cases generated for unusual or suspicious behavior for this
customer or related customers.

This creates the possibility of performing a full Risk Assessment per customer.

Fraud Prevention / Alerts

Financial institutions should embrace financial crime detection and prevention as an important competitive differentiator by building their brand on safety and soundness. As the span of financial crime is widening among multiple products, channels, and lines of business, financial institutions should have systems in place to detect and report crime to minimize the impact on their organization and their customers. Upon detecting unexpected changes in behavior, such a system should generate high-quality alerts in (near) real-time that give direct access to all relevant information to quickly determine if the activity alerted is truly suspicious, what type of crime is involved, and what action should be taken. Additionally such a system should be able to generate so-called preventive alerts based on information stored in the CRM system.

For example an address change shortly followed by a request for a new credit card could be an indicator for credit card fraud. Instead of waiting till the first fraudulous transaction happens, the appropriate person within the financial institution should be alerted and be urged to get in touch with the customer involved, verify the information, and prevent potential fraud from happening.

The same alerting mechanism can be used to proactively contact customers and serve them better. Proactive customer care can increase customer retention and loyalty, and can generate incremental revenue through up-sell or cross-sell. First, the shared nothing approach is not appropriate for use on shared everything SMP hardware. The requirement to physically partition data in order to derive the benefits of parallelism is clearly an artificial requirement in a shared everything SMP system, where every processor has direct, equal access to all the data.

Shorter Wait / Hold Times

By recognizing who the high-value / low-risk customers are the financial institution can segment the customer base and determine service levels per segment. Financial institutions are increasing their focus on their customer's profitability.

They have come to the conclusion that certain customers are worth continuing to do business with because of their value to the institution. Others are actually low value customers who must be turned into profitable customers or in the extreme case the relationship could be ended. This is not just simplistic segmentation of customers defined by bank balances or number of accounts but an in-depth analysis that takes into account every detail of a customer's association with the institution. And now more than ever this includes a customer's risk potential to the institution.

Institutions who can calculate the profitability of individual customer or customer segments can make informed decisions in an increasingly dynamic environment. Once customers are properly profiled and segmented, the institution can then use this information from the most simple of tasks such as hold/wait times to the more complex tasks such as marketing to specific customers.

Elimination of Redundant Process Steps

By segmenting your customers based on profitability and revenue potential on one hand and cost and risk potential on the other, you can differentiate your customer care processes and channel strategy per segment, and streamline your customer interactions. You could leverage low-cost self-service channels, such as the Internet with automated e-mail responses, to serve the large number of lessprofitable customers, while reserving personal interaction for the most profitable or potentially profitable customers. This allows you to increase loyalty of this toptier segment and generate incremental revenue through up-sell and cross-sell, while at the same time eliminating costly process steps or channels for the lower-tier segments.

FSI as Strategic Advisor through Personalization

By observing what your customers do and knowing what their usual behavior is, you can differentiate and personalize your customer strategies. This includes many of the aspects of service discussed above, such as reserving personal interaction for your high-value customers and proactively reaching out to customers to check on unusually large expenditures for fraud prevention reasons.

In the world we live in today customers are bombarded with marketing and advertising messages via their television, radio, email, text messages, magazines, newspapers, and the web. Financial institutions must manoeuver through all these messages to get their message to the customer. Unfortunately by the time the message reaches the customer it is often inappropriate, dated, or not even the best offer. Financial institutions realize that now more than ever they must offer the right product to the right customer at the right time at the right price. By segmenting their customers institutions can leverage the segment information with individual customer information to make the best offer to the customer regardless of the channel of contact.

Blending the information stored in Compliance and CRM systems might also reveal up-sell and cross-sell opportunities by tailoring your product and service offering to the specific needs and preferences of your customers, and leverage your customers' behavioral patterns to launch new products, enhance existing products, create new product bundles or introduce new channels.

For example when a customer reaches the contact center regarding a question about a bill payment the agent can see that the best product to offer the customer at the time is a Premiere Banking service. The system has already assessed that the customer is not an existing Premiere Banking customer and because of their bank balance ($50,000+), age (30-45), profession (doctor), and interaction behavior (Internet banking) they would most likely accept the Premiere Banking service and its fees. In addition to this the institution has been able to identify the risk profile of this customer as being low thus giving them permissions to open up foreign exchange accounts as part of their premiere banking service.

When acquiring new customers and assessing their risk level, financial institutions may also leverage the risk profiles of similar or related customers. For instance, a new customer is part of the network of one or more existing customers or has similar demographic characteristics as some existing customers.

Additionally, knowing your customers' network of family members and (business) associates - information that is readily available within Compliance and CRM applications - might reveal opportunities for acquiring new customers. Leveraging your customers' behavioral patterns allows you to offer greatly differentiated, highly personalized services and drive new revenue streams.

DRIVING VALUE WITH ORACLE CRM AND NETECONOMY

In today's mature marketplace, financial institutions have to squeeze every dollar out of their customers. The challenge is to find the optimal balance between containing operational costs and growing customer retention and loyalty. Growing customer loyalty comes down to fully understanding your customers' needs and preferences, and differentiating your product and service offering per customer segment.

Driven by regulations, most banks have invested in anti-money laundering or transaction monitoring systems, and want to generate business value from the information stored in these systems. Analyzing transaction data can offer a whole new approach to understanding customers because it shows whom they do business with, the amounts exchanged, where their money goes, and how they pay. This information, when fed into a CRM application, can be used for customer profitability analysis, customer segmentation and marketing.

In addition, CRM data can be used in detecting and preventing financial crime. To prevent or minimize losses incurred by a financial institution, it is crucial to detect fraud or any other type of crime in an early stage, or preferably even before it happens. Therefore, all signals potentially indicating crime, for instance frequent address changes in combination with new card requests, must be closely monitored. Combining these non-financial events, which are typically recorded in a bank's CRM-system, with transactional data is very instrumental in generating high-quality fraud alerts. A proactive approach to crime prevention is yet another opportunity for banks to build customer's trust and confidence, and reduce operational costs.

Combining the strengths of both Oracle's CRM solution and NetEconomy's ERASE Financial Crime Suite, gives financial institutions a wealth of information about their customer base, helping these institutions to better serve their customers while at the same time minimize risk. When a customer interacts with the Oracle CRM application, for instance directly via Internet or indirectly via a call center, relevant customer data and action(s) will be fed into ERASE, which will return a risk score based on the customer's profile and his/her action(s), so that the right action can be taken.

SUMMARY

Financial institutions that effectively utilize their Risk Management and Compliance systems in combination with their CRM functionality can help drive incremental revenue through cross-selling and up-selling, as well as increase customer retention and loyalty and profitability. Combing Oracle CRM and NetEconomy's ERASE Financial Crime Suite allows you to sell, service ad market to your customers in the most efficient way.