Business Analytics In Transaction Banking

By M. Isi Eromosele

Commentators, analysts and banks recognize four key areas where analytics capability can provide value:

• Customer analytics
• Integrated risk management
• Operational effectiveness
• Optimized transaction products

Customer analytics

Transaction banks that understand their customers and their own ability to service them in more profitable and differentiated ways will position themselves advantageously by using modern analytical technologies.

Using modern analytical technologies, it is possible to harness existing, specialized transactional systems to extract valuable customer insights and develop customer analytic maturity:

• Identify the best customers by product, geography and segment, understand their characteristics; define best customers in terms of contribution, profitability, flow, breadth of services, etc., and distribute that insight to relationship managers.
• Analyze contribution and profitability, understand customer preferences and trends, predict customer appetite and provide customer-specific advice and next-best offers consistently and frequently to relationship managers.
• Create customer targets, business models, strategies, plans, fee structures and objectives based on captured customer engagement, traffic and predictions. This might also extend to creating new business models to monetize payment traffic assets.

Integrated Risk Management

Within transaction banking, tracking transactions and resulting counterparty exposures has been linked not only to regulated risk classes (credit, market and operational) but now also to liquidity, demanding a more timely and agile response than relying solely on rigorous AML processes and controls.

Analytic maturity for integrated risk management might include:

• Create a real-time or near real-time view of risk and concentrations in the portfolio by product, counterparty, geography and time period, and identify leading and lagging indicators and correlations. Create a governance and policy control framework for key performance measures to manage exceptions and proactively manage within tolerances.
• Analyze transactions and market activity to identify trigger events, correlations and potentially predict transaction concentration and likelihood of execution weaknesses and interventions.

Operational Efficiencies

Understanding operational inefficiencies and quantifying their impact offers banks the opportunity to capture short-term improvements and identify targeted programs to deliver return on investment both iteratively and as part of a longer term infrastructure investment program.

Analytic maturity in operational effectiveness might include:

• Capture process bottlenecks by line of business, product, geography, counterparty
• Identify correlations between failed transactions, interventions and straight-through processing (STP) rates
• Embed process controls, set tolerances and targets for key performance indicators to create efficient governance and policy management
• Analyze failed trades, interventions and market events to identify correlations and develop models to predict trigger events
• Incorporate failed transaction insight and intervention costs into adjusted business models to refine product pricing and target investments to optimize network capacity.
• Align operational capacity and costs with business goals.
• Optimize pricing and customer offers to reflect the cost of servicing and indirect intervention costs.
• Build optimal relationship manager coverage models to balance service cost with client retention/sales objectives.

Product Performance

The range and complexity of transaction banking products has increased to keep up with customers’ financial demands and competitive pressures. However, the focus on attracting additional transaction traffic and revenues means that scrutinizing the profitability of these products has been less rigorous.

To maximize performance, institutions need to determine which products generate the most profit and which are valued by customers. This insight will enable banks to refine the product mix and sunset lower-value and less profitable items.

Business analytic maturity for transaction banking products might include:

• Extract analytic insight from transaction flows, revenues, direct and indirect costs to calculate and understand product profitability. Understand product preferences by customer, segment and geography.
• Understand transaction volumes, costs and profitability sensitivity to market and customer factors. Forecast and predict customer demand and identify next-best offer consistently.
• Create what-if business models and scenarios for individual product strategies and coherent portfolio strategy. Tailor and model product and services offers to create value differentiation. Create aligned, agile go-to-market plans.

Cash Management And Supply Chain Finance Services

The analytic approach can be applied to enhance customer cash management services. The bank can forecast cash flows across customers’ accounts and closing balances at start and throughout the day.

On-going forecasting enables client relationship managers to proactively discuss adjustments to limits and credit lines, as well as optimize balances. Client dialogue can also help to reinforce the benefits of pre-advising large movements.

From a corporation’s perspective, payment is only one of the final steps in the supply chain, which actually starts from the moment a valid purchase order has been placed. Supply Chain Finance, defined as the use of financial instruments that optimize the working capital throughout the supply chain processes can also benefit from analytics.

Events reported by ERP systems and sensor-driven technologies used to track goods and financial data can also trigger financial services, such as credit and draw-down on credit lines, payments, invoice financing and more.

Financial institutions can use analytics to create synergies between customer data and their economic and political insight, to warn clients and advise on alternatives.

Payment Risk Mitigation

Regulators and institutions are becoming increasingly aware of the risks inherent in payment services. As regulatory focus grows in this area, analytics can help banks to forecast the intraday exposure to all major payment counterparties.

Settlement banks can also monitor their positions with all CSMs to gain insight on potentially unsettled transactions in case of CSM disruption. Analytic insights can help banks to identify concentrations of risk with specific counterparties or CSMs, and take action before issues arise.

The insight generated can be used to track funding and intervention costs to measure their impact on profitability and allow the institutions to adjust pricing accordingly.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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