With an increased focus on client profitability, capital and new regulations, banks are breaking down internal silos to get a more holistic view of their client relationships. In a Q&A, Stuart McClymont of base60 Consulting discusses the regulatory and economic drivers for client lifecycle management solutions and the challenges firms face integrating systems and harmonising client data. Register for webinar Oct 10th to learn more!
Q: Let’s focus first on the status quo. What are some of the data-related problems with existing lifecycle management models as the uses of client data changes?
A. For most financial institutions today, each function of the bank is responsible for its own operation, as far as the relationship with the client goes—the tax department gets tax information, the legal department negotiates contracts, and the credit risk department understands the credit risk. Each department frames questions to clients at different times and in different ways, using different terms that can mean the same thing. These data sets are stored in different repositories and are typically not aligned.
For example, “What is your name?” could refer to a business name, a registered name, a trademarked name, a legal entity name, or a parent company name. A salesperson has one straightforward view of their client- the person they speak to at the client, while the infrastructure functions—for Know Your Customer (KYC) regulations, for example—needs to know at the legal entity level the actual subsidiary of the firm that they are doing business with, and who is on the board of directors of that subsidiary, and so on.
However, what has changed is that banks are increasingly focused on client profitability and capital impact, as opposed to just revenue, given new regulations such as BCBS IOSCO uncleared margin requirements. This requires adding together multiple data points throughout the lifecycle of the relationship with the client. They need to know who the client is, what they are trading, and what is the impact on their balance sheet and their risk-weighted assets (RWA), as well as the operational costs to support clients.
In the past, when revenue drove the client relationship, firms primary focus was the salesperson’s lens on client data and how much revenue has been generated with that particular client. But because of the greater emphasis on profitability and capital, the mind set has changed and firms now need to understand the end-to-end cost of doing business with clients.
In the meantime, it can be extremely annoying and frustrating for the client when different departments in the bank repeatedly ask for the same information. If legal and credit need the same data, why can’t they share it with each other instead of reaching out to the client separately?
Some banks are now looking holistically at client lifecycle management (CLM), to create an integrated ecosystem of functional infrastructures underpinned by a core “golden” set of core client data. It allows each department to service their functional requirements without each of them having to go individually and ask the client for information at different times and equally in parallel storing the same information in duplicative infrastructures.
Q: Focusing on the drivers behind the change in client data. What are the main trends driving the re-evaluation of the data that supports the CLM process among banks and asset managers?
A. Regulation is the main driver behind the trend to transform the CLM process. Some firms have been found not to be in compliance and need to correct that. Also, new regulations require further outreach to clients to fill in new forms and provide new additional data and documentation. Clients that used to trade with one or two dealers now have to trade with five or six to meet best execution guidelines, and today’s process of on boarding with each dealer is much more onerous than it was in the past. As a result, some dealers have had to re-evaluate their data collection process when suddenly faced with a large number of new inbound clients.
Dealers also need good data to assess profitability. They need to carry out client activity analysis factoring in revenues, the costs of operationally supporting that customer, and the balance sheet impact of trading with them. But merging client static data with trading activity in a seamless fashion is very challenging. Banks typically don’t know which departments hold which data in which form, nor the lineage between the data, nor how to allocate the specific costs of doing business to a client. Despite a big push four or five years ago towards activity based costing, dealers never really achieved transparency around the cost of performing each function in the end-to-end process, let alone being able to allocate it back to a specific client.
Siloed growth and investment decisions have contributed to the problem. Dealers have an FX business, an Equities business, a Credit business, a Rates business etc. and each product line has been built up over many years. The person at the top owned the revenue, the technology, the investment, as well as the people in the front, middle and back office. There were no incentives within banks to share people, process, data nor technology across the silos. But Clients traverse across multiple product lines by nature of the risks they are using dealers to manage. With the focus, away from just revenue and into profitability and impact on the capital and the balance sheet of the dealer transparency and visibility across product lines and functional departments is critical.
Dealers are changing though. Increasingly, the people in charge of the business lines are taking a more holistic view across the whole organisation rather than just thinking about their product line. As products become more commoditised, the head of a business line does not need to be an experienced technical expert market maker—banks need people who can run businesses across products. Equally some banks have introduced shared business services for middle and back-office functions such as KYC and anti-money laundering (AML) monitoring. These services are then charged back to the product line. All this is fuelling increased interest in the CLM infrastructure ecosystem.
Q: Looking at the practicalities now. How can firms look to improve their data management practices, as part of plans to implement a more efficient holistic client lifecycle management operation?
A. Firms need to take the fiefdoms and business line incentives off the table and think about what are the core components of data needed to do business with a customer across the bank. They need to bring together sales, trading, KYC, on boarding, middle office, tax, legal, and credit, and ask from an independent perspective what data each needs from the client to drive their process. The focus should be on servicing the client across the bank more efficiently rather than on just trying to increase revenue for a particular business line or service a particular functional department. If the bank interfaces with the client more effectively once for all functional requirements, the client will do more business with them, and all departments will operate more efficiently.
Often when one department fixes something, there are benefits to somebody upstream or downstream from them. By bringing all the departments together, the bank can see what are the right investments to make for the bank end-to-end, within the right time frame and logical sequencing of changes for all departments to capitalise on the investment.
In parallel they need to take all the client data fields and normalise them, because each department is calling them something different. Then create a model that they can overlay across the bank so that everyone is using the right data from the right golden source. It should cross all the system boundaries that exist in the firm from prospecting, on boarding, trading and off boarding of the client.
Lastly, firms need to learn and work with their peers in the industry around what and how they are requesting, collecting, using, managing and storing data. Clients are no longer trading with a single dealer. If all dealers are asking clients for the same consistent information, in a consistent fashion, clients are more likely to provide it in a timely, consistent and complete manner.
For the industry KYC utilities, standardisation of the data collection and storage of this data once, as a golden source for use by all appropriate parties, was the original goal. However, adoption to date has been limited. Why? In my mind, it was because they were designed and developed from a “Consumer” of the data perspective (the Dealers) without sufficient consultation and input from the “Providers” of the data (the client). Clients know how they create, store and manage their documents and data to be legally incorporated and be to trade. Clients are the credible golden source of the documents and data. It’s time to get them around the table to design the industry golden source infrastructure.
Q: Where does technology fit into plans to revamp CLM processes?
A. Firms need to first think about the client journey and the life cycle of supporting a client. They need to understand the operating model from an organisational or functional perspective and how they work together in an end-to-end process. Understanding what functional departments are involved, in what order, when and the hand offs. They then need to think about the data that each function requires to run their function but also what data they may create that feeds into other functions. Understanding the common data that drives all functions and creating the lineage between functions is critical.
Then is the time to look at what technology can enable these processes, functions and data requirements to operate most efficiently. What are the best tools for prospecting, KYC, workflow and on boarding, credit risk management, reporting, off boarding. It doesn’t make sense to have one monolithic system trying to do everything. In an ideal infrastructure, firms have a componentised view of best-of-breed technologies performing functions with a common data model that underpins all of them.
Reviewing what exists today inside their organisations, looking at what is available in the marketplace, looking at what other organisations use for common functions and learning from community practices and standards is the way we will deliver standard and consistent processing of what is mostly common client data.
Equally having a common data model that underpins functional processing infrastructures using data from credible golden sources will allow more effective monitoring of client activity to provide the transparency around client profitability and impact on capital.
Q: Is there ever a case for a firm to build this in house?
A. Not all of it. Very few banks do it well. Banks are very good at managing money and managing risk, they are not software houses. Interestingly the only thing Banks create is data. Only recently have they realised this which kicked off the trend to hire chief data officers. But one person cannot sort out the data in a bank that is produced daily or build up over many years. There needs to be a cultural and behavioural shift to change people’s mind sets on how they collect, manage and store data.
Q: How do you see the industry evolving over the next couple of years?
A. All industries across the board—not just financial services— are in the middle of a shift in terms of the way buyers and sellers come together by cutting out the middle man and the costs associated. For example, Uber brings passengers and drivers together without the need to call a taxi service. This is all data driven based on standard data and innovative technology storing, managing and using this data.
Banks are the same. Peer to peer trading in traditional banking type products is already occurring. Banks are recognising they will need to change their business model and cannot continue to just be a broker taking both sides of a trade. They are stewards of client data and need innovative tools and technologies to service this data on behalf of their clients. Therefore understanding and managing client data across the entire client life cycle is critical to get right.
Register for our upcoming webinar Sept 19 “Client Lifecycle Management: Time to Think End-to-End From Prospecting to Offboarding”