Viewing a potential client through the salesperson’s lens is no longer enough—firms need to understand the cost of doing business with their clients. Financial institutions are turning to CLM tools to help manage their client relationships from start to finish, and hoping to gain a competitive edge as a result. Comments from recent webinar, which is available to watch on demand.
When reviewing a potential customer and determining whether they are a good fit as a trading partner, institutions now must consider the profitability and capital impact of a new client in addition to potential sales and revenues, which used to dominate the decisin-making process. To do this, dealers need really good quality data, merging trading activity data with client static data, which was not done in the past. “Firms ultimately need to know who the client is, what they are trading, the potential impact on the balance sheet and risk-weighted assets, as well as the operational cost to support them,” says Stuart McClymont, Managing Director and co-founder of base60 Consulting, a subsidiary of the JDX Consulting group.
To meet this need, financial institutions are increasingly looking to manage their client relationships in a more holistic way. Client lifecycle management (CLM) goes far beyond Know Your Customer (KYC) and onboarding activities. It involves supporting clients in all stages from early prospecting all the way through to offboarding, and includes tax and credit requirements, trading confirmations and settlements, as well as the recent drive towards collateral management.
CLM is a growing priority for many financial institutions. Nomura, for example, has appointed a global head of CLM, sitting within operations to focus specifically on the topic, as part of its overall client ecosystem portfolio. Market participants are turning to technology such as CLM tools—both homegrown and off the shelf—to manage the wieldy process of pulling together all the relevant data in a timely manner, and to enable different views of their clients depending on which client profitability metrics they want to use.
Drivers include regulation, improving customer support and data management
Regulatory requirements are the most significant driving force behind investments in CLM today, as firms are now required to collect far more data and documentation from clients than in the past. And best execution rules mean firms must trade with five or six dealers as opposed to just one or two. Some 50% of the audience in a recent DerivSource webinar sponsored by base60 Consulting named regulation as the biggest driver for CLM adoption, while 34.62% pointed towards a desire for general improvements in client management and support, and 15.38% cited improving data management.
“Our industry is facing a tsunami of challenges whether they be regulatory, profitability-driven, or technology-driven. Client lifecycle management is at the core of addressing all those different challenges,” says Craig Butterworth, Managing Director, Global Head of Client Ecosystem at Nomura.
However, while firms generally know which internal departments hold which data and in which form, there is little lineage between the data held in different places, making it difficult to allocate the costs of doing business back to a client relationship. For firms looking to improve CLM, dealing with silos and disparate data sources is one of the biggest hurdles, and 54.55% of the audience named this as their greatest challenge.
Other prominent challenges include confusion over regulatory requirements, which was mentioned by 22.73% of audience respondents, while 18.18% cited the lack of a golden copy of data or common data model. A tool is only as good as the data fed into it and so firms must make sure the client data they are using is of high quality and consistent. However, many market participants are moving away from the concept of a golden copy and instead looking for the best view of the customer at a given time, according to the webinar panellists. A further 4.55% of the audience respondents bemoaned a lack of senior management buy in for CLM investment.
Can CLM offer a competitive advantage?
In assessing the value of implementing a CLM solution, a full 80% of the webinar audience said they believed investing in CLM and client onboarding delivers a competitive advantage to firms. Not only can an effective CLM solution reduce operating costs, and prevent multiple departments reaching out to customers for the same information, it can also enable firms to be more agile when responding to regulators’ requests regarding client exposure to particular market or political events, for example.
“Some of the more progressive firms are moving beyond compliance and recognising that if they achieve quality at source through the onboarding process, what they do pre-trade and how they interact with the information they capture can drive efficiency in the post-trade process, as well as yield improvements in reporting and analytics—which in turn can help target products and services towards their clients,” says Guy Harrison, Managing Director, Regulatory and Compliance Services, IHS Markit.
“Some of the more progressive firms are moving beyond compliance and recognising that if they achieve quality at source through the onboarding process, what they do pre-trade and how they interact with the information they capture can drive efficiency in the post-trade process, as well as yield improvements in reporting and analytics—which in turn can help target products and services towards their clients,” says Guy Harrison, Managing Director, Regulatory and Compliance Services, IHS Markit.
When it comes to implementing a CLM strategy, firms are split as to whether to build or buy. Just a third of audience respondents said their firm was looking to build in-house, while 40% of the webinar audience said they were investing in a single, third-party software solution. The remaining 26.67% said they were looking to implement a best-of-breed approach.
Firms looking to build an in-house CLM system must ask themselves if this really offers a competitive advantage, and whether the benefits outweigh the obligation—and risk—of keeping their KYC rules engines and other essential functions up to date in an increasingly complex regulatory world, says Butterworth. “For many firms there are huge advantages to be had by moving away from in-house built legacy monolithic systems, which tend to lead to siloed and inefficient processes, poor client service, and also mean that ever-increasing amounts of technology spend essentially burn keeping end-of-life systems effectively on life-support,” he says.
Tinkering with off-the-shelf solutions can have its issues too. “While there isn’t a clear business case for an in-house build, we do see a lot of firms taking a third-party platform that is fit for purpose, and customising and configuring it so much beyond recognition that they have effectively done an in-house build. That is something to watch out for,” warns Greg Hannah, CEO, JDX FinTech Solutions at JDX Consulting. Another issue is that when firms implement a new CLM system, they need to fully decommission their legacy in-house applications in order to get the full benefit of the new systems, he says.
How will collaboration shape the industry in the years to come?
CLM is one of the few areas where industry collaboration is not anathema. Problems with client management, high operational costs are very common, and the customer due diligence space is very commoditised, with each broker collecting up to 80% the same customer information as the next firm. There is little competitive advantage in solving this puzzle alone. Utilities such as IHS Markit’s kyc.com, industry best practice technology platforms such as Fenergo, and new technology initiatives around blockchain and distributed ledger technology are evidence of the industry starting to come together to achieve some standardisation and solve common pain points. “Our ability to collaborate as an industry and work together more effectively is going to result in a much better answer for all of us,” says Greg Watson, Managing Director, Sales and Strategy at Fenergo.
Looking ahead, the webinar panellists agreed that in the coming few years, CLM will likely become more automated and standardised; more mutualised with participants sharing more processes and technology; and more digitalised with the rise of technologies such as AI and blockchain. Consolidation as well as joint ventures in the technology space will see vendors coming together to provide more integrated end-to-end solutions, and the emergence of more technology and people specialised in this space providing managed service offerings will effectively reboot the utility market.
