Bank CEOs Fear the Data-Driven Decision
Some bankers have pronounced the data warehouse obsolete, but Dr. Jim Goodnight says it's more relevant than ever, as cheaper hardware and overlapping informational needs across the organization make sharing a large dataset companywide feasible and worthwhile.
Regulators are expecting financial institutions to provide detailed modeling of deposits and ever-greater documentation in the next round of stress tests, bankers and consultants say.
The bank's first chief data officer, A. Charles Thomas, is training his analytical eye on cross-selling opportunities, delivering instantaneous client data to employees and hiring techniques.
Do bank CEOs fear analytics?
A recent study found that analytics are underused at banks and that senior executives are cold to the technology: a scant 20% said that if it were up to them their organization would be highly data driven.
The findings come at a time when, oddly enough, banks are investing heavily in analytics software. In an online survey conducted by American Banker/SourceMedia Research, 36% of bankers said they are looking for a new analytics-solutions provider. This was the third-largest category of new spending, just behind regulatory compliance and customer experience.
Bankers are moving cautiously, adopting technology in deliberate steps, according to other research. Twenty-seven percent of banks are still at the stage of exploring customer analytics determining where to begin, developing a business case and seeking funding, according to a recent report by Celent. Another 37% are experimenting with one or more projects to validate a business case and build internal capability. Just 28% are deploying customer analytics to one or more projects at the line-of-business level. Eight percent are extending capabilities to additional lines of business or the enterprise level.
One challenge is that getting an analytics practice up and running requires coordination and buy-in from multiple groups, points out Deva Annamalai, a banking technologist in Salt Lake City. "In today's scenario, most banks have an existing enterprise data warehouse, a finance and analytics reporting group, and IT wanting to do this. The ownership and roles around who is responsible for customer analytics becomes a little muddled. Organizations are starting to realize this overlap and some are even dedicating chief data officers (a relatively new C-suite title) to solve this problem."
The apparent hesitation when it comes to analytics might also reflect the fact that the business of running a financial institution has changed dramatically, said J. Paul Leavell, senior marketing analyst at the Charlotte Metro Federal Credit Union in North Carolina.
"Banks are slowly evolving from a purely branch-oriented paradigm to one that has more electronic distribution blended in," he said. "In the old days, a lot of analytics would go into locating branches, for example. Even larger firms were using third parties for such analyses. As electronic banking has moved into late adolescence, banks are just catching up as they realize all the data they are collecting is actually an asset and not just electrons lying around."
It also reflects lack of initiative among top executives, according to Celent's study. Less than a quarter of bankers surveyed think senior management is fostering a decision-making culture at their institutions that thrives on data. Moreover, whereas 80% of IT people surveyed would like their organizations to be data-driven, only a fifth of high-level executives feel that way.
"In my view, most bankers got where they were using their ability to 'read' the situation, a relationship, a deal or a market opportunity based on their gut and their personal skills and experience," said Peter Cherpack, who is senior vice president and director at Ardmore Banking Advisors in Pa. "They dont trust data, and they dont trust models. This is particularly true for people in lending and credit, but also most executives. Some that buck that trend include some in finance, who understand that data is important, and staff in marketing. So if an executive comes from one of those two areas they might be more likely to use data to manage. Most of the others see data as something for operations folks and finance modelers to deal with."
The concept of data-driven decisions makes some executives nervous. "Analytics is largely about discovering relationships that aren't intuitively obvious," said Bob Meara, senior analyst at Celent and author of the report. "By definition, the interesting discoveries are intuitively very uncomfortable if it doesn't seem right and you can't trust your gut, then you've got to trust the numbers. That's hard for people."
Some of the executives may be seeking a balance between relying on data and going with their instincts. "I don't think CEOs fear the data," Leavell said. "In my consulting days, I did see more than one CEO deemphasize or hide findings that did not support the CEO's gut. But business decisions are, or should be, as much a function of corporate culture and strategy as they are a function of data. A good executive should respect what the data show and a good quant should understand that data alone cannot address all cultural and regulatory concerns."
The very idea of playing with data testing hypotheses against the numbers is foreign to many top executives.
"The use of analytics requires some amount of faith that profitable things as yet undiscovered will be discovered," Meara said. "The sales pitch is, these things will help you uncover the veritable needle in the haystack, help you find stuff you aren't even looking for. How can I go play with this to see if there are some interesting and profitable discoveries that I wouldn't have even thought about. That's just a crazy idea to a traditional manager."
Where most executives carefully plot a strategy, put key performance indicators in place, create compensation plans, and set up oversight, an analytics-driven approach to decisions can be more "more musician-like," Meara said. "If you start jamming, maybe something cool will come out and it will sell a million records."
The skepticism among bankers makes life tough for vendors, Meara said."They're having a hard time selling analytics to the traditionalists because they can't promise that you can plug it in, turn it on and this is what you'll get. Now it's a discovery."
What many banks end up doing, Meara said, is starting small, using predictive models in small pilots and validating the models with testing.
"They'll do lots of little tests, so their risk and spend[ing] will be minimal and they'll capture data really fast," Meara said. "Pretty soon you go, 'Holy smokes. We tried this six different times, with different samples and sure enough it shows up every time. This must be real.' You begin to build confidence in the results of relationships that weren't intuitively obvious in the past."
There are signs that bankers could be more open to change in the future, especially in certain areas like marketing and compliance.
Celent found the top priorities for analytics among bankers were: improving sales results (69%), improving customer relationships and service results (53%), cost reduction (38%), regulatory compliance (30%) and fraud/risk management (13%).
"Any new initiative has to show its ROI in either net new revenue or cost reduction," Annamalai said. "Most customer analytics projects are focused on these two key criteria [improving sales and service] and are heavily focused on customer acquisition and retention."
The Charlotte Metro Credit Union, for one, devotes a lot of analytic resources to improving customer service and sales. Fraud and compliance are the next two priorities.
"The regulatory environment has been quite challenging the last few years, and fraud is just inherently scary," Leavell said.