Vendors are pushing big data on everyone, including on banks of all types. After the cloud, it’s pretty much the most overhyped technological phenomenon of the day. And sure, big data is cool. Who wouldn’t want to use a sexy new technology like Hadoop to peer into a huge and complex data set and analyze customers’ price sensitivity? Unfortunately, for all but the largest banks, big data is a lot less important than two primary challenges: the daunting regulatory environment and banks’ ungainly data environments. In fact, here’s a little proof that bankers don’t stay awake at night thinking about big data: In a currently underway Aite Group study on using predictive analytics to improve loan portfolio management, Aite Group asks risk managers if their use of predictive analytics is hindered by the volume, variety, or rate of change in their data sources; Aite Group has yet to see a “yes.” If you’re a portfolio manager and want to add your two cents’ worth, click here.
Against all the hype about big data, it’s worth discussing the challenges that Aite Group has identified as currently top of mind for bankers: compliance and data silos. First, there is the avalanche of new regulation related to Dodd-Frank, Basel III, and stress testing. The scope, ambiguity, complexity, and continuously changing nature of these regulations are a nightmare for banks. Ambiguous Fed and OCC guidance on stress testing alone paints bankers into a corner — they must have a bank-wide stress-testing system that is simple and straightforward, yet tests virtually every type of enterprise risk for all possible events at multiple levels: division, lending team, geography, SIC code, and individual company. Do you have a headache yet?
Unfortunately, building new compliance reports and performing stress tests requires banks to aggregate data that is scattered across applications, databases, lines of business, and separate legal entities. Aite Group sees many banks addressing this challenge by hiring small armies of report builders. We’re not talking about report builders who use capabilities like IBM Cognos or SAP Business Objects to make better business decisions, but those who perform gritty tasks like using Microsoft Excel to combine standardized reports from different enterprise applications into another, manually built report that will, it is hoped, make one of the regulators happy.
Clearly, the current regulatory environment is not a money maker. Compliance-focused report builders are costly to recruit, hire, train, and compensate, and they can’t help a bank increase risk-adjusted return on capital (RAROC) or lower the expense ratio. Scale is another problem—even small changes in regulations can increase the compliance challenge almost exponentially and will almost certainly outpace the ability of banks to hire new report builders over time.
Although banks are finding it difficult to comply with regulators while increasing competitiveness, Aite Group sees in this environment an opportunity for vendors to both rescue banks from their compliance crisis and offer the reporting analysis they need to become more profitable. Here’s a little advice for vendors:
- Analytics vendors: Don’t bring up big data during sales calls. Bankers don’t find it compelling and they know it won’t solve their current problems. Talk instead about cost effectively integrating data sources; bankers know this is the first step to serving up data in a way that makes regulators happy and improves employee decision-making. Walk through capabilities that they can be embraced by banks’ risk-averse investment cultures, such as dashboards, interactive reports and queries. Offer ad-hoc, end-user-driven capabilities that will enable employees to perform the analyses and report building they want, whether for compliance or business profitability.
- Enterprise application vendors: Vendors selling applications such as loan origination systems; core banking systems; or governance, risk, and control systems should know that the large analytics vendors are in their backyard. In fact, the race is on. The vendors that enable banks to survive the current regulatory crisis will be the vendors that sell banks data cubes, metadata capabilities, reporting, dashboarding, and all the other analytical tools banks need to improve their results. Tap into R&D and use your partner network to add to your applications the three following capabilities: rapid generation of compliance-friendly reports, ad-hoc and interactive reports that can be used interactively and iteratively to analyze operations, and the ability to rapidly export data to warehouses and data cubes so that your application is a true enabler of analytics — not just compliance reporting.