It’s an example of how the nation’s four large universal banks—JPMorgan Chase Bank of America Corp. Citigroup Inc. and Wells Fargo & Co. — are beginning to make use of potentially powerful analytic technology known as Big Data, which describes a broad set of hardware and software and is designed to quickly process huge amounts of data, including information like social media posts and email, which don’t fit into conventional databases.
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“Big Data is really the theme for 2013,” says Mr. Chiarello. He says that Big Data-driven “digital marketing will become a significant thing.” Currently, as with most large banks that have had to swallow acquisitions that further muddled traditionally siloed banking operations, JPMorgan Chase has a hard time aggregating all available information about a single customer. Information about checking accounts, mortgages and wealth management for the same individual were contained in independent information management systems, preventing banks from leveraging considerable analytic capabilities that could have helped account representatives provide customers with better service. Banks can also offer lower interest rates by using Big Data to reduce credit card fraud, thus reducing their overhead, says Mr. Chiarello. “We should be able to be a better credit bureau than the credit bureaus,” he said.
This opportunity comes at a time when banks are under enormous margin pressure thanks to a slack economy, and they have little room for extra spending on technology. Whatever spending they’re doing on emerging technology is coming from savings they’ve achieved by rationalizing their technology operations. Their ambitions include the use of real-time analytics, creating better mobile offerings, and further cost reduction through the use of more sophisticated ATMs. The question is whether they have enough to spend, and can create new products to create incremental revenue and put the brakes on customer churn.
The four big universal banks, far and away the U.S.’s largest banks with over one trillion dollars in assets, each spend approximately $7 billion to $10 billion annually on technology, according to Howard Rubin, principal at bank technology advisory firm Rubin Worldwide. Mr. Rubin would not discuss individual banks because many are clients of his firm. The banks do not publicly discuss technology spending separately from operations, in part because traditionally, spending on technology has been up to individual business units. Market research firm Ovum estimates that U.S. banks will spend $41.5 billion on technology in 2013.
Budget pressure notwithstanding, the big banks are moving into Big Data. Jeff Harte, a bank analyst with Sander O’Neill, says lenders are moving beyond traditional analysis of customers’ credit-worthiness and “are analyzing the behavior of customers,” seeking answers to questions such as whether they always eat dinner out or whether they offset shopping at high-end department stores with trips to discount stores. This information can be gleaned from credit and debit card statements as well as from posts to social media sites. “It’s a step beyond analyzing credit quality and towards analyzing the customers’ behavior,” he said.
Steve Ellis, executive vice president and group head of the Wells Fargo Wholesale Services Group, says “the behavioral analysis stuff is coming” in the next five years. He warns, however, that there’s still a lot to understand for the banks to learn before they can “get to one-to-one marketing. That’s the big promise, and that’s where competitive advantage will be played out in lots of industries over the next five years. And if you don’t figure it out, you’re not going to be best in class.”
Catherine Bessant, who runs technology and operations at Bank of America, says BoA used the analytic capabilities of Big Data to understand why many of its commercial customers were defecting to smaller banks. Until recently, it offered an end-to-end cash management portal which, it learned thanks to its analytic capabilities, was too rigid for its customers, who wanted the freedom to access ancillary cash management services from other financial services firms. “We started to get beat by smaller banks that could deliver more modular solutions,” says Ms. Bessant. Bank of America used data gleaned from customer behavior on its own website as well as from call center logs and transcripts of one-on-one customer interviews to determine why it was losing those customers. It dropped the all-in-one offering and launched a more flexible online product, Cash Pro Online, in 2009, and a mobile version, Cash Pro Mobile, in 2010, even though the previous product “had been seen as a cash cow,” she says. All the development work had already been done, which meant new business “went straight to the bottom line.”
Citi, for its part, is experimenting with new ways of offering commercial customers transactional data aggregated from its global customer base, which clients can use to identify new trade patterns. “New silk roads are being created, and we think this information could show signs for which might be the next big cities in emerging markets,” says Don Callahan, who manages internal operations and technology at Citi. According to Mr. Callahan, the bank shared such information with a large Spanish clothing company which it was able to use to determine where to open a new manufacturing facility and several new stores.
The banks believe Big Data can help them grow revenue in a slack market. Thomas Sanzone, a senior vice president at consulting firm Booz Allen Hamilton who advises financial services firms, says Big Data represents “a significant opportunity for cross-selling and customized marketing because you have new technologies and techniques that give you access to pools of data that used to be unreachable. That changes the game and can create significant opportunities you didn’t have before.”
Banks executives also hope Big Data will help them use better marketing techniques to address a big problem with customer churn. JP Morgan Chase said in an investor’ day presentation in 2011 that it expected between 50% and 60% of its customers to leave as a result of new fees on checking accounts.
But first the banks must find room in the budgets to fund these initiatives. In many instances, investments in innovation are being funded by savings accomplished through rationalizing systems and automating processes.
Citi, which announced a large reorganization in December, with approximately a quarter of the savings coming from its operations and technology unit, reduced overall spending in O&T by more than $4 billion over five years, according to Mr. Callahan.
Kevin Rhein, senior executive vice president of technology and operations at Wells Fargo & Co., says the bank has largely completed the work of integrating scores of different systems, and almost two years ago began the work of moving “to the next stage of technology and operations.” For the three previous years, “we spent a lot of money on integration, and there’s a lot of pent-up demand [for technology services] as a result of that. He said approximately 80% of the company’s technology spending is now on new services and capabilities requested by the business units. Still, he said, “I think we are under-investing” in technology. “I’d like to be investing more,” he said during an on-stage Q&A with the Wall Street Journal at a CIO event sponsored by consulting firm Gartner Inc.
Mr. Chiarello said JP Morgan is plowing savings from having consolidated technology units into new initiatives around technology. But “net spend is flat from 2007,” he said. “And that’s with more investment in innovation.”
Mr. Harte of Sander O’Neill says JP Morgan and Wells Fargo are some 12 to 18 months ahead of Citigroup and Bank of America in terms of folding in the systems of merged banks, giving them a lead in the innovation race, but that the latter are catching up quickly. “The ones who got through the crisis in better shape had a head start of around six to eight months, but the others are closing ground quickly,” he said.
Bank of America has been able to shift the bulk of technology spending from activities around consolidation to investing in more innovative technologies, such as Big Data. But Ms. Bessant says the banks also must make cultural adaptations if they hope to make a good return on these types of investment. The leaders of those large institutions must be willing to absorb unwelcome news—such as accepting that customers are unhappy about a particular service, and why — and change as a result.
The promise of Big Data is “the manufacturing of brilliant data and making brilliant use of it, and we have a drive for abject purity in listening,” she said.
By Michael Hickins
Source: Wall Street Journal
