Banking: How To Get A Better Return On Data

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Banking: How To Get A Better Return On Data

By Stuart J. Johnston
Issue date: Sept. 9, 1996

he hottest information technology trend in the banking industry this year is not online banking but mining. Data mining, that is.

"Data mining is a key to providing not only more information but deeper information" on customers, says Dale Terrell, president of BancOne Information Services Co., the IT group of BancOne Corp. in Columbus, Ohio.

Banks have historically gathered huge amounts of information on their customers. But until recently, that data was rarely seen as more than a single-purpose, static resource. That's because much of the data was segregated in scores of separate databases in different bank departments. Information that consumers provided when they applied for automobile loans went into one group of databases, mortgages in another, and checking and savings transactions in others. All remained isolated.

Because the databases weren't linked, there was no easy way to get an overview of each customer's finances and bank service usage. As a result, there was no simple way to identify something as fundamental as which customers were profitable to the bank and which were not. There also was no way, other than by sheer dint of salesmanship or through scattershot advertising campaigns, to determine which customers of one bank service might be good candidates for another.

At fir st, banks were slow to pick up on data mining. Then fleeter, non-banking competitors began to out-maneuver them for customers. "Some consumer lending and credit-card companies have done a better job of mining data," says Bob Rossettie, a partner in Ernst & Young's financial services industry group in New York. "Banks are starting to realize this, so they're spending a lot more on data-mining projects."

Data-mining applications provide transparent links to all of a bank's databases and add easy-to-use client-server applications to let bank personnel quickly capture a view of a customer. That allows bank employees to provide better service to customers. Equally important, data mining lets banks cross-sell other bank services, increasing the profitability of each employee contact with each customer.

Predicting Customer Needs
"If we know a person is likely to buy a new car within six months of making the last payment on a car loan, we can be sure we're the first to let them know we've got especially attractive loan rates," says Bob Meltzer, chief technology officer at KeyCorp in Cleveland. A brochure on loans could be mailed out with that customer's statements, for example.

If a customer calls to change his or her address, the service representative can use that opportunity to in-form the customer of other bank services. "Stratifying customers based on facts is a key strategy [so we can] focus on better understanding our customers and on which segments are profitable," says Terrell.

Denis O'Leary, executive VP and CIO at Chase Manhattan Bank in New York, says data mining is "a broader concept than just putting a database in the sky and doing queries." As Chase gains more knowledge about its customers, he says, that knowledge modifies the way the bank does business. "You use what you learn from each [contact with] customers to help develop how you deal with them next time. The business model is dynamic and evolutionary."

By last May, 45 of the top 100 U.S. banks had put data-mining applications in place and another 50 were in planning or pilot stages, according to the Ernst & Young/American Bankers Association Special Report on Technology in Banking.

The use of IT resources such as data mining could contribute to the very survival of some banks. Since 1974, according to the E&Y/ABA report, banks' share of the total financial assets they manage in relation to insurance companies, mutual funds, and private pension plans has slipped by one-third. That has caused the banks' share of the assets to drop from 38% in 1974 to 25% in 1994.

While IT spending in the banking industry is expected to rise just 2.1% this year, to $19.1 billion, discretionary spending on IT--which is where data mining is accounted for in the E&Y/ABA report--will grow 14.9% to $5.4 billion.

"There are ways in which we could leverage our relationships beyond the areas you think of as banking," says KeyCorp's Meltzer. "That's where a lot of our growth will come from."

Is Online Banking A Bust ?
Banking CIOs are far less enthusiastic about home banking. The concept proved to be a bust in the 1980s and the first half of the 1990s. Still, banks are hopeful that more people will bank at home as they become more familiar with computers.

"There's a lot of lip service [to the concept of online banking] but very little actual usage," says M. Arthur Gillis, president of Computer Based Solutions Inc., a banking technology consulting firm in New Orleans. "Who cares if 3% of customers do banking on the Internet? What about the other 97%?"

In fact, only 1% of banking transactions in the United States were done using home computers in 1995. Home banking will account for only 6% by 1998, according to the E&Y/ ABA report.

Work still needs to be done to improve service. "I paid my phone bill using electronic bill-paying 13 days in advance of the due date, and I still got an overdue notice," says Bill Bradway, technology consultant at the Tower Group, a financial services consultancy in Wel lesley, Mass.

Despite such slip-ups and ongoing concerns about security, the explosive growth of the Internet could provide a needed boost to electronic banking. By 1998, banking via the Net will overtake proprietary online banking offerings in usage and popularity, according to a recent Tower Group report.

While virtually all banks want to get in on the ground floor of banking via the Internet, most see it as accounting for no more than a tiny fraction of banking volume for the foreseeable future.

"We have not seen nearly the demand for electronic home banking as you would think from [reports in] the mainstream media," says Meltzer. Nevertheless, he says, KeyCorp has no intention of being left out of the online competition and plans to begin a pilot system in early 1997.

But KeyCorp, like many other banks, isn't making a major commitment to Internet-based banking. Activity has been limited to setting up a World Wide Web page.

The same goes for BancOne. "We want to be in that marketplace, but we haven't set a timetable," says Terrell. "All banks are trying to figure out if and when current customers will shift, but the only thing we've finalized is that we will be playing." The bank has two small electronic commerce pilots under way, he says.

Chase has a pilot Internet system that lets customers apply for auto loans via the Web. O'Leary sees such applications taking off when both security and expanded bandwidth are in place.

Security, in particular, is still a huge issue when it comes to the Internet. "We're pretty conservative about the Internet, and because of security issues we're going very cautiously," says Meltzer. KeyCorp's Web site provides marketing information and phone numbers to customers and interested users, but no means of doing online banking.

Adding a link between the company's online banking service--once it has moved beyond the pilot stage--and the Internet will be as simple as adding a bridge between the two, Meltzer says.

Most banks are still limiting their use of the Internet to marketing. "There are over 500 banks on the Internet today, mostly for brochureware," says Lewis Levin, general manager of Microsoft's desktop finance division. However, a few banks, including Wells Fargo Bank and Bank of America, have already made the leap to handling some banking transactions and bill paying via the Web. Ernst & Young's Rossettie says the number will rise dramatically when security for banking via the Internet is improved--most likely within the next year.

The technology that's expected to provide that increased security--an encryption and customer-authentication technology called Secure Electronic Transaction (SET)--is being developed jointly by credit-card giants Visa and MasterCard as well as major software vendors such as Microsoft and Intuit Corp. Both Microsoft and Intuit plan to let Internet users connect to their banks using the interface of their choosing--whether it's a popular financial management package or a Web browser. For that reason, both wil l provide banking interfaces as add-ins to users' Web browsers. At that point, "the Internet will be bigger than fire," proclaims E&Y's Rossettie.

Standards For Mergers
Another major issue for the banking industry, and one with huge implications for IS departments, is restructuring due to mergers and acquisitions. As banks merge, there are usually conflicts in IT architectures. Solving them can be as complex as forcing standardization across the board or as simple as insisting that everyone use the same network technologies and protocols.

"We've been moving to operate in a nationally standardized way so that [any] acquired bank will be converted to use the same policies, procedures, and code," says BancOne's Terrell.

When the biggest bank merger to date, Chase and Chemical Bank, was completed in July, Chase began melding the banks' systems almost immediately. "We merged the banks on a Monday and it seemed like a nonevent," says CIO O'Leary, because the banks' funds transfer, gener al ledger, and international branch systems had been combined the previous weekend.

Because Chase and Chemical each had large IT investments before the merger, Chase had the luxury of picking the best systems from the two banks. Chase aims to unify all of the banks' branches and their systems by the end of September.

KeyCorp is taking a slower, more evolutionary approach, rather than forcing acquired institutions to immediately transform all their systems. Nonetheless, standardization on some level is necessary if the new megabanks are to be successful.

"Ultimately, it is a requirement for the merging institutions to standardize at the applications level," says Bradway of Tower Group. "If you don't consolidate at that level, you'll find yourself maintaining multiple applications on multiple platforms, and you'll find yourself at a competitive disadvantage."

To view the IW 500 Banking chart in PDF format click here

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