using information effectively to make more profitable ... · • what characteristics do my most...

May 28, 2003

Using InformationEffectively to Make

More ProfitableDecisions: The TenLetter Solution for

FinanceFrederick D. Busche, IBM

Tom Everly, SASKirk Boothe, IBM

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Presentation Overview

• Issues confronting today’s financial executives.

• What is Business Intelligence & Customer RelationshipManagement?

• Ten letter Overview– What is the data warehouse and how is it used?– How does this warehouse with SAS analytics drive results?– What does the Spatial Analysis contribute?

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• What is my channelusage by segment? Bybranch?

• How are my transactionsmigrating to less-expensive channels?)

• How do I optimize my staffduring peak transactionvolume periods?

• What are the “nextmost likely” productsto cross-sell?

• How many productsdo my customersown?

• What products deepena relationship?

• How do I manage andtrack opportunities?

• What are my most profitableproducts and why?

• Am I pricing my productsusing market interest rates?

• How can I re-price or re-package my un-profitableproducts?

• What are the most popularproducts being sold?

• What is the Net Margin onall accounts originated lastmonth?

Many critical issues that impact today’s FinancialIndustry executives

• Who are my mostprofitable customers?What do they look/actlike so I can keep them?

• How should I segmentmy customer base?

• How much do my leastprofitable customer costme each month?

• I want to remove theinterest rate risk frommy organization.

• I would like to “matchfund” all accounts usingmarket interest rates

Volatile Interest Rates

Retention / Cross-sell

Acquisition

Segmentation

Channel UsageProduct Profitability

• What characteristics do my mostprofitable customers have?

• How can I find more like them totarget?

4Copyrighted by IBM

Cost Justification for CRM and BI or"You are not alone..."

In a typical bank, 20 % of the customers represent 160% of the profits. First Manhattan Consulting

A 5% increase in retention can produce an increase in profits between 25-80%. Bain and Co.

A customer with one relationship with a bank has a 35% chance of leaving. Oliver Wyman & Co.

A customer with 3 or more relationships has an 85% chance of being with the bank for 3-5 years. Oliver Wyman & Co.

" A shift in the customer mix from 30% (A's) - 30% (B's) - 40% (C's) to 40-30-30 can often raise overall profits by as much as 60%." American Banker

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What is Business Intelligence andCustomer Relationship Management

• Business Intelligence is the art of structuringdisparate data and data sources to createactionable information

• Customer Relationship Management applies thatknowledge across the business to every touchpointwith the customer, providing a consistent andenriching experience

• Technology is enabling the ability to do both likenever before...

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First you have to organize your data intoa single clean repository...

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Then you have to analyze your data in thisrepository and turn it into information

OLAP

Statistical and

Data Mining Analysis

Standard Query Reporting

Spatial

Analysis

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Then you deliver this information -tailored for specific business use - to

your management and customertouchpoints

• Every channel -consistent message,consistent informationand branding

• Problem tracking andresolution

• Sales managementtracking and followthrough

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The Foundation for the solution is the DataWarehouse

The Data Warehouse is IBM's quick-start BusinessIntelligence and Customer Relationship Managementsolution targeted at Financial Institutions called theEZMart

This Data Warehouse is built upon IBM’s DB2.

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The Data Warehouse is key to the intelligentuse of information throughout the Financial

Institution

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After building the warehouse the firststep is Profitability Analysis

Sample templates are utilized that allow totalprofitability to be determined by summing itsparts such as:

• Customer Profitability - Determines the Bank's mostprofitable customers.

• Product Profitability - Determines the Bank's mostprofitable products and groups of products.

• Organizational Profitability - Determines the Bank's mostprofitable regions and branches.

• Channel Profitability -Determines the Bank's mostprofitable channels.

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EZMart is constructed based on the aggregation oftransactional-level details which allows for a “bottoms-up”

view of customer profitabilityBusiness Views for Customer Profitability

include• Organizational Unit• HouseHold / Customer• Accounts• Product / Service Type• Channels

HouseholdProfitability

Customer Customer Customer Customer

Account Account Account

ATM

Deposit

Teller

w/dVRU Internet

Transfer

Account-level Profit

Account NIM + Account Fees - Costs - Taxes

Customer - level Profit

Sum of Account Profit

Household Profit

Sum of Customer Profit

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Customer Segment Profitability SASOLAP Report The Customer

SegmentProfitabilityReportidentifiesCustomer NetContributionand balances.Individualcustomers orgroups(segments,deciles, etc)can beidentified

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Channel Usage SAS OLAP Report

The ChannelUsage reportidentifiesChannel(ATM, teller,internet,mail, etc),theTransactionType andwheretransactionsoccurred

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Product Profitability SAS OLAP Report

The ProductProfitabilityReportidentifies theNetContributionindividualproductsdeliver.Products canbe groupedusing bank-definedproducthierarchies

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Branch Profitability SAS OLAP ReportThe BranchProfitabilityReport identifiesorganizational“NetContribution”,transactions andbalances.Branches can begrouped basedupon clienthierarchies.

Note: accounts“owned” by eachbranch define thebranchprofitability.

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Products: Do some products require more transactions?How does this effect cost?

Note: You now know transaction time and can staff based upon demand...

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Now that you know profitability distributionsome areas of particular interest might be:

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Data Mining allows for many areas to beaddressed

DescriptionState of the art algorithms search the Profitability Performance Data Mart forpatterns and discoveries you didn't know were there

Sample applications/templates provided with the offering include:Segmentation - Determines which groups of your customers sharecharacteristics. Based on these characteristics, tailor marketing campaigns tomeet those segment requirements

Predictive Cross Sell - Determines the next best product to cross sell to acustomer and when the time is right to offer the product

Predictive Segmentation - Predict customer variables from weather effects onbuying to bankruptcy and life changes

Predictive modeling - Predict who my customers are who are most likely to bein financial trouble before they declare bankruptcy

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Process Flow required to perform atypical Segmentation

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SAS Enterprise Miner is required toidentify “important” variables

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This allows for a Segment (“Cluster”) to be defined that dependsupon the Net Contribution, Product Ownership and Account

Balance variables

IM Scoring

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Spatial Analysis

Description• Marketing Analytics: Spatial Analysis combines the power of

the data warehouse with spatial analysis capability.Samples of types of Spatial Analyses• Customer Profitability by Geography - Determines the

Bank's most profitable regions and prospect those regionsfor new customers

• Branch and ATM Site Optimization tools - Determines bestlocation of branches and ATM sites to maximize assess toprofitable customers and minimize cannibalization.

• External Data - Combines census and other geographic datawith your EZMart.

• How Far is Too Far - Determine what your trade area is andhow far your customers will come for each product

• Who may be a potential on-line banker - Determineprofitable areas to prospect for additional PC - Bankers

SAS Bridge

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Where do my most profitable customers live?And where do I find more of them...

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Immediate, tangible benefits have beenrealized using “10 Letter Solution” in the mid-market

Typical mid-market Bank•$1.6 billion Total Assets

•150,000 Customers owning 280,000 accounts

•$35 million net income / 2.1% ROA

•10 deciles segments (15,000 customers / segment)

•Top decile generates 90% of overall profitability

•Top 2 deciles generate 130% of overall profitability

…by acquiring 1%more customers“just like” the Topdecile generated$525,000 / yr

…by retaining 1%more Top decilecustomers this bankwas able to generate$315,000 each year

…by migrating channelusage to “upgrade” 10% ofthe most unprofitable intothe least profitable decilegenerated $315,000/yr

…by retaining 1% moreTop 2 decile customersgenerated $525,000each year

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Single ProductCampaign (1)

335

420New Branch(2) Break Even Improvement

520

LewisvilleCampaign

(22)

An example of one customer’s returns on “The 10 Letter Solution” (All numbers are $K.)

Ross Avenue BranchRedevelopment 350

E-Personalization(ECA)

2753

Single Product Campaign (2)

Asset AllocationImprovements,Reserves, IncentivePgm

400

3003

Field of MembershipExpansion

$1,450

TotalCost

Total

Return

$2,578

$1,128

NetReturn

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So what do the 10 Letters Stand for?

Better Business through AnalyticsIBM+SAS+ESRI

for success in the marketplace

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Contact Information

• Fred Busche– busche@us.ibm.com– 972-318-1723– www.ibm.com– www.esri.com

• Tom Everly– Tom.everly@sas.com– 919-531-6466– www.sas.com

• Kirk Boothe– kboothe@us.ibm.com– 251-621-1701

www.ibm.com/industries/financialservices/doc/content/solution/271916103.html or search on ezmart at www.ibm.com