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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?
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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– [email protected]– 972-318-1723– www.ibm.com– www.esri.com
• Tom Everly– [email protected]– 919-531-6466– www.sas.com
• Kirk Boothe– [email protected]– 251-621-1701
www.ibm.com/industries/financialservices/doc/content/solution/271916103.html or search on ezmart at www.ibm.com