Disrupting the Banking Industry with Big Data and Data Analytics

Bankers seen sipping away the hours over client martini lunches at upscale restaurants and posh clubs are rare these days. The slump in credit demand from the global economic crisis is part to blame but so to is the absence of ‘live’ clients. Branch offices that were once community hangouts on payday look more like empty office spaces for lease. Today bank clients ‘hangout’ virtually, while doing most of their banking online. They lurk in and out web-based services unwittingly leaving behind hundreds of data points (like footprints) that when reconstructed using data analytics algorithms can accurately reveal the client’s real identity. 

At a first-of-its-kind event in Atlanta,Georgia titled, Customer Insights & Analytics in Banking Summit 2013, representatives from various forward-thinking banks and data-analytics service companies presented their combined views to a packed room of financial professionals. Organized by Data-Driven Business (datadrivenbiz.com), a US arm of FC Business Intelligence (a London-based events company), the Summit personified the past, present, and future of banking.  First, it exposed the ugly truths characteristic of a complacent banking culture mindset.  Then it highlighted the extraordinary accomplishments from early-adaptor banks, and, finally, it unveiled a fantastic prediction on how banking could potentially hold the keys to unlocking the value of social media feeds from Twitter, Facebook, and other similar web-based services.

With off-the-shelf, data analytics, software tools, bankers can gain an accurate 360 degree view of their customers on an individual basis just by matching a customer’s banking data (i.e. loans, credit card purchases, investments) with their behavioral patterns online. The technology used to integrate data sets to match behaviors with individual names has advanced remarkably, so much so, that bankers can calculate with reasonable accuracy the ‘lifetime value’ of each customer. This magical step has been demystified by over 150 vendors who specialize in the science of Digital Data Integration or DDI. DDI connects numerous disparate data sets both structured and unstructured using assigned ID numbers. Expert companies in this area include Aster (asterdata.com, a TeraData Company), Actian (actian.com), PrecisionDemand (precisiondemand.com), Convergence Consulting Group (convergenceconsultinggroup.com) and Actuate (actuate.com, a BIRT company). The principle reason bankers want to segment their customers by their future income potential is to allocate their limited resources more efficiently.

Banks that fully integrate their operational data with unstructured social media streams will become the game-changers to watch. Already the Old Florida National Bank boasts of their younger and more agile management team (under 43 years of age) who credit their surging asset growth in the past four years to their data analytics initiatives – (from USD$100m to $1.4b). Their team has the proper bank culture, mindset, and know-how to implement data analytics tools that fully capture a digitally-holistic view of their customers. By mapping where their customers spend most of their time and money, management can target more relevant and timely offerings. Targeted customers unwittingly respond with not only a buying interest but also a willingness to refer the bank to a friend or colleague. …truly a win-win for all.

SunTrust Bank, also based in Florida, uses data analytics to determine not only the location of their next branch office, but also the optimal management qualifications required to operate one of their branches. Another interesting case study came from Wells Fargo. Their data analytics team integrates thirty-two data sets (from both internal and external sources) and presents the results in a customized dashboard format to their managers company-wide. Managers use the service to make better decisions, present data on an ad-hoc basis at meetings, and self-serve their specific research interests using a number of additional data visualization tools for non-techies. The tools they use are off-the-shelf Business Intelligence or BI software packages provided by companies such as Oracle (oracle.com/BI), MicroStrategy (microstrategy.com) and Tableau (tableausoftware.com).

Servicing a more digital client-base has come with its many challenges as well as with its unexpected opportunities. For example, credit bureaus that traditionally deny 96% of consumer credit requests often reject qualified candidates. Using data analytics tools, however, banks can integrate comparative behavioral data with a candidate’s payment history and reassess their risk profile accordingly. The results would qualify more loans that would otherwise have been turned down. Other exciting ways for banks to grow revenues include working with real estate brokers. Banks can determine which of their clients is most prone to purchase a new home and pass the list on to an agent. Agents seeking better leads will more than likely recommend mortgage business back to the bank that shared their intel.

One can just imagine how many more ways bank data can play an integral part in helping companies find their most likely customers and future business. Banks already manage the transactional data in-house and are rapidly gaining the business intelligence experience needed to integrate their customer’s behavioral data and compare their profile with their peers. Under this scenario, one might wonder why any business would not want to work with a bank that not only understands their business but also delivers buying customers.

With this much real-time intel available on customers in one central location, could banks one day become the primary lead source for their business clients? Could this new normal become a significant game-changer in the banking industry?

Despite a rosy future, the business world is not waiting for banks to embrace data analytics any time soon.  Competitive trends point to a number of threats including retailers such as WalMart who will be offering banking services directly to their customers at their retail outlets.

There is also the emergence of the ‘digital wallet’, which for the time being focuses on reducing the clutter of credit cards using available smartphone technology. Eventually one company will umbrella all credit card transactions and offer global behavioral tracking intel. Pioneers on the forefront include Protean Payments (getprotean.com), a recent startup that plans to use bluetooth technology to replace card swiping at  terminals and Wallaby (https://walla.by), a company that helps cardholders maximize points earned prior to making a purchase.  There’s also Ebay’s PayPal (paypal.com), which has released a debit card concept, which it hopes will entice developers worldwide to promote their data analytics services to SMEs.

In online banking, Simple.com does not have a physical presence nor charges the customary fees that traditional banks do. In fact, they offer plenty of financial management reports and suggestions at no charge. …all online, of course. How they make money is best understood when opening an account. Simple.com new accounts cannot be opened unless one is willing to accept ‘cookies’ on their computer, a permission which releases away a user’s complete web history to a third party. Their insistence suggests that they place a greater value in a customer’s behavioral online data than they do in their banking business.

If Simple.com succeeds, could their new business model significantly change the way consumers perceive a bank’s value proposition?  Will consumers demand additional compensation for allowing access to their behavioral online data, since the data is worth more than the interest paid on deposits?

For now, banks who are looking at data analytics for the first time and wondering how and when to take the plunge should heed practical advice from experts who spoke at the event. One individual concluded that for now, those new to data analytics should start with the data they already have and use predictive findings from data analytic tools to start a conversation rather than formulate targeted recommendations.  This advice and the rapidly evolving changes in both consumer and commercial banking remind me of the famous Aesop’s Fable about the race between the tortoise and the hare. This time, however, the winner may be a third and invisible participant called ‘Big Foot’ representing Big Data and Data Analytics.

© 2013 Tom Kadala

Brazil’s Shrewd Banking Strategy

Last year when Brazil’s second largest bank, ITAU Unibanco, sold 400 million reais (USD$200 million) of bundled corporate loans (technically referred to as CLO’s or Collateralized Loan Obligations) to foreign investors, the news media viewed the move as a signal that Brazil’s lending capacity was drying up.  Just like a business that sells its receivables to raise cash quickly, Brazilian banks were replenishing their lending capacity by selling their attractive loan portfolios at a discount to foreign investors. To date, sales of CLOs have been brisk exceeding 50 billion reais (USD$25 billion).  Should investors be concerned that Brazilian banks might be unloading their inventory of corporate loans to avoid a liquidity crisis?  If not, what is really going on? 

Brazil’s commercial and industrial backbone consists of over 14,000 mid-cap size companies that range in sales between USD$30 million and USD$200 million. These companies are mostly privately-held, which makes buying and selling equity shares for foreign investors that much more challenging. Funding resources for these companies are limited, and the Brazilian government believes that the bulk of financing for these mid-cap companies, going forward, will have to come from outside sources.  For these and other reasons, the Brazilian government has deliberately used the sale of its double-digit interest rate CLOs, ranging between 12% and 16% per year, to entice hedge funds, private equity firms, and investment banks worldwide to consider Brazil as their next port of call. Compared to the 1% and 2% returns earned back home, it is no surprise that these CLO sales have generated a strong buying demand from foreign investors. Brazil banking authorities hope that these transactions will catalyze a comprehensive consolidation of its mid-cap companies through cross-border mergers and acquisitions activities. In preparation to receive foreign investors, Brazilian companies have started to hire professionally-trained  management teams. Their CEO’s realize that unless they conform to internationally accepted best practices, their firms could either miss out on a huge funding opportunity or be left behind.  It is not up to foreign investors individually to decide where their funds can be invested but rather their shareholders who, by design, require sound investments that include third-party auditing, financial transparency, and evidence of proper governance practices.

At a recent breakfast meeting titled ‘Brazil Investment Management’ sponsored by the Brazilian-American Chamber of Commerce, a distinguished panel of experts shared their thoughts on viable approaches for Brazilian investments.  One of the panelists, Mr. Pedro Soares from Eurovest S.A., highlighted one of his company’s success stories, namely, the Brazilian clothing manufacturer, Hering. By restructuring its high interest debt and installing a professional management team, Eurvest unleashed Hering’s true growth potential from an initial valuation of USD$50 million to that of a public company currently valued at $7.5 billion.

Hering’s huge success was in large part attributed to Brazil’s growing domestic market which included over 40 million new consumers that had been lifted from poverty and could afford to buy beyond their basic needs.  However, without the organizational and financial structural changes spearheaded by Eurovest, Hering could never have achieved this incredible milestone.

Eurovest’s success story prompts the following two questions:

Q1. – How many more ‘Hering-like’ potential success stories are hidden within Brazil’s 14,000 mid-cap firms?  …probably a good number!
Q2. – If potential profits are so readily available in Brazil, why would Brazilian banks be so eager to sell their loan portfolios to foreign investors?

Central to the answers to both of these two questions is Brazil’s antiquated and neglected infrastructure followed by two Brazilian nuances that investors should heed.

Brazil’s Infrastructure
It is no secret that Brazil’s infrastructure, which includes highways, airports, railroads, and shipping terminals are vastly inadequate to support its rapidly growing commercial base.  Very often the cost of transporting goods from the interior of the country to a nearby port is more expensive than moving the goods from a port to its intended destination (i.e. China or US).  City roads for commuters are also an issue.  In May of 2012, underground metro workers in Sao Paolo held a strike that resulted in a 249 kilometer vehicle traffic backup!

Building a new highway, for example, is an immense project that not only can take a long time to complete (i.e. 30-40 years) but also can tie up capital funding that otherwise could be used elsewhere to help grow the economy.  However, one cannot exist without the other, which, in short, illustrates Brazil’s current dilemma.  If Brazilian banks extend credit to the private sector without investing in the country’s infrastructure, the higher cost associated with transporting finished goods and workers throughout Brazil would eventually hurt their exports by making their products too expensive and hence less competitive to global markets.  On the other hand, if Brazilian banks neglect the private sector’s financial needs, good companies would fail, which in turn would increase unemployment and hurt the overall economy.  As part of an optimal response to this dilemma, Brazilian banks have sought out the assistance of foreign investors by selling them their prized portfolio of loans or CLO’s.  They promote these high interest investments as ‘sure bets’, since the government’s overall strategy is hinging upon its success to attract more direct investments.  Should foreign investors be concerned and what Brazilian nuances should they take into consideration?

Brazilian Nuance #1 – ‘Local Knowledge’ Premiums
At the Brazilian breakfast panel meeting, a representative from Triunfo Participacoes e Investimentos, Mr. Sandro Lima, proudly announced his firm’s three recent concession awards, which included the Campinas Airport near Sao Paolo (soon-to-be the largest airport in Latin America), two hydroelectric power plants with a combined total of 300 MW capacity, and a container terminal port.  When asked what business the firm was in, since all three concessions were vastly different from a business model perspective, Mr. Lima explained that Triunfo’s core business was not managing construction projects but rather navigating through the Brazilian government’s network of officials to secure these concessions.  Although there is nothing wrong with leveraging 30-years of government relationships to gain access to lucrative contracts, investors might have good reason to question the company’s ability to deliver an economically crucial project on time and on budget.

As shown by Triunfo’s example, being ‘well connected’ in Brazil is a key consideration to succeeding in business, so much so that Brazilian firms with market shares larger than 80% are considered more valuable by Brazilian brokers and usually priced at a premium above and beyond their normal valuations.  On paper this rational may make perfect sense, but Brazilians sellers may discover a tepid response from foreign buyers. Dominant players from emerging technologies usually involve family-run businesses that may not have earned their dominant position through free market competition but rather from strong-arm tactics.  Smaller players with more agile technologies and better aligned management teams will be seen as the more likely disrupters and hence better investments.  One might expect that this arbitrage will self-correct as more investors purchase mid-cap winners such as Hering who over time can be expected to take market share from the ‘overpriced’ dominant firms in their respective industries.

Brazilian Nuance #2 – Extended Tax Liabilities
CLOs may look attractive on paper to foreign investors but when matched to the balance sheets of the companies these loans represent, the advantages may start to look fuzzy to the financially astute.  At the breakfast meeting, panelist explained, as a matter-of-fact, that over 90% of Brazilian individuals and company taxpayers today openly hold a past due tax liability with the government.  In some cases the amounts in arrears are staggering and could cause great alarm with any investor group not in ‘the know’.  As it turns out, those that choose to pay their tax bill hire specialized firms to negotiate with tax collectors.  That may appear similar to a developed country such as the US, however, the negotiating leverage falls largely on the taxpayer who can decide either to postpone payment to the government for another twenty to thirty years at will or to pay a significantly smaller settlement.  Some firms go as far as capitalizing their debt using clever accounting maneuvers.

Humored by the panels ‘very relaxed’ attitude toward the importance of paying their back taxes, I wondered if the Brazilian taxpayer’s past experience with hyper-inflation between 1980 and 1994 had forced the government to over tax as a means of keeping its public sector payrolls funded. Now that the Brazilian currency is stable and inflation under control, the supposed brazen attitude of tax collectors during the hyper-inflation era may have created a sense of animosity among taxpayers.  There is an interesting irony to this story.  Due to recent turn of events, Brazil’s tax authorities may win out after all.  Brazilians who became accustomed to not paying their ‘inflated’ taxes are now being forced to comply, not because the Brazilian government has clamped down on tax evaders, but rather because firms like Hering would otherwise not get funded by foreign investors who are required by their board of directors to invest in companies that pay their taxes in full.

Not-to-be-underestimated, the Brazilian authorities know that they must focus on the large and less attractive public investments in order to modernize their current infrastructure. Luring foreign investors with high interest rate CLO’s has helped gain the attention and commitment of global fund managers to meet Brazil’s pressing mid-cap company needs.  At least for now, these foreign investors will bring the contacts and expertise needed to sift through Brazil’s rich inventory of 14,000 mid-cap companies and select the ‘Hering-like’ winners that could one day, qualify for a listing on Brazil’s Bovespa Stock Exchange.

In retrospect the Brazilian fire sale of CLO’s had nothing to do with a crisis of liquidity but rather everything to do with a renewed set of government priorities, based on an optimal allocation of global resources.  Brazil’s banking strategy is not only shrewd but brilliant!