Data is the key to driving profitability in financial services

But the industry is not making enough of the data it holds to inform strategic decisions

Data is the key to driving profitability in financial services

The financial services industry handles a lot of data but is it effectively using that valuable information to drive profitability and customer relationships?

According to a new report, while 94% of chief financial officers at financial institutions feel it is important to monitor how profitable the relationships they have with customers are, but just 40% do so.

The Kaufman Hall ‘2020 Outlook for Financial Institutions: Addressing Economic Uncertainty and Competitive Pressure’ highlights the concerns of industry CFOs that they do not have a deep enough understanding of what drives relationship profitability – especially as competition from fintechs and others intensifies.

"Financial institutions are experiencing a time of significant challenge and transition," said Kermit S. Randa, chief executive officer of Kaufman Hall Software. "Quantifying these challenges is a critical step for prioritizing and solving them. Our survey shows that across various dimensions, industry leaders need to better leverage their own data to navigate changes, maximize value to customers, compete with new players, and build a profitable future."

Profit margins

When asked if they understand what drives margins in their organization, just 16% said they have a clear understanding while 60% acknowledge gaps but are working to improve.

Sixty-eight percent of respondents said their institutions plan to improve profitability measurement across various dimensions, such as customers, channels, and relationships, in 2020. This is a sharp increase from just 12% in the 2019 survey.

"While we are officially in the longest economic expansion in history, the excitement is tempered by conflicting indicators such as slow job growth and GDP growth that is slower than other expansions. This suggests the expansion has been weaker than thought," said Ken Levey, vice president at Kaufman Hall and the report's author. "This situation is made worse by the fact that there are currently less than 30 basis points separating the one-month interest rate and 10-year rate, which make it difficult for institutions to remain profitable just through generation of net interest margin. Still, there are opportunities if you know where to look. This report's findings demonstrate that many institutions don't know where to look because they lack insights that guide profitable decision-making, despite the availability of tools designed to deliver a tremendous advantage today and position them for explosive growth when things get better."  

The survey also found that only 38% of respondents include profitability as a metric in calculating incentive compensation for their employees, and 39% would like to do so.

Strategic priorities

Kaufman Hall has identified 11 strategic priorities for 2020 and beyond:

Addressing Economic Uncertainty

1.  Gain actionable insights for data-driven decision-making, creating and managing planning models that are connected to market and operational drivers.

2.  Better predict net interest margin and improve accuracy of predicted cash flows.

3.  Increase profitability by understanding where profit is coming from across customers, relationships, branches, channels, officers, and products. 

4.  Ensure that profitability analyses and pricing adequately consider portfolio concentration, credit, and reputation risks.

5.  Accurately assess the profitability of customer relationships and create portfolio management plans for each relationship tier.

6.  Design incentive compensation plans that fuel profitable growth, measuring employees on net contribution.

Gaining a Competitive Edge

7.  Follow industry standards by encompassing cash flow-based planning, funds transfer pricing, and scenario planning as routine elements in planning processes.

8.  Improve accuracy and transparency using a single platform for financial performance management.

9.  Enhance reporting and analytics through dashboards that help executives better understand why results matter.

10.  Create more time for analysis and innovation by automating processes for data collection and report distribution.

11.  Prioritize portfolio management by identifying top-performing relationships, products, and relationship managers.