Monday, March 14, 2011

What Amazon Can Teach Banks About Fraud May Surprise You

While they do not always succeed, FIs constantly fight a very expensive battle against fraud attack. Across the US industry, FIs spend $250-300M a year on IT alone. Spending on Fraud Prevention Operations averages 6x-10x this number. That's nearly 1% of industry revenues (using numbers from Fortune Magazine). Sadly, despite this significant investment, fraud losses are estimated by Gartner Group to be 5-8% of revenues. This goes straight to the bottom line as a write-off, especially painful in an industry that hasn't turned a profit in 3 years.

Let's focus for a moment on the ratio of spending between IT and Ops. Across the industry, FIs spend far less than a third of their Anti-Fraud budget on technology and projects. If you include actual fraud losses in the numbers, that percentage drops well below a tenth of all spend.

This tells me that FIs don't trust their technology. When the rubber hits the road, they fall back on laborious manual processes. Step onto the floor of an FI's Anti-fraud department and you'll see why: reams of paper, hundreds of phone conversations, managers prowling the aisles, quants debating math on whiteboards, and armies of data-crunchers building ad-hoc reports in Excel. Look more closely and you'll see that the investigators have multiple PC monitors so they can switch among the dozens of bank systems, each of which contains a few small pieces of the client's overall behavior puzzle. I call this "swivelware" or "alt-tab-ware" and I see it as a clear symptom of a larger problem in the industry.

Swivelware is simply the human response to a failing of technology. Investigators need a full picture of the client's profile: "one-stop-shopping" access to all the client's identifying details, relationships, transactions, historical behavior, and other info. To put all this info on one screen requires a deep and comprehensive level of IT system integration. That's not easy or cheap even under stable conditions. It's nearly impossible in the real world of booms and busts, economic cycles, industry consolidation, new products, new client segments, new fraud patterns, new IT systems, and constant transformation. In fact, this is a never-ending initiative. Unfortunately, most IT spending is driven by corporate budgeting cycles, not by business objectives. This leads to a myopic, fire-fighting, quarter-by-quarter approach in which managers try to constrain the life of these initiatives by breaking them into discrete, well-bounded projects. Unfortunately, the sum of those parts does not add up to the whole business objective, and the result is swivelware.

When I hear a client say they have a "never-ending project" I know that, like it or not, they're really talking about a mis-categorized permanent business process, just like Accounts Payable, HR, or Accounting. It is often a tough sell, but my objective in these cases is to convince my client that they must create a permanent capability to address the business need, including permanent staff, permanent funding, and permanent management with permanent objectives, authority, and accountability.

FIs which have the foresight to do this will lead the industry in establishing competitive advantages through unique and advanced capabilities. Said another way, if you stand up a department whose objective is ongoing integration in order to develop a holistic view of each client, that department will develop capabilities and skills required to fulfill their stated objective. They will also quite likely find other creative ways to use those capabilities and skills to create additional unanticipated value for the institution.

One telling example of this is Amazon, which started as a bookseller, but realized its ingenious supply-chain was a competitive advantage. It leveraged this capability to become a marketplace for all sorts of products, and grew exponentially as a result. More recently, the Amazonians have realized that the infrastructure they built to link millions of customers to thousands of merchants is another competitive advantage. They are now leveraging this to offer "cloud computing" services to businesses.