Keeping the customer profitable

Manual paper-based processes are losing revenue

When Stockholm-based SEB reviewed its correspondent banking services in 2008, it found a lot of fees had gone missing somewhere in the multiple manual billing processes, reports Tom Groenfeldt.

“It took us weeks to do the billing manually for corporations, the accounting wasn’t perfect, and we had a lot of revenue leakage,” said Linda Wade, the global manager for GTS product profitability. “We had a value chain for different product areas like cash management and trade finance. We’d do negotiations and then wonder if the client really had sent us 100,000 transactions as they had promised.”

The bank issued an RFP for a solution which would work across its operations in 11 countries, Wade added. Most of the vendors who responded had a demo page and nothing more: “We eliminated 90% at the first stage.”

SEB wanted a system that wasn’t too big, was built on modern architecture, was flexible and came from a company that would act as a partner. With so many demands from regulators, banks don’t have budgets to replace core systems so they have to move some functions off the core.

Billing has proven to be a useful example of reducing the core workload. Wade said she faced some scepticism within the bank but she persisted, betting her job that the software from Zafin – which it calls miRevenue – would pay for itself in 24 months. In June 2009 she turned the implementation over to project managers who were under 30 and hadn’t done anything of this scope before, “but they had very fine minds and young thinking.” Zafin knew pricing and billing, and she knew the partnership was working when brainstorming sessions went back and forth so fast that she lost track of who worked for the bank and who worked for the vendor.

“You forgot who was on which side,” she said.

They found examples of missed income like cash management clients who had taken up a bank offer but had generated no revenues at all. Through an emphasis on communication across the bank, and by staying within scope, the project was a success, paying for all its internal and external costs in one year. The solution went live in 2010 and revenue increased 44% in Sweden and more than 100% in other Nordic countries.

“After that we were quite popular within the bank and I have lines coming to me because the Zafin system is so easy to integrate,” said Wade.

The Zafin system is written in Java and can reside in an app server like IBM’s WebSphere. The architecture is SaaS so the service can easily be consumed by surrounding systems, said Dinesh Krishnan, managing director for global product development at the firm. In a legacy implementation, it updates from the core system in batch, usually overnight, and feeds front-end systems, such as customer onboarding, in real-time with suggested products and product bundling along with pricing. For banks with middleware like IBM MQ Series – more common in Europe and Asia than in North America – Zafin can participate in the enterprise bus.

The Zafin system complements CRM, said Krishnan. CRM holds the customer information and Zafin contains the product information, ideally in the form of a catalogue along with suitability, bundling and pricing rules – all of which are transparent to reassure regulators the bank is treating customers fairly.  For corporate customers, the customer and product information can be used to examine the existing relationship and model ways to increase it. The system prevents sales people from giving away too much and tracks their compensation.

A Capco study in the Sibos edition of Zafin’s journal suggests a reason this improvement in transaction banking could be important – transactions are now seen as a key, and relatively safe, source of bank revenue.

Recovery of Net Interest Margin is probably two or three years away while investment banking and retail banking have lost their sheen: “the bank’s traditional profit and growth equations no longer work and have likely been irreversibly altered,” wrote Frank Mackris and James LeVan at Capco. “This is true at the enterprise level, as well as within individual business lines.”

The transaction business, once overshadowed by flashy investment bankers, is getting new respect: “In the midst of all this tumult, wholesale transaction banking continues to be one of the few lines of business that bucks prevailing trends, providing less volatile net income at healthy margins and in the current context, completely respectable return on equity – which in many cases dwarf those produced by the rest of the bank. In many respects, the convergence of the global commercial banking industry on this single realisation has been the most underreported story of 2013.”

The billing lifecycle

Zafin calls its approach Product and Billing Lifecycle Management to show there are two aspects to it – initial pricing and subsequent monitoring to avoid revenue leakage.

In corporate banking, a company will issue an RFI or look to reprice existing services, laying out the business it intends to do with the bank. Then the bank’s treasury management group responds with a proposal. (Retail is similar but on a less complicated scale – a bank might offer preferential pricing to a customer who maintains checking, savings, a credit card, mortgage and car loan, for example or make offers to encourage the movement of clients from branch to online banking, which can be 70% cheaper.)

Using miRevenue, a bank can look across the entire relationship, including the parent and subsidiaries, to determine what to offer to drive net new revenue.

“You can innovate faster and offer more customer-centric pricing,” said Krishnan. “It is clearly win-win for the customer because they are getting a unique deal with the institution rather than one size fits all pricing.”  Then Zafin can generate all the appropriate billing, monitor the accounts to ensure the customer is doing the business it promised, and even issue alerts when transaction numbers are falling below projections. In addition to making it easy to launch new products, the software lets banks discontinue old products without major surgery on a mainframe.

With its ability to customise products and pricing, and create bundles to meet individual corporate or retail customer needs, Zafin delivers several of the key features that some banks have turned to core system replacement for, but at much lower cost and lower risk.

Legacy systems were designed to maintain debits and credits, said Krishnan, and that is their enduring strength. Unfortunately, billing systems were embedded in many cores where they have become static. Zafin is taking the billing and charges from the core and putting them into a flexible system where banks can define and change the business rules easily across product lines to facilitate bundling.

With Zafin, banks can avoid core transformation projects while launching innovative packages and product bundles while the core can continue to run the bank’s GL. Zafin said studies show that banks with end to end revenue management experience 10% greater revenue from their existing client base, and through better knowledge of customers and markets achieve nearly 20% higher pre-tax profits.

Indian software developer SunTec, which announced recently that Visa Europe will use its Xelerate product to support real-time billing on 100 million transactions a day, also stresses the importance of pricing and billing, noting that “Financial products are sometimes priced at a loss. Mostly unintentionally…”

Nanda Kumar, president and chief executive of SunTec Business Solutions, started the company 20 years ago doing billing for telecommunications in India. “Then I realised that billing expertise could be applied to any industry, and focusing on the customer could make the whole transformation seem seamless,” he said

SunTec works across retail, finance and other businesses that needs relationship pricing. It does fee management for Charles Schwab in the US, for Comcast, the cable TV, telecommunications and internet giant, for Dubai Port and for an automobile leasing company that manages 800,000 cars for different companies.

“We process two to three billion transactions a day,” Kumar said.

Corporations are often dissatisfied with their banking relationships, he explained, and banks need to work hard to provide transparency to retain, or restore, trust. “Your customers are changing; you need a partner who can help the corporation manage its accounting. If you can understand your customers on a continuous basis and can see changes as they come, you can help them go higher in the future.”

The challenges for a financial services institution start with understanding the cost of their products.  A study by Boston Consulting Group at one bank found that 17% of clients were unprofitable on a variable basis and 15% on a full-cost basis. Banks also were poor at checking volumes against volume discounts. “… we found almost zero correlation between price and volume,” says BCG. In addition, contracts tended to be pretty old – 20% of client contracts were more than 10 years old and some were 20 years old. “Just on an inflation basis of, for instance, 3% per year, the prices could have doubled in 20 years.”