The British mathematician Clive Humby has an interesting take on the role of data in this modern era:
“Data is the new oil. Like oil, data is valuable, but if unrefined, it cannot really be used. It has to be changed into gas, plastic, chemicals, etc. to create a valuable entity that drives profitable activity. So must data be broken down, analyzed for it to have value.”
Data can become an asset for banking and financial services organizations only if it is accurate and authentic. Master data management is a discipline that can make this happen if adopted and implemented across all sectors of business. This blog explores the need for master data management in banking and then dives into the challenges that banks currently face and the benefits of adopting a master data management solution in their digital information systems.
A Short Primer on the need for MDM in Banking
Banking as an industry is floating in a sea of vast amounts of data. Data about their customers, products, and services, their purchase history, and all other kinds of meta-data about this data. This data can prove useful and valuable, you may say so, in analyzing and extracting all sorts of useful insights which can be used to derive business value. But the flip side is that this data can be inconsistent across numerous subsystems and internal processes. This inconsistency can create numerous problems and challenges. One of the more familiar problems can be challenges with severe regulatory restrictions such as the Beneficial Ownership Rule (BFO). Originally derived from the Financial Crimes Enforcement Network (FCEN), the BFO places severe regulatory restrictions on banks and financial institutions to identify and report the ultimate beneficiaries of all accounts linked to legal entities such as private individuals and corporations to prevent financial crimes such as money laundering, tax evasion, and avoidance, fraud, and also to prevent terrorists from benefiting from such crimes. This is one of the reasons banks and financial institutions need master data management to prevent data errors and mishandling and comply with severe regulatory restrictions whose penalties for non-compliance and contempt can be quite severe.
A Short List of Challenges in the Banking Sector
Banks face a large list of challenges on the data aspect on all fronts. There’s a huge list that includes a large quantity of data that is growing exponentially day by day, a complex data system architecture that stores and provides access to this data, numerous regulations that have to be absolutely complied with, and so on. Let’s take a look at some of these challenges in detail.
Vast quantities of data
It is estimated that banking and financial services institutions generate and consume 2.5 quintillion bytes of data every day. This puts a huge strain on their data infrastructure to produce, store, access, and utilize this amount of data. Mergers and acquisitions also bring in new sources of data and huge data stores. Such institutions also consume and use data from external or third-party sources, especially for credit scoring and marketing purposes.
Lack of data ownership due to fragmented architecture
Banks and financial institutions often face the challenge of fragmented architecture due to the number of applications and systems employed in various departments such as loans, credit cards, payment processing, etc. This fragmented architecture poses a huge challenge in the area of data management. Due to the absolute amount of data being managed in different verticals, there is a lack of data ownership and consequently, data stewardship and data governance.
Need for compliance with regulations
Banking is a highly regulated sector with the need for compliance with various industry standards (PCI DSS for example) and government regulations (FATCA, BASEL, etc). In addition, there are various data protection and privacy laws to adhere to. This poses an additional challenge for banks when designing systems and processes for data management and governance. This calls for a need to design appropriate data repositories to meet these challenges.
Benefits of adopting MDM solutions
An appropriate MDM solution must be built for client-centricity. For example, building a central repository of the client, product, and purchase data by collecting data from numerous systems can help banks build a 360-degree view of each customer. It will also help eliminate data redundancy and duplication across the entire organization. It will also help client-facing officials improve and nourish relationships with customers.
Preliminary level fraud detection
Despite all the pros of digital technology, it does have some loopholes or weaknesses which can be exploited to gain illicit or illegal advantages. With master data being an authentic source of a picture of product and customer behavior, performing the real-time analysis can help understand customer spending patterns which can be cross verified to prevent fraud at an early stage or entirely eliminate it altogether. Management of master data can prove to be an effective tool in the threat prevention tools of banking and financial services organizations.
Abolishment of compliance risks
Master data management systems can help the IT teams of banks to maintain data quality by implementing a central storage architecture. This can help banks to ensure compliance with industry and government regulations. By adopting master data management solutions and in turn maintaining data quality, banks see a reduction in the fines they pay for regulatory non-compliance.
Better growth in business revenue and profitability
By using master data management solutions, and with master data being an authentic source of information, banks can get a clear and accurate picture of their business model. They can act upon this to drive growth across all areas of their operation. For example, marketing teams can act upon customer master data to better market products by recommending appropriate products which customers actually need. This improves cross-selling and up-selling opportunities which in turn increases revenue and profitability.
MDM solutions can take care of aspects such as creating accurate inner catalogs of customer and product master data thus promoting long-term cost reduction with benefits such as ensuring client centricity, early detection of fraudulent activities, abolishing compliance risks, and reducing regulatory fines for non-compliance, and lastly better growth in business revenue and profitability. This can certainly help banks see a brighter and better future ahead in an era defined by a hyper-competitive market environment and chaotic economic trends.