A credit union attempting to chart its future financial course no longer has to rely on gut instincts, educated guesses or even a crystal ball. Increasingly, CUs are delving into the world of what’s called business intelligence.

The term business intelligence, or BI, was coined by a computer scientist at IBM over 50 years ago. In an article in the October 1958 issue of IBM Journal, the German-born Hans Peter Luhn defined “intelligence” as “the ability to apprehend the interrelationships of presented facts in such a way as to guide action toward a desired goal.”

In the case of credit unions, the “desired goal,” particularly in these difficult economic times, is to be able to make faster, better business decisions.

That’s something many experts say spreadsheets are increasingly unable to help with.

“You get a lot of perspectives when you mention ‘business intelligence,’” says Patricia Valentino, senior vice president and general manager at CUES Supplier member FIS, Jacksonville, Fla., one of the many companies offering software solutions for credit unions seeking to better understand financial data. “It really boils down to the concept of being able to take data, create information and answer questions about your business.”

The questions BI applications can be used to help answer can be as varied as the institutions offering or using them. Some credit unions have created entirely new departments while others have used the data supplied by BI processes to measure the success of a particular product. BI can also be used to deepen the relationship between the CU and its members.

Excel: No Longer Does

Financial institutions have used Microsoft Excel and its predecessor, Lotus 1-2-3, to cull data from their systems for some 25 years. But Excel’s days as a useful utility for credit unions are winding down, say experts.

William Soward, president/CEO of Adaptive Planning, maintains that business has gotten too intricate for financial institutions to continue to rely on a spreadsheet when attempting to understand their “cash positions.”

He cites the example of a finance department employee creating a spreadsheet only to see the document undergo numerous revisions. “Time is passing with multiple revisions. Increasingly, the objective is to get your key stakeholders involved in the process in as close to real time as possible. So, if someone makes a change, it’s automatically replicated through the rest of the model. At some point, that business becomes too complex in terms of multiple products, branch locations, changing business models and adding or subtracting people over the past 18 months. It’s those kinds of things that drive people crazy in Excel today. It takes too long. In 2010, the stakes are too high and time is too valuable to do things the old-fashioned way.”

Adaptive Planning, founded in 2003, is a Northern California-based company offering software alternatives to spreadsheets like Excel.

$1 billion/88,000-member Westerra Credit Union in Denver saw its reliance on Excel begin to wane in the summer of 2009 when the credit union acquired programs from Adaptive Planning.

“The Excel model we were using was somewhat cumbersome and slow,” says Jennifer Myers, VP/finance at Westerra CU. “It had a lot built into it and was powerful. However, it was reaching the end of its capability.”

According to Myers, “We wanted to move away from being collectors and managers of data that was coming in from our various branches to being able to be more like business partners and being able to analyze that information.”

It didn’t take long for Westerra CU executives to note the positive changes. “On the capital side, they were able to more quickly see how the capital items were impacting the operating and personnel decisions,” explains Myers. “So, instead of waiting for someone to input that data, they could immediately see the results if they made a change in, for example, the personnel budget and how that would affect the operating budget. I’ve already seen improved efficiency in terms of my ability to work with the team to review, analyze and summarize budgets for executive and board approval,” she adds.  

Credit Risk Dept.: No Gamble

Southern California-based Wescom Credit Union (close to $3 billion in assets, nearly 300,000 members) launched a credit risk department over 12 months ago. As David Gumpert-Hersh, Wescom’s VP/credit risk, explains, the CU had to become more competitive at forecasting loan losses to protect the business and better serve members.

Wescom CU turned to help from SAS, a company offering BI-related software and other business services to over 3,100 financial institutions. Gumpert-Hersh says that while Wescom CU was once limited in its ability to do heavy quantitative analysis in regard to forecasting and mitigating loan losses, that changed when SAS entered the picture. “You have to know far more about so many facets of your business to understand where your profits and losses are coming from, and quantitative analytics helps deliver on this need” notes Gumpert-Hersh.

As to the creation of Wescom CU’s credit risk department, Gumpert-Hersh says that his CU needed to be able to still provide members with credit while ensuring the ongoing safety and soundness of the credit union. This means being able to better predict and separate the underperforming account vs. the rest of the portfolio.

Using SAS software, Wescom CU’s management was able to create member scorecards based upon the factors the CU deemed important to predict delinquencies, charge-offs, etc. Another factor, according to Gumpert-Hersh is that, “whenever we take on a loan we have to be mindful of how it is likely to impact profitability potentially over the entire life of the loan. In addition to the interest you earn, you’ve got to figure out what are the potential losses and delinquencies from the loan so you can essentially predict events not just before but after funding as well.”

Such determinations were much more difficult in the days before Wescom CU began its relationship with SAS, he says. “What we had was a situation where the forecasts may not have been as accurate prior to the creation of the credit risk department and its ability to derive the charge-off forecast. It gave everybody the comfort to implement tactical and strategic planning for risk mitigation,” Gumpert-Hersh says.

Wescom CU can now more accurately understand risk, which allows them to better price the risk when extending credit. Gumpert-Hersh continues, “Confidence means we know what we are risking at the loan level. The other piece is better understanding where you are and where you are going. The more confident you are, the better planning you can have. You can offer different interest rates to your customers, and if all comes together as planned, you can improve profitability and, therefore, capital ratio. All those pieces add into the puzzle of making your operation more financially profitable and efficient.”

According to Gumpert-Hersh, Wescom CU has saved “millions in charge-offs” since the launch of the credit risk department.

Getting to Know You

Wescom’s efforts to learn more about the habits of its members is a classic use of business intelligence applications. David A. Wallace, global product marketing manager for financial services at SAS, says that a credit union can best market to its members only after it understands who the members are.

“You first need to be able to categorize those members,” he says. “That’s what we would call segmentation. By segmenting the members, which you would do by accessing the core system files that describe the members and their accounts, you can then categorize the members based upon the (CU) products that they have, their age range, deposit balances, etc.”

Once the member categories have been established, Wallace says that a CU can create “models, a visual representation of the actions you want to take for that specific segment. Then you can track the implementation of those models and report on the success. Once you have determined the ideal sized profile of those members you are concerned about, you would create campaigns that would be described in those visual models. You would execute against those campaigns to try and retain those members. Then you would report on the success or lack of success in those campaigns.”

Online Banking Success with BI

In Richmond, Va., $1.8 billion/190,000-member Virginia Credit Union is employing BI applications from FIS to chart the success of its new online banking system. And that’s just the beginning, says an official there.

CUES member Christopher Saneda, SVP/chief information officer, explains that employees working at the CU’s contact center were traditionally spending a great deal of time answering calls from members about pending transactions. He says Virginia CU officials wanted to “substantially reduce” the volume of calls being made to the center. Enter the new online banking system in December, allowing members to check their pending transactions over the Internet.

Saneda says Virginia CU has seen a six percent reduction in the number of calls the contact center is fielding in the short time since the debut of online banking. “We’ve seen that reduction, but we aren’t convinced that that’s an ongoing trend. That’s where we are using our data warehouse and reporting tools to trend to see if there is a true correlation (between the decline in calls and the online banking system).”

The credit union began using “upgraded BI tools” (including data warehouse) from FIS in 2008, says Saneda. “We take a lot of the data warehouse information and we feed risk analysis tools. We ask questions like, ‘Do we want to launch a particular product?’ We definitely use those tools to help with that analysis. We also use the tools to look at product effectiveness, such as ‘Are we offering a product that brings too much risk to the portfolio?’”

As Virginia CU officials gain experience interpreting the data gathered using the FIS-supplied BI applications, Saneda says the credit union is now looking to deepen its understanding of its members. “We’re now asking questions such as, ‘Which members call our contact center multiple times per week or month with no associated transactions?’ It gets back to finding out how many people are calling each week just to find our what their balance is.”

Saneda explains that Virginia CU’s ability to better analyze the behavior of its members is beneficial. “We’re asking ‘Which members are unprofitable to the tune of $5 to $25 per month, are not online banking users and visit a branch or phone the call center more than once a month?’ We really have the depth of information there where we can pinpoint the number of members like this.”

Armed with such information, Saneda says Virginia CU will be able to determine whether some product can help transform these members from being “slightly unprofitable to slightly profitable. And it might just be a small behavior where we have a product that can twinge their behavior just a little bit that can make a huge shift in profitability.”

The bottom line, he says, is to put the credit union into a position where it can be of even greater service to members. “We’re all very strong believers in having a deeper understanding of our members. I think that it’s all in the data. We want to be there for our members when they need us the most.

“The data tells the life story of the member: Where they shop, vacation, what their income is, when they have children. There are keys in the data that tell what’s going on. When we combine all of this data with external sources like a credit bureau, we really garner powerful knowledge. And we can be proactive with that knowledge in creating products and services for our members during these life events.”
 

Time is Money

Seeing a return on investment from using BI applications depends on a number of factors, say industry leaders.

One variable would be the amount of time/labor saved in making decisions. Greg Schneider, VP/marketing at Adaptive Planning maintains that a CU’s move from Excel to BI solutions can pay for itself rather quickly. “You might think that Excel is a free process. But that doesn’t take into account all the time invested by dozens or perhaps hundreds of people within an organization who are participating in a reporting and planning process. And that would include managing it across the financial organization and all the budget contributors. Then, what is the time savings when you move to an automated solution? And that would be in terms of less time and fewer revisions spread across all those people. What we see in an organization is a less than six-month payback and an ROI that can be in the 400 to 600 percent range.”

Another consideration would be how heavily the CU comes to rely on using the applications to help in decision-making, according to Valentino. “Whenever you’re going to make an investment, you’re going to ask, ‘What am I going to get for that?’ It really becomes the business driver for putting something in like business intelligence. You really have to make sure that you have the commitment to use it to help run your business.”

Questions and Answers

A credit union considering the BI plunge should also know in advance what questions it wants answered and whether those questions will be asked once or multiple times, she adds.

Wallace says a credit union must clearly define its goals before determining how its investment in BI will pay off. “In regards to the solutions SAS offers regarding customer segmentation, acquisition and retention, the overall ROI would be measured by considering what the goals are that the credit union has set for itself. If, for example, a credit union saw that its member growth was a negative number at the present time, then investing in those solutions would be justified by reversing the slide.”

As for the future, Valentino believes the use of BI applications by credit unions will only increase. “I think the trend should be growing for the following reasons: As the economy and the financial institution industry, in general, change, it’s more important than ever for a credit union to understand how to increase their retained earnings, which is how they supplement capital. It’s not so much the idea of a bank vs. a credit union, as having to get sharper at understanding the business. And that’s what business intelligence can help you do. It helps you make better decisions,” she says.

Dave Windsheimer is a free-lance writer based in Upstate New York.