He goes on to say, "One of the most notable benefits of the new software is the ability to analyse the wealth of data held on Equation’s database, which is fully SQL-compatible. This allows profitability statistics to be analysed by any attribute held on the operational database using business intelligence tools such as OLAP (On Line Analytical Processing); for example, banks can make comparisons between individual customers or groups of customers, different product lines, or organisational units such as branches, departments or individuals within the bank. For this reason, Equation’s new Profitability Analysis application provides an essential element of the system’s overall customer relationship management functionality."
The Profitability Analysis application is an optional supplement to Equation’s MIS functions and is designed to analyse a bank’s income and expenses, including interest paid and received, fees and disbursements, plus foreign exchange profits or losses. Data is analysed by customer or groups of customers according to user-defined business categories.
In addition to making the resulting data available for viewing through enquiries or reports, comparisons of business transactions carried out between specified dates can also be made, in order to identify any trends in a bank/customer relationship. To simplify this process, the application incorporates a separate profitability database to store statistics, which can be accumulated over several years.
Lindsay Baldock points out, "The objective is not only to enable banks to analyse income generated by customer accounts and loans, but also the interest paid to depositors, as some sources of deposits are inherently cheaper than others. To enable meaningful comparisons to be drawn, it is not sufficient to analyse just gross income and expense statistics. It is also necessary to establish the cost involved in generating interest from a loan, or similarly, the relative worth to the bank of deposits taken."
"For this reason, the Profitability Analysis application uses the concept of Transfer Pricing. This employs a set of reference rates, which can be applied automatically to assets and liabilities, as well as foreign exchange transactions. Transfer Pricing overcomes the problems created by structural or
deliberate mismatching, as it is generally not possible to identify the specific liability used to fund a particular asset," he adds. "For example, there may be term mismatches between assets and liabilities. The Transfer Pricing approach applies a pre-determined reference rate on the assumption that each deposit or loan is matched for an equal amount and term. This effectively removes the need for interest rate risk to be factored into profitability analysis, and properly leaves it with the bank’s treasury department."
The statistics produced by Equation’s advanced new functionality therefore represent notional profitability, derived by using a consistent methodology to calculate the cost and return on funds and to enable meaningful comparisons to be drawn. Reference rates may be defined by the bank and based on industry-standard indices such as Base Rate or LIBOR.
The Equation Profitability Analysis application has already been licensed by a number of MKI’s existing Equation users. The new software is available immediately for first delivery testing and is expected to be fully operational at the first customer site later this year.
Lindsay Baldock sums up by saying, "Banks will be able to derive enormous benefits, as well as considerable competitive advantage by employing Equation’s new Profitability Analysis functionality in aiding understanding of their business. As well as being in a position to know exactly which customers represent the most profitable areas of their business, banks will also have accurate statistics on which to judge the relative performance and profitability of different products, account types, branches, departments and individuals within the organisation. Thus, it forms a vital component of effective customer relationship management, and will provide a valuable guide for framing new product types or cross-selling additional services."