Brave New BankingA research study into how location intelligence is driving the new world of retail banking

White Paper

A new independent study, commissioned by Ordnance Survey, found that the retail banking community is becomingmore aware of the importance of location intelligence. Regulation and compliance is a key driver for the use of locationdata, helping banks to manage risk concentrations and minimising capital set-aside requirements. Retail banks are alsousing location data to guide key business decisions and helping to meet the needs of the modern, mobile customer.

Management SummaryTo provide a benchmark of location data use in retail banks, Ordnance Survey commissioned MindMetre Research to carry out a series of arm’s length third party research studies, of which this paper is the first output. To uncover the main areas of application for location data in 2015, respondents were asked what location-based priorities they had for the next twelve months and revealed that for example, they will be using geo-information to find out:

• how to better manage risk in their lending portfolios; • decide which products to offer without increasing risk concentrations; • how to attract, serve and retain increasingly mobile customers; • to rationalise branches while maintaining high customer service; and, • to improve fraud detection.

Key findings

• Banking organisations are making greater use of location data, mainly to:- ■ understand and manage lending portfolio risk better; ■ to improve customer service quality in an increasingly mobile world; ■ to optimise the branch network in the light of changing customer behaviours;

and, ■ to identify and combat fraud.

• These are the findings of independent qualitative research commissioned by Ordnance Survey in 2014, canvassing the views of the top UK banking organisations.

• The study also identified that location data is playing a key role in identifying portfolio concentration risk, in order to reduce capital adequacy requirements.

• In doing so, waste of marketing effort is being avoided, by focusing on customers outside of those concentrations where the bank wants to target new business.

• Emerging partnerships between banks, mobile operators and retailers are developing mobile banking services with added value, location-triggered retail offers for the customer.

• Branches are being developed as effective advisory centres, with location-based systems efficiently routing the bank’s roving advisors to be in the right branch at the right time to meet customer demand.

• And decisions about the branch network are reported to be newly invigorated by sophisticated location-based analysis to determine current strategic and future potential.

Location Data in Modern BankingIn the world of retail banking, location data has been traditionally associated with the process of visualisation of a branch catchment, or a customer group – to help understand its distribution on a local, regional or national basis. As factors affecting those communities were adjusted, a visual impression of the effect could be seen, to help planners, marketers and managers. Increasingly mobile Generation Y is also driving demand for location intelligence among retail banks globally.1

However, a quiet revolution has been happening. There is a growing recognition in retail banking (and amongst the key systems integrators that support those banks) that location data has become critical to a range of business decisions that fundamentally affect business performance.

These decisions include:-

• where is the risk in my lending portfolios, and how should I adjust them to mitigate that risk, to comply with regulation and minimise capital set-aside requirements?

• which products should I offer to which customers in order to increase business without increasing risk concentrations?

• how can I better attract, serve and keep the increasingly mobile and remote banking customer?

• how can I better detect fraud, or likely fraud?• which branches should I keep, and which should I close, while maintaining customer

service where it is needed, and not losing sites with high future potential? • where are my competitors investing and expanding/withdrawing services

So nowadays, location data is being employed increasingly in the banking and financial services industry to improve market targeting, customer service, mobile banking services, portfolio risk management, branch management, and other key areas.

What, then, does location data mean? Location data ranges across:-

• a comprehensive, consistent, maintained address database linked into precise geographical locations (to validate identity, or act as a matchkey between disparate operating databases);

• information on new infrastructure developments (power, water, rail, road, etc);• data on hazards, such as flood risk, environmental hazards, historic local catastrophic

events (such as the Buncefield fire), etc; and• information on factors as diverse as property value, crime rates, road access, nearby

retail outlets and other points of interest, and much more.

Ordnance Survey commissioned independent research in 2014 in order to provide insight into why banks are now employing location data for fundamental decision support. Why is this topical issue right now? And where is location data primarily being applied?

‘Speed of decision wins business, not just at the consumer level but at the business level too – our commercial finance decisions (such as leasing) can be critical to the overall perception of the total service a firm is getting from its bank – and geo-data is often a key component in risk decisions.’

Operations Director, Retail bank

1 CapGemini, World retail banking report, 2014

Why location data now?Respondents all agreed that retail banking is going through a period of rapid change; fuelled by increased pressure from the Government to grow lending, whilst satisfying the regulators that the banks’ have taken increased steps to mitigate risk from lending. This change divides neatly into three main headings:

1. Fiercer regulation demanding tighter risk management;

2. New customer behaviours and the changing nature of the branch; and

3. The constantly evolving battle against fraud.

The management of all three areas, requires intelligent analysis of a bank’s main competitive asset – its customers and their transactions. That analysis is most powerful when transactions are overlaid with other valuable information (often location-based) to reveal patterns, triggers and predictions that allow the bank to serve customers better, reduce risk and spot fraud.

Understanding risk exposure: regulation and compliance

Regulation has tightened, post financial crisis, with the implementation of Basel II’s international capital adequacy rules and other requirements as set out by Basel III2. As a result, lack of rigorous risk insight and management have a direct impact on a bank’s cost of doing business, by increasing capital set-aside requirements and restricting capital that can be employed.

Respondents to the research study reported that audit activity across the industry had revealed a lack of sufficiently granular knowledge about where risk concentrations lay. Such concentrations included clusters that were: within a volatile valuation segment; close to an environmental hazard; at undue risk of flooding; in an area of rising crime; close to planned new infrastructure; representative of an imbalanced accumulation risk within the geographical spread of the portfolio.

The range of products represented within these portfolios was mainly focused on: mortgages; equity release; business loans; and business lending with property as collateral. Risk analysis for business loans was not only focused on risk to collateral value, but also threats to actual business operations. It was noted that this was not only a matter of environmental and social risk, but that business serving a local catchment are at risk from a significant proportion of their customers facing business interruption.

In relation to specific underwriting activities, whereby retail banks are assessing consumer risk and eligibility for equity capital, credit, mortgages or insurance, respondents also highlighted that among their geo-data relevant priorities for the next

‘Business lending decision support that incorporates physical hazard data – such as flood or contamination risk data – is an area that we’d like to develop more…. where a collateral asset – property – could be significantly devalued by the hazard.’

Head of Risk – Commercial Lending, Retail bank

2 Basel Committee on Banking Supervision, http://www.bis.org/publ/bcbs107.htm

twelve months, deeper transactional analysis on consumer loans, cards and mortgages was also required. Access to the demographics of specific areas or unique spatial attributes on homes and properties can add vital insight to loan granting decisions.

A number of respondents also noted that deeper insight into portfolio concentration risk was introducing new disciplines, such as checking property valuation periodically throughout the lifetime of the financing period, not just at origination. Another example cited was the use of hazard analysis to decide which properties to investigate when checking on valid insurance during the financing period – an exercise that would be uneconomic to perform for every property financed.

How mobile is driving new customer behaviours and changing role of the branch

Society is changing its habits regularly when it comes to banking. The recent explosion on portable device usage, particularly smartphones, has driven up demand for mobile banking capabilities, an area where respondents universally reported significant development activity at their institution. Research by Experian® has found that 65% of UK adults now own and use a smartphone, and almost half (47%) own and use a tablet. Of those that own a smartphone or tablet, 45% use a mobile device to check their online bank balance, while 27% have used their device to transfer

money to another person via an online banking app. 3

In order to implement effective mobile banking services (or better put – services for a more mobile customer), certain institutions reported that they are already exploring partnerships with mobile network providers, and with retailers or groups of retailers.

This three-way partnership – bank, mobile operator and retail – is designed to deliver mobile banking with added value. The bank provides the transactional services; the mobile operator provides both network and knowledge of location; and the retail aspect provides special customer offers exclusive to the partnership (added value for competitive advantage). The bank is able to offer a fully-fledged mobile banking facility; the mobile operator appeals to more customers with a non-commodity service; and the retail partners generate additional footfall through special location-triggered offers promoted to the customer when they are close to an outlet.

Knowledge of location is also the main driver behind banks’ increasing need to refine the skill of communicating and

‘The idea of bringing special offers together on a geo-basis The idea of bringing special offers together on a geo-basis (geo-triggered) – you’re in a particular location and you want a restaurant or a shop – is something we’re actively exploring. There’s real customer value to be gained here – we want more transaction on our card(s) and the retailer wants to fill their low transaction periods.’

VP Marketing, Retail bank

£

££ £

££££££65

% o

wn

a smartphone 47% own and use a tablet

25%

use

mob

ile d

evice

s for online banking 27% use devices to transfer money

3 Banking Technology, The mobile movement driving multi-channel banking, 15th September 2014, 4 British Banking Association, It’s in your hands, June 2014

‘Of course, we have a serious challenge in persuading the majority of customers to allow us to track physical location through the mobile device – they have to be convinced of the benefits.’

Mobile Delivery Lead - VP, Retail bank

serving the modern, always-connected and mobile customer. It is not a coincidence that the key development area relevant to geo-data-based applications cited by most respondents was indeed mobile banking.

In this context retail network planning was considered a key application priority for geo-data-based applications. There is for example, the tactical opportunity to enhance branch and ATM planning following a merger or acquisition – particularly decisions about which physical assets to keep or divest, and what outlets were required for high-quality customer service and which were not – especially in the context of the increasingly mobile demographics. In addition to this, location can be the key asset in helping banks provide more personal and tailored services to their customer and establish partnerships in their role as enablers of location-intelligent business, while allowing mobile providers to increase customer loyalty.

As customers become more mobile, and heavier users of remote (online) banking services, the demand for transaction processing in the branch has dwindled rapidly. A recent BBA report found that UK consumers used their mobile phones for 18.6 million transactions a week in 2013 and signed up to receive more than 457.7 million SMS balance alerts and other text messages.4

Branches, say respondents, have become customer service centres where loan, mortgage, investment and other advice and consultation is delivered. Location analysis is now starting to be used in routing applications to ensure the right advisor is in the right branch at the right time in order to deliver this high-value advice and sales. And at a more strategic level, location analysis is therefore being focused on which branches can best service this requirement, and which should be divested. Location intelligence is leading the way banks think about assets and optimising the provision of services.

Branch location value and potential then becomes a sophisticated process, where different sets of customer and area information need to be over-layered and analysed. For a branch catchment, new mortgage data might be combined with property value, retail chain newcomers, existing multiple-product customer profiles, single-product customer density and crime data (diminishing trend) to arrive at a view of customer cross-selling potential for that branch. In any of these analyses, proximity to a host of factors (attractive retail centres, disruptive infrastructure development , poor road access, competitor branches, changing wealth profiles) all help assess the strategic decision of whether to close, retain or develop a branch. This amounts to sophisticated decision support based on location data, not simply the visualisation legacy of the past.

Such decision support allows the different demands of risk management and marketing performance targets to be harmonised. By understanding risk concentrations better, the bank can divert its marketing efforts away from those concentrations and towards customers that it wants to take on. Risk is mitigated; marketing effort is not wasted.

Fraud and location data

The mobile customer now wishes to operate more remotely, as well as consuming banking services at a location convenient to their pattern of life (rather than being dictated by the shape of their bank’s branch network). However, this gives rise to new types of fraud exposure, report respondents to this study. Identity theft remains a growing problem with much criminal activity now online. In the UK, reported card fraud losses were over 450m in 2013 according to the Financial Fraud ActionUK. ATM exposure of

banking details remains a constant challenge.

As a result, respondents report, location is being employed as a key trigger for fraud, or possible fraud. As mobile banking partnerships come into being, a disparity between

‘We can, for instance, make great use of ‘location disfunction’ – i.e. if an ATM withdrawal happens in one place, but the customer mobile location is elsewhere, then a fraud may well be taking place. Of course, we have a serious challenge in persuading the majority of customers to allow us to track physical location through the mobile device – they have to be convinced of the benefits.’

VP Fraud and Risk Management, Retail bank

4 British Banking Association, It’s in your hands, June 2014

‘We’ve been looking into merchant alerts for card fraud – in a predictive fashion. This is a service we can offer to issuers (either at a charge or as added value). As a card originator (as opposed to issuer), we want to improve the card eco-system.’

VP Global Fraud Risk Management EMEA, Card originator

457.7 Million

‘Branches are very expensive – but they’re also critical to our customer service promises… as our customers move to more and more mobile banking, we need to understand how branches serve the customer who mainly operates off their mobile device, but when a problem, or the need for advice, arises, they can meet the right person or access the right facility in a branch near them. By the same token, routing is then critical to having the right people in the right branches at the right time – as efficiently as possible.’

Managing Director, Transformation and Optimisation, Retail bank

18.6 million transactions

‘Geo-spatial data has a major role to play in spotting patterns of fraud… ‘rings’ that cluster, and then if the ringleader moves, the associates often move too, both for consumer and business fraud (N.B. corrupt mortgage or leasing brokers). There are serious amounts of money at risk here, so where we can use geo-analysis of historic cases to build a predictive model, we’re actively interested.’

Head of Strategy, Risk Operations Office, Retail bank

the location of transactions that occur soon after one another will activate investigation and service suspension, protecting customer and bank alike. In other words, if a cash machine withdrawal takes place in Birmingham just one hour after a credit card payment was made in Manchester, this triggers an investigation. Even today, sophisticated models of transaction proximity are being developed. These involve analysing a customer’s normal patterns of transaction location (including typical travel schedules, proximity to home/work/etc) along with their history of transactions further afield, in order to build fraud investigation triggers that protect the customer without annoying them with false alerts.

A high proportion of study respondents identified the need for banks to gain sufficient customer trust to keep their mobile device location information switched on. Fraud prevention was noted as a key driver to gain customer confidence with a valued service, which could then be followed by asking the customer’s permission to deliver added value offers and promotions described in the previous section. Those respondents already embarked on mobile banking initiatives stressed the importance of rigorous opt-in permission procedures so as not to undermine customer trust (and not infringe the structures of the upcoming EU Regulation on Data Protection).

Application fraud, whether for cards, mortgage, loans or other products, is also benefiting from increased availability of location data. In addition to this, improvements in the national address database, which now include local government’s address and streets gazetteers, along with a wide range of other sources, are expected to significantly increase the ability of banking systems to validate identity, whether of person or property, and look set to provide a better basis for overlaying ownership, transaction history, valuation data, shared fraud data, and other key datasets.

ConclusionsThere is clear consensus in the banking sector, from risk, operations, branch network planning, fraud, marketing and customer services, that location data is playing an increasingly important role in decision support. Key applications cover lending risk decision support, portfolio risk concentration management, branch optimisation, (mobile) customer management and marketing, and fraud identification.

Current applications are mainly focused on physical assets, especially property related, whether the subject of a financing agreement, or being offered as loan collateral. Analysing the current and future business contribution made by each branch, and therefore informing strategic decisions whether to retain or divest, is also an area where location intelligence is much employed. However, applications currently under development that rely heavily on location data are now embracing the emerging challenge of mobile banking customer service and management.

This is the first in a study series commissioned by Ordnance Survey, and will be followed by a series of focus workshops and webinars. Any interested member of the banking community who would like to be part of this ongoing research process should contact Greg Davis by email: greg.davis@ordnancesurvey.co.uk.

5 FFA UK, Fraud, the facts 2014, 2014 http://www.nlpg.org.uk/nlpg/link.htm?nwid=22

Location data in banking - what’s available and how’s it being used?In order to bring the subject alive for banking professionals, the final section of this paper draws on anecdotal evidence from the research to paint three short scenarios of key business applications in the sector, and how location intelligence is helping meet those challenges. In each case, the description draws on real-life applications, whether mature and implemented, or currently under development. Each of these applications of location intelligence draws on a variety of location data sources, including Ordnance Survey, and has been developed by the bank in collaboration with a specialist systems integrator or solutions provider.

Scenario 1 – Property risk – understanding risk better, diluting concentrations and improving marketing return on investment

A UK bank has an extensive mortgage portfolio. Because of recent tightening of risk management regulations, the bank conducted a number of audits to better understand the true levels of risk represented by the property assets securing its mortgage portfolio. Preliminary investigations revealed that whilst effective checks were made at mortgage origination, the changing nature (risk and value) of the portfolio over time was poorly understood. This meant that the bank was not accurately assessing underlying risk and was unsure whether it was setting aside sufficient capital reserves to meet regulatory requirements. Equally, the bank could not be sure about unwelcome risk concentrations appearing in the portfolio.

As a result, the bank is developing a tool based on various types of geographical information and location intelligence to resolve these issues.

The tool not only confirms and validates recent sale prices of similar properties in the area; it also assesses ongoing risk of flooding, subsidence and a variety of environmental hazards, including land contamination. In addition, the tool reveals ongoing trends in the concentration of properties mortgaged to the bank within the local area, along with a view of similar property concentrations in the vicinity which may affect

market value of the asset both in good and less favourable economic circumstances.

Using this application, the bank is able to identify and visualise higher risk properties which can then be selected for ongoing monitoring, for instance to check building insurance has been purchased and is valid. Concentrations in the mortgage portfolio are also identified and linked into local marketing and sales activity to (a) dilute such concentrations and (b) focus marketing effort on property types or geographic areas for which the bank has a suitable risk appetite.

Key data used:-

• Bank’s own transaction & portfolio data by customer• AddressBase Premium (existing, lapsed and proposed addresses, including Postcode

Address File (PAF) from Royal Mail)• OS VectorMap Local• Land Registry• Various property valuation/sales information

• Flood Risk from Environment Agency or other flood modellers• Environmental hazard data including contamination or subsidence, from Ordnance

Survey and others• Local infrastructure development from Ordnance Survey and others for example HS2.

Scenario 2 – Branch optimisation

Like many of its competitors, a bank was seeking to improve the insight and intelligence with which it assessed branch value and potential. In a world where financial services are rapidly moving to mobile, the cost of a branch presence has to be firmly connected to the changing nature of customer needs.

In order to better manage its branch portfolio, the bank has developed a tool based on a range of relevant factors, all of which are based on a geographical location.

Firstly, the tool identifies customer counts within a range of catchment distances and drive times from the branch, expressing those counts in terms of market penetration for the area. The banks own customer data also allows a loyalty/longevity score to be calculated to understand the stability and growth rates of business in the branch’s catchment. The competitive environment, in terms of proximity to competitor banks, is also reported.

Similarly, the overall convenience profile of the branch (to serve its current and future customers) is assessed and monitored by scoring the surrounding retail attractors, such as supermarkets, fashion outlets, department stores, restaurants, stationers, chemists, and mobile technology outlets, to name just a few. Parking and access is also taken into account.

By linking to current and historical geodemographic data, the application is also able to offer insights into the developing nature of the branch catchment, and calculate how closely or otherwise this matches the bank’s customer base. In this way, a predictive picture is modelled to reveal the branch’s potential value versus emerging product demand in the area. Risk factors are also included to ensure that this emerging demand also matches the bank’s risk appetite across its range of services. And information on provisional addresses (planned developments) also contributed to the modelling of future potential in the branch catchment.

Key Data Used:-

• Bank’s own transaction & portfolio data by customer, with historical tracking• AddressBase Premium (existing, lapsed and proposed addresses, including PAF)• OS VectorMap Local• OS MasterMap Integrated Transport Network Layer• Points of Interest from Ordnance Survey• Geodemographic profiling codes• Land Registry• Various property valuation/sales information• Flood Risk from Environment Agency or other flood modellers• Environmental hazard data including contamination or subsidence, from

Ordnance Survey and others• Local infrastructure development from Ordnance Survey and others for example HS2.

Scenario 3 – Card fraud: balancing service with fraud risk

Few things are more irritating for customers than having their credit card rejected when they are making a legitimate transaction. Yet at the same time, both customer and bank want to prevent fraudulent card usage. Exposure to identity theft is has increased with the growing prevalence of online transactions, and so the issue is an important one to tackle.

A bank wished to improve its ability to trigger investigation of potentially fraudulent card transactions without inconveniencing customers. First, the bank conducted a series of analyses that looked at the geographical pattern of customer transactions. Insight from these analyses were then used to build an internal software application that built, and periodically refreshed, a picture of transaction location patterns for each individual customer. Along with location patterns, transaction type and value were also fed into the model.

As a result, the bank was able to greatly improve its card fraud spotting model, particularly to catch cases where identity and details had been compromised but the fraudulent card use was happening locally. Visualisation tools allow rapid alerts to be issued to local merchants. More local fraud is identified and investigation triggered more rapidly. And fewer customers are irritated by false alerts.

By the same token, the bank is now able to analyse patterns of fraud on a finer geographical basis. Fraudsters tend to operate within a given area, using particular addresses. They too have the ‘catchment’, and identifying the fraudsters behavioural patterns, often with reference to crime data and hotspots within an area, is assisting the co-operative work between bank and police force. The issuing bank also now shares this information with the card originator, who themselves have more widespread fraud data across multiple issuing banks. Both bank and card originator are therefore helping each other to improve the whole ’ecosphere’ of credit card usage.

Key Data Used:-

• Bank’s own transaction & portfolio data by customer• Card originator data on fraud exposures• CIFAS shared fraud database• AddressBase Premium (existing, lapsed and proposed addresses, including PAF)• OS VectorMap Local• Geodemographic profiling codes

Flagging potentially fraudulent transactions for further investigation based on location

About Ordnance SurveyBritain’s mapping agency works with the majority of the top 20 financial services organisations across insurance and banking, helping them to reduce risk, increase operational efficiency and save millions of pounds through the use of mapping and addressing data. Our data, services and solutions are also trusted by brands across utilities, telecoms, land and property as well relied on by thousands of organisations across the public sector including local and central government. Every day up to 10,000 changes to the geographic landscape are captured by surveyors and the latest technology, maintaining the geographic database of Great Britain, recording just less than half a billion individual features.

To find out how your organisation could benefit from using geographic intelligence, visit: www.ordnancesurvey.co.uk/financialservices

MethodologyOrdnance Survey commissioned independent research organisation MindMetre (www.MindMetreResearch.com) to conduct a qualitative research exercise canvassing the view of 15 retail banks in the UK. Thirty eight respondent contributors were interviewed by telephone between January and March 2014, ranging across senior risk professionals, department heads, enterprise architecture, senior operations and branch network management and functional leadership in marketing and customer services. The views reported in this summary represent consensus opinion from at least 50% of respondents.

This document has been screened in accordance with the requirements set out in Ordnance Survey’s Equality Scheme.If you have difficulty reading this information in its current format and would like to find out how to access it in a different format (Braille, large print, computer disk or in another language), please contact us on: +44 (0)3456 05 05 05.

+44 (0)3456 05 05 05General enquiriesGeneral information

www.ordnancesurvey.co.uk/contactus +44 (0)23 8005 6146Textphone

Ordnance Survey and the OS Symbol are registered trademarks of Ordnance Survey, the national mapping authority of Great Britain.Ordnance Survey acknowledges all trademarks. Ordnance Survey © Crown copyrightImages: ?????????????D?????