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Is the Capital Markets Industry Missing a Trick Around Client Retention?

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How can firms in the capital markets improve the client journey and user experience? A true digital transformation is at the heart of that answer and centers on the ability for firms to gather and analyze all their data, plus the available data about their clients, even unstructured data sources such as email. In this article, Virginie O’Shea, CEO and Founder of Firebrand Research, offers insights into how firms can improve the client experience, have better insights into their clients and turn that knowledge of their clients' needs into a stronger business relationship.

There has been a huge amount of buzz within capital markets over the last couple of years about improving client journeys and user experiences, but in this endeavour could the industry learn a few tricks from other sectors?

True digital transformation is more than just a new, shiny front-end, after all. Any digital transformation effort should focus on more effective communication as well as adopting a more proactive than reactive approach to client management. This involves the ability to analyse all of a firm’s data and any other available data about those clients, including information contained within unstructured data sources such as email, to understand and predict their future needs and requirements.

The community and retail banking crowd have faced significant pressures over the last decade to ramp up their investment in the client experience, starting with improving online user interfaces and extending to better supporting the full lifecycle of their clients. The pandemic’s shift from in-person to primarily digital interactions further spurred innovation in the sector, with credit unions such as Financial Center First Credit Union (FCFCU) deploying new strategies to make better use of their available data assets and to be able to hyper-personalise their client service. FCFCU’s use of a data fabric to gather all of the relevant data across its organization enabled it to pivot effectively from one form of client touchpoint to another seamlessly.

Much like other credit unions, FCFCU has significant physical operations to service its 68,000 members across the US. When the pandemic hit, it pivoted like all of its counterparts to a primarily digital client engagement model. However, rather than focus solely on improving its digital communication and outreach, the firm recognised that many of its members were likely to be struggling because of the pandemic and decided to identify members at risk and find ways to help them. To this end, rather than waiting for members to ask for financial assistance or advice, FCFCU assessed all the data pertaining to those individuals and proactively offered them the means to refinance their loans and offered them home equity lines of credit, for example.

The credit union built predictive models to analyze dozens of different behavioral metrics based on data such as transactions, payment history, and credit and loan applications to inform these actions. These data sets enabled FCFCU to put the right people on the phone with the right clients at the right time, arming them with relevant data to help them make better decisions to the benefit of both parties. By helping these clients in their hour of need, not only did they increase brand loyalty, they also managed to surpass all of their previous total revenue records in a year when many other similar firms struggled.

How much could the capital markets industry learn from this example? How often are firms losing clients to their competition due to perceived complacency or lack of insight into their particular circumstances at any point in time?

As the industry heads into a global recession, does your firm have a good handle on the clients that may need extra support? Although institutional clients operate in a very different way to retail banking customers, it’s still a people business at the end of the day. Client relationships matter a great deal and knowing as much as possible about those clients at any point in time (especially during extreme market volatility) is key to delivering a better service.

Capital markets firms have many drivers to invest in improving their client service and to develop a much more holistic view of their clients’ activities and requirements. New competitors have entered areas such as retail brokerage and wealth management, able to offer services built on brand new next generation technology platforms without the burden of legacy systems and data silos (for now, at least). Incumbent providers need to respond to these competitive threats by differentiating on high levels of client service and a bespoke approach to product bundling and pricing.

In such a competitive environment, firms cannot afford to focus only on their large clients and rely on the key accounts model, which is arguably outdated and due for retirement. Institutions expect a higher level of attention and service, regardless of their size relative to a provider’s other clients.

Moreover, institutional and retail clients expect much more from their providers overall and are wont to vote with their feet if their providers fail to meet these expectations. Digital transformation needs to be much more than just an exercise in PR. If firms want to prove their digital credentials they must get better at modelling and analysing their clients’ patterns of behaviour. This will allow them to increase their share of each client’s wallet and cross-sell or up-sell relevant products to clients with the right risk profiles. It could also enable client relationship managers to identify problems ahead of time before they escalate into client losses.

There is significant pressure on these firms to proactively respond to changing market dynamics and the risk profiles of their clients can alter rapidly. What is suitable for a client one day may not necessarily be suitable for that same client the next day. In tough economic times, the most trusted partners are those that understand client needs ahead of major market changes and that help those clients to weather the storm. Much like FCFCU members during the pandemic, clients may need support for financing for certain business lines or collateral and risk management support, among other things.

The regulatory framework within which client interactions must sit has also become much more complex over time. For example, regulators have set strict parameters around the types of products that can be offered to various types of clients and these can and do change over time. In Europe, the review process for the second Markets in Financial Instruments Directive (MiFID II) is well underway and new considerations related to environmental, social and governance (ESG) investment are now included within the framework. In the US, ESG regulation has already been proposed and is likely to be implemented in the next year or so. Climate risk considerations have already been introduced globally.

The existing silos of information across an organisation mean it is challenging to attain a single client view, let alone to use the data that resides in various transactional systems and in unstructured formats such as emails. How much more could be achieved by linking requirements related to client risk categorisation or declared investment preferences contained within documentation to product suitability assessments? What if you could run analytics and predictive models on this data? Could a firm use this data for new product idea generation? Intelligent data fabrics can provide a valuable resource for firms wishing to tap into all the knowledge about their clients that is retained within silos across their enterprises.

The G in ESG is also a huge focus for institutional clients. Share prices can be impacted by evidence of poor governance and therefore firms need to keep a close handle on all of their external relationships as well as their internal processes. Understanding external exposure to entities under sanctions in as rapid a manner as possible and determining the impact of potential exposures ahead of time is also important in this endeavour. It isn’t just a compliance matter, it’s a reputational imperative.

Capital markets firms spend a lot of time and effort on analysing market sentiment for trading decision-making, but by turning that focus inward to client data, what other opportunities could be uncovered?

Article originally published on TABBFORUM by
Virginie O’Shea, CEO and Founder of  Firebrand Research. As an analyst and consultant, Ms. O’Shea specializes in capital markets technology, covering asset management, international banking systems, securities services and global financial IT.