Geography Can Provide Better Banking Services

Our Failed Financial Institutions Need to Meet Their Community Covenant

We dodged a bullet. The global economic meltdown, which saw 140 banking organizations closed in the U.S. in 2009, has affected every industry and sector of life. Governments spent billions trying to correct systemic failures that began with the subprime mortgage crisis and led to a vicious cycle of reduced credit, business bankruptcy, and soaring unemployment. A 1930s-style depression was avoided at great cost to our public and private financial systems, but it could have been much worse.

Part of the problem was poor governance and a one-size-fits-all attitude toward economics at national and local scales. Banking professionals thought they could smooth over risky investments by diversifying across markets and product lines. They believed that what’s good for one community would be good everywhere else and that all that mattered was the big picture. This couldn’t work, and the financial train wreck that was 2009 proved this.

Why? Communities are diverse. Lenders and financial institutions failed to see us as individuals and how our individual differences impact each neighborhood. Every street is made up of unique transactions that can be strung together to create hot spots. The hot spots impact other areas, and like a financial cancer, they feed off each other, growing and merging.

The consequences of this? Tragedy— from a few faulty loans, we saw crumbled communities, wholesale foreclosures, and neighborhood blight. We’ve witnessed the topology of the failed financial network. Now, let’s fix it.

If banks and credit unions are to thrive in the “new normal,” they need to pay attention to information about each individual customer including lifestyle, location, and life stage. We have to begin with the most accurate information at the smallest scale possible and adjust our financial policies to this new reality. Only then will we avoid the mistakes of the past.

How should banks and financial institutions use geodemographic information to better understand their communities?

Simon Thompson

About Simon Thompson

Simon Thompson is responsible for global marketing strategies for Esri’s commercial sector. He is a keynote speaker, author, and seminar leader who has lived and worked on 5 continents.
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6 Comments

  1. steve lackow says:

    Simon, this is good stuff. Banks need to understand who they serve, and could serve, in order to understand what the needs of communities and individuals are, and manage to those needs. Banks need tools, information, expertise, and concern. This is all spatial, of course – where and who the communities, store trade areas, customers and competitors are.

    Tools. As we know, geographic information systems (GIS) go far beyond maps, offering an integration technology to bring together financial/profitability, management, marketing, and CRM infosystems. These systems all coexist today, and can be organized around the customer and the customer household. Integrated with the geography and demography of neighborhoods and communities, this enables banks to reach towards the mass personalization empowered by the ability to understand, address, and price each customer household uniquely.

    Information. Robust demographic estimates and projections, lifestyle segmentation, market potential data, and branch locations and performance data complete the customer-level perspective. This customer-level perspective resides in terabytes upon terabytes of customer level transaction data over time that exist today, in every bank of every size. Fair lending and compliance is empowered by the inclusion of LMI and minority geographies in the GIS, along with economic and community development incentive areas from the CDFI, HUD and others that will help banks collect financial incentives for doing business in designated communities of under-served people. They will support small buysiness and help create jobs and housing.

    Expertise. Risk managers will be able to quantitatively assess lending risk geographically, household by household. Throughout the enterprise, GIS will offer a means for every employee to plug in two-way to all this vast information to help hear, listen and serve the customer, not just take orders. Also, consider the broader role of this Web 2.0 digital age, the age of social networking and The Big Table. There is room to include everyone – individuals, community organizations, consultants, bankers, regulators. We can gather together now in virtual space and share experience, expertise and perspectives, across disciplines and roles, even while mobile. We can merge our talents and information and work together towards common goals.

    And if we do this, we’ll fix It. And we may not have seen the end of It quite yet.

  2. Peter Weir says:

    Developments in alternative electronic banking channels (e.g, I/Net, ATMs, Eftpos) have significantly diminished the local bank branch in some areas and, more importantly, the one-on-one communication between the client and the bank personnel. There is now a greater demand to converse with clients and discuss their financial planning requirements.

    Urban industrialization and suburban growth have changed the characteristics of local population areas. Demographics that were appropriate for local banking facilities a few years ago have altered, demanding changes to bank services and locations.

    Bankers must understand where their clients are and their special banking needs. Providing prompt decision making at the most appropriate banking facility using local factors and observed customer behavior is a challenge. Geography is critical to these planning initiatives whereby spatial relationships between customer and the bank need to be better understood. As an example, one recent study revealed that a bank customer will travel many more kilometers for a lending transaction and advice than any other standard transactions.

    Recent trends have seen more customer-centric concepts to overcome these restrictions and thereby increase customer consideration rates.

    As an example, programs being developed to place lending facilities where they are most needed. Other projects, such as “Bring Back the Local Branch Manager” and “Understand Local Communities,” aim to help facilities suit the needs of the neighborhood.

    GIS is helping banks understand their customers better, and this is providing customers with better service. It’s a positive relationship for everyone.

  3. Lorri Peltz-Lewis says:

    Year ago while teaching a GIS class to some less-than-impressed-students I mentioned that I could use GIS in pretty much any application. One student mentioned banking (yes this was the early 90′s) at which point in time we had a wonderful discussions (as much as Earth Scientists-Hydrologist-Geologist types could have on the subject banking). We came up with stacks of how GIS could be used in banking. Yea, you can use GIS to look at brick and mortar stores, ATM locations, etc. but there is much more to this. OK with that said here is a list of thoughts and ideas not only from that, but from an perspective outside of the banking industry.

    1 – show money paths, how is it used, where are the sinks (remember hydrology) and the sources?

    2 – where are the aggregation points? Maybe looking at the offshore accounts – Swiss banks, Cayman Islands, are these true aggregation points, how does money from here flow elsewhere…

    3 – trace a dollar bill or other coinage – where does it go? what does it do? Try using animal movement models… this might lead to some interesting elements.

    4 – what about the investments – yes we are all interested in the ARRA, neat to see where it goes, but how can you map the impacts that it is having? The sub-distribution of the money into the local area is what we really want to see, not just where it is being sent to and used on.

    5 – how the heck does the flow or availability of the resource (money) impact interest rates in different geospatial areas? What is the stratification associated with these?

    Etc. Etc. It’s not just about the structures that banks have, but how the money flows. Treat it like a resource – nothing different that water, but controled by interesting parameter. So how about some real Geographic Information Science (GISc) applied to finances and money?

  4. John May says:

    Years ago (1993-1996)I worked with the banking industry as a consultant. At that time CRA (Community Reinvestment Act) was a hot topic. Working with one client I geocoded over 1 million of their accounts and then analyzed the information for purposes of spatial distribution of lending and savings activities. What was discovered is that banks have 2 distinct market areas; One for lending activities and the other for savings/deposit activities.

    A consumer is willing to travel some distance to secure a loan, in this case home loan, and save money but when it comes to travel for the purpose of depositing a check, going to the branch, etc then the consumer is much less willing to travel.

    Here is a link to a talk I gave at an ESRI conference back in the Palm Springs days.

    http://proceedings.esri.com/library/userconf/proc95/to400/p360.html

  5. Simon Thompson Simon Thompson says:

    Lorri
    Thank you for your insightful comments.

    I have had a lifelong interest in the “ant farm” style GIS ideas you describe. Tracking pathways, identifying clusters and temporal patterns provides amazing insight to behavior and need. We’ve been fortunate to be able to do some of these applications you describe with anonymous transaction data for e-payments.

    Johannes Moenius of the University of Redlands, School of Business, did an informative investigation on housing prices, interest rates and neighborhoods in his – Anatomy of a Housing Crash: The Case of the California Inland Empire. You will find a YouTube video at http://bit.ly/3yCI9g

  6. Jacob Maggard says:

    I have been leveraging GIS for Oil & Gas Exploration and Production for about 10 years. I have a wealth of experience in producing business answers which drive high level strategy and investment.

    A few years ago, I became more interested in leveraging my skills in the finance / investment banking world. To build toward my goal, I recently completed an MBA. Now, I am having trouble finding GIS analysis opportunities in the financial realm. I had hoped that over time, the industry would begin to realize the value of GIS — not just to locate stores or trace money flows — but to improve logistics, locate sinks, properly rank projects, optimize M&A and to systematically reap razor thin margins across myriads of supply / investment chains.

    I brought this conversation to my university career counselor and the best answers he could get out of his contacts at banks were that MIS systems handle all of this. They said I should look toward the software engineering and MIS line of work.

    To me, it seems like someone like me could be very handy in building prototype analyses frameworks and completing quick hit one-off studies. Repeatable and key processes could then be built into solid MIS applications (by someone else!).

    Am I a pioneer, or thinking about this incorrectly? Have you heard of these types of firms embracing raw GIS and custom spatial analysis? If so, how would staff of this nature be classified at an investment bank?