Battling Fraud and Basel II
October 07, 2003

Comment
Financial services institutions are spending vast amounts of cash on business intelligence and analytics systems, in order to defeat fraudsters and money launderers and keep up with Basel II legislation. Fraud detection solutions are expected to see strong growth, with a compound annual growth rate estimated at 7.5 per cent between now and 2006, when Datamonitor estimates FSI spend will reach $420 million.

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A new report by independent market analysts Datamonitor shows that compliance and risk management projects are going to be the major drivers of investment in analytics and business intelligence software by financial services institutions (FSIs).

The report predicts that the overall European FSI spend on business intelligence and analytics will grow at a compound annual growth rate (CAGR) of almost seven per cent between 2002 and 2006. Fuelled by anti money laundering and Basel II initiatives, Datamonitor says that compliance and risk management solutions in particular will experience the strongest growth in terms of FSIs investments.
 
For compliance and risk management combined, investment will amount to $1.7 billion in 2006. Spend on fraud detection mechanisms is also tipped to be a key area of investment. Datamonitor predicts that investment by European FSIs in business intelligence and analytics will hit $4.8 billion by 2006. The report splits business intelligence and analytics solutions into six solution areas: customer intelligence, risk management, fraud, performance management, financial analysis and compliance. Combined, FSI spend on compliance and risk management solutions are predicted to grow at a CAGR of 9.5 per cent between 2002 and 2006, showing the fastest growth of all solution areas.

Basel II,  with its current 2006 deadline, will require banks to implement a range of new processes to determine capital requirements in order to cushion themselves against credit, market and operational risk. Many of these processes will require investments in business intelligence and analytics software that enable banks to gain a consolidated view of data stored in different departments across the organization.

Similarly, banks will increasingly invest in anti money laundering (AML) solutions in order to prevent major fines from regulators that take money laundering increasingly serious. Royal Bank of Scotland was fined in December 2002 for non-compliance with FSA anti money laundering requirements.

Vendors from various backgrounds, including traditional business intelligence and analytics vendors, as well as players from data management, enterprise resource planning (ERP), customer relationship management (CRM) or other transactional processing backgrounds, are increasingly recognizing this potential. As a result, they are rushing to claim their stake of the market by providing tailored Basel II, AML, and other reporting and financial analysis solutions. Particularly, those vendors from backgrounds that are currently seeing tougher market conditions, such as ERP and CRM, hope to capitalize on the growth potential of the front end reporting space, as well as use the opportunity to gain more direct exposure to business users across organizations.

Daniel Lessner, financial services technology analyst at Datamonitor, commented: "The business intelligence and analytics industry, as with most of the IT space, has seen some slower years recently. The financial services sector, traditionally the largest market for business intelligence and analytics, is going to play a pivotal part in fuelling this recovery in the coming years as banks and insurance companies are pressed to satisfy regulatory requirements and meet pressure from shareholders to provide a more complete picture of risk exposure, compliance and profitability."