The Building Blocks of Finance Modernization Profitability and Balance Sheet Management Cloud Service
Introduction
Banks that embrace finance modernization gain a powerful market advantage—one rooted in greater agility to support evolving business needs, improved financial data management and insights, streamlined compliance, and increased operational efficiency. Institutions that power their modernization initiatives with the cloud stand to achieve even greater benefits as they move faster and eliminate technical debt that blocks innovation.
While there are many facets to finance modernization, institutions are increasingly focusing on two components: performance management and balance sheet management. A recent IDC study of financial services leaders underscored this priority—with balance sheet management and performance software and business analytics and data management solutions topping the list of the most important tools needed to build modern finance capabilities. As part of their finance modernization initiatives, and in the face of our most recent banking crisis, banks are also seeking expanded interest rate and liquidity risk management capabilities that support the development of balance sheets with acceptable levels of risk to achieve the desired financial results.
“Modernization in finance involves transforming the finance function to make it data-driven and digital-first. The goal is a more automated and optimized finance function capable of delivering faster, more strategic value to the business.”
Winds of change
The financial services industry continues to transform at an unprecedented pace. In response, financial institutions are working to innovate processes across their enterprises, including finance management, as part of broader efforts to better align accounting, finance, risk, and treasury and ensure profitability and compliance.
Several powerful market forces are converging to drive the need for finance modernization, including the following:
1. The need for greater resilience in a climate of increased volatility
Today, banks are operating in an era of increased volatility, marked by rising inflation and interest rates, growing cost pressures, escalated geopolitical risk, and increased regulatory scrutiny, especially regarding interest rate risk and liquidity. For more than a decade, banks have essentially been operating in an environment of nearly “free” money, during which time they shifted their focus away from interest rate risk. However, the environment has changed significantly since the start of 2022, and once again it requires an intense focus on interest rate and liquidity risk.
In addition to increased volatility, banks are also contending with customers who expect more-frictionless, personalized, and integrated financial experiences as well as continued competition from new digital-native market entrants. All these factors are driving banks to focus on agility and resiliency. To achieve these goals, banks need to better understand performance and risk—both of which require finance modernization.
IDC Research Report: “Road Map to Driving Finance Transformation in the Office of the CFO”
2. New business models
Progressive banks are moving to a platform-based business model that aligns their digitalization and ecosystem strategies—allowing them to offer their customers new value-added services. For example, banks not only provide loans for home mortgages, but they may also serve as matchmakers, helping customers buy homeowners insurance, house maintenance services, or even furniture through their platform. Managing these ecosystems drives even more-complex finance scenarios and the need for deeper insight across diverse lines of business.
3. Growing regulatory and security risk and requirements
Banks are under incredible pressure to manage complex and costly regulatory requirements that seem to change and grow annually. There is also growing consensus that financial services institutions should expect more rigorous regulatory review in light of growing liquidity and interest rate risk. In April 2023, the Federal Deposit Insurance Corporation (FDIC) issued a new report: “What to Expect During an Interest Rate Risk Review.” In addition, there are growing expectations that changes may be coming to the Reporting Form FR 2052a "Complex Institution Liquidity Monitoring Report" from the Federal Reserve Bank of New York.”
Banks continue to struggle to meet rigorous requirements for transparency given their siloed legacy finance, risk, and accounting environments.
The two most prominent issues impacting regulatory and statutory reporting
Disparate systems hinder the quality of reporting results
Data reconciliation across finance and risk platforms
An expanded role for finance and treasury teams
In response to these market factors and the expanded emphasis on ensuring greater alignment across finance, risk, and accounting, we’re seeing the role of finance and treasury teams change as well.
CFOs and their teams are now expected to transform from information providers to problem solvers who help drive business value and growth. In addition to their traditional duties as financial stewards, their new responsibilities include architecting pricing strategies that drive higher margins, finding ways to reduce revenue leakage, and identifying opportunities to make the business more profitable through efficiencies and new revenue streams. Today, nearly half of banking CFOs say identifying and unlocking value has become a key focus.
To succeed in this new role, CFOs and their teams need expansive, real-time, and actionable insights that only finance modernization can deliver. Extended insight into profitability and improved balance sheet management—key pillars of finance modernization—are especially critical for financial executives in their expanded role.
Harnessing analytics
Actionable insights for smarter performance management and balance sheet planning
Finance executives have been chasing expanded and actionable insights for years—with mixed results. To improve their outputs and return on investment, they seek more effective ways to
- Integrate data and automate its management
Finance management inherently involves data management, which can be immensely complicated in large financial institutions with dozens, if not hundreds, of data repositories, ranging from enterprise resource planning (ERP) systems, governance, risk, and compliance systems to assorted data warehouses and lakes and even one-off spreadsheets. Reconciling this data for reporting is extremely time-consuming, requiring extensive aggregation and reconciliation that often falls short. Financial services organizations seek more efficient and cost-effective ways to automate the integration of the critical enterprise data needed to power next-generation performance management. - Achieve a complete view of profitability
Financial institutions continue to grapple with understanding performance and profitability at the customer account level. This capability is even more important as finance is increasingly expected to drive business value, including contributing to pricing strategies. Finance teams need a complete and accurate view of profitability across customers, accounts, individual products, channels, lines of business, geographies, and more to achieve a deep understanding of performance drivers and offer input on ways to improve customer acquisition and cross-sell and upsell strategies. - Connect planning and forecasting
Planning and forecasting processes and cycles are often not synced, and limited visibility between finance, operations, and lines of business, along with fragmented data and systems, makes it difficult to accurately refine and reforecast continuously. Finance teams are eager to connect these processes, especially as they intensify their focus on managing interest rate and liquidity risk—and to do so, they need to integrate data and establish an enterprise view. - Ensure calculation transparency
Regulators, as well as internal compliance teams, require new levels of transparency across calculations and reporting. As a result, finance teams need extensive audit capabilities that provide transparency into the modeling and calculation processes for planning and performance management. The ability to deliver on these requirements streamlines compliance and builds confidence in business decisions.
Modernization blueprint
Oracle’s answer
The Oracle Financial Services Profitability and Balance Sheet Management Cloud Services suite is purpose-built to help banks rapidly achieve their finance modernization goals.
The suite includes multidimensional profitability management, profitability analytics, funds transfer pricing (FTP), asset liability management (ALM), and balance sheet planning and optimization applications.
Together, these cloud native SaaS services provide a complete solution to help financial institutions measure and meet risk-adjusted performance objectives and price products to reflect their actual risk. They also help finance leaders better understand how changes in interest rates, liquidity, and capital adequacy and exposure to market rate volatility impact their institutions.
The solutions leverage a single transparent data model and platform that allows organizations to share component building blocks across applications—streamlining data integration, improving data quality, and reducing IT costs and complexity.
This common data foundation and componentized approach also enables banks to begin their modernization journey where they choose and progress efficiently from there. Institutions can use the common infrastructure to load and cleanse raw data, schedule batch processes, and share implementation building blocks, such as dimension members, hierarchies, hierarchy filters, data filters, and expressions.
The blueprint for a complete solution
Oracle’s complete solution for profitability and balance sheet management comprises six components.
Oracle Financial Services Profitability Management Cloud Service
Provides financial institutions with an enterprise wide view of profitability drivers, risk-adjusted performance, and performance across multiple dimensions, including products, business units, legal entities, channels, relationship managers, and customers.
Market advantage
- Analyze and report profitability along any dimension and deploy any costing methodology.
- Prioritize customers by value and profitability.
- Achieve the scale and performance to compute customer risk-adjusted profitability.
- Gain insight into how results are derived.
- Streamline multiple disparate systems and integrate with the broader Oracle suite.
Oracle Financial Services Profitability Analytics Cloud Service
Empowers banks to identify profitable and potentially profitable portfolios, accounts, and customer relationships and understand enablers. The solution also supports top-down reporting from the management ledger and bottom-up reporting from instrument tables for different user roles.
Market advantage
- Analyze expenses across customer segments, products, lines of business, and channels to understand ROI and performance across dimensions.
- Engage in product-specific analysis, including customer distribution across the industry, customer segments, regions, balance maturity, and asset liability balances.
- Gain deep insights into enterprisewide relationships of the customer, instruments/products the customer holds, and associated performance to drive more-effective upsell and cross-sell strategies.
Oracle Financial Services Funds Transfer Pricing Cloud Service
Builds on Oracle’s history of producing the industry’s first matched maturity FTP application to enable financial institutions to determine the spread earned on assets and liabilities, as well as the spread earned because of interest rate exposure for each customer account. It also provides an accurate assessment of profitability across products, business lines, channels, and customers and centralizes interest rate risk for effective management.
Market advantage
- Integrate risk insight into decision-making.
- Accurately price the cost of funds by assigning multiple FTP rates comprised of base and add-on rates.
- Understand actual exposure to interest rate risk when calculating funding charges and credits for each account record for each component FTP rate and posting offset entries to your funding center.
- Identify break events and calculate their actual economic gains and losses, incentivizing lines of business to recoup costs and increase revenue.
Oracle Financial Services Asset Liability Management Cloud Service
Delivers an accurate view of profitability, earnings stability, and overall balance sheet risk exposure. The solution provides an integrated framework for high-end ALM analytics, dynamic interactive dashboards, intuitive reporting, alerts, and scenario-based what-if analysis.
Market advantage
- Actively incorporate risk into decision-making.
- Promote a transparent risk management culture.
- Deliver pervasive intelligence throughout the enterprise.
- Model every instrument on and off the balance sheet for the most granular level of detail and precision, using either deterministic or stochastic methods and accounting for both contractual and behavioral adjustments.
- Gain deep and accurate insight with the ability to calculate and store a wide variety of financial risk indicators, including value at risk (VaR), earnings at risk (EaR), and probability distributions; static and dynamic market value, duration, dollar duration (DV01), and convexity; static and dynamic gap (based on both repricing and liquidity); and income simulation.
- Calculate net investment income (NII) based off the attributes of the instrument, or include base and add-on rate transfer pricing assumptions for net interest margin (NIM) reporting.
Oracle Financial Services Balance Sheet Planning Cloud Service
Brings new precision and confidence to balance sheet planning. The solution enables finance teams to accurately model the detailed and complex events on a bank’s balance sheet for both the current book of business and forecasted new volumes to achieve accurate margin forecasts and produce comprehensive, meaningful budgets.
Market advantage
- Simultaneously forecast new business volumes and margins.
- Optimize your ability to plan business unit–level margin and profit with common cash flow engines shared with Oracle Asset
- Liability Management Cloud Service and Oracle Financial Services Funds Transfer Pricing Cloud Service.
- Determine accurate current positions with customer relationship–level details.
- Develop regulatory capital requirements and capital plans based on budgeted balance sheet data.
- Deliver actionable insights across multiple dimensions.
Oracle Financial Services Cash Flow Engine Cloud Service
Enables a fresh and granular look at cash inflows and outflows. This solution enables financial institutions to calculate cash flows of assets, liabilities, and off–balance sheet products at the individual instrument level. The application measures and models every loan, deposit, and off–balance sheet instrument individually. This helps provide better insight into the granularity of cash inflows and outflows to be used for multiple nonregulatory and regulatory purposes.
Market advantage
- Support stronger alignment of risk and finance with expanded transparency.
- Enable cash flow analysis at the account level to meet rigorous regulatory and business requirements.
- Optimize cash flow insight with granular analysis that incorporates account- and instrument-level data as well as numerous customer behavior, amortization, and pricing variables.
Innovation
A better cloud connection
The cloud offers a faster path to finance modernization, and Oracle Financial Services Profitability and Balance Sheet Management Cloud Services offer unique benefits that further accelerate innovation.
Built on Oracle’s highly elastic, reliable, and secure cloud platform, the solutions enable banks to move faster when deploying new technology and extending business insight while meeting complex and dynamic management reporting and risk management requirements.
Oracle’s approach to SaaS uses an industry-agnostic base SaaS architecture that is native to Oracle Cloud and the services it offers to enable unmatched strength, performance, and resiliency. Our deep domain experience in the financial services industry—coupled with our in-house development approach of building Oracle financial services applications on our own complete technology stack—allows us to take SaaS-enabled finance modernization to the next level.
The big picture: Accelerate innovation and compound value with Oracle Cloud Services
The Oracle Financial Services Profitability and Balance Sheet Management Cloud Services suite combines the power of Oracle’s industry-leading financial management applications with Oracle Cloud Infrastructure to deliver unmatched value, agility, performance, and security.
- Reduce spend on hardware and physical facilities
Oracle’s SaaS solutions enable financial institutions to reduce on-premises infrastructure spend and add predictable costs based on usage. In addition, they can significantly decrease spend on both internal support and consulting resources, further reducing the total cost of ownership. - Accelerate implementation and streamline management
As true SaaS solutions, Oracle Financial Services Profitability and Balance Sheet Management Cloud Services accelerate implementation and time to business impact. Oracle manages the software deployment, patching, and maintenance while the applications include rich configuration capabilities that business users can manage without IT team support. A simplified and unified data model and advanced data movement capabilities further accelerate time to value. - Achieve superior scale and performance
Oracle Cloud’s resiliency ensures high availability and extreme scalability while lowering latency. And our autonomous cloud infrastructure reduces the management burden with autoscaling, self-healing, and more. - Gain the latest and greatest functionality with ease
Financial institutions benefit from automatic and seamless upgrades in the cloud, so users always have the most advanced functionality without the cost, time, and risk associated with traditional upgrades.
- Optimize availability and operational resiliency
Oracle Cloud Infrastructure uses proven engineering strategies, such as principles of architecture and system design, new architectural concepts, and service engineering procedures, to achieve resilience and availability. - Ensure security first and always
Oracle Financial Services Profitability and Balance Sheet Management Cloud Services are built on a cloud architecture that is designed with built-in security as well as security best practices, such as a defense-in-depth approach, and Oracle Software Security Assurance. They also include industry-leading implementation technologies and tools, including OpenID, OAuth, and OWASP, to help ensure multilayer protection and intentional redundancies for our customers.
Conclusion
Begin today
The imperative to move forward with finance modernization is clear and urgent for financial services organizations. Oracle has the cloud solutions financial institutions need to achieve this goal faster, more cost effectively, and with greater confidence.
Begin your journey today with Oracle Financial Services Profitability and Balance Sheet Management Cloud Services.
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