RISK MANAGEMENT TECHNOLOGY: Build-or-Buy Decision Hinges on Needs

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Byline: Andrew Johnson

Last Of Three Parts

The economic crisis and subsequent financial regulations threw a wrench in many banks' technology road maps - but risk management continued to attract interest throughout the downturn and remains a main driver of tech spending today.

New capital requirements, restrictions on certain credit card lending practices and other regulations have put pressure on banks to get a better grasp on their overall risk profile.

"In the area of risk management, we are seeing a big pickup in activity since the beginning of the crisis," David Wallace, the global financial services marketing manager at SAS InstituteInc. of Cary, N.C., said in an interview at the BAI Retail Delivery conference in Las Vegas in October.

"There are so many regulations that are affecting banks' bottom line or will affect the bottom line over time," Wallace said. "We certainly see institutions assessing what they think the impact of all that's going to be."

But in re-evaluating their approach to tracking and gauging risk, banks encounter a basic challenge: whether to build tools from scratch or buy new packaged products.

"It's always one of the fundamental questions," said Mike Stevens, the enterprise risk management, analytics and business intelligence manager at BB&T Corp. "My personal view is that ... sometimes building is a good thing because you know what you've got and there's a learning experience built into building something yourself."

The Winston-Salem, N.C., banking company is a longtime SAS customer that has used the vendor's technology to value loans based on expected payments and economic conditions, and model loan portfolios for future returns and losses. With SAS' Enterprise Miner product, BB&T analyzes loan information and scores loans to help make future lending decisions.

The build-or-buy decision often hinges on the amount of customization a bank anticipates doing to a packaged solution, Stevens said. Banks that decide to buy sometimes fall into the trap of tweaking new software programs to adhere to their own processes, inadvertently spending as much money as they might have developing in-house.

"If you decide to customize, often times that customization process can become like remodeling," Stevens said. "It can be much more expensive per square foot than building from scratch."

He said that extensive customization can "create an application that the vendor no longer supports."

BB&T has gone down the build and buy paths in the past and is currently evaluating its options for new SAS tools it is considering using.

One tool would require BB&T to transfer data from an existing database to a new one.

"We've challenged SAS to show us how we can benefit from all the other components of this [product] without having to move our data," Stevens said.

It is also considering buying SAS Forecast Server, a product Stevens said could help it devise more accurate predictions and would not require it to scrap previous work.

BB&T uses a more manual process for establishing its forecast models currently. The Forecast Server product would automate the creation of models. …