Continuous changes in the economy and the world political scene have brought about structural changes in the financial sector, making it increasingly important to meet the challenges posed by the markets and to implement the self-regulation recommendations of the Basel Committee which, embodied in rules and regulations, require financial institutions to comply with these principles within specific time periods.

By incorporating tested cost management methodologies for the financial industry, profitability is measured, first of all, through the establishment of the non-financial costs generated by the institution during a given period at the level of areas, business units and products. These costs are presented under an overrating concept, which is an annualized interest rate for each product of the institution, with the additional option of viewing the costs at their actual value (currency). The analysis and parametric evaluation of the cost model and the effect of its components on the costs distributed to the business and products units is facilitated by the integration of end-user tools which allow a multidimensional display of the resulting information and its analysis.

The determination of the financial spread (Internal Transfer Price) is an integral part of the profitability model. It allows the user to obtain, through a methodological and technical mechanism, an evaluation of the internal and external information required to determine the cost of money in the institution itself, both for borrowing and lending operations, so that the financial spread can be obtained by comparing the rates applied to those operations.

Other factors affecting the profitability of a Financial Institution are integrated into the determination of the non-financial costs and the internal financial spread of the operations. These factors are the need to allocate capital in terms of the different risk factors of an operation, the legal reserve, legal provisions (expected loss), allocations for risk capital and income in respect of the services or fees generated by the operations. By consolidating these factors, the user has available the required methodology and mechanisms for an effective calculation of profitability per product and per business unit.

From the profitability per product, which is the summation of the profitabilities per operation, and together with the detailed information on the customers generating these operations provided by FINANWARE™ Analytical CRM, the institution will obtain the calculation of the Profitability per Customer as a high-value management tool.