Multidimensional Value Analysis (MVA) involves assessing the value of a business—such as a Financial Institution—across multiple dimensions or variables. This provides the ability to gain a nuanced understanding of where the profits and losses come from. These dimensions could range from member segments, geographical regions, and delivery channels to specific products, loan officers, and credit scores, among others.
The idea is to dissect the financials along multiple axes to identify the areas of strength and weakness, allowing for more targeted decision-making. Rather than looking solely at aggregate metrics like total revenue or net profit, the analysis dives deeper to evaluate how different aspects of the business contribute to those aggregates. This enables the Financial Institution to make more informed decisions on resource allocation, risk management, and strategic planning, thereby optimizing value and operations.
Financial Institutions, like other businesses, aim to optimize their value/profitability while mitigating risks. Optimized value is favored by credit unions since it directs any excess value back to the membership while a bank maximizing profitability drives excess value to the stockholders. Multidimensional Value Analysis (MVA) offers a nuanced, thorough approach for assessing performance by examining various facets of a Financial Institution's operations. Here are some reasons why a Financial Institution might opt for this comprehensive approach:
Better Understanding of Revenue Streams
Different dimensions could include types of members, geographical locations, products, or channels. By understanding the value of each dimension, a Financial Institution can make more informed decisions about where to invest resources for maximum returns.
Resource Allocation
MVA can help a Financial Institution decide how to allocate its resources more effectively. For instance, if a particular service line or member segment is not valuable, the Financial Institution may choose to shift its focus to a more lucrative area.
Risk Mitigation
Multidimensional analysis can reveal areas of higher risk, helping the Financial Institution to adopt preventive measures. For example, if a certain member segment or delivery channel shows higher default rates, then corrective actions can be initiated.
Competitive Advantage
Understanding the value metrics across various dimensions can provide valuable insights that could be turned into a competitive advantage. For example, if a Financial Institution realizes that a specific service is valuable and meets an unmet need in the market, it can focus on scaling that service.
Member Relationship Management
Financial Institutions can use MVA to identify their most valuable members and tailor their services to retain them. Conversely, they can identify less valuable or costly member segments and develop strategies to either improve value or minimize loss.
Pricing Strategies
By knowing the costs and returns associated with different products, member segments, or channels, Financial Institutions can implement more effective pricing strategies.
Relationship Management
Assessing the profitability of accounts where the Financial Institution has multiple product relationships (e.g., checking, mortgage, and credit card with the same member) can give a more rounded view of member value.
By incorporating these additional dimensions into a multidimensional value analysis, a Financial Institution can gain a much deeper, more nuanced understanding of its operations and profitability. This, in turn, allows for more effective decision-making.
Customer Lifetime Value
Examining profitability through the lens of Customer Lifetime Value (CLV) can help the Financial Institution focus on long-term customer relationships rather than short-term gains.
Performance Metrics
MVA allows Financial Institutions to set more accurate key performance indicators (KPIs) by considering multiple variables. This way, the Financial Institution can focus on metrics that truly matter and are aligned with their value objectives.
Regulatory Compliance
Understanding value in a nuanced way may help Financial Institutions in maintaining adequate capital ratios and other regulatory requirements, as they can more accurately project income and associated risks.
Operational Efficiency
Analysis of various dimensions can also lead to insights into operational inefficiencies, providing opportunities for cost-saving measures. Specifically, this can involve understanding costs at the employee level. Afterall, employees can drive up to 75% of non-interest expense.
Enhanced Decision-making for Mergers and Acquisitions
A multidimensional view of value can be invaluable when considering mergers or acquisitions. It provides deeper insights into where value is being created within potential acquisition targets, helping to inform the negotiation and decision-making processes.
By digging deep into each dimension, Financial Institutions can make far more nuanced and effective decisions than by simply looking at overall value. This enables them to optimize returns and improve their overall operational efficiency and effectiveness.
The common denominator for Financial Institution Multidimensional Value Analysis is typically optimized ROA. A consistent application of an optimized ROA across multiple dimensions helps provide a fair and equitable view of all dimensions. Here are a few of those dimensions:
Return on Assets (ROA) by Credit Score
- Risk-Adjusted Pricing: By examining ROA across different credit scores, a Financial Institution can more accurately price loans to better reflect the risk associated with lending to borrowers with varying creditworthiness.
- Targeted Marketing: If the Financial Institution finds that certain credit score bands are more valuable, it can target its marketing and pre-approval efforts toward attracting such members.
ROA by Loan Officer
- Performance Evaluation: By segmenting ROA by loan officer, Financial Institutions can identify which loan officers are generating more valuable business and why.
- Training and Development: Low-performing loan officers can be trained or mentored by high-performing ones to improve overall value.
ROA by Delivery Channel
- Optimization of Channels: Financial Institutions can understand which delivery channels (online, in-branch, mobile app, etc.) are more valuable and may decide to allocate more resources to them.
- Member Experience: If a highly valuable channel offers a superior member experience, the Financial Institution may focus on replicating this experience across other channels.
ROA by Product Type
- Product Development: Financial Institutions can focus on developing and promoting more valuable products.
- Product Rationalization: Less valuable products can either be improved, phased out, or recognized as a loss leader.
ROA by Member Segments
- Member Retention: High-value member segments can be targeted with loyalty programs to improve retention rates.
- Cross-Selling and Up-Selling: Understanding which products are more valuable for different member segments enables more effective cross-selling and up-selling strategies.
In summary, Multidimensional Value Analysis can significantly enhance a Financial Institution's strategic decision-making by providing a multi-faceted view of its operations. It allows for a more targeted and effective approach to optimizing value, reducing risk, and achieving a sustainable competitive advantage.