OM in Finance, Brief and Expanded

Full text available at: http://dx.doi.org/10.
1561/2900000005
Operations in Financial
Services: Processes,
Technologies, and Risks
Full text available at: http://dx.doi.org/10.1561/2900000005
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Operations in Financial Services:

Processes, Technologies, and Risks
Michael Pinedo
Stern School of Business, New York University, USA
Yuqian Xu
College of Business
University of Illinois at Urbana-Champaign, USA
Boston — Delft
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in Technology,
Information and Operations Management
Volume 11, Issue 3, 2017
Editorial Board
Editor-in-Chief
Charles Corbett
UCLA, Anderson School of Management
United States
Editors
Fernando Bernsteini
Duke University
Cheryl Gaimon
Georgia Institute of Technology
Uday Karmarkar
University of California, Los Angeles
Sunder Kekre
Carnegie Mellon University
Panos Kouvelis
Washington University
Michael Lapré
Vanderbilt University
Karl Ulrich
University of Pennsylvania
Luk van Wassenhove
INSEAD
Editorial Scope
Topics
Foundations and Trends
R
Management publishes survey and tutorial articles in the following topics:
• B2B Commerce • New Product & Service Design

• Business Process Engineering • Queuing Networks
and Design
• Reverse Logistics
• Business Process Outsourcing
• Service Logistics and Product
• Capacity Planning Support
• Competitive Operations • Supply Chain Management
• Contracting in Supply Chains • Technology Management and
• E-Commerce and E-Business Strategy
Models • Technology, Information and
• Electronic markets, auctions Operations in:
and exchanges
– Automotive Industries
• Enterprise Management – Electronics
Systems manufacturing
• Facility Location – Financial Services
• Information Chain Structure – Health Care
and Competition – Media and Entertainment
• International Operations – Process Industries
• Marketing/Manufacturing – Retailing
Interfaces
– Telecommunications
• Multi-location inventory theory
Information for Librarians

Management, 2017, Volume 11, 4 issues. ISSN paper version 1571-9545.
ISSN online version 1571-9553. Also available as a combined paper and
online subscription.
Contents
Preface 2
1 Introduction 5
1.1 Importance of Financial Services . . . . . . . . . . . . . . 6
1.2 Operational Characteristics of Financial Services . . . . . . 7
1.3 Process Drivers and Operational Measures . . . . . . . . . 12
1.4 Operational Risk Aspects of Financial Services . . . . . . . 16
2 Operations Management in Financial Services 22

2.1 Product Design and Testing . . . . . . . . . . . . . . . . . 24
2.2 Process Design and Reliability . . . . . . . . . . . . . . . 25
2.3 Process Management and Quality Control . . . . . . . . . 32
2.4 Analytical Modeling in Process Design and Management . 37
3 Online and Mobile Financial Services 40

3.1 Channel Operations . . . . . . . . . . . . . . . . . . . . . 41
3.2 Customer Behavior . . . . . . . . . . . . . . . . . . . . . 43
3.3 Online and Digital Fraud . . . . . . . . . . . . . . . . . . 46
4 Operational Risk in Financial Services 50

4.1 Model Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2 IT Related Risks and Cyber Security . . . . . . . . . . . . 53
4.3 Behavioral Issues - Incentives and Moral Hazard . . . . . . 56

4.4 Remoteness Factors . . . . . . . . . . . . . . . . . . . . . 61
4.5 Exogenous Events . . . . . . . . . . . . . . . . . . . . . . 63
5 Data Analytics 66
5.1 Data Gathering and Supervisory Control . . . . . . . . . . 66
5.2 Multifactor analysis . . . . . . . . . . . . . . . . . . . . . 70
5.3 Data Mining and Machine Learning . . . . . . . . . . . . . 72
5.4 Bank Client Relationship Analytics . . . . . . . . . . . . . 80
5.5 Workforce Analytics . . . . . . . . . . . . . . . . . . . . . 84
6 Conclusions and Directions for Future Research 86

6.1 Current Practice of Operations Management in Finance . . 86
6.2 Future Research Directions . . . . . . . . . . . . . . . . . 87
References 92
Operations in Financial Services:

Processes, Technologies, and Risks
Michael Pinedo1 and Yuqian Xu2
1 Stern School of Business, New York University
2 College of Business, University of Illinois at Urbana-Champaign
ABSTRACT
This monograph is an attempt to establish a framework for
Operations in Financial Services as a research area from an
Operations Management perspective. Operations in Finan-
cial Services has not developed itself yet as a well-defined
research area within the Operations Management commu-
nity. It has been touched upon by researchers from vari-
ous different disciplines, including Operations Management,
Statistics, Information Technology, Finance, and Marketing.
However, each discipline has a different perspective on what
the important issues are and the various disciplines are often
at odds with one another. This monograph has been written
from an Operations Management perspective.
Michael Pinedo and Yuqian Xu (2017), “Operations in Financial Services: Processes,

Technologies, and Risks”, Foundations and Trends
R
in Technology, Information and
Operations Management: Vol. 11, No. 3, pp 223–342. DOI: 10.1561/0200000048.
Preface
This monograph is an attempt to establish a framework for Operations

in Financial Services as a research area from an Operations Management
perspective. Operations in Financial Services has not developed itself yet
as a well-defined research area within the Operations Management com-
munity. It has been touched upon by researchers from various different
disciplines, including Operations Management, Statistics, Information
Technology, Finance, and Marketing. However, each discipline has a
different perspective on what the important issues are and the various
disciplines are often at odds with one another. This monograph has
been written from an Operations Management perspective. After a lot
of discussion with colleagues of ours from the various different research
communities, we settled on the current structure and Table of Contents.
In the first section we present an introduction and provide an
overview of the monograph. In the second section, we establish links
between the current state of the art in relevant areas of Operations
Management and Operations Research and three of the more important
aspects of operations in financial services, namely (i) financial product
design and testing, (ii) process delivery design, and (iii) process delivery
management.
The third section focuses on the current issues that are important
in the financial services operations area. These issues center primarily
on mobile online banking and trading in a global environment. Several
2
Preface 3
reviewers were of the opinion that if such issues were not discussed, a
monograph on Operations in Financial Services would not be of any
interest.
The following section discusses operational risk aspects of Financial
Services. These topics are just as important as, for example, Total Qual-
ity Management (TQM) in micro-electronics manufacturing. Anyone
working on TQM in manufacturing knows how important this field is.
But it is only lately that people in the finance world have started to
realize how important operational risk is. And operational risk in finance
has not yet received the research attention that TQM has received in
manufacturing.
Since Big Data and Machine Learning have, in many disciplines,
become very much in vogue lately, it is more than appropriate to
have one section on Data Analytics, which includes Machine Learning.
It seems that Data Analytics will have a huge impact on financial
operations in the near future and that it will become an important area
of academic research.
In the final section we conclude with a discussion on research direc-
tions that may become of interest in the future.
We hope that this monograph will turn out to be useful for the
operations management community from a teaching as well as from
a research perspective. Hopefully, instructors will be able to use this
monograph in a course on Service Operations (or maybe even for a more
focused course on Operations in Financial Services). For researchers in
this area, this monograph may be useful as well since it may provide
an overview of the general area and some indication where a particular
research problem would fit in within the overall framework.
We are very grateful to the many people who have gone through
preliminary drafts of this manuscript and who have provided us with
useful feedback. We are especially grateful to Manos Hatzakis (Merrill
Lynch) and Suresh Nair (Univ. of Connecticut); several subsections of
this monograph have benefited a great deal from ideas presented in the
survey paper by Hatzakis et al. (2010). Several other colleagues of ours,
in academia as well as in industry, have also provided us with many
useful comments, namely Stephen Brown (Stern School of Business at
4 Preface
NYU), Marcelo Cruz (Ocwen Financial), Connor Farley (AQR), Stephen

Mellas (AQR), Cyrus Mohebbi (Morgan Stanley), Pavel Shevchenko
(Macquarie University), and Gary Thompson (Hexagon).
New York, summer 2017
Michael Pinedo
Yuqian Xu
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