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PRODUCTION AND OPERATIONS MANAGEMENT

Vol. 19, No. 6, November–December 2010, pp. 633–664
ISSN 1059-1478|EISSN 1937-5956|10|1906|0633

POMS

10.3401/poms.1080.01163
r 2010 Production and Operations Management Society
DOI

Operations in Financial Services—An Overview
Emmanuel D. (Manos) Hatzakis
Goldman Sachs Asset Management, Goldman, Sachs & Co., New York, New York 10282-2198, USA, manos.hatzakis@gs.com

Suresh K. Nair
Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269-1041, USA,
suresh.nair@business.uconn.edu

Michael L. Pinedo
Department of Information, Operations and Management Science, Leonard N. Stern School of Business, New York University,
New York, New York 10012-1106, USA, mpinedo@stern.nyu.edu

e provide an overview of the state of the art in research on operations in financial services. We start by highlighting a
number of specific operational features that differentiate financial services from other service industries, and discuss
how these features affect the modeling of financial services. We then consider in more detail the various different research
areas in financial services, namely systems design, performance analysis and productivity, forecasting, inventory and cash
management, waiting line analysis for capacity planning, personnel scheduling, operational risk management, and pricing
and revenue management. In the last section, we describe the most promising research directions for the near future.

W

Key words: financial services; banking; asset management; processes; operations
History: Received: November 2009; Accepted: July 2010 by Kalyan Singhal, after 2 revisions.

insurance (other than health), credit cards, mortgage
banking, brokerage, investment advisory, and asset
management (mutual funds, hedge funds, etc.).

1. Introduction
Over the past two decades, research in service operations has gained a significant amount of attention.
Special issues of Production and Operations Management
have focused on services in general (Apte et al. 2008),
and various researchers have presented unified theories
(Sampson and Froehle 2006), research agendas (Roth and
Menor 2003), literature surveys (Smith et al. 2007),
strategy ideas (Voss et al. 2008), and have discussed
the merits of studying service science as a new discipline
(Spohrer and Maglio 2008). A few books and a special
issue of Management Science have focused on the operational issues in financial services in particular (see
Harker and Zenios 1999, 2000, Melnick et al. 2000).
However, financial services have still been given scant
attention in much of the literature relative to other
service industries such as transportation, health care,
entertainment, and hospitality. The dilution of focus, by
concentrating on more general distinguishing features
does not do justice to financial services where some of
these characteristics are not central. (The more general
features that are typically being considered include
intangibility, heterogeneity, contemporaneous production and consumption, perishability of capacity, waiting
lines (rather than inventories), and customer participation in the service delivery.)
In this overview, we mean by financial services
primarily firms in retail banking, commercial lending,

1.1. Importance of Financial Services
Financial services firms are an important part of the
service sector in an economy that has been growing
rapidly over the past few decades. These firms primarily deal with originating or facilitating financial
transactions. The transactions include creation, liquidation, transfer of ownership, and servicing or
management of financial assets; they could involve
raising funds by taking deposits or issuing securities,
making loans, keeping assets in custody or trust, or
managing them to generate return, pooling of risk by
underwriting insurance and annuities, or providing
specialized services to facilitate these transactions.
Services is a large category that encompasses firms
as diverse as retail establishments, transportation
firms, educational institutions, consulting, information, legal, taxation, and other professional, real estate,
and healthcare. Even within financial services, there is
a wide variety of firms which are characterized by
unique production processes and specialized skills.
The processes and skills required for banking are
quite distinct from solicitations for credit cards, acquisitions of new insurance accounts, or the handling
of equity dividends and proxy voting, for example.
633

Hatzakis, Nair, and Pinedo: Operations in Financial Services—An Overview

634
Table 1

Production and Operations Management 19(6), pp. 633–664, r 2010 Production and Operations Management Society

Employment within Financial Services

Table 2 A sample of Financial Service Operations Job Titles, Responsibilities, and Products
Total employees

NAICS code

Title within financial services

Number

Titles

Products
Premiums, Claims, Refunds, Cash
flow and treasury management,
Customer statements, Loan servicing and support, Trade
confirmations, Reconciliations, Tax
reporting, Security settlements,
Mortgages

%

21,510

0.4

1,816,300

30.7

Non-depository credit intermediation
(credit cards, mortgage lending, etc.)

659,930

11.2

5223

Activities related to credit intermediation
(brokers for lending)

294,910

5.0

Vice President, Operations, Operations Manager, Financial Operations
Supervisor, Foreclosure and Bankruptcy Operations Manager, Risk
Operations Team Manager, Team
Manager Ops Control-Fixed Income,
National Director Operations, Hedge
Fund Operations Specialist, VP/
Director Of Operations

5231

Securities and commodity contracts
intermediation and brokerage

516,010

8.7

Nature of work/responsibility

5232

Securities and commodity exchanges

8,010

0.1

5239

Other financial investment activities
(mutual funds, etc.)

344,950

5.8

5241

Insurance carriers

1,258,050

21.3

5242

Agencies, brokerages, and other
insurance-related activities

907,880

15.3

5251

Insurance and employee benefit funds

47,730

0.8

5259

Other investment pools and funds

41,190

Brokerage operations, Improve customer service, resolves customer issues,
Review security pricing, Vendor support, Authorize net settlement, Hand-off of
data, ensure data integrity, Verifying transactions, Tracking missing transactions,
Leverage technology, Maintain ops controls, update policies, procedures, Backoffice support, Understand regulations, Ensure compliance, Attain profit and
revenue benchmarks, Reduce risk, Improve quality, Six sigma, Operational
processing efficiency, Problem solving, Ensure best practices, Streamline
activities, Manage key expenses, Work management tools, Monitors work flow,
Production/testing

5211

Monetary authorities-central bank
(Federal Reserve banks, etc.)

5221

Depository credit intermediation
(banks, credit unions, etc.)

5222

5,916,470

0.7
100.0

Source: Bureau of Labor Statistics, stat.bls.gov/oes/home.htm, May 2008.

Even though services account for about 84% of the
total employment in the economy, only about 4% of
this workforce is employed in financial services. This
might come as a surprise to some because financial
services transactions in one form or another are so
ubiquitous in our lives. Not surprisingly, however, the
number of financial services firms is about 7% of the
total non-farm firms and contributes about 13% of total non-farm sales. Only wholesale trade has a similar
employment and number of firms with a larger contribution to sales.
Table 1 provides employment information for the
sub-codes within financial services. As can be seen,
retail banks, insurance companies, and insurance brokers together employ about two-thirds of the financial
services workforce. A cursory look at the table gives a
sense of the diversity of the services sector. Clearly
operations management problems and approaches
used to solve them have to be customized for particular types of services—we already know that what
works for manufacturing may not work for services,
but by looking at Table 1 we can also realize that what
works for retail trade or recreational services may not
work for financial services. A quick glance through
Monster.com’s job openings for operations managers
in financial service firms shows a wide variety of titles, responsibilities, and ‘‘products’’ related to such
jobs. This is shown in Table 2, and gives a sense of the
wide swath of topics that could be covered in academic research on financial services operations. As
financial services are such an important segment of

Source: Monster.com jobs listings during the week of March 8, 2009.

the services economy, we wish to explore whether
operations in financial services are indeed unique, or
share several characteristics with services in general.
That is the motivation for this special issue.
1.2. Distinctive Characteristics of Operations in
Financial Services
There are several unique operational characteristics
that are specific to the financial services industry and
that have not been given sufficient attention in the
general treatment of services in the extant literature.
We list below a number of these unique operational
characteristics and elaborate on them in what follows: 
Fungible products with an extensive use of
technology 
High volumes and heterogeneity of clients 
Repeated service encounters 
Long-term contractual relationships between
customers and firms 
Customers’ sense of well-being closely intertwined with services 
Use of intermediaries 
Convergence of operations, finance, and marketing.
1.2.1. Fungible Products with an Extensive Use
of Technology. One obvious difference between
operations in financial services and operations in
manufacturing and in other service industries is that
the ‘‘widgets’’ in financial services are money, or related
financial instruments. As there is a declining use of the
physical vestiges of money such as coins, currency,

Hatzakis, Nair, and Pinedo: Operations in Financial Services—An Overview
Production and Operations Management 19(6), pp. 633–664, r 2010 Production and Operations Management Society

bond, or stock certificates, much of the transactions are
in the form of bits and bytes. Thus inventory is fungible
and can be transported, broken up, and reconstituted
(facilitating securitization, e.g.) in malleable ways that
are simply not possible in manufacturing or in other
service industries (see, e.g., the recharacterization of
bank reserves in Nair and Anderson 2008).
The increased use of online transactions (in brokerages, credit card payments, retail banking, and retirement accounts, e.g.) are forcing fundamental changes in
the way operations managers think about capacity issues (for statement mailing and remittance processing,
or for transfer of ownership in securities, e.g.). The fact
that adoption of online transactions is still growing and
has not yet matured and leveled off makes capacity
planning a big challenge. Yet we are aware of very little
research that would help managers deal with this issue.
1.2.2. High Volumes and Heterogeneity of Clients.
Financial services are characterized by very high
volumes of customers and transactions. Furthermore,
customers are not all alike. In many firms, a small
fraction of the customers generate most of the profits,
giving the firms an incentive to view them differently
and provide differential treatment, given the firms’
limited resources. For example, high net worth
individuals may be treated differently by asset
management firms; banking clients who keep high
balances in checking accounts and transact heavily may
be handled differently from depositors who keep almost
all their funds in savings accounts and certificates of
deposits (CDs) and transact minimally; revolvers (i.e.,
customers who carry over balances from one month to
the next) may be regarded differently from transactors
(customers who do not revolve balances) by a credit
card firm. In most non-financial services, because of
a limited number and sporadic interactions with
customers (e.g., in restaurants and amusement parks),
one customer is considered, for the most part, similar to
the next one in terms of margins and attention required.
1.2.3. Repeated Service Encounters. In contrast to
other service industries, where research typically
focuses on a single encounter (‘‘the moment of
truth,’’ ‘‘when the rubber hits the road’’), financial
services are characterized by repeated service
encounters or potential encounters between the firm
and its customers due to regular monthly statements,
year-end statements, buy/sell transactions, insurance
claims, money transfers, etc. Anecdotal evidence from
the brokerage and investment advisory industry
suggests that clients with low asset balances and
transaction volumes contribute the least to firm revenue
and the most to operational cost through calls for
customer service. One online bank discouraged calls to
customer service because it found that just a few calls by

635

a client could wipe out all the profit from the client’s
savings account. Very little research in service operations
management has focused on this issue. New customers
constitute another major group that is more likely to
make calls with billing questions or inquiries regarding
their statements. Should billing and statementing to new
customers be handled differently, perhaps with more
care, than to existing customers? Obviously, if this
observation is true, differential handling can reduce the
traffic to call centers. Existing call center research usually
assumes the call volume to be a given, for the most part,
and the focus is on ‘‘managing’’ the traffic. This is akin to
traditional manufacturing where it was assumed that
large setup times were a given, and a good way to
‘‘manage’’ would be to use an optimal batch size. One
learns to live with such a constraint. Not until just in
time (JIT) manufacturing came along did managers
question why setup times were large and what could be
done to reduce them.
At one credit card company, operations managers
struggled for years to cope with volatile demand in
bill printing, mailing, remittance processing, and call
center operations. Daily volumes could fluctuate
easily between half a million and one and a half
million pieces of mail in remittance processing, and
managers were reconciled to high overtimes and idle
times because they felt they had no control over
when customers mailed in their checks, and reducing float was important. Call volumes at the call
centers were similarly volatile, as were volumes in
the bill printing and mailing operations. This situation continued until someone recognized that all
these problems were interconnected and to a large
extent within the control of the firm. As it happens,
the portfolio of current customers is distributed into
about 25 cycles, one for each working day of the
month. For example, customers in the 17th cycle are
billed on the 17th working day of the month. Care is
taken to ensure that customers in the same zip code
are put in the same cycle so volume-mailing discounts from the US postal service can be obtained,
and the cycles are level loaded. However, this allocation to cycles was carried out several years back
and over time some customers had closed their
accounts while new customers had been added to
existing cycles, resulting in large differences in
the numbers of customers in the various cycles,
and in a wide variability in the printing and mailing
of monthly statements. On the remittance side, an
analysis found that there was less randomness in
customer payment behavior than one would expect.
There were broadly four cohorts of customers:
one that sent in payments on receipt of the statement, a second that mailed checks based on due
date, a third that acted based on salary payment
date, and a fourth that acted randomly. The first two

1. and (ii) the clients’ heightened propensity and incentive to check for error in something so closely linked to their livelihood and sense of security. detect fraud. which has attracted sufficient attention in the literature as we will see later. ensure that review triggers are not overlooked. loyalty programs (such as rewards and balance transfer programs in the credit card business) are important to stanch the bleeding. Long-Term Contractual Relationships Between Customers and Firms. pp..2. and detail of communication and disclosure as required by regulation. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). The design and execution of these programs are based on complicated processes that need to consider risks. An optimization model found that this constrained move was sufficient to take care of the vast majority of moves that were initially thought to be necessary. incremental sales. in financial services the firm and the customer have a relatively long-term contractual arrangement. complaints. There are several opportunities here (Jewell 1974) to speed up the process (and speed up the workers’ return to work. and subrogation activities (money the firm pays out but is owed to it by other carriers).5. again traffic that was determined by the cycles created by the firm. or credit card accounts. faulty processes resulting in incorrect calculations of interest amounts in savings. 633–664. There is an extensive literature in risk and insurance journals on scoring for fraud prevention and detection. or in inappropriate handling of stock . redemptions. and will generate immediate rebukes from the customer in the form of calls. state authorities. But there was a problem—the firm needed to inform each customer if their cycles were moved. Nair. but leveraging that information in the claims process can benefit from an operations perspective. Connected to the previous characteristic of repeat encounters is the recognition that. technology and information availability makes comparison shopping easy. But unnecessary costs can be reduced by fraud prevention and detection. Another example from the insurance industry concerns worker’s compensation claims. and because the account can be easily moved around. Along with the ease of manipulating the putty at the core of the financial services process comes the responsibility of working with something that is so close to the customer’s sense of well-being and worth. At least two factors make the detection of errors due to operational faults and their exposure to the clients relatively easy in financial services: (i) the amount. and more attention could be paid to even small opportunities.4. and therefore high attrition. 1. there may be other processes that are put in place to reduce unnecessary costs. However. Poor operations management that results in delays. this notification was not necessary if the move was to be within  3 days from their current cycle. the employer. However. resulting in easy switching between firms. something that is lacking in the current literature. Researchers in financial services operations. Similarly. or sloppiness can and will attract regulatory scrutiny and unfavorable publicity. Because of the above. In the insurance business. Timely intervention can avoid expiry of opportunities to collect dollars owed. customer attrition. We are unaware of any recent operations management literature in this area. billing calls were also heaviest soon after the statement was received by the customer. etc. tolerance for error is significantly lower than in other industries. and may be paying instead too much attention to relatively mundane and low-impact issues (‘‘good to do’’ activities). This loss of customers makes the acquisition process very important to the continued growth and profitability of the firm. unlike in other services. are missing the boat with regard to issues that are the most important (‘‘must do’’ activities) for the firm. where the process for handling workplace injury can have long tails spanning several years before the claim is closed. quality issues. costs. etc. by not making their presence felt in these areas. reduce costs. Just as the above processes aim at increasing revenue. hospitals.2. This example illustrates how stepping back and taking a broader view of the situation and collaborating across processes can have a major impact on financial service operations. If the cycles could now be level loaded. were in fact dependent on the cycles that the firm had set up many years back.e. which is in the insurance firm’s interest). increase the utilization of staff counsel compared with panel counsel by better scheduling of appearances for hearings. and lawyers (both on the staff of the insurance firm and panel counsel. many of these problems would disappear (similar to what happened in manufacturing when setup times were dramatically reduced thereby enabling lean operations). the largest ones. mortgage loan. for good reason because customers needed to plan their finances. r 2010 Production and Operations Management Society cohorts. i. the claims processes may primarily revolve around a call center. For example. Similarly. Customers’ Sense of Well-Being Closely Intertwined with Services. scheduling and sequencing of offers. medical practitioners. The process is complicated with interactions between the worker.636 Hatzakis. for example. lawyers who are hired on an ad hoc basis). frequency.

6. information technology. resulting in fewer delinquent accounts (requiring fewer outbound collection calls). The above customer service issues are distinct from the perceived quality of the performance of individual customer brokerage portfolios. in other cases most of the customer facing work is done by intermediaries (financial advisors. and operations. which may result in repeated mailings to chronic non-responders. and fund manager performance. Working through an intermediary entails a set of issues not normally seen in other services that function without intermediaries. 633–664. The foregoing does not imply that no significant work has been done in the research on financial service operations. even if they do respond). to our knowledge. recognizing the costs (Schneider 2010) and capacity issues (the increased transactions during market turbulence. and in still other cases the firm’s employees and its agents have to collaborate with one another (insurance). The purpose of this article and this special issue is to begin to expand that focus and encourage research in neglected or emerging areas in financial service operations. as described by Voss et al. 1. 1. The managers developing campaign strategies may not have the analytical background that a researcher in service operations can bring to bear. because the implications on customer lifetime interactions with the firm go much beyond initial pricing.) are important operations management concerns that have received little attention. We will survey existing research next. Convergence of Operations. call centers. Nair. insurance agents. etc. and is ultimately implemented through the sales force of brokers/ financial advisors. and file structures may not have been designed to carry information about previous contacts and the response to them. has not paid attention to product and service design in such situations. hereby adding a layer of complexity because the customer may choose between products from competing firms. There is very little research in the service operations literature that leverages this convergence. In some cases a direct-to-consumer approach is used (credit cards). These functions are supported and enabled by a healthy dose of statistics.). At many large firms. r 2010 Production and Operations Management Society dividend payments. or operations.2. annuities. Finance. which requires a choreography. researchers in service operations are working on a problem akin to quality inspectors at the end of the production line—by then it is too late. Therefore. and perhaps also fewer billing calls to inbound call centers. who put it in a more limited context of operations and marketing. and interest accrued in retail banking. the relationship between the firm and the intermediary is not exclusive.7. At times. the stock market. Even though performance may depend on the economy. collections. These complicated processes leave little time to incorporate experience from a previous mailing because a reading of the results of that mailing takes time (prospective customers may not respond immediately. This is an important aspect of the financial services industry. e. scrubbing of data. For example. For example. At a more sophisticated level. the volumes of mail and calls are baked in during the mailing campaign creation. become obvious immediately after monthly statements are sent out. where it draws resources from marketing. researchers in service operations are leaving a lot on the table. financial product and service design and delivery get filtered through the prism of what the agent feels is in his or her own best interest. and billing call centers. very few credit card firms use contact history in mailing solicitations. whether the student concentrations are in finance. By focusing only on back-office operations such as call centers. and optimization.g. marketing. Use of Intermediaries. Customer acquisition at a credit card company is a competitive differentiator and a complex process focused on direct mail campaigns. and Marketing. just that areas of work have had a narrow focus. but also where research in service industries in general has substantial application in financial service operations. There is probably no other industry where this convergence is more pronounced. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). mutual funds.2. technology. (2008). retirement accounts. and the cycle time for campaign creation is typically so long and complicated that much attention gets expended on scoring for credit and response. file transfers from credit bureaus and data vendors. moving an account to the competition is only a few clicks away. In Appendix . and the inventory of brochures left with the agents. investment research. the budgets for direct mail run into several hundred million dollars annually. strategy. the client 637 acquisition process in full-service retail brokerage and investment advisory firms begins at the corporate level. what gets planned in the corporate offices of the financial services firms and what is seen by the customer may be quite different. The operations management literature. while their skills could have made the mailings more effective and targeted (given the minuscule response rates). annuity sales through banks. information systems. product features. With the plethora of information available comparing a customer’s firm with others in the same space. pp. not only where the attention is only on financial service operations. Another indication of this convergence is that the majority of the undergraduate and MBA hiring at an investment bank in the greater New York City area from one of the region’s business schools is in the COO’s operation. etc. By focusing on the billing mailroom.Hatzakis.

638 Hatzakis. Section 2 focuses on process and system design in financial services. Sections 6 and 7 deal with waiting line management and personnel scheduling in retail banking and in call centers. 2. She states that firms design services to factor in this variability by trying either to accommodate the variability at a higher cost (cross training of employees. product design). 2001). Descriptive vs. they are treated separately. pp. Menor et al. rather than as part of a life cycle of firm–customer interactions. and therefore a proper service design is fundamental to the success of the customer experience. Financial Services System Design Service systems design has attracted quite a bit of attention in the academic literature. section 10. . and quality of resource inputs. the only one with client contact. standard option packages. whether in the front office or in the back office. traffic. This focus on client contact tasks. access to the service (channel access). combo meals). Shostack also pioneered the use of service blueprinting for identifying fail points where the firm may face quality problems. Focus on Single Encounters Much of the services literature. Section 8 focuses on operational risk in financial services. presents our conclusions and discusses future research directions. r 2010 Production and Operations Management Society A. and customer preference variability. Prescriptive Studies of Financial Services Several descriptive studies have focused on retail banking (Menor and Roth 2008. She illustrated this methodology for a discount brokerage and correctly identified that many of the operational processes are not seen by the customer. Even though these two topics are strongly dependent on one another. Frei (2006) discusses the various sources of randomness in service processes and how firms react to them in the design of their services. The last section. Aspects of Service Design Service research has usually focused on capacity management (type of customer contact. This area has become very important over the last decade and this section describes how this area relates to other research areas in operations management. and comes away with impressions regarding the quality of service. variable staffing) or to reduce the variability with a view to increasing efficiency rather than cost (off peak pricing. technology. which are common in services such as fast food. Other than meeting the branch manager when opening an account. is widespread in services research in general and in research on financial services operations in particular. Section 9 considers product pricing and revenue management issues. Nair. Perhaps this will change with time as more firms start experimenting with their service delivery design as Bank of America has been doing (Thomke 2003). She identifies five types of variability— customer arrival variability. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). From the outset. increased automation. 2. request variability. 2. such as total quality management (TQM). but here again the focus is on disparate single visits to the branch or Automated Teller Machine (ATM). Shostack 1984). neighborhood customer profile. product marketing.3. customer effort variability. This survey paper is organized as follows. such as associate training. however. the reason being that the techniques required for dealing with each one of these two topics happen to be quite different from one another. this section relates cash management to classic inventory theory. Even if a customer repeatedly visits the same restaurant. the service experience gets baked into the process at the time of the service design itself. 633–664. Sections 2 through 9 go over eight research directions that are of interest from an operations management point of view. One reason may be that service researchers have found it necessary to motivate their work by differentiating services from products (whether it is service marketing vs. because forecasting plays a major role in virtually every segment of the financial services industry. The first couple of sections consider the more general research topics.2. customer capability variability. It is clear that service design has to be as rigorous an activity as product design. and deployment) and the impact of the response to variability on costs and quality. much like a product. because the customer experiences the service first hand. For long the nature of customer contact has influenced service design think- ing by creating front-office/back-office functions (Sampson and Froehle 2006. 2. while section 3 considers performance measurements and analysis. Section 4 deals with forecasting. focuses on single service encounters. there is usually no other recognition of the stage of the relationship in the delivery of service. whereas the later sections go into more specific topics and more narrowly oriented research areas.1. she then focused on the telephone communication step. it has been clear that service processes are subject to a significant amount of randomness from various sources. scheduling. and client contact is an obvious differentiator. The next section focuses on cash and liquidity management. Retail banking seems to have attracted the most attention among financial services with respect to service design. Although the quality of service delivery depends on a number of factors. we provide an overview of the various operations processes in financial services and highlight the ones that have been addressed in operations management literature. there is not the kind of stickiness to the relationship as can be found in financial services. or service design vs.

pp.). In general. 633–664. Bank performance as a result of process variation has been studied by Frei et al. using such factors as customer and employee loyalty. Financial Services Performance Measurement and Analysis 3.and customer contact-intensive services. in that they speak about how existing firms and customers have already adopted these technologies.. Productivity measurement in services is also a challenge (Sampson and Froehle 2006). 2000). automated). (1999). customer satisfaction. the second may refer to the availability of service capacity/personnel (e. operational competence. 1999).). However. or if quarterly returns from a mutual fund are below industry performance. in an empirical study on retention in the online brokerage industry. the use of customer feedback to improve customer satisfaction (Krishnan et al. pricing. 2002..1. a process (e. (2003) find that trust is important for online transactions. its complexity vis-a-vis customer knowledge). customer utility. see Campbell and Frei 2010a. online banking (Hitt and Frei 2002). and lifetime value (Heskett et al.) and manufacturing process design (process selection. found that ease of use. batch/line. and e-services in general (see Boyer et al. there had been little incentive for senior managers to keep track of how . rather than prescriptive. If there is an error in the posting of a transaction. etc. there is an immediate customer reaction and the points in the service design that caused such failures to occur is apparent. Ciciretti et al. form and function. resolution. For example. b. 2002. rather than what they should be doing in the future.). this paper proposes an empirically grounded conceptual analysis and prescriptive frameworks that can be used to improve the performance of information. In general. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). location analysis. Because batching and lot sizing issues have been of considerable interest in the history of the study of manufacturing processes. The first type of quality measure is not as nebulous in financial services where the output is generally related to monetary outcomes. 2004. face to face vs. 2002. waiting time. Roth and Jackson (1995) found that market intelligence and imitation of best practices can be an effective way of improving service quality. breadth of offerings. it would be interesting to see how research in service systems design unfolds in the future.. Meuter et al. the use of distribution channels (Lee et al. These studies talk about the types of customers who use the various different channels and how firms have diversified their delivery of services using these new channels as newer technologies have become available. and quality reduce customer attrition. 2001). etc. Nair. (2010). Xue et al. They develop a dynamic programming model to optimize the collections process in consumer credit. financial service system design still has ways to go to catch up with product design (product attributes. scheduling. One paper with prescriptive recommendations for service design in the property casualty insurance industry is due to Giloni et al. This makes ensuring quality in financial services more doable and one of the foci of the research in operational risk management which we will discuss later. Menor et al. and because online technologies have made the concept of batching considerably less important. and that service quality is more influenced by service process choices and the cumulative impact of investments than by people’s capabilities. product development teams. The paper by Apte et al. and quality of service help create trust. there may be two different measures of service quality that are commonly used: the first refers to and measures the actual service provided (e. ‘‘Analysis and improvement of information-intensive services: Evidence from insurance claims handling operations. service level. etc. rigid/flexible automation. In that sense. Instead. 2007). Chen and Hitt (2002). because psychologically lenders do not enjoy analyzing their mistakes. r 2010 Production and Operations Management Society substitution of labor with information technology (Fung 2008). service quality is difficult to manage and measure because of the variability in customer expectations. etc. as may be the case in other services. etc. there are few quantitative metrics to measure a product (e. capacity planning.g. and also once an accounting loss is ascribed to a defaulted loan. This current special issue of Production and Operations Management provides some interesting new cases of process improvement in financial services. etc. 3. because physical appearance of branches. 2009. Collection processes have been the Cinderella of consumer lending research. The paper by De Almeida Filho et al. (2003). Best Practices and Process Improvement Many service firms are measuring success by factors other than profitability.g.. perceived 639 environmental security. and proximity (on-site or off-site) to help a manager navigate financial service operations strategies from a design standpoint based on where her firm is now. Quality in financial services is not influenced by such matters as the mood of the customer. as measured by retention.Hatzakis. their involvement in the delivery of the service. Balasubramanian et al. depth of relationship. self-service technologies (such as ATMs. Clemons et al. no longer matter in such situations. 1994). pay at the pump. whether it is in remittance processing or in the hiring of a fund manager. Furst et al.g. availability.’’ presents a classification of information-intensive services based on their operational characteristics. they are usually descriptive. (2010) focuses on collection processes in consumer credit. configuration.g.

credit card issuer. life or property/casualty insurer. and execution o Sales and client relationship management o Product development o Marketing Independent internal oversight functions o Compliance. (2010). r 2010 Production and Operations Management Society Figure 1 Typical Structure of an Asset Management Organization Asset management o Investment research. Typically. which has been adapted from Alptuna et al. lists the functions in the investment management process according to their distance from the end client. Schneider (2010) provides a framework for asset management firms to analyze their costs. but often by those in the finance world (Black 2007. the untapped research potential of operations in asset management must be sought there. Figure 1. none of which is less complex than an asset manager. shows the multiple constituent parts that must work together in order for a typical asset management organization to function effectively. Stulz 2007). (2010) draw heavily on asset management industry resources on best practices. Figure 2. The paper by Buell et al. Cruz (2010) argues that the focus of cost man- . 3. clearing and execution o Custody and trust services o Fund administrator o Prime brokerage and financing o Reputable auditor o Valuation (reputable third-party valuation firm) much will be subsequently collected. A collection of operations management research papers in asset management can be found in a recent book by Pinedo (2010). b. legal and regulatory o Controllers o Credit and market risk management o Internal audit o Valuation oversight Internal support teams o Billing o Human resources o Operations o Operational risk o Performance o Tax o Technology o Treasury External service providers o Brokerage. This is a particularly important issue in the financial services industry where considerable investments have been made in developing self-service distribution channels. (2010) investigates why self-service customers are more reluctant to change their service provider. They examine conditions under which the cost-effective strategy of outsourcing asset management operations can be successful for asset managers and their clients. asset custodian. however. the Report of the Asset Managers’ Committee to the President’s Working Group on Financial Markets (2009). who examine operational risk issues in hedge funds. not always produced by operations management researchers. pp. 633–664. for a typical retail bank. mortgage lender. Nair. management. To develop their framework. Brown et al. accountability as well as technology and expense control in asset management firms. Alptuna et al. trust bank. 2009a. and migrating customers to them. also adapted from Alptuna et al.640 Hatzakis. (2010) present a best practices framework for the operational infrastructure and controls in asset management and argue that it is possible to effectively implement such a framework in organizations that enjoy a strong. One can create a similar framework. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). Kundro and Feffer 2003. 2004. (2010). This paper’s primary contribution is to investigate how satisfaction and switching costs contribute to retention among self-service customers. The body of research on operations management in asset management is growing. Arfelt (2010) proposes an adaptation of the Lean Six Sigma framework used in automobile manufacturing for asset management. Alptuna et al. the Alternative Investment Management Association’s Guide to Sound Practices for European Hedge Fund Managers (2007). principle-based governance. the operations-intensive functions reside in the middle and back offices. among others. Biggs (2010) advocates a decentralization of risk management. accordingly. brokerage. and the CFA Institute’s Asset Manager Code of Professional Conduct (2009). An Example of Best Practices: Asset Management Asset management provides an interesting example of an area within the financial services sector that has been receiving an increasing amount of research attention with regard to best practices from various operations management perspectives.2. as shown in Figures 1 and 2. Outsourcing operations adds to the complexity by introducing elements of quality control for outsourced pieces and coordination between the main organization and the third-party provider (State Street 2009). namely the Managed Funds Association’s Sound Practices for Hedge Fund Managers (2009).

g.Shareholder servicing Zenios et al. Nair. Kantor and Maital (1999) for a large Mideast bank.Investment research . (1999). and study their implications for portfolio construction. Cummins et al. (1999).Product development Investment operations . bank branches) within the same service organization (e. or ratio bounded.Portfolio and risk management . and customer acquisition and development strategies. Oral and Yolalan (1990) performed such a study for a bank in Turkey.Failed trade reporting .Income/tax reclaims . and adhoc reporting . Soteriou and Zenios (1999a).Client data warehouse . For a good survey and cautionary notes on the pitfalls of improper interpretation and use of DEA results (e.Security pricing Global custody .Assets safekeeping . DEA has been used in many retail banks to compare productivity measures of the various branches with one another. (2007) provide a comprehensive textbook on the subject. Sherman and Ladino (1995). loosely using the results for evaluative purposes when uncontrollable variables exist). and Athanassopoulos and Giokas (2000) for Greek banks.Cash administration . and Seiford and Zhu (1999) performed such studies for US banks.Trade order management and execution Fund accounting . ordinal. and the development of better cost estimates for banking products via DEA.. and Berger and Humphrey (1997) for various international financial services firms. r 2010 Production and Operations Management Society Figure 2 Front office Middle office Back office 641 Investment Management Process Functions Asset management . Zhu (2003) discusses methods to solve imprecise DEA (IDEA).Sales and client relationship management . Nordgard and Falkenberg (2010) give an IT perspective on costs in asset management. It compares productivity measures of different entities (e.Client reporting Trade execution .Cash availability . DEA is a technique for evaluating productivity measures that can be applied to service industries in general. trade implementation. Campbell and Frei (2010a) examine cost structure patterns in the asset management industry. stock market performance. fund design. a large retail bank) to one another.Reconciliation . Performance Analysis Through Data Envelopment Analysis (DEA) There are numerous studies on performance and productivity analyses of retail banking that are based on DEA. Koetter (2006) discusses the stochastic frontier analysis (SFA) as another bank efficiency analysis framework. Such a comparative analysis then boils down to the formulation of a fractional linear program. These papers discuss operational efficiency. They compare mutual and stock property liability companies and find that in using managerial discretion and costefficiency stock companies perform better..Hatzakis. .Trade settlement agement programs at asset management firms should be strategic and tactical (see also Cruz and Pinedo 2009). and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). quality. where data on inputs and outputs are either bounded. Soteriou and Zenios (1999b). Cook and Seiford (2009) present an excellent overview of the DEA developments over the past 30 years and Cooper et al. and in lines of insurance with long payouts mutual companies perform better. 633–664. cash and liquidity management.NAV calculation .g.Reconciliation ..Portfolio recordkeeping and accounting . which contrasts to the deterministic DEA. profitability.Daily. where the original linear programming DEA formulation can no longer be used. - Corporate actions processing Data management OTC derivatives processing - Performance and analytics .Transaction management Transfer agency . 3.Billing .Reconciliation processing . pp.3. Sherman and Gold (1985).General ledger . Vassiloglou and Giokas (1990). (1999) use DEA to explore the impact of organizational form on firm performance.Financial Information eXchange (FIX) connectivity .g. Amihud and Mendelson (2010) examine the effect of transaction costs on asset management. see Metters et al. monthly.

savings. 4.. business and personal checking. and local market or firm-specific idiosyncratic factors. have a set maturity and an amount established at inception.g. Janosi et al. In its most familiar form in which it presents itself to customers and the general public. and also CDs).. Forecasting the future behavior and profitability of retail borrowers (e.e. Migration probabilities were provided by a major rating agency. Forecasting techniques have been applied to demand deposits because of their relative non-stickiness due to the absence of contractual penalties. is offered by Capon (1982). or outflows (e.g. pp. however. A discussion of credit scoring models. with penalties for early withdrawals. However. Revolving credit lines. Demand deposits have no stated maturity and the depositor can add to the balance without restriction.. (1999) use a commercial bank’s demand deposit data and aggregate data for negotiable order of withdrawal (NOW) accounts from the Federal Reserve to empirically investigate Jarrow and Van Deventer’s model. in which past balances.. (ii) when severe deterioration of their financial condition causes them to lose access to the credit markets. it does allow for more complexity. checking.. r 2010 Production and Operations Management Society 4. A product with similar non-stickiness is credit card loans. Forecasting involved in a decision to grant credit to a new borrower is known as ‘‘credit scoring. the types of forecasting we discuss tend to be more internal to the firms and not visible from the outside. Banks that offer these credit facilities must set aside adequate. and for capacity considerations. Forecasting in the Management of Cash Deposits and Credit Lines Deposit-taking institutions (e. without warning or penalty.. or withdraw from ‘‘on demand. more broadly defined as non-maturity deposits. interest rates. Banks typically offer these facilities to corporations with investment grade credit ratings. and assumes Markovian credit rating migrations. and devel- ops models for different deposit types. Forecasting Forecasting is very important in many areas of the financial services industry. linear in the logarithm of balances. The model uses industry data for revolver usage by borrower credit rating.. mortgages.. Many electronic payment systems now address this.g. or facilities.642 Hatzakis. Nair. i. Jarrow and Van Deventer’s (1998) model for valuing demand deposits and credit card loans using an arbitrage-free methodology assumes that demand deposit balances depend only on the future evolution of interest rates. Such promotional CDs carry an above-market premium rate for a limited period of time. future balances are highly correlated with past balances.e. and money market account deposits. He focuses on core deposits. time deposits.. bonuses or tax refunds). tax payments).e. correlated within and across industries. which have access to cheaper sources of short-term funding. but not excessive. for asset–liability management. savings and loan associations.’’ and its origins in the modern era can be found in the 1950s. and correlation estimates were calculated by Merrill Lynch’s risk group. They find demand deposit balances to be strongly autoregressive. NOW. Duffy et al. and a time trend are predictive variables.e. they find that one of the reasons for the slow pace of moving from checks to electronic payments in the United States is the customers’ perceived loss of float. Of special interest to these institutions are demand deposits. such as macroeconomic variables (income or unemployment). it consists of economic and market forecasts developed by research and strategy groups in brokerage and investment management firms. i. (2000) forecast the adoption of electronic payments in the United States. commercial banks. Humphrey et al. and credit unions) are interested in forecasting the future growth of their deposits. give borrowers access to cash on demand for short-term funding needs up to credit limits established at facility inception. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). for example. and money market accounts. commercial paper. such as during the crisis of 2007–2009.g. for credit card loans. 633–664. funds to satisfy the demand for cash by facility borrowers.g. also known as CDs. and (iii) during system-wide credit market dysfunction. O’Brien (2000) adds income to the set of predictive variables in the regression models. by allowing for payment at the due date rather than immediately. (2005) describe a Monte Carlo simulation model that Merrill Lynch Bank used to forecast these demands for cash by borrowers of their revolver portfolio. They develop regression models.1. i. checking accounts and savings accounts.’’ i. The model was used by Merrill Lynch Bank to help manage liquidity risk in its multi-billion portfolio of revolving credit lines. They use this information in the process of determining the value and pricing of their deposit products (e. savings. and home equity lines of credit) has become a key component of the credit management process. Fore- . and do not draw significant amounts from them except: (i) for very brief periods of time under normal conditions. distinguishes between the behavior of total and retained deposits. including related public policy issues. Sheehan (2004) adds month-of-the-year dummy variables in the regressions to account for calendar-specific inflows (e. Labe and Papadakis (2010) discuss a propensity score matching model that can be used to forecast the likelihood of Bank of America’s retail clients bringing in new funds to the firm by subscribing to promotional offerings of CDs. In contrast.

to select high quality households to target in its prospecting efforts. Baesens et al. k-nearest neighbor. through Markov decision processes. Merrill Lynch used discriminant analysis. The formal statistical methods used for classifying credit applicants into ‘‘good’’ and ‘‘bad’’ risk classes is known as ‘‘classification scoring. r 2010 Production and Operations Management Society casting involved in the decisions to adjust credit access and marketing effort to existing borrowers is known as ‘‘behavioral scoring. To improve the chances of acquiring and maintaining profitable customers.e. i.. and profitability. neural networks. (2003) discuss a model for optimally managing the size and pricing of card lines of credit at Bank One. minimize the number of trades for which delivery of securities is missed. and simpler methods such as logistic regression and linear discriminant analysis to have good predictive power. response. and online trading channels. 4. and neural network classifiers. Forecasting in Securities Brokerage. establishing mutual obligations of counterparties in securities and/or cash trades.’’ which aims to forecast a prospect’s likelihood to respond to an offer for credit. Trench et al. but not excessive. It must also hold adequate.. such as support vector machines and least-squares support vector machines (LS-SVM). and human relationships are key determinants in the channel choice decision. because they greatly impact capacity planning. pp. The results of a rational economic behavior (REB) model were used as a baseline. (2011): they develop a linear programming method to model the clearing and settlement operation of the Central Securities Depository of Mexico and evaluate the system’s performance through deterministic simulation. They find LS-SVM. and (ii) ‘‘balance scoring. as well as guarantees of payments and deliveries. Client choice decision forecasts were used as inputs in the process of determining the proper pricing for these new offerings and for evaluating their potential impact on firm revenue.e. as well as research and investment advisory services. and balance scores. they also review more recently proposed ones. including logistic regression. a method akin to classification scoring. revenue.2. i. (2002) contains a comprehensive review of the objectives.’’ Hand and Henley (1997) review a significant part of the large body of literature in classification scoring. The model uses account-level historical transaction information to select for each cardholder. annual percentage rates. and (ii) settlement. Altschuler et al. discount. and practical implementation of credit and behavioral scoring. A different approach is used by de Lascurain et al. This evolution has introduced a variety of channel choices for retail and institutional investors. clients’ decisions are impacted not only by price differentials across channels.’’ which forecasts the prospect’s likelihood of carrying a balance if they respond. offers for credit should be mailed only to prospects with high credit. The trading of securities in capital markets involves key operational functions that include: (i) clearing. (2003) examine the performance of standard classification algorithms. and credit lines that optimize the net present value of the bank’s credit portfolio. and decision trees. discriminant analysis.e.. The model’s formulation in de Lascurain et al. it can achieve this by modeling the clearing and settlement operation using stochastic simulation. transfer of titles and/or cash to the accounts of counterparties in order to finalize transactions. and Execution In the last few decades. The REB model assumes that investors optimize their value received by always choosing the lowest-cost option (determined by an embedded optimization model that was solved for each of millions of clients and their actual portfolio holdings). The central clearing organization must have robust procedures to satisfy obligations to counterparties. amounts of cash to meet payments. The Monte Carlo simulation allows for more realistic assumptions. methods. service mix and quality. Clearing.Hatzakis. (2011) is a relaxation of a mixed integer . Traditional wirehouses charging fixed commissions evolved or were replaced by diverse organizations offering full service. who represented the higher-cost options. Forecasting the number and value of trades during a clearing and settlement cycle can help the organization meet the above objectives. The REB model’s results were compared with those of a Monte Carlo simulation model. Firms are interested in forecasting channel choice decisions by clients.’’ The book by Thomas et al. (2002) discuss simulation models developed for Merrill Lynch’s 643 retail brokerage to forecast client choice decisions on introduction of lower-cost offerings to complement the firm’s traditional full-service channel. the securities brokerage industry has seen dramatic change. Nair. Response and balance scoring models are typically proprietary. 633–664. other methods include: (i) ‘‘response scoring. In addition to classification scoring. i. For example. Pricing.000 in assets). but also by the strength and quality of the relationship with their financial advisor. Most major markets have centralized clearing facilities so that counterparties do not have to settle bilaterally and assume credit risk to each other. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). Labe (1994) describes an application of forecasting the likelihood of affluent prospects becoming Merrill Lynch’s priority brokerage and investment advisory clients (defined as clients with more than US$250.

In a recent empirical study. Eisenberg and Noe (2001) include clearing and settlement in a systemic financial risk framework. (1996) fit piecewise linear rate functions to approximate a general time-inhomogeneous Poisson process.e. At low granularity.. Advertising and special calendar effects are addressed by Antipov and Meade (2002). who show that the bank clearing problem is NP-complete. More recently. Andrews and Cunningham (1995) describe the autoregressive integrated moving average (ARIMA) forecasting models used at L. The elegant textbook assumption that call arrivals follow a Poisson process with a fixed rate that is known or can be estimated does not hold in practice. and discusses the issues that each methodology addresses. Forecasting of Call Arrivals at Call Centers Forecasting techniques are also used in various other areas within the financial services sector. which is a crucial input in the personnel scheduling process in call centers (to be discussed in a later section). They addressed this ‘‘overdispersion’’ by proposing a Poisson mixture model.e. strategic. Jongbloed and Koole (2001) found that the call arrival data they had been analyzing had a variance much greater than the mean. (2009) show that forecast errors can be large in com- parison to the variability expected in a Poisson process and can have significant impact on the predictions of long-run performance. (2001) demonstrate how to remove relatively unpredictable short-term variability from data and keep only predictable variability. Taylor (2008) compared the performance of several univariate time series methods for forecasting intra-day call arrivals. ignoring forecast errors typically leads to overestimation of performance. Steckley et al.644 Hatzakis. (2005) found data from a different call center that also followed a Poisson distribution with a variable arrival rate. linear regression.L. (2010) examine the correlation of call volumes at later periods of a day to call volumes experienced earlier in the day for the purpose of updating workload schedules. Steckley et al. Shen and Huang (2005. Nair. and operational. a survey by Aksin et al. (2004). Methods to approximate non-homogeneous Poisson processes often attempt to estimate the arrival rate by breaking up the data set into smaller intervals. b) developed models for inter-day forecasting and intra-day updating of call center arrivals using singular value decomposition. Xu (2000) presents forecasting methodologies used at multiple levels of the business decision-making hierarchy. business plan. who developed models in which the call arrival rate is a random variable correlated across time intervals of the same day. r 2010 Production and Operations Management Society programming (MIP) formulation proposed by Gu¨ntzer et al. ARIMA models. In a study of Fedex’s call centers. and a research paper by Aldor-Noiman et al. Soyer and Tarimcilar (2008) incorporate advertising effects by modeling call arrivals as a modulated Poisson process with arrival rates being driven by customer calls that are stimulated by advertising campaigns. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). Recent papers that focus on forecasting call center workload include a tutorial by Gans et al. and therefore did not appear to be samples of Poisson distributed random variables. pp. (2007) forecast an inhomogeneous Poisson process using a Bayesian framework. and the dynamic harmonic regression of Tych et al. (2004) and Mehrotra et al. 4. They forecast arrival rates in short intervals of 15–60 minutes of a day of the week as the product of a day’s forecast volume times the proportion of calls arriving during an interval. refer to the framework of Thompson (1998) for forecasting demand for services. progressively moving up from minute of the hour to hour of the day to day of the month and to month of the year. Results indicate that different methods perform best under different lead times and call volumes levels. a Poisson model with an arrival rate that is not fixed but random following a certain stochastic process. for example.. They use a Bayesian modeling framework and a data set from a call center that enables tracing calls back to specific advertisements. (2007). call arrival data may have too much noise. To set this in a broader context. . i.. Weinberg et al. High intra-day correlations were found by Avramidis et al. 633–664. (2003). Methods tested included seasonal autoregressive and exponential smoothing models. Bean’s call centers. They achieve this by aggregating data at higher levels of granularity. i.3. Brown et al. The quality of historical data improves with the passage of time because call centers become increasingly more sophisticated in capturing data with every nuance that a modeler may find useful or interesting. Mandelbaum et al. Methods used include exponential smoothing. (1998). The prediction model proposed includes the previous day’s call volume as an autoregressive term. (2002). i. whereby from a set of prior distributions they estimate the parameters of the posterior distribution through a Monte Carlo Markov Chain model. tactical. Time series data used to fit the models exhibit seasonality patterns and are also influenced by variables such as holiday and advertising interventions. Massey et al. 2008a. Their approach resulted in a significant dimensionality reduction. (2009). they also allow for a random error term. Henderson (2003) demonstrates how a heuristic that assumes a piecewise constant arrival rate over time intervals with a length that shrinks as the volume of data grows produces good arrival rate function estimates. the forecasting of arrivals in call centers. the arrival rates were also serially correlated from day to day.e. and time series decomposition.

units of the risky asset are converted into cash at the lower bound. 1969.. Eppen and Fama (1968.e. pp. In what became known as the Miller–Orr model for cash management. Miller and Orr (1966) extended the Baumol–Tobin model by assuming the demand for cash to be stochastic. where its value does not fluctuate and is available on demand. 1971) proposed cash balance models that are embedded in a Markovian framework.. but its value may be subject to significant fluctuations and uncertainty. capturing the stochastic nature of precautionary demand for cash. In another one of their papers. 645 The concept of transactions demand for money. To meet short-term liquidity needs. and transactions take place when it starts moving out of this range. and uncertainty in receipts. for example. 5. Sprenkle (1969) and Akerlof and Milbourne (1978) observed that the Baumol–Tobin model tends to under-predict demand for money. Cash Inventory Management Under Deterministic and Stochastic Demand Organizations. and bought with the excess cash at the upper bound. in which demand for cash is deterministic but does vary with time. addressed by the Baumol–Tobin model. Bensoussan et al. real estate. Determining the value of certain types of risky assets (e. In the era of checks and electronic transactions. Sethi and Thompson (1970) proposed models based on mathematical control theory. Eppen and Fama (1968) developed a general stochastic model that allowed costs to have a fixed as well as a variable component. namely ‘‘bonds’’ . constant rate of demand for cash. Transaction costs were assumed fixed. Risky assets can also be subject to default. and we have not identified an earlier comprehensive review that accomplishes this purpose. They showed how to find optimal policies for the infinite-horizon problem using linear programming.g. opportunities for advantageous purchases. Weitzman (1968) finds it to be ‘‘robust. and assetbacked fixed income securities) may require specialized valuation services. this work served as a model for the cash management problem. The cash balance can fluctuate randomly between a lower and an upper bound according to a Bernoulli process. Eppen and Fama (1969) presented a stochastic model. Cash not needed to meet short-term liquidity needs can be invested in risky assets whereby it may earn higher returns. 633–664. which allows that variable to be continuous. The model assumes a deterministic. which in turn prompted a counter-response by Sprenkle (1977). It calculates the optimal ‘‘lot sizes’’ of the risky asset to be converted to cash. or the optimal numbers of such conversions. formulated as a dynamic program.Hatzakis.1. stock. We review the cash management literature from its beginnings so we can put later work in context. but may correspond only to a value in an account that has been set up for this purpose. independently developed by Baumol (1952) and Tobin (1956). Researchers have produced over the last few decades a significant body of work by applying the principles of inventory theory to cash management. b) and Armony and Maglaras (2004). in which case all or part of the value becomes permanently unrecoverable. (1965) propose a deterministic shortterm financing model that incorporates a great degree of realistic detail involved in the financial officer’s decision-making process. i. is related to. Eppen and Fama (1971) proposed a stochastic model with two risky assets. In their third paper. which they formulate and solve as a linear program. independent of transaction size. Sprenkle’s paper elicited a response by Orr (1974). and individuals need cash to meet their liquidity needs. partly because it fails to capture the stochastic nature of precautionary demand for cash. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). see Whitt (1999a.e. (2009) allow the demand for cash to be satisfied by dividends and uncertain capital gains of the risky asset. precautionary demand for cash that applies to unforeseen expenditures. Treasury bills and checking accounts are considered riskless. general results do not change much when the underlying assumptions are modified. Inventory and Cash Management 5. In a critique of the Miller–Orr model. Robichek et al. r 2010 Production and Operations Management Society Forecasting other aspects of a call center with a significant potential for future research include. Tobin’s version requires an integer number of transactions and therefore approximates reality more closely than Baumol’s. households. private equity. In an extension of the Sethi– Thompson model. with transaction costs proportional to transaction sizes. in the presence of transaction and interest costs. but subtly different from. cash must be held in a riskless form. its value may or may not be quickly recoverable and realizable at a modest cost (as with a public equity that is listed in a major stock exchange). One of the early works produced an elegant result that became known as the Baumol–Tobin economic model of the transactions demand for money. In one of their papers. Changes in the cash balance can follow any discrete and bounded probability distribution. an amount of cash does not have to be in physical currency.’’ i. and could become wholly or partially unrecoverable. Whalen (1966) developed a model with a structure strikingly similar to the Baumol–Tobin model. waiting times of calls in queues. They include a discussion on model extensions for solving the financing problem under uncertainty. Whistler (1967) discussed a stochastic inventory model for rented equipment that was formulated as a dynamic program. which could involve significant time and cost.. but earns little or no interest. Nair. Depending on the type of risky asset. some hedge funds.

linear holding and penalty costs. Supply Chain Management of Physical Currency Physical cash. Their approach was extended to cash management by Vial (1972). Disadvantages of cash include ease of tax evasion. Constantinides and Richard (1978) formulated a continuous-time. There are studies on paper currency circulation in various countries. (2006) study the cash supply chain structure in the United States. and electronic transactions. To compare and contrast new and old Federal Reserve policies for currency recirculation. and the public must be studied as a closed-loop supply chain (see. Smith (1989) developed a continuous-time model with a stochastic. For example. credit. Constantinides (1976) extended the model by allowing positive and negative cash balances. it protects privacy by leaving no transaction records. discounted-cost cash management model with fixed and proportional transaction costs. paper currency and coins. Fase et al. and determined the form of the optimal policy (assuming one exists).e. In a study of costs and economies of scale of the US Federal Reserve’s currency operations. and describe the cash flow management system used by US banks.. (1979) discuss a numerical planning model for the banknotes operations at a central bank. and it eliminates the need to receive statements and pay bills. Bauer et al. i. Opening currency operations to market competition and charging fees and penalties for some services provided for free by the Federal Reserve at that time could lead to more efficient allocation of resources. (2001) find that the Federal Reserve is not a natural monopoly. The movement of physical cash among central banks. pp. remains an important component of the transactions volume even in economies that have experienced a significant growth in checks. Massoud (2005) presents a dynamic cost minimizing note inventory model to determine optimal banknote order size and frequency for a typical central bank. it does not require a bank account. (2000) develop optimization models for determining the least-cost configuration of the US Federal Reserve’s currency processing sites given the trade-off between economies of scale in processing and transportation costs. Bohn et al. Central banks provide cash to depository institutions. Ladany (1997) developed a discrete dynamic programming model to determine optimal (minimum cost) ordering policies for banknotes by Israel’s central bank. Geismar et al. whose continuous-time formulation had fixed and proportional transaction costs. Dekker et al. and discussed properties of the optimal solution. shipping used currency to the Federal Reserve and ordering it in the same denominations in the same week. and linear holding and penalty costs. The two movements are so intertwined that they cannot be decoupled. with examples from pre-Euro Netherlands. and Bather (1966). Among the practices to be discouraged was ‘‘cross shipping. They also discussed using ‘‘bonds’’ (the intermediate-risk asset) as a ‘‘buffer’’ between cash and the more risky asset. Fase (1981) and Boeschoten and Fase (1992) present studies by the Dutch central bank on the demand for banknotes in the Netherlands before the introduction of the Euro. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). (2010) examine the conditions that . Dawande et al. who used a Wiener process to generate a stochastic demand in their inventory problem formulations. ability to counterfeit.2. They also discuss the new cash recirculation policies adopted by the Federal Reserve to discourage banks’ overuse of its cash processing services. Advantages of cash include ease of use. risk of loss through theft or damage. 2004). and analyze banks’ responses to the new guidelines to help the Federal Reserve understand their implications.e. 633–664. and finality.’’ i. and the Wiener process as the demand-generating mechanism. Daellenbach (1971) proposed a stochastic cash balance model using two sources of short-term funds. together with a flow of new notes from the central bank to the public through depository institutions (forward logistics).646 Hatzakis. The production and distribution of banknotes. Nair. analyze it as a closed-loop supply chain. which in turn circulate it in the economy. 5. They proved that there always exists an optimal policy for the cash management problem. infinite-horizon. Rajamani et al. It involves the recirculation of used notes back into the system (reverse logistics).. depository institutions. They present a detailed analysis that provides optimal policies for managing the flow of currency between banks and the Federal Reserve. have also been studied. time-varying interest rate. determined the parameters of the optimal policy. and unsuitability for online transactions.g. Taking a similar approach. Girgis (1968) and Neave (1970) presented models with both fixed and proportional costs and examined conditions for policies to be optimal under different assumptions. and the required infrastructure and processes. (2007) introduce models that explain the flow of currency between the Federal Reserve and banks under both sets of guidelines. e. and that this policy is of a simple form. r 2010 Production and Operations Management Society and ‘‘stock’’. Hausman and Sanchez-Bell (1975) and Vickson (1985) developed models for firms facing a compensatingbalance requirement specified as an average balance over a number of days.. support of an ‘‘underground’’ economy. anonymity. the stock is more risky but has a higher expected return. and encourage increased recirculation at the depository institution level. Continuous-time formulations of the cash management problem were based on the works of Antelman and Savage (1965). debit and smart cards.

The client can use the loaned funds to buy more equity securities. Until very recently. and derivatives. pp. Rudd and Schroeder (1982) presented a simple transportation model formulation for calculating the minimum margin. Brokerage houses make loans to investors who want to use leverage. is methodologically the most relevant to mention in this overview. We believe that the approach in the paper by Fiterman and Timkovsky (2001). and in call centers. address the problem of obtaining efficient cash management operating policies for depository institutions under the new Federal Reserve guidelines. A significant body of subsequent work has been published on this problem. In a simple application of this practice. the size and timing of the first five sweeps must be carefully calculated to avoid a sixth sweep. The complexity increases even more with the presence of long and short positions and various derivative strategies practiced by clients. The impact of the sequence of transaction postings on account balances and resultant fees for insufficient funds. which is based on 0–1 knapsack formulations. The mixed-integer programming model developed for this purpose seeks to find ‘‘good’’ operating policies. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). (2010). especially by Timkovsky and collaborators. which represented an improvement over the heuristics used in practice. Money market deposit accounts (MMDA) with checking allow banks to reduce the amounts on reserve at the Federal Reserve by keeping deposits in MMDA accounts and transferring to a companion checking account only the amounts needed for transactions. They investigate how overdraft fees and nonsufficient funds (NSF) fees interact in such situations. Banks have been using heuristic algorithms to plan the first five sweeps. r 2010 Production and Operations Management Society can induce depository institutions to respond in socially optimal ways according to the new Federal Reserve guidelines.e. Therefore. Another objective was to analyze to what extent the new guidelines can discourage cross shipping and stimulate currency recirculation at the depository institution level. which is more related to portfolio strategies and hedging. known as margin lending. banks had a strong incentive to keep funds on reserve at a minimum. Mehrotra et al. Queueing occurs in the branches of retail banks with the tellers being the servers. Only up to six transfers (‘‘sweeps’’) per month are allowed from an MMDA to a checking account. and can pledge securities that they own as collateral. queueing is a common phenomenon that has been analyzed thoroughly. retail brokerage. bonds. Waiting Line Management in Retail Banks and in Call Centers 6.1. . in particular with regard to the following characteristics: (i) the information that is available to the customer and the information that is available to the service system. The stochastic dynamic programming model developed by Nair and Hatzakis (2010) introduces cushions added to the minimum sweep amounts. in particular in retail banking. and retail asset management (pension funds. 5. which is a paper in this special issue of Production and Operations Management.). and a client’s number and amount of transactions in the days remaining in a month is unknown. banks prefer to have funds available for their own use rather than have them locked up on reserve. 633–664. to quantify the monetary impact on a depository institution operating according to the new guidelines. (2004). Queueing Environments and Modeling Assumptions In financial services. because these funds were earning no interest. etc. has been studied by Apte et al. where the operators and/or the automated voice response units are the servers. Mehrotra et al. if such exist. all with different margin requirements. at banks of ATM machines with the machines being the servers. Nair. These diverse queueing environments turn out to be fairly different from one another. authorizing payment of interest on reserves held at the Federal Reserve. which will move the remaining MMDA balance into the checking account. It determines the optimal cushion sizes to ensure that sufficient funds are available in the transaction 647 account in order to cover potential future transactions and avoid the need for a sixth sweep. This specialized inventory problem has been examined by Nair and Anderson (2008). Even after the 2006 Financial Services Regulatory Relief Act became law. Calculating the minimum value required in a client’s account for a margin loan can become complex in accounts holding different types of securities including equities.3. similar to the cost of stock-outs in inventory management. the brokerage extends a margin loan to a client of up to the value of equity securities held in the client’s portfolio. 6..Hatzakis. to invest funds in excess of their own capital in risky assets. Other Cash Management Applications in Banking and Securities Brokerage US banks are required to keep on reserve a minimum percentage (currently 10%) of deposits in client transaction accounts (demand deposits and other checkable deposits) at the Federal Reserve. i. who propose a stochastic dynamic programming model to optimize retail account sweeps. (2010a) study pricing and logistics schemes for services such as fit-sorting and transportation that can be offered by third-party providers as a result of the Federal Reserve’s new policies.

nor the ATM environment. The number of servers in either a teller environment or an ATM environment may typically be. see Larson (1987). The institution knows of each customer his or her identity and how valuable (s)he is to the bank. Second.) In the early 1980s retail banks began to make extensive use of ATMs. some research has been done on queues that are subject to non-homogeneous Poisson inputs (see.. The queueing system in a call center is actually quite different from the queueing systems in a teller environment or in an ATM environment. a customer can observe the length of the queue and can. developed the so-called queue inference engine. a customer now has no direct information with regard to the queue length and cannot estimate his waiting time. This new capability has made the application of priority queueing systems suddenly very important. 1996). (2008). therefore. First. In many cases. Waiting Lines in Call Centers Since the late 1980s. Larson (1990). . in particular abandonment. The more theoretical research in queueing has also focused on various aspects of customer behavior in queue. The bank can now put the customers in separate virtual queues with different priority levels. though the former. see Kleinrock (1976). Such a queue is typically a single line with a number of servers in parallel. we consider the various different queueing environments in more detail. Kolesar (1984) did an early analysis of a branch with two ATM machines and collected service time data as well as arrival time data. (2002) have modeled the adaptive behavior of impatient customers and Whitt (2006) developed fluid models for many-server queues with abandonment. There are clearly no priorities in such a queue and the discipline is just first come first served. are more common in financial service situations. However. at most 20. e. Call centers have therefore been the subject of extensive research studies.g. see the survey papers by Pinedo et al. pp. Massey et al. longer service time may be perceived as better service. given the service times recorded at the ATMs as well as the machine idle times. In neither the teller environment. 6. However. In all three queueing environments described above. (iii) the order of magnitude of the number of servers. Gans et al. customers want a businesslike pace for both waiting and service. (2003). and Aksin et al. (This gives rise to many personnel scheduling issues that will be discussed in the next section. 6. One important aspect of this type of queueing in a branch is that management usually can adjust the number of available tellers fairly easily as a function of customer demand and time of day. arrival processes in practice are more appropriately modeled as non-homogeneous Poisson processes. the teller environment and the ATM environment do have some similarities. therefore. can the bank adopt a priority system that would ensure that more valuable customers have a shorter wait. 633–664. banks have started to invest heavily in call center technologies.g. the psychology of the customers in the queue also plays a major role. In still others. well-known results in queueing theory have now suddenly become more applicable. in restaurants and salons. (1991). he must rely entirely on the information the service system provides him.2.. the number of ATMs at a branch is fixed and cannot be adjusted as a function of customer demand. and reneging. the call centers are in another aspect quite different from the teller and the ATM environments. reducing wait times may not always be the best approach in all service encounters. In both environments. it became clear very quickly that a bank of ATMs is capable of collecting some very specific data automatically (e.3. For example. (2000). balking. customers do not like waiting. and Bitran et al. The ATMs at a branch of a bank behave quite differently from the human tellers. In the following subsections. A significant amount of research has been done on this topic. in grocery checkout lines. Waiting Lines in Retail Bank Branches and at ATMs The more traditional queues in financial services are those in bank branches feeding the tellers. queue lengths.. In contrast to a teller environment. All major retail banks now operate large call centers on a 24/7 basis. when a customer visits their mortgage broker or insurance agent. say. Katz et al. Nair. they would not like to be rushed. (2007). Such a queueing system is typically modeled as an M/M/s system and is discussed in many standard queueing texts. customer waiting times). which basically provides a procedure for estimating the expected waiting times of customers. Even though in the academic literature the arrival processes in queueing systems are usually assumed to be stationary (time-homogeneous) Poisson processes. but when it comes their turn to be served. For example. would like the service to take longer. but cannot keep track of certain other data (e.g. Over the last couple of decades. Zohar et al. r 2010 Production and Operations Management Society (ii) the flexibility of the service system with regard to adjustments in the number of servers dependent on the demand. estimate the amount of time (s)he has to wait. customer service times and machine idle times). which we may call dispassionate services. there are a number of major differences. On the other hand. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). the service organization in a call center has detailed knowledge concerning the customers who are waiting in queue.648 Hatzakis. are also present—for example. The latter category. for example. As it turns out. which we may call hedonic services.

Given the large scale of call center operations in financial services firms. (2007) and Shen and Huang (2008a. Outbound calling is quite different from inbound calling. the queue length at each point in time. 7. etc. (2009). see Halfin and Whitt (1981) and Reed (2009). simulation. (2004). an enormous amount of statistical data is available that is collected automatically. It includes the waiting times of the customers. namely. stochastic modeling. see Brown et al. This presents unique challenges and opportunities. a limited amount of research has also been done on outbound call centers. As the assignment of tellers and the hiring of operators depend so strongly on anticipated customer demand. these decision problems were addressed separately). the banks have detailed information with regard to the skills of each one of its operators in a call center (language skills. Personnel Scheduling in Retail Banks and in Call Centers 7. In call centers. staffing. (2001) and Brown et al. Thompson (1993) studied the impact of having multiple periods with different demands on determining the employee requirements in each segment of the schedule. From a research perspective. Avramidis et al. Third. (2006). see Mandelbaum et al. (2004). see Weinberg et al. Lately. and Mehrotra and Fama (2003) used simulation to schedule bank tellers and call center operators. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). see Stolletz (2003). They focus on the operational implications of cross selling in terms of capacity usage and value generation. However. the customers receive the basic services. Bollapragada and Nair (2010) focus in this environment on improvements in contact rates of appropriate parties. Chevalier and Van den Schrieck (2008). The approach by Meester and colleagues integrates decision problems involving call distribution. For example. Preliminaries and General Research Directions An enormous amount of work has been done on workforce (shift) scheduling in manufacturing. (2010) analyze networks of geographically dispersed call centers that vary in service and revenue-generation capabilities. O on the effects of cross selling on the management of the queues in call centers. Slepicka and Sporer (1981). optimization modeling. which in practice is often based on non-homogeneous Poisson customer arrival processes. For probabilistic modeling of customer arrival processes. r 2010 Production and Operations Management Society whereas the number of operators in a call center may typically be in the hundreds or even in the thousands. 633–664. workforce scheduling in manufacturing is quite different from workforce scheduling in services industries. Optimally configuring a service network in this context requires managers to balance the competing considerations of costs (including applicable discounts) and anticipated revenues. For statistical analyses of customer arrival data. it is now possible to apply limit theorems with respect to the number of operators. a significant amount of research has focused on probabilistic modeling of arrival processes. see Gans and Zhou (2003) and Mehrotra et al. Even though most call center research has focused on inbound call centers. The data that are collected automatically are much more extensive than the data that are collected in an ATM environment. pp. (2005) and Robbins et al. (2005). Meester et al. the front office. as well as in costs. (2007) and . Hammond and Mahesh (1995). or through a partnership with a labor supply agency (see Larson and Pinker 2000). because the scheduling of calls is done by the call center rather than the call center being at the mercy of its customers.Hatzakis. product knowledge. and Jongbloed and Koole (2001). (2010) consider hierarchical call centers that consist of multiple levels (stages) with a time-dependent overflow from one level to the next. a fraction of the served customers requires more specialized services that are provided by the back office. Ridley et al. on statistical analyses of arrival processes. Nair. The application areas considered included the scheduling of bank tellers as well as the scheduling of the operators in call centers. This special issue of Production and Operations Management as well as another recent special issue contain several such ¨ rmeci and Aksin (2010) focus papers. and artificial intelligence. Van Dijk and Van der Sluis (2008) and Meester et al. For example. For customer demand forecasting. and so on. see also Chen and Henderson (2001). the service network configuration problem is important and economically significant. and scheduling in a hierarchical manner (previously.1. adapting the number of tellers or operators to the demand process can be done through an internal pool of flexible workers. many other aspects of queueing in call centers have become the subject of research. the personnel scheduling problem has been tackled via a number of different approaches. In practice. workforce scheduling in the service industries has to adapt itself to a fluctuating customer demand. b). the proportion of customers that experience no wait at all. This enables the bank to apply skills-based-routing to the calls that are coming in. and on customer demand forecasting in order to accomplish a proper staffing. typically. Green et al. Rising delinquencies and the importance of telemarketing 649 has increased the need for outbound calling from call centers. In contrast to manufacturing industries. at the first stage. and Barth et al.). (2010) consider the service network configuration problem. In the analysis of call center queues. The workforce scheduling process in manufacturing has to adapt itself to inventory considerations and is typically a fairly regular and stable process.

7. the ending time at the end of the day. call routing has gained a significant amount of interest. In the first stage of the approach. r 2010 Production and Operations Management Society Feldman et al. the personnel assigned to such tasks must have received a rigorous specialized training. workforce scheduling and waiting line management are strongly interconnected. pp. (A solid tour represents a shift without any breaks. 7. They develop a linear program-based method to obtain optimal staffing levels as well as call routing. see Robbins et al. or currency trading). an exchange. (2003) use better staff scheduling and team reconfiguration to improve check processing in the Federal Reserve Bank. (2009) and Bhulai et al. Skilled personnel must perform the back-office tasks of reviewing documents. or an electronic communication network). a significant amount of work has also been done on the more detailed optimization of the various possible shift structures (including even lunch breaks and coffee breaks). In offshore outsourcing. An optimization model to determine the optimal staffing levels and call routing can take a more aggregate form or a more detailed form. a dark pool. (2010) have developed a chance constrained optimization approach to deal with uncertain demand forecasts.. A factor that may add complexity to workforce scheduling is the emerging trend of outsourcing such back-office tasks. 633–664. A larger and better trained workforce clearly results in a better queueing performance. there are many different types of shifts that can be scheduled. Given the regulatory implications of errors in this process (e. (2007). Typically. Such departments have to keep track of information on trades. However. The demand process (the non-homogeneous arrival process) usually can be forecast with a reasonable amount of accuracy.3. the break placement problem is a very hard problem.. Gurvich et al. Gans et al.g. Miscellaneous Issues Concerning Workforce Scheduling in Financial Services Very little research has been done on workforce scheduling in other segments of the financial services industry. such as the number of trades done per day for each trader. In large call centers.2. Sarbanes-Oxley 404 compliance). the so-called solid-tour scheduling problem is solved. see Mehrotra et al. whether the firm acted in a capacity of principal or agent. namely call routing. So et al. (1999) applied an artificial intelligence technique. but operational risk mitigation practices necessitate the involvement of skilled personnel in populating and reviewing of the data. As stated earlier. and populating the appropriate fields through user interfaces of databases. a solid tour is only characterized by the starting time at the beginning of the day and by the ending time at the end of the day. After it has been determined in the first stage what the actual number of people in each solid tour is. It is clear that workforce scheduling is also important in trading departments or at trading desks (equity trading. Nowadays another aspect of personnel management in call centers has become important. workforce scheduling is also strongly connected to operational . foreign exchange trading. Brazier et al. and trading venue (e. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). Harrison and Zeevi (2005) developed a staffing method for large call centers based on stochastic fluid models. Nair. as well as the timings of the lunch breaks and coffee breaks. namely co-operative multi-agent scheduling. and is usually dealt with through a heuristic. client-level. especially to offshore locations in Asia or Europe. Gawande (1996) (see also Pinedo 2009) solved this staffing problem in two stages. and/or from legal agreements signed by the client and the firm. and relationship-level information.650 Hatzakis. the placement of the breaks is done in the second stage. (2008). Not surprisingly. Typically such information is taken from forms filled out by clients on hard copy or electronically. the starting times at the beginning of the day. and trades’ impact with regard to risk limits of each trader or the entire desk.g. time-zone differences and high turnover of trained professionals can be serious issues to contend with. This problem leads to an integer programming formulation of a special structure that actually can be solved in polynomial time. Institutional and retail brokerage and asset management firms need to maintain databases with account-level. Optimal call routing typically has to be considered in conjunction with the optimal cross training of the operators. A shift is characterized by the days of the week. The first stage of the problem is to find the number of personnel to hire in each solid tour such that the total number of people available in each time interval fits the demand curve as accurately as possible. on the workforce scheduling in call centers.) There are scores of different solid tours available (each one with a different starting time and ending time). Optimization Models for Call Center Staffing Many researchers have considered this problem from an optimization point of view. their work was done in collaboration with the Rabobank in the Netherlands. As the clients may have many different demands and the operators may have many different skill sets. amounts per trade and total. Bassamboo et al. relevant pieces of information may include the commission charged for each trade. (2009) applied parametric stochastic programming to workforce scheduling in call centers. (2008) have addressed the problem from a stochastic point of view and have developed staffing rules based on queueing theory. (2005) consider a model with m customer classes and r agent pools. Automated systems exist for recording such information. In the case of a broker/dealer.

for example.com). Cheng et al. people. pp. available at www. since the mid-1990s a number of events have taken place in financial services that can be classified as rogue trading. for example. 8. see Cruz (2002). Procedures that are common in TQM turn out to be very useful for the management of operational risk. This area of research originated in the aviation industry. Nair. and (iv) EVT. i. Most of the methodological research in operational risk has focused on probabilistic as well as statistical aspects of operational risk. Operational Risk Management 8. However.g. It is for this reason that EVT has become such an important research direction. extreme value theory (EVT) (see Chernobai et al. This topic will be discussed in more detail in the next section on operational risk. A larger and better trained workforce clearly results in a lower level of operational risk (especially in trading departments. Actually. Process mapping also includes an identification of all potential failure points. 8. this limit theorem specifies the distribution of the maximum of a series of independent and identically distributed (i. Elsinger et al. They typically have three parameters. or due to fraud. or the Fat Tail Lognormal. 633–664. Information system failures can be caused by programming errors or computer crashes. The need for being able to parameterize the fatness of the tail is based on the fact that the tail affects the probabilities of catastrophic events occurring. and a third one that specifies the fatness of the tail. where human errors can have a very significant impact on the financial performance of the institution). Operational risk has since then typically been defined as the risk resulting from inadequate or failed internal processes. or from external events (Basel Committee 2003). (iii) TQM. see the classic work by Barlow and Proschan (1975) on reliability theory. 8. in operational risk management the analysis of operational risk events focuses mainly on the outliers. information management and data security. Failures concerning internal processes can be due to transactions errors (some due to product design). Operational Risk in Specific Financial Sectors There are several sectors of the financial services industry that have received a significant amount of . (ii) Reliability theory. in particular... (2007). the Lognormal. e. operations research. This type of event has turned out to be quite serious because just one such an event can bring down a financial services firm.1. it has become clear that there are important similarities as well as differences between TQM in the manufacturing industries and operational risk management in financial services. because financial services in general are quite concerned about being hit by such rare catastrophic events.i. for example. and statistics. As discussed in earlier sections of this paper. process mapping in financial services. (2006).d. These extreme value distributions include the Weibull. The area of process design and process mapping is very important for the management of operational risk.ge. It covers product life cycle and execution. human resources and reputation (see. Failures concerning people may be due to incompetence or inadequately trained employees. and Jarrow (2008). The statistical analysis often focuses on the occurrences of rare. However. For that reason. Frechet. product performance.2. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). because any parameter that is being measured may have an equal probability of having a deviation in one direction as in the other.) random variables. Reliability theory has always had a major impact on process design. the catastrophic events. The areas of importance include the following: (i) Process design and process mapping. 2007). Types of Operational Failures Operational risk in financial services started to receive attention from the banking community as well as from the academic community in the mid-1990s. the distributions used are different from the Normal. r 2010 Production and Operations Management Society risk.e. including concepts such as optimal redundancies. Chernobai et al. they may be. and Gumbel distributions. the General Electric Annual Report 2009. or inadequate operational controls (lack of oversight). EVT is based on a limit theorem that is due to Gnedenko. one that specifies the variance. This area of study is closely related to the research area of reliability theory.3. One major issue in financial services is the issue of determining the amount of backups and the amount of parallel processing and checking that have to be designed into the processes and procedures. Relationships between Operational Risk and Other Research Areas It has become clear over the last decade that the management of operational risk in finance is very closely related to other research areas in operations management. business disruption.Hatzakis. catastrophic events. One important difference is that TQM in manufacturing (typically referred to as Six Sigma) is based on statistical properties of the Normal (Gaussian distribution). see De Haan and Ferreira (2006). The area of reliability theory is very much concerned with system and process design issues. and systems. (2007). Shostack (1984) focuses on process mapping in the 651 service industries and. namely one that specifies the mean. Six Sigma (see Cruz and Pinedo 2008).

and credit risk.g. Nair. mainly by researchers in artificial intelligence and data mining. for example. Chan et al. see Muermann and Oktem (2002). (1999). as presented by Alptuna et al. (2010). Operational risk events in trading may be due to human errors. 2004).g. and can be used as a supplement for qualitative due diligence on hedge funds. see Cruz (2002). this issue has not received much attention yet as far as the financial services industry is concerned. some of the most catastrophic losses suffered by investors resulted from failures to properly address operational risk. (iii) Asset management (retail.652 Hatzakis. for example. The purpose of the o score is to identify problematic funds in a manner similar to Altman’s z score. Dhillon 2004.. (2003) have made an attempt to quantify the financial impact of information security breaches. (2009b). For banks. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). Straub and Welke 1998. 8. these issues concerning mitigation require more study. see. brokerage. Asset management has also been one of the areas within the financial services sector that have recently received a significant amount of research attention as far as operational risk is concerned. examine a comprehensive sample of due diligence reports on hedge funds and find that misrepresentation. given the increasing visibility of operational risk and the potential losses in financial services. However. for example. These correlations have to be analyzed in more detail in the future. They include security breaches. Wei (2006) developed models based on Bayesian credibility theory to quantify operational risk for firm-specific capital adequacy calculations. Fraud as a cause of an operational risk event is a major issue in the credit card business.4. Brown et al. are key components of operational risk and leading indicators of future fund failure. market risk. Security breaches in retail financial services often involve clients’ personal information such as bank account numbers and social security numbers. (2009a) propose a quantitative operational risk score o for hedge funds that can be calculated from data in hedge fund databases. For example. Other Research Directions There are a number of other important research directions that already have received some research attention and that deserve more attention in the future. The growing body of research on operational risk in financial services presents interesting cross-fertilization opportunities for operations management researchers. During the financial crisis of 2007–2009. Garg et al. Two more recent approaches for mitigating operational risk include insurance (in particular with regard to rogue traders. which predicts corporate bankruptcies. credit cards). 2003. it is more likely that human errors may be made or systems may crash. and systems breakdowns. rogue trading (i. Such events can seriously damage an institution’s reputation. pp. The financial services industry has thoroughly studied what the aviation industry has been doing with regard to operational risk. Several studies have shown that many of the hedge funds that have gone under had major identifiable operational issues (e. Upgrades and consolidations of information systems may be major causes of operational risk events associated with systems breakdowns. and. the Basel Capital Accord in a recent revision began to require risk capital to be reserved for potential loss resulting from operational risk. either unauthorized trades or illegal trades). Hong et al. it has been observed that there is a significant interplay between operational risk. institutional). as well as not using a major auditing firm and third-party valuation. 633–664. becoming the basis for class-action lawsuits. Whitman 2004). when the markets are very volatile. An enormous amount of work has been done on credit card fraud detection. see Cruz and Pinedo (2008). Second. catastrophe bonds). Jones (1988) and Kekre et al. Kundro and Feffer 2003. fraud. Brown et al. In a subsequent study the same authors. r 2010 Production and Operations Management Society attention with regard to their exposure to operational risk.. (ii) Trading (equities. see. However. (2009). in some well-known instances. see Netter and Poulsen (2003). some articles have appeared that discuss the tradeoffs between costs and productivity on the one hand and quality on the other hand.. Third. Several rogue traders have caused their institutions billions of dollars in losses. First. A number of such events have occurred in the last two decades with catastrophic consequences for the institutions involved. 2010) and securitization (e. bonds. or system breakdowns.e. namely. in the fraud perpetrated by Bernard Madoff (see Arvedlund 2009). a fair amount of research has been done with regard to mitigation of operational risk. bringing about punitive regulatory sanctions. In particular they have considered near-miss management practices of operational risk. how can we analyze the trade-offs between operational costs (productivity) and operational risk? In the manufacturing and in the services literature. see Jarrow et al. Operational risk can be effectively addressed by implementing robust operational infrastructures and controls in organizations that enjoy strong governance. Operational risk is most salient in the loosely regulated domain of hedge funds. There has been an extensive body of research in the literature that has focused on understanding the risk of information security (see Bagchi and Udo 2003. foreign exchange). . (i) Retail financial services (banking. There are several types of operational risk events that are common in retail financial services.

known as Most Favored Nation (MFN) clauses. usury laws specify maximum interest rates to be charged for lending to consumers or businesses by banks. who has to assume some of these actions’ adverse consequences. In this elegant model.. Pricing and Revenue Management 9.2. including fund.. because pricing strongly affects consumer demand for products and services. for example.1. All of these can have significant implications on how these products and services are best delivered (e. (iii) custody fees. i. revenue minus cost. For example. and anything else that may be paid through these transaction costs. Nair. whereby the agent has private information that can be used to take actions to serve its interests. The principal–agent model addresses the design of contracts with appropriate incentives to best align the interests of principal and agent in the presence of the informational issues of moral hazard. Applications are diverse. and (ii) adverse selection. pricing in financial services may be driven by other factors or constraints that may complicate or simplify it. The theory of incentives addresses the informational issues that arise in the principal–agent economic relationship.e. where an agent uses private information about its own characteristics to gain advantage in selecting a contract offered by the principal. research.Hatzakis. and trading commissions. advisory. Theory of Incentives and Informational Issues in Pricing of Financial Services By the neoclassical economic assumption of rational individual behavior in perfect market competition. and customer attrition. and custody fees.g. Insurance regulations vary by jurisdiction. The Employee Retirement Income Security Act of 1974 (ERISA). In such a relationship. investment advice. a court of law. and propose links to other research that might help remedy some of the issues. Preferred pricing provisions. We also review the meager operations management literature on pricing in financial services. information is incomplete and asymmetrically shared. In the rest of this section. Fees in open-ended mutual funds offered to US investors are governed by the Investment Company Act of 1940. Pricing of Financial Services: Background and Academic Research Financial services organizations expend serious efforts and resources on pricing and revenue management. such actions may work against the interests of the principal. transactions in accounts that hold plan assets must reflect the best value for the services received. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). examine the challenges faced by researchers. which regulates US pension plans. a ‘‘principal’’ delegates a set of tasks to an ‘‘agent’’ who possesses special competencies to perform the tasks and the two may have conflicting interests. A body of literature exists in economics and finance on some aspects of pricing in financial services. and non-verifiability. making price formation a more complex process. and hedge funds. Pricing and revenue management are intertwined with many operations management functions in large financial services firms. are typically included in investment management agreements of pension plans governed by ERISA in the United States and by similar laws elsewhere. In addition to market mechanisms. and (ii) consumers’ desire to maximize their utility when faced with exogenous prices. prices for financial products and services should be formed by: (i) firms’ efforts to maximize profit. Among the duties of fiduciaries is to ensure that the plan pays reasonable investment expenses. credit cards. or pawn shops. we discuss the economic foundations of price formation and attempt to link them to research in finance on pricing practices specific to insurance. Non-verifiability is a third issue that may arise when the principal and the agent share information that cannot be verified by a third party. By the fiduciary standard of ERISA. and vendors offer pricing services and software. quality issues) as well as on cash (inventory) management. but little academic research with an operations management 653 orientation has been published. capacity issues. In a setting that more closely approximates reality. credit. Informational issues present in a principal–agent relationship include: (i) moral hazard. (iv) investment advisory fees. specifies that plan trustees and investment advisors are considered ‘‘fiduciaries’’ who should act in the best interests of plan participants. they include the setting of: (i) interest rates (APR) on deposits and credit products. pp. (ii) trading commissions. The related free-rider problem refers to asymmetric sharing of benefits and costs in resource usage among economic agents. Complicated pricing mechanisms can increase the volume of billing questions to call centers. (v) fund fees (which for hedge funds can be a function of assets and performance). and (vi) insurance policy premia. 9. 633–664. information is perfectly known and shared by all economic agents. Laffont and Martimort (2002) focus on the situation of . Such services include execution of trades. r 2010 Production and Operations Management Society 9. adverse selection.

they often require that an investment’s value be at or above a historical maximum.e. before an incentive fee becomes payable to the manager. and Hume (1740) explicitly defined the free-rider problem. must have been recovered. implementation capacity is rarely an issue. etc. that equilibria in competitive insurance markets under imperfect and asymmetric information needed to be specified by both price and quantity of contracts offered. Nair. The text by Tirole (1988) contains thorough discussions on price formation. are formed in the process of bringing investor demand into equilibrium with each vehicle’s capacity. because there is no price high enough to be profitable with certain customers. Mutual funds and similarly managed SMAs typically charge asset-based fees on a calendar basis. as Stiglitz and Weiss (1981) noted. Akerlof (1970) noted that aggregate risk in segments of the insured population will be an increasing function of insurance premium paid. Securities Trading and Brokerage. therefore. and (ii) implementation. life. In contrast. That means. Earning high incentive fees depends on fund manager skill. to ensure that the interests of the two parties are aligned. dependent on AUM’s return. and attempt to address the principal–agent issues between investor (principal) and investment manager (agent). 633–664. i. Pricing structures reflect costs of different vehicles.. Such hedge funds can afford the higher expense of setting up and maintaining a robust operational infrastructure and control framework. as discussed by Alptuna et al.. hedge funds with highly skilled managers have higher revenues. or mortgage insurance. incentive fee arrangements have asymmetric payoffs. hedge funds. leads them to accept or reject higher premia offered for health. regardless of AUM. However. Contract negotiations can be addressed by game theory. i. Capacity of an investment vehicle refers to: (i) operational infrastructure. Stiglitz (1977) examined differences in the role of imperfect information in insurance pricing under a monopoly regime compared with perfect competition. Typically. or (iii) performance-based.3.. 9.e. driving behavior. Hedge fund pricing. Their book begins with a review of the literature on incentives in economic thought since Smith (1776) examined incentives in agriculture. where they are typically known as carried . This implies that prior losses. r 2010 Production and Operations Management Society a principal dealing with a single agent.e. Incentive fees are also common in private equity. or separately managed accounts (SMAs). if any.654 Hatzakis. i. and has additional complexities for SMAs. and covers operating costs of the fund. Camerer (2003) wrote a very accessible text on behavioral game theory in which he cites all relevant literature. they reward gains and do not penalize losses. pp. constitutes a more representative application of the principal–agent model because it must use more complete incentive mechanisms to minimize informational issues between fund manager (agent) and investor (principal). which can be a percentage of AUM paid on a calendar schedule. Insurance and credit are therefore rationed. (ii) asset-based. and (ii) an incentive (or performance) fee. as Rothschild and Stiglitz (1976) found. Pricing in Asset Management. which allows the manager to keep a share of the value created for the investor during agreed-on time intervals. which tends to be more sophisticated and expensive for hedge funds than for mutual funds. hedge funds and like-managed SMAs often face capacity constraints that limit their size due to diminishing returns to scale. Moral hazard and adverse selection are responsible for anomalies in insurance and credit product pricing. As assets grow due to good performance and inflows of new funds resulting from this good performance. stability of employment. called a high water mark (HWM). and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). The same holds true for credit. to whom the principal offers a take-it-or-leave-it contract without negotiation. a percentage of AUM. These borrowers would then become even more likely to default because of the high credit cost burden. and Credit Cards Pricing in the asset management industry consists primarily of fees charged on a client’s assets under management (AUM) in investment vehicles such as mutual funds. This is the case because private knowledge of individuals’ state of health. automobile. Higher interest rates offered would be a lot more likely to be accepted by borrowers whose private self-assessment of their default probability is high. As securities traded by mutual funds are typically liquid. Fees can be (i) fixed. (2010). the manager gets rewarded for skill and effort. drinking or smoking habits. whereby profitable opportunities become scarcer as investment vehicles become larger. A typical pricing structure for hedge funds may consist of (i) a base (or management) fee. which makes the asset-based fee an inadequate incentive for hedge fund managers. The manager earns an incentive fee if value is created for the investor according to an agreed-on metric usually based on either monetary units or rates of return (see Bailey 1990). and the effectiveness of execution of a vehicle’s investment strategies depends to a large degree on the market liquidity of the securities traded by the investment manager in the vehicle’s portfolio..

Stiglitz and Weiss 1981). They developed models to determine appropriate commission rates for a new discount brokerage channel. Anson (2001) and Lee et al. which might prompt full-service clients without a strong relationship with their financial advisors to select the low-cost discount channel. In a seminal paper. Another known issue is moral hazard. Economies of scale are very important. (2003) valued incentive fee contracts with HWMs using models with closed-form solutions. Grinold and Rudd (1987) added another perspective by examining fee structures that would be appropriate for the investor and for the manager according to the latter’s investment skills. Phillips (2005) discusses consumer loan and insurance pricing. mortgages. Generally. This issue was addressed in practice by offering investors a different HWM based on their time of entry. these issues were also addressed by Grinblatt and Titman (1987). 9. Pricing for security transactions is determined in a deregulated and competitive market. It has been experiencing a downward trend driven by the dramatic cost reductions brought by technological innovations such as electronic trading (see Bortoli et al. He expands on it in a more recent book (Phillips 2010) that also includes a chapter by Caufield (2010). trading. or a hedge fund. A pricing application for brokerage commissions and investment advisory fees was studied by Altschuler et al. Another key consideration is consumer behavior (Talluri and Van Ryzin 2004). for example. because a brokerage’s operational infra- 655 structure requires a very high capital investment and is costly to operate. Nair. Wuebker et al. a CD vs. (2008) also wrote a book on pricing in financial services. Akerlof 1970. 2006). Manski 1995) that make it hard to build demand curves from data and . (2002). 2004. Levecq and Weber 2002. including credit cards. Bailey (1990) demonstrated that incentive fee metrics based on value added in monetary units serve investors’ interests better than metrics based on rates of return. can be quite different in financial services than in the transportation and hospitality industries. e. Davanzo and Nesbitt (1987) analyzed incentive fee structures and their impact to the business of investment management. (2004) examine the free-rider problem in hedge funds that offer all investors the same HWM: late investors can avoid paying incentive fees if they enter after losses suffered by earlier investors. and investment advice before the brokerage firm can make a profit. More recent works have studied the role of HWMs in incentive fee contracts. Thomas (2009) discusses the use of risk-based pricing in consumer credit. Phillips 2010. institutions have access to lower pricing than individual investors. r 2010 Production and Operations Management Society interest and paid by investors on the liquidation of a partnership and distribution of proceeds. Identification problems exist (see Koopmans 1949. pp. The framework can address key considerations. and auto loans. and asset-based fees for advice and unlimited trading in full-service accounts introduced by Merrill Lynch.g. research.Hatzakis. Revenue Management in Financial Services: Challenges and Opportunities Revenue management principles can be applied to financial services pricing with some adaptation. Goetzmann et al. 633–664. with emphasis on inherent moral hazard and its mitigation. The nonlinear optionality in incentive fees was found by Li and Tiwari (2009) to be optimal even for mutual funds. Weber 1999. A new rule adopted by the Securities and Exchange Commission under Section 205 of the Investment Adviser’s Act of 1940 permitted the use of performance fees by registered investment advisers. Kritzman (1987) proposed ways to deal with moral hazard issues. In his book. especially in extracting value-creating effort by the manager. Golec and Starks (2004) examined the reduction in risk levels of mutual funds after the option-like incentive fee option was prohibited by an act of Congress in 1971. Stoll 2006. when an advisor might not be committing much effort to a client’s portfolio after the account was converted to the assetbased annual fee. and to reward the manager’s skill rather than investment style or chance. Credit card pricing and line management were studied together by Trench et al.. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6). and examined the basic issues involved. capacity. Transaction commissions typically pay for the costs of brokerage. such as rationing in credit and insurance (see. They built a Markovian model to select the optimal APR and credit line for each individual cardholder based on historical behavior with the goal to maximize Bank One’s profitability. Anson (2001) valued the call option implicit in incentive fees by Black–Scholes analysis. who examines pricing for consumer credit. Evidence of rationing is reflected in protecting capacity for airline fare classes (Talluri and Van Ryzin 2005). Some revenue management concepts. Among the issues to contend with were adverse selection. Offering an attractive APR and a large credit line to entice a cardholder to transfer a balance presented the moral hazard issue of the client taking advantage of the offer and then defaulting. a mutual fund. Lynch and Musto (1997) examined how incentive fees compare with asset-based fees. for example. Boyd (2008) discussed the challenges faced by pricing researchers. Record and Tynan (1987) described incentive fee arrangements. (2003).4. It can also be idiosyncratic to each financial product. clearing and execution. 2008. In his book. Several published articles then examined performance fee schemes. which the model successfully addressed.

which are key to pricing. we provide an overview table of the various operational processes in financial services and highlight the ones that have attracted attention in operations management literature. and (v) able to take advantage of pricing and revenue management opportunities. These problems are especially acute in industries where sales and client relationship persons have a lot of information on customers. some of which we have highlighted here. pp. interfacing information technology. Much work remains to be done on the design of financial products so that they are (i) easier to understand for the customer (resulting in fewer calls to call centers). r 2010 Production and Operations Management Society therefore figure out demand elasticities. and may adapt revenue management principles to develop novel pricing methodologies for financial services. Another area with a potentially significant payoff is the optimization of execution costs in securities trading. it becomes immediately clear that many processes in the financial services industries have received scant research attention from the operational point of view and that there are several areas that are worthy of research efforts in the future. Nair. and tried to make the case that this industry has several unique characteristics that demand attention separate from research in services in general. O’Hara 1998). such as Gonik’s (1978). 633–664. requiring an interdisciplinary approach. Tools used by Athey and Haile (2002) may also be considered. Operations management researchers could leverage related work in economics.. Amihud and Mendelson (2010) and Goldstein et al. the operational risk encountered in these processes. and statistics. most financial services are quite keen on improving the productivity of their processes. the latter remains in the field. As described in this paper. market microstructure. Operations management research may also be key in enabling visionary ideas for reforming corporate governance. and are at the same time prone to attrition due to poor performance or frustrating service encounters. and Bertsimas and Lo (1998) develop trading strategies that optimize the execution of equity transactions. Operational risk management is an emerging area that is attracting quite a lot of attention lately. 10. we have attempted to present an overview of operations management in the financial services industry. proxy voting is the most important tool available to . finance. involve long-term relationships with customers. Remedies have been proposed and can be considered. Such information remains private and not centrally shared. From the table in Appendix A. For example.656 Hatzakis. one has to keep in mind that there are strong relationships between the productivity of the processes. Another interesting area of research could be the integration of the various objectives for improving operations in financial services in which interactions among components can be viewed and modeled holistically. with less waiting). firms have databases with prices of closed sales but no information on prices of refused offers. however. Inventory models have been successfully applied to cash and currency management. (ii) easier to use (better online and face-to-face interactions. Concluding Remarks and Future Research Directions In this paper. the operational risk may increase and the quality of service may go down. and the search for liquidity in securities markets (see. These include each step in the financial product and service life cycle as well as in the customer relationship life cycle. Pricing and revenue management of financial services could be an area that is ripe for academic research with a potential short-term payoff that may be large. and personnel scheduling that are applicable to financial services as well. In Appendix A. Many of these are likely to be cross-disciplinary. Service designs need to recognize the fact that financial services are relatively sticky. forecasting. productivity may indeed go up. For example. finance. Operations management researchers can examine the problem and develop solutions by synthesizing elements from this diverse set of disciplines and points of view. there is an extensive literature on traditional service operations research topics such as waiting lines. marketing. e. Anecdotal evidence suggests that it is six times more expensive to acquire a new client than to service an existing one. A significant body of work exists in algorithmic trading. (iii) less prone to operational risks induced by human errors. However. as is often the case in some areas of financial services. which Chen (2005) analyzed and compared with a set of linear contracts. In the principal–agent relationship between corporate shareholders and management. and the quality of the services delivered to the clients. When one reduces headcount. We expect researchers to branch out and address other non-traditional operational issues in financial services. It is of great interest to the financial services industry that these interdependencies are well understood. (iv) easier to forecast and arrange the necessary operational resources for. (2009) examine transaction costs in recent studies. making operations a really important factor in financial services. We have identified a number of specific characteristics that make financial services unique as far as product design and service delivery are concerned. including demand and price elasticities. and Pinedo: Operations in Financial Services—An Overview Production and Operations Management 19(6).g.

Syndicated loan offerings Credit risk management Risk management Outsourcing / insourcing Credit. Appendix A: Operations Management Processes in Financial Services Operational processes Process realm Retail banking Acquisition/origination Campaign management Current customer portfolio management Cash. liquidity. Implementation of proxy aggregation mechanisms is almost certainly expected to face complex logistical issues. etc. 633–664. Nair. and Pinedo: Operations in Financial Services—An Overview 657 Production and Operations Management 19(6). which operations management can examine and address. operational Technology issues Anti-money laundering surveillance Commercial lending Loan syndication Credit agreement maintenance Defaulted borrower management Credit facility offerings Credit facility design Lending operations Loan syndicate management Recovery operations Revolver. and other readers for constructive comments that helped revise an earlier version of the paper. and online operations Recovery operations Outsourcing / insourcing Retail loan origination Treasury operations ATM location planning Risk management Capacity issues Credit. The views expressed in this paper are those of the authors and do not necessarily reflect those of Goldman Sachs. content. credit line.) Technology issues Risk management Operational Credit cards Campaign creation and management Statement operations Collections Card offerings management Facilities location Credit risk management Remittance processing Recovery operations APR. operational Capacity issues Technology issues Insurance Acquisition planning Policy maintenance Past due account handling Product design Product offerings Solicitation management Claims investigation and processing Recovery operations Insurance policy types Outsourcing / insourcing Application processing Worker’s comp case tracking Annuity products Capacity issues Underwriting Property disposal (auto auctions. The presentation. rewards Processing and call centers Plastic printing and mailing operations Call center management Merchant acquisition Outsourcing/insourcing operations Plastic printing and mailing operations Private label cards Risk management Capacity issues Technology issues Credit. flow. term. pp. r 2010 Production and Operations Management Society shareholders for ensuring that management acts according to their interests. an editor. liquidity. operational Continued . letter of credit. Acknowledgments The authors thank five anonymous referees. Holton (2006) proposed proxy aggregation mechanisms. bridge. with thorough knowledge of the issues to be voted on. This tool is seldom effective due to shareholder apathy and obstacles to voting through institutional ownership of shares. such as a proxy exchange. Such mechanisms would ensure that the voting of proxies is handled by informed entities acting in the best interests of shareholders. and readability of the paper has benefited as a result. that could make the process more effective in improving corporate governance. etc.Hatzakis. ATM. and deposit management Strategic processes Delinquent customer management Collections Product design Service/process design Account type Branch location and offerings and design rationalization Deposit product operations Teller. currency.

Milbourne. Alternative Investment Management Association. referrals Client litigation Delinquent margin accounts Anti-money laundering Commission management Recovery operations Account offerings management Multichannel design and pricing Outsourcing/insourcing Capacity issues Margin lending Technology issues Trust services Trading platform design Channel choice and coordination Risk management Credit. H. Mandelbaum. Manag. R.. Altschuler. A. Available at http://www. M. L.. Aksin. Pricing analysis for Merrill Lynch Integrated Choice. 1978. . R. Prod. B. Andrews.Hatzakis. B. M. 2007. Nigam. R. Processes in italics have received less attention in the operations management literature. Mendelson. Y. 633–664. operational Anti-money laundering Asset management Investment manager due diligence Pricing structures Collections operations New product/fund design Organization design Pricing structures Custodian operations Recovery operations Share class/series management Location of sales and client relationship management New account setup processes Fund administration Outsourcing/insourcing Operational risk management Fund accounting Capacity issues Anti-money laundering Valuation operations Infrastructure. Interfaces 25(6): 1–13. New York. M. Oper. A best practices Alptuna. Pinedo... M. 18–41. The modern call-center: A multi-disciplinary perspective on operations management research. Operational Control in Asset Management—Processes and Costs. Pinedo. 2009. S. ¨ . Operational Control in Asset Man- agement—Processes and Costs. Guide to sound practices for European hedge fund managers. U framework for operational infrastructure and controls in asset management. r 2010 Production and Operations Management Society Appendix A (Continued) Operational processes Process realm Mortgage banking Acquisition/origination Strategic processes Current customer portfolio management Delinquent customer management Product design Mortgage origination Mortgage servicing operations Collections Product offerings Facilities location Securitization Remittance processing Foreclosure management Term. J. 60(4): 541–546. J. 84(3): 488–500. 2009). 2002. Ann. Nair. 2010. Stat. Labe. 2007. Interfaces 32(1): 5–19. operational Brokerage/ investment advisory Service/process design Client prospecting Client at risk handling Technology issues Collections operations Cold calling. A. S.. Econ. J. 1970. Z. Mehrotra. M. P. Appl. Econ. Bean improves callcenter forecasting. The market for ‘‘lemons’’: Quality uncertainty and the market mechanism. Workload forecasting for a call center methodology and a case study. D.. Batavia. S. 3(4): 1403–1447. Palgrave Macmillan. L. Oh. R. A. D. Palgrave Macmillan. Q. Aldor-Noiman. V. Liao. Rev.. and Pinedo: Operations in Financial Services—An Overview 658 Production and Operations Management 19(6). Amihud. APR Processing and call centers Secondary market operations Call center management Recovery operations Credit risk management Risk management Outsourcing/insourcing Capacity issues Credit. 16(6): 665–688. Armony. References Akerlof. D. Tu¨tu¨ncu¨. Akerlof.org/en/knowledge_centre/sound-practices/ guides-to-sound-practices. G. O. pp. Transaction costs and asset management. 2010. ed. H. Feigin. G. 1995. Cunningham. New York.aima. Stat. implementation Operational risk management Technology issues Anti-money laundering Processes in bold have been addressed in operations management literature. Hatzakis. ed. Bennett. New calculations of income and interest elasticities in Tobin’s model of the transactions demand for money. 170–189.cfm (accessed date August 3.

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