What's this all about?
A bank possesses swathes of personal information about its customers. So why are only a select few grasping the power of data and using it to transform their business model? In this article, Conor McAleavey, Head of Innovation at LEVERIS, ponders a future where banks act as trusted advisors rather than commercial organisations that sell financial products.
Read on if you:
- Work in banking or financial technology
- Are curious about the potential of data
- Have an interest in the future of banking
- Want to use data to transform your bank
In the time it will take you to read this article, approximately ten quadrillion bytes of data will have been produced by the digital world. Suffice to say, the amount of data we are producing these days is quite literally off the charts and into the realm of makey-up numbers.
In fact, every two days we are producing as much data as was produced between 2003 and the dawn of civilisation. This volume of data creation is having a profound impact on many industries. But it is perhaps in financial services where it could have the most transformative effect.
As the potential application of data begins to dawn on banks, many see it as a threat (and it is). However, the most visionary leaders view it as one of the greatest opportunities that global banking has ever seen.
Financial transaction data 1.0
The first group of banks to have realised the massive potential of data and advanced analytics are the ones assessing how it can help them in traditional areas.
On the risk side, banks are looking to the power of real-time data in order to increase capital efficiency and manage liquidity in a more data-centric approach.
Many banks are also following closely the success of companies like Kreditech and how they harness a myriad of never-before-used data streams to turn some of the old credit adages on their head – looking not only to the past for indications of creditworthiness but also to the present by way of social media and other unstructured data sources.
Compliance too is an area where early adopters are looking to harness the true power of data and advanced analytics. Most banks struggle to attest to their compliance requirements due to the fragmented nature of their underlying systems. The ability to use machine intelligence to streamline the attestation process is a distant goal for many banks, but for those who have adopted a data-centric approach, this is now becoming a realistic goal.
So while these early applications of data and analytics are highly valuable, it’s still only streamlining existing functions. Only a very select few are grasping the power of data in terms of the complete and inevitable transformation of their business model.
The creator economy
Before the age of the platform, it would have been heresy to suggest that many of the most profitable companies in the world allow free use of their products. Yet that is essentially what both Google and Facebook do by allowing ‘free’ consumer use of their search engine and social platforms. They do this because they understand the dynamics of what Silicon Valley forecaster Paul Saffo termed the ‘Creator Economy’, which allows them to turn every consumer-generated data point into a vast “bonanza in advertising revenue”.
It was Saffo who first coined the term ‘creator economy’ and he defined the central economic actor in that economy as someone “who produces and consumes in the same act”. These ‘creators’ are “ordinary people whose everyday actions create value”.
Each search on Google, each ‘like’ on Facebook creates value for the platform owners, which is then used to drive revenue from their advertising clients.
This begs the question: should this not also be the case for banks and banking customers?
While every debit card transaction is a consumption of the bank’s financial service, it should simultaneously be a creation of value for the bank in terms of the data point.
Financial transactions 2.0
Of course, not all data is created equal. The more accurate, rich and up-to-date the data, the more profitably it can be monetised. The more insight it can drive about future behaviour, the better.
In other words, the more accurately the data can represent each individual as a consumption entity the better. And is there any better representation of a human being as a consumption entity than the sum of all their financial transaction data?
- Your earnings
- Where you spend
- How much you spend
- How much you have in savings
- Services you consume
- Investments you have
- Policies you own
- Causes you support
- Where you work
- Where you travel
- When you travel
- Events you attend
- What car you own
- Where you live
- How many kids you have
Your bank quite literally knows almost every valuable piece of psychographic and demographic information about you.
As The Economist has put it: “The world’s most valuable resource is no longer oil, but data”. It just so happens that banks are sitting on the richest seam of that resource in existence.
Just imagine what the likes of Google, Facebook or Amazon could do with that level of insight and contextuality on their customers.
The consumer benefit
This is not just about business model transformation for banks, it’s also about what proper custodian use of transaction data could do for consumers.
Imagine a bank that automatically signs you up to the most cost-effective utility supplier each time your contract runs out. One that continuously scans airline websites to find the optimal time to book your summer holidays. One that regularly analyses your buying behaviour to find you money-back deals at your favourite retailers.
Just imagine a bank that uses your data in a benevolent manner to perpetually save you money.
The perception of a bank could move from that of a commercial organisation that sells financial products to a trusted financial advisor – one that sits in the background and offers contextual advice whenever customers require it most. A bank that constantly stands vigil over your financial health and future.
So what is stopping banks from utilising this data?
First up, in order to harness all their customer’s information, banks must consider the data consent issue. Do customers permit the bank to share their data on their behalf?
This challenge is far from insurmountable, especially if the bank starts to build real trust by properly advocating for their customers in a fully transparent manner. Perhaps the topic of a future article.
The biggest challenge of all is, of course, technological. Fixing this for an incumbent bank run on legacy systems is no easy task. Traditional banking systems were designed long before the explosion of data and were principally intended as the immutable system of record.
They did an excellent job at recording and storing transactional data, but when now required to extract the esoteric value from that data, their fundamental architecture is quite frankly ill-equipped.
For a start-up bank, on the other hand, the technological issue is much less challenging. It simply needs to choose a platform provider with data capabilities baked in at the most fundamental architectural layer, as well as a visionary approach to its business model in the age of the creator economy.
What happens next?
Whatever happens, this Cambrian explosion of data is only going to continue, as will encroachment from fintech start-ups and technology giants into financial services. PSD2 will only accelerate these two inevitabilities, and the existential threat to banking’s traditional business model will escalate.
So the question is: what do banks want to become?
The dumb pipes that power financial services by surrendering the customer and billing relationship to the fintech world?
Are they willing to proactively adapt to the inevitability of data as the new asset class in the creator economy and challenge the Silicon Valley giants in this new reality?
This post was originally published by LEVERIS in August 2017.