Refining the new oil
Banks and FinTechs are extracting new value from the world’s expanding data reserves, both to develop new services and improve existing ones
Data is the key to the future. It is the digital oil that can power new services and drive strategic change,” moderator Carmel Crimmins, financial services editor, Reuters, told delegates packed into the plenary room for this year’s ‘Future of Money’ session, held on Wednesday morning. “Traditional banks know that they already sit on a huge treasure trove of data,” Crimmins continued. “Right now, there’s a very interesting scramble afoot.”
Who is involved in this ‘scramble’? Large banks, often hampered by legacy, are working to utilise what they have in their own systems; FinTech firms have developed data-drilling techniques and (in some cases) are going into partnership with banks; challenger banks aim to combine the nimble capabilities of a FinTech with the services, reach and domain expertise of a bank. All three were presented for this Big Issue Debate, but Crimmins noted absent ‘friends’ to counteract any complacency. “Google and Facebook are masters at refining, extracting, aggregating and selling users’ data,” she reminded her capacity audience. So began a session that was at once reassuring (the data’s there; traditional banks already have it) and thought provoking (we don’t necessarily have the most effective tools for utilising it). We have to be aware of restrictions on use of our customers’ data, but how most effectively can we leverage it to deliver new services and drive change?
Already, on Monday morning, Innotribe had given us a clue. Introducing the session, ‘How does Facebook know you better than yourself?’, Ghela Boskovich, head of FinTech/RegTech partnerships at Rainmaking, home of Startupbootcamp, declared: “Identity will be your capital wealth in the coming years.” In a discussion on the evolution of social media, ecommerce and marketing, Vladan Joler, director of Share Foundation, identified “surveillance capitalism” and the practice of ‘nanotargeting’ individual customers. Innotribe regulars came to the ‘Future of Money’ session knowing that the familiar injunction ‘know your customer’ now has a new meaning.
A data-rich world
The primacy of data was reflected in a poll in which two-thirds of the plenary audience asserted it was now more important than money itself. Ather Williams III, head of business banking at Bank of America Merrill Lynch, said it was not a matter of either/or. “We’re less than a decade removed from a financial crisis that rocked the world. The first question my clients’ boards and CEOs ask is: where’s the money?” Large non-financial multinationals ask about counterparties, risk and access, Williams continued: “That said, the data provides them with very interesting insights into how to deploy that money, how to grow their business and understand counterparty risk, and how to find new customers.”
“For the FinTech world, data is the currency of now,” commented Richard Koh, founder and CEO of Singapore-based FinTech M-DAQ Group. “Banks can collect a lot of data on businesses’ and individuals’ accounts. But there is the other part of our lives: offline and increasingly online. Banks are not collecting those data points.” A credit score might indicate ability to pay, said Koh, but not willingness; an ecommerce platform operator will know, for example, that a customer has a pattern of returning purchases. “There are many small businesses in the world that can’t clear a standard credit score,” he explained. “But micro-loans can be given because credit data sourced from non-credit data can give us reassurance.”
In a data-rich world where nanotargeting of largely online customers is a viable strategy, willingness to pay is measurable. Banks’ own datasets are thus incomplete, but can be augmented. Citing the Monetary Authority of Singapore’s decision to allow regulated banks to invest up to 10% of their capital base in ecommerce and ancillary businesses (minority stakes only), Koh observed: “The regulators are seeing that the only way for a bank to do a banking job better is to collect data; one way to do that is from multiple online platforms, and they’re allowing that to happen.”
In Europe, the most significant regulatory initiative related to the use of customer data is PSD2, the EU’s revised Payment Services Directive, which enables third-party service providers to access and aggregate data from incumbents. Due to come into force in 2018, PSD2 increases opportunities for challenger banks such as Starling Bank, described by chief platform officer Megan Caywood as “a tech startup with a banking licence”. Because it focuses on delivering retail current account services by mobile, Starling Bank has a presence on iOS and Android, but not the high street, and is building a multi-vendor marketplace for retail financial products, whilst harbouring plans to move into business banking.
Data and money are tightly linked, Caywood said, but ownership is the key point. “PSD2 shifts the view of data. Banks may have the treasure trove of data, but they don’t own it. The customer owns it. By virtue of owning it, they can share it with whatever other company they wish. Now, customers are getting easier access to the entire financial-services ecosystem.” Caywood referenced the “unbundling of banking” whereby challengers can target specific product areas within traditional banks’ overall commercial proposition. “This disintermediation of banking will offer customers more choice, but it’s a threat to traditional banks with their horizontal feature sets.”
The opportunity for challengers, Caywood continued, is to build out an easily scalable network-effect platform enabling any FinTech (subject to due diligence and a compliant API) to bid in real time to service customer requirements. But variations on this strategy are open to traditional banks too. “We’ve had very explicit conversations with our corporate clients about what this means for them in Europe,” said Williams. “We’ve adopted a framework that we call the Ecosystem Orchestrator. Our role can be helping them manage this. No CFO wants to manage 100 banking relationships; they really want to manage one.”
No longer ‘us and them’
Williams described a role for banks built around leveraging the open-banking architecture enabled by PSD2, but also offering consolidation to the client. “We already do that through notional pooling and other cash-concentration structures, but now we can more efficiently move and access money and complete transactions on our clients’ behalf.” Does this approach mark a change of attitude from traditional banks, Crimmins wondered, to the challenge from Silicon Valley? “I’d say we are more understanding of the challenge. Banks have pivoted from an ‘us versus them’ approach to a much more collaborative approach. We think of this as a partnership. The insights that can be brought in are amazing. This is not a zero-sum game,” said Williams.
But will Silicon Valley’s giants be satisfied with a partnership role? “Tech companies such as Amazon, Google and Facebook will increasingly move into financial services, probably focusing on payments first as we’ve already started to see. But I don’t think any of the large tech companies will want to take on the risk and regulation of actually being a bank,” said Caywood. Multiple other challengers will look to get into financial services, she continued, with a view to delivering services and driving revenue very differently from traditional banks.
Expanding on this theme, Koh predicted a step-change in the competitive landscape. To date, FinTech 1.0 featured the use of information technology to make the processes of financial services faster, cheaper and better. “Now we have FinTech 2.0, which is where you try to use big data science and methodology to reimagine banking services. Something that wasn’t possible or that may not be offered by a traditional bank or a challenger bank – we can now make possible through big data science,” said Koh.
Know your customer
If the main panel discussion confirmed the ever-increasing importance of data in shaping the development and delivery of future financial services, an audience question on customer acquisition further underlined its role in helping service providers understand the diversity of customer preferences. “For us, the future is mobile,” said Caywood. “We expected our early adopters to be the digital natives, but what we found is, our provision is age-agnostic, and it appeals across income categories. People want to be able to do things automatically and easily from their mobile.”
But Williams suggested that the future of banking would still include branch networks. “What’s Amazon doing now? It’s opening branches,” he said. Noting the role of face-to-face discussions for banks when acting as trusted advisers to the client, Williams declared: “At some point, most people will want to sit down and talk.”