In the time it will take you to read this blog post, approximately ten quadrillion bytes of data will have been produced by the digital world. 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 creation of data is having profound effects 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 see it as one of the greatest opportunities that global banking has ever seen.
Financial Transaction Data 1.0
The first group of banks who have realised the massive potential of data and advanced analytics, are those that are looking at how data 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 looking at 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 all 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 would 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 the ‘Creator Economy’, which allows them to turn every consumer-generated data point into a vast “bonanza in advertising revenue”.
It was Paul Saffo who first coined the term ‘The 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, and each ‘Like’ on Facebook, create value for the platform owners which is then used to drive revenue from their advertising clients.
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 Transaction Data 2.0
Of course, not all data is created equal. The more accurate, rich and up-to-date the data is, 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 synthesise each individual as a consumption entity the better. And is there any better synthesis of a human being as a consumption entity than the sum total of all their financial transaction data?
Where you spend. How much you spend. How much you earn. How much you have in savings. What services you consume. What investments you have. What policies you own. What causes you support. Where you work. Where you travel. When you travel. What 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”, and it just so happens that banks are sitting on the richest seam of that resource in existence.
Just imagine what the likes of Google or 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 old contract runs out. Imagine a bank that continuously scans airline websites to find you the optimal time to book your summer holidays. Imagine a bank that regularly analyses your buying behaviour to find you money back deals at your favourite retailers. Just imagine a bank that used your data in a benevolent manner to perpetually save you money.
The perception of banks could move from that of being a commercial organisation that sells financial products to their customers, to that of a trusted financial advisor. One that sits in the background and offers them contextual financial advice whenever they require it most. A bank that constantly stands vigil over their customer’s financial health and future.
So what is stopping banks?
First up, banks must figure out the consent issue in order to harness all their customer’s data. This, however, is far from insurmountable. Especially if they start to build real trust by properly advocating for their customers in a fully transparent manner. Perhaps the topic of a future blog post.
The biggest challenge of all is, of course, is technological. Fixing this for an incumbent bank on legacy software 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.
Siloed data across a vast array of subsystems, with no unified and universally accessible data layer, is simply unfit for purpose when it comes to how banks need to start using their vast data troves. Standing up a new technology stack on a modern platform is the only way forward for a multitude of different business reasons.
For a startup bank, the technological issue is must less. They simply need to choose a platform provider who has data capabilities baked in at the most fundamental architectural layer, as well as a visionary approach to their business model in the age of the creator economy.
What happens next?
What ever happens, this Cambrian explosion of data is only going to continue. As will encroachment from FinTech startups 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 which 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?