Data

Banks are falling behind when it comes to understanding — and using — data

  • Banks and startups will soon start pushing the envelope of how they monetize data and create incentives for customers to generate more
  • Evolving data strategy isn't just about trust and the creepy factor, banks’ ability to access customer data is restricted because of the legacy systems in which it's stored
Banks are falling behind when it comes to understanding — and using — data

Banks are falling behind when it comes to data strategy, especially when it comes to matching — and competing with — platforms.

Finance companies typically monetize data by using it to personalize product offerings for customers, such as credit cards based on transactional history or loan offerings based on customer ages and milestones. But with the shift to open banking systems and the integration of AI technologies, banks will soon look to emulate the monetization models of companies like Facebook and Amazon to create incentives for customers to generate more data and new types of data.

“Banks are just starting to think about data as a revenue source,” said Bradley Leimer, head of fintech strategy at Explorer Advisor & Capital, adding that it’s an interesting time as banks dabble in platforms and AI-driven processes.

According to a recently published report by the World Economic Forum in collaboration with Deloitte, data will become a growing point of differentiation for banks, which, for that reason, will have to use “a combination of data strategies to collect the depth and breadth of data needed to follow the lead of tech firms in data monetization.”

For example, Allied Irish Bank has a Visa partnership in which it offers cash backs to customers. In return, retailers receive customer data, which they can use to provide targeted offers.

Of course, the existing challenge is that banks have higher fiduciary standards than other data stewards, like Facebook or Google. People sort of know that those companies are using their data — selling it even — to third parties. But they don’t expect their banks to handle their data that way, and the banks understand data give them a unique position of customer trust. So on one hand, banks have to compete with platforms, but are held to very different standards.

The legacy infrastructure also holds them back: Banks’ ability to access and analyze customer data is restricted in large because it’s usually stored in legacy mainframes.

“Banks’ data are spread around in several legacy databases and not easily accessible,” said Ron van Wezel, a senior analyst at Aite Group. “Data mining will require collecting data —including metadata — in one big accessible ‘data lake’ and this is not something that large banks currently have.”

They also need to be able to access external data through APIs to create new offerings, he added.

Three or four years ago, the dominant model among financial institutions was to completely remove and replace the core system, which was an expensive path and had a high risk of failure, according to Jesse McWaters, the World Economic Forum’s project lead on disruptive innovation in financial services and author of the report.

What banks are doing now, he said, is carving out particular functions or processes and moving them to a more agile environment: cloud-based information providers. Traditionally they’ve been external clouds, but they don’t necessarily have to be.

“Traditionally financial institutions have thought of themselves as having the data advantage in that they have a large store of data,” McWaters said. “Increasing they’re realizing they haven’t been flexible in their ability to analyze that store of data and are now working to rectify that.”

Another implication of this shift in how banks think about monetizing data, according to the WEF report, is it creates a new business line for fintech startups as traditional banks figure out how to effectively manage, use and secure their data.

A startup called AlphaRank, for example, turns credit and debit data into human influence graphs. Another, called Peotic, uses purchase behavior and payment data to help retailers target consumers.

Soon, the monetization strategy will extend beyond banks’ own customers, channels and products, said Devon Watson, vp of strategy and operations at Diebold Nixdorf.

“The future is much more about how can a bank act as your trusted and secure financial steward but also help plug you into an ecosystem of other offers, insights, exclusive promotions and things like that,” Watson said. “Banks will become more interconnected in how they use data and bring value to the customer from the outside world.”

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