Is data the new currency for banks?
It’s well known that banks have huge amounts of customer data. However, for me, there remains the question of whether they have enough or the right data.
Don’t get me wrong, there is a lot that can be deduced from spending data alone.
Even before Clive Humby (mathematician and architect of Tesco Clubcard) said “data is the new oil” in 2006, banks were exploiting customer data.
Initially data was used to assess credit risk. In the early 90s I was part of a project at a bank where we delivered customer data to branch managers with a tool I helped to develop that enabled them to slice and dice that data.
It was too expensive to ship a relational database to every branch manager’s laptop, so we wrote our own query tool using indexed files. This gave immense power to our users.
For example, with this tool we could identify when we thought customers were leaving the bank, simply by looking at trends of their cash withdrawals, standing orders and direct debits.
Essentially, if the average number of transactions a customer made monthly reduced consistently, we deduced they were now starting to use another account elsewhere. Of course, we could also look for regular transfers to other banks.
The key learning from the project was that data could be used for many other purposes. We also learnt that arming branch managers with a laptop and training them to query their data (through a UI, not by writing queries) didn’t mean they would be creative in the use of data. Leveraging data needed a different skill set.
Having left the bank, I worked for a start-up that put banks on the internet from 1996 onwards. Here I saw the power of data not only to understand customer behaviour, but to influence behaviour through personalisation.
We used a “personalisation” server for banks first in 1998, largely to identify customers that were ideal targets for specific products. In 1999 I presented at Oxford University on the future of technology and said that “data was the new currency”. What I meant was that data about transactions was quickly becoming more valuable than the money banks make from transactions themselves.
Armed with this experience and knowledge, why then raise the question of whether banks have enough or the right data? The answer to this goes back to the bank’s purpose.
If a bank’s purpose is only to sell financial products and help customers manage their money, then they have enough data from transactions, especially if they are aggregating accounts using open banking.
However, if the bank’s purpose is to help customers with a broader purpose like managing their household finance or helping families live sustainably, then a broader data set is required.
For example, some banks are trying to help customers save money by identifying cheaper providers of electricity. However, if a bank had the data about how electricity is being used, the energy efficiency of their appliances or what type of heating system was installed, they could potentially be saving their customers far more money than just by switching suppliers.
Similarly, some banks are looking at transactional data to help their customers understand their carbon footprint. Again, more data about their car and their house would provide a much clearer and therefore more useful picture.
For businesses, if a bank integrated accounting data, they could provide help on cashflow and finance options rather than customers having to work out when they needed it.
By doing this, they aren’t just providing banking, they are helping the business to run their business better. By doing this they not only help to make the business more profitable, but the bank takes less risk lending to the business.
These are just a few examples where data either from third-party sources or directly from customers could really help both the customer and the bank.
The bank’s transactional data used to be part of the “moat” that protected the bank from losing customers. With open banking, that protection is reduced because third parties can access it with customer permission.
Fintechs are already starting to combine transactional data with other sources of data to create new value propositions not offered by banks. They are leveraging these combined data sets to not only create new products and services, but to drive better engagement than banks.
I’m just saying that there are huge opportunities for banks that utilise data beyond transactions.
About the author
Dharmesh Mistry has been in banking for 30 years and has been at the forefront of banking technology and innovation. From the very first internet and mobile banking apps to artificial intelligence (AI) and virtual reality (VR).
He has been on both sides of the fence and he’s not afraid to share his opinions.
He is CEO of AskHomey, which focuses on the experience for households, and an investor and mentor in proptech and fintech.
Read all his “I’m just saying” musings here.