Smaller Institutions Should Not Overlook the Importance of Data

There’s an opportunity inside the banks’ walls – mountains of customer data, which many companies would pay richly for, but which the banks are charged with protecting. Other companies like Google and Facebook’s very businesses are built on sharing their users’ data, but banks cannot do the same – or can they?

Nearly 75% of financial services and insurance executives admit they are challenged by the fractured nature and vast amount of data available to them. Who can blame them?

Banks have been habituated to overlook the utility of their data because it is spread across multiple silos and not gathered in one easily accessible area. Transaction data is also stored in machine-readable (not human-readable) form such as DC8xx-34che-99f2, which makes the utilization of it somewhat intimidating.

“What’s a financial institution supposed to do with that?” asks Don MacDonald, chief marketing officer at MX, which offers solutions to help banks better manage their data. “By contrast, a cleansed transaction string would simply read ‘Chevron’ — or wherever else the purchase was made,” said MacDonald. But machine-readable strings are not the only problem. Transactions involving competitor institutions are also difficult for banks to identify.

And yet smaller financial institutions are underinvesting n the tools required to harness this data. The Financial Brand in December 2018 noted that only 9% of institutions with assets under $1 billion have invested in advanced analytics, while 50% of banks with more than $50 billion have done so. The challenges of managing so much data can intimidate smaller institutions such as community banks and credit unions and make them hesitant to get started on the work necessary to get useful data.

Barbara Wixom, a research scientist at the MIT Center for Information Systems Research, has spent 25 years studying how companies can derive value from data. She distilled this research down to three key points:

  1. Use data to improve processes
  2. Sell your data
  3. “Wrap” your data around products and services

The example cited for this last point is a bank account “wrapped” with personal financial management tools, but that is of course only the most rudimentary service of what fintech companies and larger banks are beginning to offer through AI-powered insights around consumer data.

There is also a world of third-party data that may be help banks serve their customers better – knowing when a customer is getting married or has had a negative health event — risk-averse banks avoid. Customers leave data footprints everywhere as they go about their digital lives, and this data is often freely available. Fintech startups such as InterGen Data, one of the standouts at FinovateFall, aggregate this data and apply machine learning to deliver the insights to banks. But why don’t banks collect his data themselves?

MacDonald noted that banks should start behaving more like fintechs in this regard. “As it so happens, we believe that data belongs to consumers — that consumers should have complete access to all their data and should have complete say in how it gets used and shared,” he said. “Consumers have demonstrated that they are willing to share their data with fintechs if they receive a secure value-add service. Banks need to embrace the same paradigm.”

At the same time, banks can responsibly monetize the customer data they have custody of by adding value, MacDonald said. “Once banks have had their data cleansed, categorized, and classified, the next step is to put the data to use in such a way that it benefits both the customer and the bank,” he said. MX, with a more holistic view of the data, can inform a bank of customer’s other relationships, if approved by the customer. “For instance, if a customer at ACME Bank has a loan with an APR of 5% at a competing bank, we can enable ACME to engage with that customer with an offer for a loan with a better APR. In this way, ACME and their customers win.”

Many banks are also missing out on using data to enhance the customer relationship. Every bank customer has received irrelevant offers, or an offer for a product they already use. These missteps cost banks in terms of the customer relationship – “My bank doesn’t know me.” With a proper customer relationship management system, or simply a mature data management system, this can be avoided.

Younger customers in particular say that they value authenticity – or more precisely, the feeling of authenticity – in relations with brands. This can mean transparency about issues such as the Chime outage, as well as insights that can be provided at scale by AI and advanced data analytics.

“In the digital age of banking,” MacDonald said, “relationships have been replaced by a series of arms-length transactions using phones or computers. Customers increasingly expect Amazon, Netflix and not least, their bank, to use their data to deliver a better customer experience.” In MX’s view, the proper use of data includes providing information to make a customer financially stronger through the use of products such as MX Pulse, which uses data-driven AI “nudges” to provide information for smarter financial decisions. Pulse “might point out the total number of subscriptions they currently have, or highlight areas of overspending,” MacDonald said. “By offering personalized guidance, customers have deeper, more frequent engagement with their FIs. We have seen this result in increased brand loyalty for the institution.”

Fintechs have made their share of mistakes – notably Chime’s recent problem where customers were locked out of their accounts for days – but by and large they retain the affection of their customers because their messaging and products are aligned with customer interest. Banks can do the same thing, and they hold – if not own – a wealth of customer data to be leveraged to the benefit of consumers and their institutions.

An interesting corollary to the Chime story is the assertion by Onfido CEO Husayn Kassai that younger customers (“the smartphone generation” of young millennials and Gen Z) value ease of use and superior interfaces to the five 9s uptime of major banks.

“Fintechs are showing banks not just that they’re sitting on a goldmine of data, but — more importantly — fintechs are enabling banks to put their data to use,” MacDonald said. “For instance, we helped a major financial institution in the U.S. discover that $1.6 billion of their customers’ money was going to competitors’ accounts. Once banks understand how to target these users with better offers, they can’t help but understand the power of data.”

CCG Catalyst is partnering with MX to host a poolside reception at Money20/20 Sunday night, October 27, at the Venetian in Las Vegas. Join us here.