The complete transformation of the availability and use of data, resulting from regulatory reform and technology innovation, will be so profound that large financial institutions will need to rethink their business models and operational structures.
We know that open banking and APIs will combine to make the client data held by banks more mobile and accessible.
However significant, this is just one example of a much bigger change. With so many of our economic interactions now being conducted via digital means, more data is being generated – and in more places – than ever before.
This represents a shift in how financial value is generated, exchanged and recorded, and calls for data-oriented business models if banks want to avoid being marginalised.
In agrarian, pre-cash economies, value was exchanged and generated through nodes such as markets with a restricted number of participants and interactions, and few links between these nodes.
These decentralised models, which required limited data exchange, were replaced by centralised ones as financial interactions meshed with the levers of government (eg, treasury departments, central banks, tax authorities, etc), which collectively dictated the rules of financial intermediation and dominated its data flows.
Today, however, we’re seeing the emergence of a distributed model, whereby governments oversee a framework that allows economic actors to choose how value is transferred from a range of competing options, leveraging technology innovations such as APIs and blockchain.
In this distributed model, consumers and platforms are the nodes in the network, connected with APIs to access, exchange and mesh multiple data flows.
In this digital economy, banks have access to more data, but a less complete picture of client activities and needs.
Digitisation’s impact in other industries is well-established, but, in 2018, it will become much more evident in banking.
Over the next 12 months and beyond, we see three ‘mega-trends’ as pointing the way to the future needs of clients and the changes banks must undertake to remain relevant.
1. Rapid service digitisation
The first mega-trend that will continue to drive change in banking business models is the rapid service digitisation that has transformed multiple industries over the past decade.
These services leverage innovation in technology to provide greater speed, choice and simplicity to users, with implications for banks’ traditional role in the financial value chain.
As more services to consumers and businesses are delivered digitally, a more diverse range of data flows is being generated, while banking services are increasingly integrated into the back-end of third-party value propositions, meaning banks risk losing control and visibility of client data and relationships.
2. Regulatory support for open banking
Having reduced margins and overturned business models elsewhere, service digitalisation is now directly impacting banks, most notably through regulatory support for open banking, our second 2018 mega-trend.
With the Payment Services Directive 2 entering force in the EU, regulators are encouraging competition from fintechs, primarily weakening banks’ traditional control of account and transaction information, while facilitating new entrants in fields such as wealth management and lending.
Australia has opted for a ‘read-only’ approach to its open banking framework starting next year, which means third parties won’t be able to execute transactions on behalf of customers.
However, open banking, both in the EU and in Australia, is also unleashing new forms of competition and decentralising data.
The new form of connected banking empowers firms that can use it to deliver value to the consumer, forcing current financial institutions to adapt operationally and strategically.
3. Power shifts
While open banking gives customers control over which service providers may access their banking data, it is just one example of the power shifts in the new distributed data model of financial value.
This third mega-trend of 2018 is driven by the increased volume, diversity and mobility of data flows in the digital economy but is also supported by regulatory reforms that reflect the importance of data and digital identity in the exchange and reporting of financial value.
The EU General Data Protection Regulation, for example, not only governs how companies store and use data harvested from consumer interactions, but also offers opportunities for consumers to monetise their digital assets, via their new rights to grant or withhold access to their data history.
Joined-up views to better service clients
For decades, banks have held privileged access to client data, but their siloed structures have often frustrated efforts to create a joined-up view of the client and their future needs.
Although service digitisation across multiple sectors and interactions has generated a treasure trove of data, financial institutions have been ill-equipped to maximise this opportunity.
Few have the processes or infrastructure to effectively capture, store and analyse transaction data. For them, there is a risk of further margin compression as banks’ value-add becomes less clear to the end-user.
But there is an alternative for banks with the resolve and vision to change. In sector after sector, platform-based approaches are being adopted by incumbents in response to digital disruption.
Though models vary, a key attribute is the ability to combine resources and relationships into a flexible value proposition that leverages data to inform future service development.
By consolidating data from multiple retail partners with transaction information, perhaps in a budgeting app, banks and other institutions can provide real insight and value, which are rewarded with loyalty and transaction fees.
To do this, these companies must not only reassess their data management, aggregation and analytics capabilities, but also develop new relationships and value propositions.
Banks and other financial institutions have long-known that effective data management is key to cost reduction and operational efficiency through greater automation, as well as effective defence for cyber security and against financial crime threats.
The distributed data markets of today’s digital economy – driven by the combined force of innovations such as blockchain, cloud computing and artificial intelligence – represent a more fundamental shift.
As such, 2018 has become a critical year in the reshaping of data management strategies, operating infrastructures and business models.
Christopher Truce is head of fintech at Saxo Bank Group.