Digital technology and the adoption of the internet continues to bring in structural changes to all segments of the economy; and the financial services space has not been spared. Traditional banking processes have been completely transformed, with the relevance of banking halls in the future being questioned. Banks have jumped on the digitization trend by either investing in their own internal capabilities to transform and adopt technology in their processes; or partnered with other institutions that have made technology adoption possible for them.
Consumer trends and preferences have also changed as a result of digital banking. Customers have increased their demand for convenient and personalized banking that is considerate of their unique spending and consumption patterns and banks are doing their best to provide this. Other new players in the financial services space such as neobanks have realized this need from the customer side and positioned themselves as the better service provider by developing financial products aligned to specific market segments. One advantage that these new entrants have is their ability to leverage on either internal or external data in order to understand their unique customer needs, and develop products that best suite them. Banks can also leverage on their own generated data or from other parties to better position themselves to their current and target customers.
Data monetization is the process of obtaining a direct or indirect economic benefit from large pools of data. Organizations can either sell or grant access to their large pools of data to third parties in exchange of monetary or some other economic benefit. On the other hand, they can use this data for their own objectives such as improving their customer experience or internal processes.
Financial service providers -develop data from two points; internally (this can be referred to as zero- or first-party data), and from external sources (second- or third-party data). Internally generated data is developed from questionnaires, polls or surveys that the financial institution may conduct with its customers. For example, when logging out of a banking platform they may ask you to rate your experience. Additionally, this internal data can be developed when they bank analyses the behavior of its clients. For example the bank may analyze how their clients spend their money and how often they receive payments into their accounts in order to develop useful insights.
Externally generated data tends to come from other parties outside the financial institution, and the company does not have a direct relationship with the people whose data they are viewing. These external parties can also be using this data for their own internal processes for example retail companies. One example of third-party data sharing is here in East Africa where we have NCBA bank entering into a partnership with a telco, Safaricom to offer credit and savings options to Safaricom’s customers via Mshwari. In order to analyze the risk profile of these customers, NCBA bank gets access to their mobile money spending and consumption habits and is then able to extend credit to them without these customers having a direct relationship with NCBA. Additionally, a financial services firm can get access to this data from a third-party data aggregator who collects data from different sources. Financial institutions primarily use externally generated data to compliment their internal data and develop a wholistic view of their target markets.
For financial institutions monetizing their data is a clear formula for developing stronger relationships with their customers. A study done by Accenture in 2020 showed that the trust customers had with their banks reduced in 2020 compared to previous years due to a reduction in human interactions. The human aspect in financial services cannot be ignored as people prefer to talk to another person when choosing financial products such as a loan or a mortgage. This reduction in human interaction is as a result of increased online banking that became a greater necessity in that year due to limitations on movement as a result to the Covid 19 pandemic. Banks can leverage on the information that they collect regarding their customers to offer personalized experiences to their customers when they interact with them. In addition, banks can draw insights on their customer earning patterns and develop products that help them invest and save their money better. In the eyes of the consumer, this shows that the bank is concerned for their well being and not just interested in earning fees. Neobanks leverage heavily on educational products that touch on saving and investing not only as an additional value add to their customers, but as a way of attracting them.
The new trend of open banking has allowed financial service players to share their internal data with third parties. Banks can also monetize these relationships for a direct financial gain or strategic partnerships with the third parties who mostly tend to be fintechs. Banks can share information regarding their customers credit card spending locations that can enable these fintechs such as payment service providers to offer location-based advertising that is relevant to the customers. On the other hand, the payment service providers can share information about the merchants that they are working with and based on the transactional information, a financial institution can extend short term working capital to the merchants.
With increased sharing of data between parties and financial institutions looking to monetize their own internal data, risks around data handling and customer privacy increase significantly. Around the world, regulators are putting into action regulation that will guide this. Payment Services Directive (PSD2) in Europe came into force in 2019. on the other hand, the Central Bank of Kenya in its strategic plan for 2021 to 2025 has acknowledged the growth and potential for open banking; and will be developing standards that the financial industry can follow to ensure data sharing is done correctly. Internally, financial institutions should have a Governance, Risk & Compliance approach to management and oversight when developing their own internal capacities. This will enable them to handle and monetize customer data while being cognizant of existing compliance and privacy best practices.
Author: David Kageenu