I sat through a discussion of FinTech last night. The theme was how FinTech is changing the business model of banking and a bunch of bankers focused upon the issue. From the dialogue, there were clearly four big buckets of change:
- Regulations and how they impact the incumbents and the challengers
- Data and the permissibility of usage of data
- Customers and what they actually need and want
- Structures and how you marry the digital world with the physical engagements
These are four big threats and opportunities to FinTech firms and incumbent institutions. For example, on the first note, many incumbents see this as their protection. For example, pre the Brexit vote there was a very interesting presentation by Conservative MEP Daniel Hannan at the Oxford Union:
Arguing against his own future as an MEP, Mr. Hannan claims that the big banks were pouring millions into the Remain vote (and they were) because it would allow them to continue to embrace regulations as their protection from competition. It’s not quite true – PSD2 opens up banks to third party competition via data access – but it is a key factor in all markets that the regulatory structure allows banks time to change. Is that a regulatory barrier to competition or a necessary requirement to protect the consumer and the economy? Hmmmm … that’s an argument we could have forever.
Meanwhile, the question of data usage and access is an interesting one. I blogged the other day about the American markets and how big US banks are lobbying the government to block third party access to data. This would block aggregators and other third parties from getting a looksee into a customer’s information store. Again, this is a fine line of balance as access to customer data is all well and good, as long as that data is not breached or abused. Figures published in the UK this week, for example, show that identity theft doubled in the last year and this has to be a key concern. As a result, banks can use data fear as a reason to exclude third parties from data access. This has been tried as a method to exclude third parties from access to bank data under PSD2, although it failed. Banks have unsuccessful tried to show that third parties could compromise customer accounts and should be legally precluded from access to data. The EU determined that customers can allow third parties access, as long as those third parties are trusted. The core of the issue here is that trusted third parties are lite licensed by the regulatory authorities and can use customer data for extended services, such as pay through Facebook or easy money transfers through TransferWise. The question the banks raise is that if the customer data is breached, who is liable? That’s a fine balance, with the regulator saying the first port of call would be the bank. Shoot.
Another factor we talked about in terms of data access, was when would the customer feel a bank over-stepped the mark. Customers need to give permission for data access and advising a customer of a better deal is all well and good, as long as the customer said the bank could do that. Is it scary if a bank reaches out to me and says Hey Chris, you could save $’s if you switch your broadband deal to BT. Not really. But it might be if the message was Hey Chris, I see you’ve just spent $100 on anti-depressants. We can recommend this therapist for just $100 per consultation. Would you like to get in touch?
This relates to what customers actually need and want. The fact is do NOT ask them what they want. If you ask a customer what they want the answer is faster horses, as Henry Ford would say. Customers see what there is today and will advise you how to improve what they have today. That’s fine, but banks should focus upon what customers are actually doing and what they need and then reimagining the process. For example, banks provide loans and if we asked what customers want, they want cheaper loans. That leads us down the rate churn route. We should instead be asking what they need loans for, and then thinking about packaging loans for what they need it for. This is why I love the Banco Original example of using Facebook Likes to discover customers interests.
The idea is that the bank uses Facebook Connect for sign on and, by having access to a customer’s Facebook profile, can see their Likes. If thousands of customers Like the BMW 5-series, then the bank could negotiate a deal to buy the new BMW model direct from the manufacturer and get a discount. In fact, they could get an exclusive deal whereby, for example, they buy 300 BMW models at 10% discount and delivered two weeks before the public sale of the new BMW. This would be offered to their customers direct packaged with a loan. In other words, the bank knows that I like the BMW 5-series and is offering me delivery of the new model two weeks before the rest of the country at 10% discount and packaged with a 5-year loan to make it easy to purchase. That’s imaginative. If you know that a customer desires the BMW 5-series and bundle a loan with the new model, you are far more likely to get the loan product sale than if you just said here’s a 5-year term loan at 5% interest. This is what customer data leverage will be about: being clever with the data you can access and use, and making it a no-brainer for the customer to give you access.
After all what customers want is for banks to give them better service, advice, support and buying power. Unfortunately, what banks generally deliver falls well below this level.
That leads to the final point: marrying the physical and digital structure.
Banks generally have their structure aligned to lines of business that emerged over the past fifty years. This means that the mortgage, loans, deposit account, payments processing and other functions are all separated and lack a single customer view. A single customer view. A single customer view. Oh, how we aspire for a single customer view.
This is probably where the real issue lies, which is that customer data is spread around the lines of business and no-one has a single customer view. Do you know I’m Chris Skinner the deposit account holder who also has 25-year mortgage with you? Probably. Do you know that I’m married, and my wife’s account is in her maiden name? Do you know about my two children’s accounts? Do you know that I’m also the CEO of the Finanser, with a commercial account with your Business Banking division? Are you aware that the capital of the Finanser is being used to refinance the extension on my house? And does the person in the branch who you call my Relationship Manager know all of this? Does the person at the Call Centre I’m talking to about my credit card limits know this?
I could go on, but you get the picture. When I deal with my bank, I know that the people only know about the one product I’m calling about. The credit card person only knows about my credit card history. My relationship manager only knows about my deposit account. The mortgage advisor only knows about my mortgage application. Information is not integrated; it is siloed. That is why I have an issue: the physical structure has separated my digital footprint.
This is where banks that are clever will win, as they will marry their physical and digital structures over time, with a single customer view. That single customer view will be digitally leveraged with advice, as in the Amazon style of recommendations, or the Facebook style of giving me just what I like. The banks that do this well will win. The banks that rely on their old structure of siloed product sales to survive will lose.
Anyways, that’s a quick write up of last night. More later …
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...