When discussing data, it’s easy to couch the issues in technical language. This makes it tempting to see data as an IT issue. However, data lies at the very core of what banks do; it represents their source of enduring competitive advantage and the effective use of data will determine success in the digital age.
An explosion of data – and processing capabilities
The amount of data produced annually is increasing exponentially, by a compound rate of 40%, according to McKinsey estimates. This is being driven by an explosion in smart devices and user-generated content. The same is true in banking. As banking digitises and payments move away from cash, data is mushrooming and customers are using their mobile apps far more than visiting branches. Data variety is also growing – banks now can gain contextual and social data on customers, for instance.
The good news for banks (and other companies) is that with improvements in processing power, this data can be turned into insights that will help drive a more intimate customer relationship. Moore’s Law predicted the density of chip transistors would double roughly every two years, which has played out over time and allowed computers to become much more powerful. But, it is also interesting to look at storage costs (“Kryder’s Law”). These have fallen even faster thanks to increasing disk density: 1GB of data cost more than $200,000 in 1980 compared with less than 3 cents today.
However, banks are doing little with their data. A Capgemini survey found that only 37% of customers believe banks understand their needs and preferences adequately.
In order to capitalise on their data, banks will need to overcome challenges, like:
- Tackling the prevailing mindset. Banks’ reputations rest on safeguarding customer assets. For many bankers, the priority is to lock down customer data to ensure that it isn’t compromised. While the privacy of customers must be maintained, this mindset will limit banks’ ability to leverage data to improve experiences.
- Data silos. Banks’ IT systems have been typically built to offer specific products and services and data is product- rather than customer-focused. The data is bound up in multiple systems with no conformity on semantic standards. Banks will need to solve this problem if they are to get data flowing easily
- Using unstructured data. Since few banks have a consolidated view of their structured data, trying to enrich it with unstructured might seem a challenge to far. However, the ability to do so would open new frontiers.
- To leverage the power of big data and the internet of things, banks need to capitalise on real-time data, and move off batch systems. With rapidly growing databases increasingly being queried, banks also need to consider how they store data. Splitting read/write data from read-only data would be a good place to start since it would improve data management by separating the mission critical data from the mission sustaining data. This separation would also provide far faster querying to accommodate increased look-to-book; and it would make transactions cheaper by using in-memory for the (reduced in size) read/write database
- Banks are likely to see skills shortages. To draw meaningful insight from massive amounts of data requires skills that combine technology knowledge (eg ability to use complex statistical models) with business acumen, problem-solving capabilities and excellent communication. This is why it is hard to find the right candidates and wages are high – a recent report looking at the UK market found three quarters of “big data” jobs were difficult to fill and wages were twice the national average
IT has a key role – but must work together with rest of organization
The IT team must provide the technological backbone for the company data, ensuring all company data is in a single data model against which users can run interactive queries and visualise outcomes in real time. For many banks, this will be best achieved through moving to a cloud-based model. The mainframe is a high performance computer, but unfortunately built for a world where storage and CPU were scarce and i/o abundant, which is the opposite of the situation today.
The IT team is also key for maintaining data security and should design it into the architecture from scratch. That’s why some companies are moving responsibility for security from general counsel to CIO. Another option has cloud providers run applications since they adhere to recognised data security standards.
As crucial as IT’s role is, most data does not reside with IT. Most customer data, for example, sits with the CMO, and there are other pockets of data across whole organisations. Further, IT doesn’t own all IT spending. According to Gartner, CIOs typically only control 50% of IT spending today. Also, data is far too crucial to the success of the bank for the CEO to delegate responsibility to any single department. The role of the Chief Data Officer, a fast growing C-level position, working directly for the CEO, is to bridge the data silos, to interpret business requirements for the CIO’s team, to oversee procurement and to ensure data is top of mind.
A key source of competitive advantage
Digitization is opening up banking to new competitors and new business models.
However, banks retain several sources of competitive advantage, even in the digital age, the most enduring of which is data. When it comes to data security, consumers rank banks higher than any other service provider. This advantage may diminish over time, but for now banks enjoy a better rating than some of their emerging competitors such as online retailers (in which just 6% of consumers have a lot of trust) and social media sites (2%).
Adding to the data advantage is the fact that banks have masses of it. They have millions of customers and records of billions of transactions. Google and Apple and other potential disruptors are spending billions of dollars on digital wallets and other means of getting access to the information that banks already have. It is now incumbent on banks to do something with this rich material, and not just use it for up- and cross-selling opportunities.
Realising experience-driven banking
Before the crisis, you were statistically more likely to change spouse than switch banking providers. But this is changing. Customers have choice. They have information. And, they are accustomed to the kind of rich, interactive experience afforded by e-commerce providers.
To retain customers, banks need to use data and analytics to bring value-added services. An EY survey found people would expand their relationship (or pay more) if providers gave expert advice, found ways for saving money and rewarded loyalty.
When financial providers combine this personalised service with other information, such as context and channel preferences, we begin to move into experience-driven banking. That is, using data to drive value-added insights and getting that information to customers at the time and place they need it, over their preferred channel.
It’s going to be hit or miss
Banking is at a crossroads.
Digitization is bringing major structural change including the opening up of the industry to new non-traditional competitors such as Google and Apple, which have cutting-edge analytical capabilities.
The industry can respond by building on the competitive advantages it has, particularly around data, to deliver a better, fuller, richer banking experience. Or, it can continue on a path towards disintermediation which will see it relegated to a role of providing highly regulated commodity back-office services.
In the same way as talent can’t be left to HR alone, data can’t be left to IT