Banks increasingly find their businesses challenged by fintech startups that often look to attract new customers by undercutting banks with free or low-cost services. These newer players typically provide such cheap financial services, such as Venmo’s free peer-to-peer payments or neobanks like Chime that charge no overdraft or foreign transaction fees, in order to later monetize the user data they collect.
Banks now must face a future where traditional revenue sources — like transaction processing fees — could dry up as customers flock to low-cost fintech offerings.
To compete in this future, banks need to take a page out of the fintech playbook and explore new revenue sources built through data monetization. While this can seem like a risky prospect for financial institutions in an era rife with privacy concerns regarding personal customer information, taking this step is important for maintaining future profitability.
Many banks have been working on data monetization efforts for years. BBVA, for instance, operates an online marketplace for other companies to purchase anonymized transaction data from BBVA cards and point-of-sale terminals. However, these efforts tend to be aimed at making use of very specific data for highly targeted initiatives, rather than part of an overarching strategy. Barriers to effectively monetizing data across the organization remain high for many institutions — IT and organizational silos, shortages of talent with data science skills and organizational structures and cultures built around monetizing transaction services rather than data — and these all hinder data monetization in the industry.
Most banks don’t have full visibility into the data they have, making it impossible to formulate and implement a strategy for monetizing a greater extent of their data assets. One survey earlier this year found that nearly 70% of banking respondents either agreed or strongly agreed that they hold hidden value within their operational data and capabilities that have yet to be leveraged. Reaping such hidden value from data will require banks to catalog their full inventory of data assets and map out a strategy for how they can use those assets to the greatest extent possible to benefit the bottom line. This might include anonymized data on transactions or credit worthiness, segmented by customer demographic, geolocation or even product category — data that other businesses can use to market products and services more effectively. Failing to create such an inventory raises the risk that consumers will flock to fintechs for their cheaper transaction.
How a bank chooses to monetize different data sets will depend on many factors, including the bank’s broader strategic priorities, customer needs, regulatory constraints and more. For instance, data sets pertaining to a bank’s most important customer segments should be prioritized for monetization through new services for those segments. A bank focused on acquiring and retaining small-business customers could use customer transaction data to provide fraud monitoring or advisory services.
In many cases, monetizing customer data will mean partnering with third parties to offer a new service or selling data directly to other organizations. But banks need to be more thoughtful than ever about sharing customer data given growing public awareness and scrutiny around how internet companies share user data in the wake of Facebook’s Cambridge Analytica scandal. Many financial institutions balked, for example, at recent news that Facebook has been reaching out to large banks about collecting their consumer data to build new features on its site. Proper compliance and customer communication are a must — customers should know how and why their data is being shared, with an understanding of how it benefits them and the ability to opt in or out.
It will often take banks several years to formulate and execute a broad data monetization strategy. However, it will be well worth it — banks that succeed will be in a far better position to stave off new, digitally native competitors.