Data is the New Superpower of the Financial Services World

How the Digital Transformation is Creating Value Disruption and New Opportunities for Banks

By Thomas Egner, Secretary General, Euro Banking Association and Markus Rupprecht, CEO, Traxpay

As businesses of every shape and size are being impacted by the forces of an ongoing global digital transformation, the value of data is taking on immense importance. Consider the amount of data that is being collected worldwide every day. According to the April 2017 McKinsey & Company report, Analytics in banking: Time to realize the value, “by 2020, about 1.7 megabytes a second of new information will be created for every human being on the planet.”(1)

This a tremendous amount of data the exploitation of which will have great economic implications, especially for the financial community.

Tapping into this data will be a decisive differentiating factor for banks and other players looking to compete in this marketplace and to take their customer propositions to the next level. A July 2017 article in Global Banking & Finance Review titled Why Data Has Become Banks Most Important Commodity stated, “Faced with increased competition, traditional banks must utilize data effectively and transform themselves into data-driven organizations that will deliver knowledge banking. This will lead to better financial products and services for customers that suit their needs and expectations.”(2)

Hunger for Data Leads New Players to Eat into Traditional Bread-and-Butter World of Payments

In today’s marketplace, the commodisation of payment processes and the growing interest in payments-related data are creating real challenges for the bread-and-butter world of payments and cash management. As major corporations have begun to recognize the value of the data associated with transactions, banks have increasingly been used primarily for their balance sheets to simply execute transactions, which in some markets has led to a gradual disintermediation of banks.

A telling example of this trend can be found in China, where WeChat, a Chinese multi-purpose messaging, social media and mobile payment app is turning the payments industry practices on its ear by handling payment processing within its own ecosystem. A Bloomberg article suggests that billions of dollars in annual revenue from transaction processing could be siphoned away from banks and other firms in the near future.

One of the principal motives behind this move by WeChat was to harness the power of the data it collects, including the data associated with consumer payments in order to drive improvements to the overall customer experience and create additional revenue opportunities for the business. Clearly, this scenario presents a shift that portends significant change for the financial services industry.

Data Analytics Offers Opportunity for Banks to Strengthen Bonds with Corporates

While this paradigm shift may be causing consternation for some banks, others are happy to embrace the strategic opportunities it offers. The strong relationships these banks have fostered with their corporate customers often serve as a starting point for investigating how they can best leverage analytics of the data they collect to provide corporates with access to critical capabilities and to help finance corporate growth – which, in turn, brings tremendous additional value to the relationship.

Some banks have already made strides in unlocking these opportunities for the benefit of their customers and, eventually, their own profit. The previously mentioned McKinsey & Company article cited a recent survey that found “A few banks are already seeing the rewards. These leaders have built substantial foundations by establishing data lakes and centers of excellence and using machine-learning techniques. For them, advanced analytics is becoming a reflex action, with commensurate rewards of about €300 million in additional annual profit, on average.”

Data analytics capabilities are becoming an increasingly important means for banks to differentiate themselves, harnessing high value knowledge and actionable insights to improve efficiency and increase revenue growth through the generation of added value for their corporate customers. This is a message that the Euro Banking Association (EBA) has been promoting to the industry as part of its objective to encourage member organizations and relevant stakeholders to embrace innovation in payments and transaction banking.

Data Analytics is Key to Internal and External Value Creation

EBA research has found that data analytics can deliver both internally-oriented and externally-oriented value for banks and their corporate clients. Banks are optimally suited to leverage data analytics for internal purposes, such as improving product development, targeting market and sales efforts, as well as driving operational efficiencies and better risk and fraud management. Analytics can also provide a good source for creating potentially priceable service offerings.

In terms of delivering external value to clients, banks will need to focus on specific data that can be offered to corporates as a unique value proposition, which will in turn provide opportunities to generate new revenue streams for the bank. To truly reap the benefits of this data, banks will be compelled to develop competencies in three principal areas. These include the implementation of analytics capabilities so they can facilitate informed decision making and advice derived from data; the ability to unlock data sources by being able to both grant access to and use data made available by authorized third-parties; and development of the knowledge and skills needed to identify relevant internal data and external data sources.

These capabilities will have to be supported through investments into bank systems such as IT infrastructure and architecture, as well as improvements to employee skills and operational processes. Development of monetization models and strategic partnerships, along with compliance considerations will be key to the business success of data analytics initiatives.

In order for banks to strengthen their analytical capabilities, they will have to create centers-of-excellence (CoE) that can cut through the internal complexity found at most banks and provide leadership, cohesion, best practices, research, support and training for these vital initiatives.

However, it cannot be stressed enough that exploring data and drawing helpful conclusions need a sound and thorough design and management of the processes, analytical tools and algorithms used. In the end, data economy is not only about accessing relevant data. The quality of data as well as the analytical algorithms, models and tools applied to sort the data into categories determine the quality of the conclusions and any subsequent actions. Or as John Thornhill put it in an opinion piece in the Financial Times titled “Lessons from history on the dangers of blind trust in data” (31 December 2018): “There is a significant difference between Big Data and strong data. (…) We should be incredibly careful in understanding exactly what data were being included and excluded in any given model and what inferences could be reasonably drawn.” The author referred, among other examples, to the Sesame credit scoring system that the Chinese Internet giant Alibaba had hoped to rely on as an accurate measure to establish customer trustworthiness. Although the scores of this system are based on data of hundreds of millions of customers, they have not been used as a basis for making loans yet, because “it is difficult to build reliable predictive models across different contexts.”

While data exploration probably offers the most promising opportunities for the benefit of customers, banks can also create value in an area that may look as if it is all just about compliance: the management of data access and related customer consent. It goes without saying that banks should proactively manage client privacy, so as to maintain the highest levels of customer trust. But informing their corporate clients about data policies restricting the use of customer data to agreed-upon applications and implementing strict consent management solutions are only minimum measures to be implemented by every institution. In addition to this, banks could generate tangible value by providing central and user-friendly consent management facilities and tools to their clients. This will give customers the necessary overview to manage the rights on their distributed data assets, enabling them to exert their data sovereignty in an easy and convenient way.

In order to avoid typical many-to-many challenges in terms of consent services, the banking industry could even collectively develop consent standards and services for use in the B2B2C and B2B2B context, building on their existing digital identity and access-to-account infrastructure. Since GDPR, PSD2 and Open Banking are already driving banks to implement consent standards and services for themselves, the next step could be to offer this capability for the wider economy. Quite similar to how Amazon, Google and Microsoft started offering their IT capability to other companies via the cloud, banks could offer their trust capabilities to other segments of the economy as well.

Vincent Brennan, Deputy Chairman of the Euro Banking Association and Chair of the EBA Open Banking Working Group, says: “Our recent publications on Open Banking have been exploring practical implications of the data sovereignty paradigm – this paradigm basically means that the right to exploit customer data is not automatically tied or granted to the party that collects and stores this data as part of a given application or service it provides. We believe that banks are well-placed to assist their clients in centrally managing access consent for the data distributed over different applications, just as they help them to manage other assets in a very secure and reliable fashion.” The EBA working group is currently finalizing a thought leadership paper that is zooming on the role banks could play in laying the trust foundation required for the new data economy.

Filling Product Gaps and Strengthening Client Relationships

While financial institutions have access to a treasure trove of internal data, it is often not sufficiently unique to provide actionable insights critical to maximizing the value of data analytics. To develop truly differentiated value propositions responding to customer requests and needs, banks need to look beyond financial information, and concentrate on corporate data needs in primary and secondary processes. These data-driven corporate processes might include manufacturing, CRM, marketing, and logistics. This is where collaboration with fintechs offers an opportunity to enable the enrichment and distribution of data services to corporates to better meet business needs.

Partnering with third-party providers can be mutually beneficial, enabling banks to fill product gaps and offer corporates the vertically integrated solutions many of them demand, including dynamic discounting, reverse factoring and factoring services, supply chain financing, and other asset-based finance solutions. Banks can partner with fintechs to take advantage of their advanced technology platforms and specialised applications, thereby unlocking the value between the bank and its corporate clients using ERP data to strengthen supply chains and deepen relationships. By taking advantage of software-as-a-service models, banks don’t have to reinvent their platforms in order to quickly and easily make the most of corporate data.

Partnering for Success

As banks consider partnering with fintechs, it is advisable to carefully evaluate such partners, taking into consideration the provider’s focus and business objectives.

Alan Koenigsberg, Chief Revenue Officer at TraxPay, says: “Based on our experience, it’s important for banks to consider the following nine factors in assessing a future partnership with a fintech and its potential for success:

Banks should look at their own product gaps and work with a fintech to leverage innovative solutions to fulfill specific customer needs – strengthening the bank’s value proposition as a trusted partner.
Fintechs should display an in-depth understanding of industry regulatory requirements and have rigorous compliance standards in place.
A fintech’s management team should have a deep skill-set and thorough understanding of corporate treasury practices.
Banks should consider the reputation and brand value of a fintech partner, and how such a partnership will enhance their own value with customers.
Execution: Knowledge that a partner can deliver on time, on budget and to requirements.
Assurance: A fintech should be established, recognized and a credible player that can scale without any reputational risk.
A fintech’s technology platform should be compatible with leading ERP systems.
A fintech’s technology must demonstrate rigorous security protocols, so as to minimize risk for the bank and its customers.
A fintech should be fully funded, ensuring viability today and well into the future.

If these factors are in place and there is a close-enough match of the long-term goals of both organizations, the partnership can result in a fruitful relationship enhancing the strengths of both organizations.”

Additionally, it is important for banks to consider the needs of thousands of suppliers that will be called upon to participate in a supply chain finance program. Bank relationships with corporate buyers are obviously key but if each bank offers a siloed solution, forcing suppliers to deal with multiple platforms because of their relationships with various buyers, supply chain finance programs will fail. Forward-thinking banks will recognize this potential and partner with a fintech that works with multiple banks and corporates so suppliers can have all of their needs serviced in one place.

It’s a Brave New Digital World

In the past, banks were critical in payment processing for clients, but increasingly clients have options that not only allow for payment processing, but also greater access to the new gold rush of data.

According to the recent article, Clearing and Settlement: The New Battleground For Payments Innovation,(3) published in Finextra in October 2018, today’s new payments paradigm compels banks to take a holistic approach. They must gain an “understanding that payments will originate from both bank-owned as well as third party API-driven channels, carry rich data payloads, require differentiated processing in the middle office, and then distribution to an increasingly diverse set of clearing and settlement mechanisms. It must ensure that transformation can be achieved in quick sprints, with well-defined business goals, rather than marathon projects based on technical objectives. It must simplify the process of onboarding customers on the front end and incorporating new clearing and settlement options on the back end, by reducing the heavy integration burden imposed by traditional payments renovation programmes.”

Banks have an opportunity to embrace the new data economy and develop new or improved value propositions for their corporate clients in particular. Partnering with fintechs is one way to help banks leverage the power of information around corporate’s financial transactions and data. Based on well founded relations, digital service experiences and service options can be created for better customer experiences and strengthend business relationships.

[1] https://www.mckinsey.com/industries/financial-services/our-insights/analytics-in-banking-time-to-realize-the-value

[2] https://www.globalbankingandfinance.com/why-data-has-become-banks-most-important-commodity/

[3] https://www.finextra.com/researcharticle/32/clearing-and-settlement-the-new-battleground-for-payments-innovation

Thomas Egner is Secretary General of the Euro Banking Association (EBA). He has been engaged in several positions in transaction banking for over 20 years. Mainly responsible for the development of mass payment clearing and settlement strategies he as well was involved in the implementation of SEPA and PSD.

Markus Rupprecht is the Founder and CEO of Traxpay. He has used his deep experience in the European and U.S. banking industry and passion for technology to innovate solutions in the B2B payments space.

The Euro Banking Association (EBA) is an industry organization with 160 bank and non-bank members from Europe and around the world. The EBA fosters dialogue and experience exchange amongst payments industry practitioners towards a pan-European vision for payments. EBA involves member organisations and relevant stakeholders in thought leadership on innovation andhelps to understand and implement regulation e.g. by supporting the development of market practices. EBA has its offices in Paris, France.

Traxpay is an award-winning, global fintech company that partners with banks to offer a turnkey solution for supply chain financing and payment transactions. Based in Frankfurt, the company also has offices in Los Angeles, California.