11 Apr 2018
Banks once profited from what was known as the ‘edifice effect’ – substantial buildings, in prominent locations, made of solid stone, created an impression of security.
Such buildings could protect your savings as hidden inside would be a massive, thick-walled steel vault penetrable only by the intricate plot of a heist movie.
"Banks can be data vaults.”
Edifices were good for brands. But today in the digital world global banks don’t need Doric-pillared Gringotts replicas on every street corner. Yet the customer desire for security remains just as strong.
However, where once it was deposits the physical edifice promised to protect, for financial institutions today there is also another, increasingly precious, commodity: data.
Just as they deal in money, banks deal in data. Moreover, where fintechs and bigtechs are a competitive threat because they can compete with banks to make loans and facilitate transactions, banks have a competitive edge in they are trusted to protect data.
Now let’s be clear: this is not to say the banking industry has not lost considerable trust in society but that loss is focussed on how it has served – or miss-served – customers; not on financial institutions losing customers’ deposits or their personal data.
The loss of trust on the data front has been vastly more pronounced with platforms and social media, most notoriously the Facebook-Cambridge Analytica debacle.
There’s a growing awareness too of how widely we share our data – although an awareness of how secure the various repositories of our data are lags. For example, there’s the recent example of a very widely used recruitment firm whose candidate data was stolen.
Having had my own identity stolen recently it was sobering to speak with the investigating officers who asked whether I’d recently rented a car or a dwelling. Organisations like car rental and leasing firms and real estate agents request reams of highly sensitive data – not always properly protected.
Indeed, the officer said one potential source was paper application forms at a car rental business – they were investigating a series of ID thefts which all seemed to hook back to one agency where someone had simply photocopied all the application forms.
In this environment, tarnished though the image of financial institutions is in the public sphere, the idea of such institutions having the modern equivalent of an ‘edifice effect’ is quite cogent: banks can be data vaults.
This was the argument Francisco González, executive chairman of global banking giant BBVA, made in this column in the Financial Times.
Discussing the threat from bigtech – notably Facebook, Google, Amazon, Tencent, Alipay – he argued “we have realised that some of banking’s core strengths — security, privacy and compliance — are not easily replicable and are increasingly significant”.
Gonzalez sees this as a substantial competitive advantage.
“This is what we call the circle of trust argument,” he wrote. “If customers are willing to confide their data in us, we can use it to suggest money saving alternative investments. The exchange builds trust, leading to more data-sharing, better recommendations and data-driven sales of products and services.”
Even central bankers see the opportunity. The Bank of England’s chief economist Andrew Haldane believes “the application of data analytic techniques to the many pressing questions in finance and macro holds great promise” - although he said that in a speech cautiously titled Will Big Data Keep Its Promise?.
Amusingly he also noted “for economists, few sins are more heinous than data-mining.” “It is the last resort of a scoundrel to engage in ‘regression-hunting’ – reporting only those regression results which best fit the hypothesis the researcher first set out to test. It is what puts the ‘con’ into econometrics,” he said.
Nevertheless, Haldane concluded he was optimistic about the role Big Data would play in finance.
“Economics and finance needs to make an on-going investment in Big Data and data analytics if it is to rebalance the methodological scales,” he said.
What Haldane didn’t address in this particular speech was the question of the security of the actual data, particularly personal data, and that is where many argue incumbent banks have an edge because of their track record of securing confidential financial and personal information - unlike the newer bigtech firms and fintech disrupters.
Partly that is because of the history of the banking sector and particularly because it’s historical importance has always entailed a significant – and growing – level of regulation and supervision.
That is changing as we see more data breaches and particularly the greater sensitivity to the dealing in personal data by firms like Cambridge Analytica.
The EU’s General Data Protection Regulations, which have a global impact, are a major step towards a regulatory coercion for companies to deal fairly with data – and they do draw in social media platforms and non-bank organisations as well as the financial sector.
BBVA’s González argued this growing sensitivity will put more pressure on sectors who previously have not worried about it and “will lead to a crackdown on monopolistic behaviours by the big search and social media groups”.
“A new regulatory model is needed, one that understands the complexities of data and balances privacy, security and competition across sectors,” he said. “As we develop one, the playing field between lenders that have adapted to digital on the one hand and tech and fintech companies on the other will become more level.”
This trusted data custodian role extends beyond the primary relationship between individual and organisation. As EY’s Tim Dring explains, so called “third party risk” is another area where organisations – particularly financial institutions – must be alert.
Managing third-party risk is particularly challenging as it puts pressure on financial institutions to account for how other companies and providers are using and protecting their data.
"Effective third party risk management is about more than just keeping on the right side of regulators,” he says. “It provides an opportunity for financial institutions to create business value while better managing risks now and into the future.”
This role of data custodian for banks -rather than just financial custodian - becomes more important as the business model for financial services shifts from one where customers are ‘owned’ and sold products manufactured in-house to one where customers ‘own’ their data and look to banks – and partners – to provide solutions.
Open data and eventually open banking – where organisations are forced to provide the data they have on individuals to whomsoever the individual wants – will drive this shift.
In a way a bank can become a ‘curator and guarantor’ of trusted services on behalf of a customer.
As BBVA’s Gonzalez said, this is a “paradigm shift” for banking.
“But, at the same time, it is also the evolution of something we have been doing for many years,” he said. “It is about finding a new way to support customers to increase their assets — to make their money, and now their data, work harder for them.”
Andrew Cornell is managing editor at bluenotes
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
11 Apr 2018
27 Oct 2017