Big data in banking: The barriers to better customer understanding part 2/2
In my last blog post I discussed how banks are sitting on a goldmine of exclusive customer data but are struggling to put that data to use. One of the key reasons is regulation. In this post I will focus on how banks can overcome regulatory challenges and how customers can benefit from sharing their personal data.
How can the regulatory challenge be overcome?
The problem, then, is that banks need to convince their customers to permit their data to be used in a wider range of circumstances than has been traditionally necessary. There's a major obstacle here in terms of how the public will regard such a request - in the age of Google and Facebook, there's some resistance to the idea of turning personal information into a sellable product. And what data is more sensitive than income, expenditure and wealth?
However, what Google and Facebook arguably demonstrate is that customers are, in fact, willing to hand over personal information in exchange for a better service. Google's ads might elicit paranoia, but its products are typically free, easy to use and never offline. It delivers value, so customers feel justified in sharing their data.
Banks today are in a good position to mimic and even build upon this model. For an example of the form that this might take, think about the health insurance market's growing interest in fitness-tracking wearable devices. It's now understood that customers can be convinced to part with personal information - heart rate, blood pressure and calorie intake, for example - if proof of their healthiness translates to lower premiums. The availability of this data allows the insurer to reduce its exposure to risk and deliver an immediate cost-saving to the buyer, so it's a win-win situation.
The same principle could also be applied to banking, where the interest rates on loans are set according to the customers' chances of defaulting on their debts. Currently, a few generic parameters are used to determine a person's risk profile. Were the bank able to leverage more user-specific information, shared willingly by the individual, then this pricing could be made more accurate and therefore more favourable to the customer.
What do customers gain from sharing personal information?
Obviously, this isn't the same thing as convincing customers to permit the use of their personal information for generic sales and marketing efforts. Nonetheless, the principle of offering a better service still applies - banks should see their remit here not as simply to sell products, but as to assist customers in building wealth. A person might be willing to share their data in exchange for an automated digital advisory service, for example, rather than for generic marketing purposes. Imagine a bank that proactively helps its customers to make smart decisions on their wealth management - isn't that a bank you would want to be a customer of?
Compared to some other financial services players, such as nefarious short-term loan providers, banks in the Nordic countries benefit from having a trustworthy brand. They have a legitimate reason to use big data: it's a new, innovative way for them to help customers make the most of their money.