Why aren’t banks extracting value from payments data?

17 December 2019

As traditional financial institutions compete with big tech and fintech players, gaining access to and extracting value from payments data has become paramount. In fact, the Economist recently described data as now the most valuable commodity on the planet. However, according to Aite Group research, just 9% of top tier banks are effectively monetising payments data.

With data-rich ISO 20022 reaching its 15th birthday and now the de facto industry messaging standard, why are banks still struggling to extract value in the era of Open Banking?

A treasure trove of data

Open Banking has driven the creation of collaborative Application Programming Interfaces (APIs) as a means of achieving open access to data. APIs are often described as the key to exchanging data at pace with a multitude of end users, but this alone is not sufficient. APIs are only part of the story. For data to truly be of value it needs to be machine readable, consistently structured and standardised.

Enter ISO 20022.

ISO 20022 provides the messaging standard for data interchange between financial institutions and, aside from being the basis for SCT Inst, it allows financial messages to carry much richer data, offering the ability for rapid data analytics. However, until recently with advent of Open Banking, it has not really been thought of as a means of extracting data in a way that allows banks to deliver new products and services to their clients and prospects.

Why have banks been unable to extract value?

Banks, however, have faced regulatory, cultural and technical challenges that have prevented them from doing so. The treasure trove of data is there, but three obstacles stand in banks’ way.

1) Regulatory change

While regulations like PSD2 have forced banks to open up customer data to third parties, the handling of customer data is still a murky issue.

In July 2019, Dutch banks were told to stop using their customers’ payments data for the purposes of personalised direct marketing. The Dutch Data Protection Authority informed the Dutch Banking Authority that banks are “not allowed” to simply send their customers personalised offers based on payment details, and may even be a breach of the General Data Protection Regulation (GDPR)

This means that third parties providers, and even other banks, can access and use customer data via Open Banking, but the compliance and data governance framework for institutions is unclear, if not unworkable at present.

A potential GDPR fine alone could set a bank back up to 4% of its total global turnover, the spectre of punitive measures has prevented institutions from using payment data.

Regulators must work with the banking industry to set clear parameters for the use of payment data in a safe and reliable manner whilst still being able to promote innovation.

2) Collaborate

If you look at any successful company, product or innovation, there is likely to have been a collaborative aspect that helped make it a reality; some degree of cooperation is standard practice in most industries.

However, in this case, banks are quite simply not collaborating enough. And this is particularly problematic when it comes to data.

Payments data only tells half the story. The who, the where, the when can all be understood – but the why is missing. Without understanding the drivers behind transactions banks don’t have the intelligence required to deliver services that offer genuine value.

The only way that banks can see the entire story is partnering – with retailers, transit providers, governments, and yes, big tech companies.

For banks to harness the true potential of payments data they need to open up and go beyond the legislative requirements of Open Banking to explore new models of collaboration.

3) Technical preparation

The last obstacle to extracting value from payments data is technical and closely tied to collaboration.

Banks have started to create the systems and processes that allow them to collaborate with third parties – and APIs are the focal point.

However, most banks are lagging with this having taken a relatively conservative, compliance-led approach focused on meeting regulations rather than driving innovation. In reality, institutions should regard APIs as new route to market alongside branch, telephony, and digital, given the orders of magnitude differences in usage by customers.

While it is indeed still early stages for Open Banking, banks are realising that it will have fundamental implications for how customers interact in the digital world in the medium-to-long term. Banks need to approach and manage API as a channel rather than just as a system interface, to the extent that they do with the existing core channels.

Spurring on the monetisation of payments data

According to a report by the World Economic Forum data will become a growing point of differentiation for banks, which, for that reason, will have to use “a combination of data strategies to collect the depth and breadth of data needed to follow the lead of tech firms in data monetisation.”

Data should be considered holistically and strategically, including business, operational, governance and technical requirements. Waiting for regulatory clarity does not need to mean stalling adoption. Banks may be reticent to utilise and monetise data types to their maximum, but institutions can and should experiment with types of data that are considered ‘safer’ than others, such as anonymous or synthetic data.

To speed up time to market, banks need to take advantage of previously made investments. ISO 20022 is a proven, flexible, modern data standard that can assist banks in homogenous data capture, of which they can receive actionable insight from. It should be a cornerstone of every bank’s data strategy. Much like APIs, ISO 20022 has been around for a long time. Banks now need to look at both of these through a new lens, to magnify revenue opportunity.

Hussam Kamel

Hussam Kamel is a Payments Architect with extensive experience navigating Global Tier-1 financial organisations through digital transformation journeys. His management consultancy background enables him to provide detailed viewpoints on key market initiatives, as well as pragmatic advice and recommendations for successful payment transformation.