Re-imagining Financial Services with Data Democratization and Hyper-personalization

Convenience and instant gratification have become the corner stones of customer journey in the recent times. Over the top customer experiences from the global e-commerce players, cab aggregators, hotel aggregators etc., have only underscored the changing customer behaviour over a period. Though industry experts have identified fallacies in such businesses, there is plenty to learn from these companies, on how to manage customer experience, journey and expectation. The flip of such improved customer experiences on an individual’s life, is the expectation of similar experiences in all spheres of life. From yesteryears concepts of  2 months’ timeline for getting a loan sanctioned, we now see loans being sanctioned in hours (with scope of further reduction). Businesses are remodelling themselves to cater to such increasing customer expectations

I have been tracking the two concepts of data democratization and hyperpersonalization (well localization too but will keep that for a separate discussion) for a while and think that future of many industries might be impacted by these (positive or negative will be open to debate and perspectives). These concepts have already taken various shapes and forms in different jurisdictions/industries for formalization – Account Aggregators in India, PSD2 in UK, API Playbook and API Framework released in Singapore & Hong Kong; however, the basic concepts remain the same.

With this article, I want to put forth my thoughts on the future of financial services, based on complete acceptance of these two concepts. Before delving into the hypothetical future of banking, let’s try and understand the two concepts:

Data Democratization

Everybody has access to all data. A consumer will be more informed on her data and have full control on who accesses what data at what frequency. Moreover, traditional “owners” of customer’s data, will become gatekeepers, with the key for such information lying with customers. Additionally, certain protocols will be followed to make data understandable to end-users and to minimize any misrepresentations or misinterpretations

A Simple banking example: A customer has two savings accounts, one each in Bank A and Bank B, a mutual fund with fund house C, vehicle insurance with Insurer D and a host of other financial holdings. In the current world, each entity works separately, and customer accesses services of each entity through the entities’ own apps/branches/RMs etc. Most importantly, customer financial / holding / transaction data is within the confines of entities’ in-house systems (which makes the entity owner of this data). However, the concept of data democratization breaks these confines and makes customer the owner. Customer can decide if she wants to give complete access of data across the existing relationships to a new entity ‘X’ (which can be a bank, MF or a registered wealth manager). With such proper consent from customer, Bank A, Bank B, Fund House C and insurer D must share the data which erstwhile was considered sacrosanct for these entities.

Hyperpersonalization

Though the concept of hyperpersonalization is a derivative of data democratization, it’s worth a separate mention. “One product fits all”approach has long been put to rest. Consumers today are more informed, and the trend will continue across industries to make personalized offers/sales/marketing to each customer. Let’s take e-commerce as an example – if a customer wants to buy an electrical appliance, she has the option of viewing prices/availability/time to deliver on multiple sites/apps. To remain competitive and relevant, an e-commerce company must make sure that prices on products are at minimum, consistent with competitors (price-search engine is common technology across all e-commerce giants). With pricing, services, delivery etc. at par, the differentiator now is advances in AI/ML made by e-commerce industry. Data is being mined from every possible source to make AI / ML realistic and responsive (e.g. previous transactions, previous catalogue browsing etc.). We all have received marketing emails usually at that exact moment when we were thinking of buying that electrical appliance. We are also privy to displays of additional products at the time of buying with a view to upsell/cross-sell.

A simple banking example: Let me extend the above customer example to financial services. Assume that along with implementation of data democratization, both banks A and B, have made significant technological advances and provide at-par personal finance management services (PFM). Just like customer is able to make an informed decision to buy an electrical appliance after accessing personalised information on multiple websites, with data democratization, customer can access financial information across various service providers to make an informed decision (based on her subscriptions). She decides to log in to the PFM module of Bank A to get consolidated view of her holding across Bank A and Bank B. Bank A can offer a Fixed Deposit to her citing “You have $50K lying idle in Bank B’s account, earning a 3.5% interest rate, however we can offer you 5% interest for 180 days on a fixed deposit”. She can also login to the PFM module of Bank B and get competitive prices on personal loans based on her overall “net-worth”

Two important outcomes of Data Democratization and Hyperpersonalization are: a) Customer is completely aware of her own data across various entities b) entities are completely unaware of how “their” customer’s data is being used by competitors. This situation creates data symmetry from customer standpoint; however, it is a prone to create information asymmetry for Financial Institutions (FIs). With the concepts of data democratization and hyperpersonalzation established, below are two futuristic hypothetical scenarios for the Financial Services industry, due to the disruptions expected by the two above defined concepts:

Scenario 1: Zero-sum game:

A hypothetical scenario, where in all FIs will reach a stage of stability and saturation (i.e.) market share of each entity will evolve to a %, after years of competitive pressures. FIs will continue to own the relationship with end customers and distribution channels will co-exist as service partners. Over time current distribution channels may realign business models to become full fledged financial services providers.

Assumptions:

1. All FIs maintain quality of assets and comply with evolving regulatory requirements on an ongoing basis
2. All FIs implement data democratization principles and move up the technology curve to provide hyperpersonalization

Highlights:

• For an elongated period, we might see heightened competition to “steal” customers
• For an elongated period, we might see price wars (Example - For a long period of time, cab aggregators had to run deep discounts/offers to attract customers)
• Increased cost of acquisition of new customers, with discounts, offers etc.
• Increased cost of retaining a customer, eventually forcing all entities to focus on customer retention

An eventual distribution of customers across FIs will result in a zero-sum game, with profits and number of customer stabilizing to an optimal number at each FI. FIs will primarily focus on customer retention by fulfilling customer needs across the spectrum of various touch point, rather than looking for newer customers. For increasing touchpoints with customers, FIs will look at launching multiple newer lines of businesses (either white labelling or inhouse or partnerships), for example - travel bookings (some of the large players have already launched such services), E-commerce/marketplaces (either FIs can launch such services, or we can expect large e-commerce players launch banks/neobanks/NBFCs/insurance etc.)

Scenario 2: Financial Institutions: Bookkeeper :: Fintechs: Customerkeeper

A hypothetical scenario, where in end customer will be “owned” by Fintechs and FIs will become bookkeepers for such Fintechs. Fintechs can range from e-commerce to pure play customer finance management, but the bottomline to this scenario is a strong partnership between FIs and Fintechs, leading to growth of both industries. The words Fintech and Distribution Partners can be used interchangeably going forwards

Assumptions:

1. All FIs/Fintech/distribution partners maintain quality of assets and comply with evolving regulatory requirements on an ongoing basis
2. FIs are slow movers in the technology curve. However, Fintechs/ Distribution Partners show technological advancements to incorporate principles of data democratization and hyperpersonalization

Highlights:

• A surge in the number of distribution partners (Fintechs). Dependence on marketplace model is driven by convenience and customer service. Similarly, if a customer gets better service (E.g. she can view all her financial holdings at one place, preference will be to opt-in for a third party) from a Fintech, she will prefer to be serviced by the third party
• Existing distribution partners (such as E-commerce, Cab and Hotel aggregators, etc.) might pivot their businesses to become the new-age Fintechs
• Price wars exist but amongst distribution partners
• FIs do not incur any cost of acquisition of customers, however partnerships with distribution channels will define success for FIs. FIs will have to upgrade technology to integrate with distribution partners

Fintech’s agility, time to market for innovation and ability to adapt to newer segments differentiates them from FIs. However, at some point I expect Fintech’s portfolio to balloon and reach a size, which might be restrictive to current differentiators. Thus, the vicious circle of newer fintech entering the system and capturing market share continues. Is this a sustainable model? Or will there be a model wherein Fintechs and FIs can survive, sustain and grow together. Many end-consumer facing companies (in the marketplace businesses) with massive interaction / touch points with end-consumers are pivoting their businesses or adding newer business lines to increase presence in the financial services. In the above hypothetical scenarios highlighted, either current financial services industry will see newer players competing with existing players, which can eventually lead to a zero-sum game; or existing players considering the high customer touch point industries as partners to eventually become bookkeepers for end customers. A lot of disruption is expected in the coming few years, and lot of it will be driven by changing customer behaviours and expectations. Customer is always right. Period!