Use it or lose it - can banks innovate with their ultimate competitive advantage, existing customers, before others use their data to disrupt them?

The potential implications of Open Banking and the rise of technological innovation in financial services (FinTech) have been discussed and debated for years. While the timing of impacts varies due to delays in the rollout of Open Banking in different countries, the general sentiment of the impact remains reasonably consistent - these initiatives and trends will put pressure on incumbent banks’ business models and profitability if they do not evolve.

Open data will drive the next wave of innovation in financial services

The requirement on banks to allow access to their core data and services through open banking opens the doors for new types of competitors to enter the financial services ecosystem. In doing so, the relationships banks have with their customers are under threat, as those customers increasingly turn to non-bank channels to get banking information.

Source: McKinsey 2021.

All is not lost for the incumbent banks, however, with large installed customer bases, the incumbents hold an enormous advantage over new entrants. While open banking lets new organisations use insightful banking data to generate new ways for customers to better manage their spending or grow their savings, it isn’t stopping incumbent banks from finding new ways to create value for their customers on the same data. In fact, given open banking requires new fintech to acquire customers one-by-one and collect consent to use this data, banks are still in a strong position to drive this innovation with existing customer bases.

Strategic data partnerships play a crucial role in creating new value

One way banks have the opportunity to drive innovation with their data is through strategic partnerships, where collaboration on data can create new insights, products or experiences that are not possible by one organisation alone.?

Some examples include:?

• Bank and insurance company providing integrated lending and insurance products for home buyers
• Bank and telco collaborating to create improved risk and fraud detection models to keep their customers safe
• Bank and real estate platforms partnering to offer pre-approved loan products based on a customer's financial position?

Another example of this type of partnership, which is rapidly becoming a trend, is banks partnering with e-commerce, merchant offers or loyalty platforms to generate new ways to save their customers' money and enhance their relationships. In 2021 Commonwealth Bank of Australia invested $30m into e-commerce site Little Birdy, as well as launching deal finder app Cheddar through it’s venture-scaling arm X15ventures, while ANZ Bank launched a successful takeover bid for cashback company Cashrewards.??

The underlying business model of these platform providers is to connect merchants and consumers through cashback, points or other incentives. While they develop strong bases of merchants and customers as they grow, they glean limited information about their customers' general preferences, habits, or intentions based on the customers' usage of their platforms. This limited understanding impacts their ability to provide real personalisation, which can affect the likelihood of customers finding offers relevant to them, and in turn, the platform's attractiveness for merchants to fund offers.

A data partnership between a merchant platform and a bank, where the two can collaborate on shared data to create better recommendations can create shared value to all participants within the ecosystem:

• The platforms access financial data to determine preferences and intention to buy, creating better offers for customers and increasing their performance as a marketing channel.
• The merchants get a better performing, higher quality, marketing channel to target potential customers, optimising their return on advertising spend (ROAS), making them more willing to fund higher or more offers.
• End consumers get an increased range of offers that are better suited to their actual spending and preferences, with increased discounts available from the merchants.
• The banks get exclusive offers to provide to their customers, creating additional value for their customers and improving retention.

How can banks benefit from data collaboration while ensuring the privacy and security of their data assets?

While the opportunity is promising, concerns around data security, protecting consumer privacy and commercial sensitivity have prevented many large organisations, including banks, from realising the value of data collaboration in the past.?

At DataCo Technologies, we've designed and built a platform to address these concerns, ensuring data partnerships are done right, protecting everyone's interests and rights while decreasing the time to understand and realise value.??