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Interviews with
FIVE BIG DATA
EXPERTS IN
BANKING
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Introduction
Banks have to upgrade themselves,
or risk being burnt to the ground
TABLE OF CONTENTS
Interview with banking expert JP Nicols
1
2
3
4
5
On the past, present, and future of
banking
Interview with banking expert Vik Atal
The challenge for banks isn't becoming
digital; but providing personalization
Interview with MasterCard’s Eric Schneider
Both the physical and digital
worlds present new challenges for
banks Interview with Ron Shevlin
We’re witnessing the creative
destruction of financial services
Interview with banking expert Arvind Sankaran
INTRODUCTION
Baiju NT,
Editor,
Big Data Made Simple
Read interviews by five thought
leaders in banking and their
views on Big Data for banking.
igital personalization. FinTechs. Business models of banks. Innovation in
the banking industry. Big data Analytics. In order to compete today, every
bank must embrace these and other techniques that were irrelevant a
generation ago.
These topics continue to evolve, and new theories and practices are created and
discarded constantly. That means that the typical search-engine approach can yield
conflicting or out-of-date information. Really, the only way to get accurate and
complete information is to ask people with hands-on experience in the industry.
So that’s what we did. Over the past few months we have been lucky to conduct in-
depth interviews with five experts in the banking industry for bigdata-
madesimple.com. The five interviewees have varied roles and focus areas: from
strategic advisors to consultants, to those working at established companies.
The raison d'etre of this PDF version: we wanted to make the interviews easily
accessible to the community. You can read this ebook in any order. Each interview is
standalone, so feel free to skip around to the topics that interest you.
This is second ebook in the Masters of Big Data series. We hope you enjoy the read
and thanks again to all our expert interviewees!
D
Chapter One
BANKS HAVE TO
UPGRADE THEMSELVES,
OR RISK BEING BURNT TO
THE GROUND
Interviewed by Manu Jeevan Prakash
Sub-editor, Big Data Made Simple
JP NICOLS
Co-founder,
Bank Innovators Council
For decades, banks have only
competed with one another, on
the same terms. As an industry
not very used to change, the
banking sector is currently
undergoing a radical
transformation.
or decades, banks have only competed with one another, on the same terms.
FAs an industry not very used to change, the banking sector is currently
undergoing a radical transformation. JP Nicols, a veteran from the banking
sector, has spent twenty years in the space. For the past eight years, his work has been
at the intersection of banking and fintech. In this interview, Nicols shares his
perspectives on the transformation of the banking sector.
You are the COO of Innosect.com. What exactly does Innosect do and what is
your role as a COO at Innosect?
At Innosect, we believe innovation is the intersection of human capacity and ideas.
Ideas alone are a dime a dozen. What matters is how you organize people around
those ideas to bring them to life.
I often tell banking audiences about what happened to Kodak . It is not that Kodak
was unaware of digital photography, in fact they were actually pioneers of the
technology. However, they failed to get the company focused on how digital
innovations in the industry were changing customer behaviors.
All businesses want to move forward. To do so, they not only have to create ideas but
implement them and turn them into revenue.
That’s where Innosect comes in. We mobilize companies to turn ideas into action, 5
often that is under the heading of innovation, but it may also be a product manager
or a business line executive that just wants help generating new sources of revenue or
new cost savings.
What kind of analytics techniques do you use at Innosect.com?
Founder and chairman of Innosect, Jay Van Zyl, has been a pioneer in social
innovation. Social innovation is the concept of getting people involved throughout
the organization, in the process of innovation. He helped FNB (number one bank in
South Africa) to be named the most innovative bank in the world in 2012, he did that
using the social innovation approach. He got people across the whole organization
involved in ideas.
Now, we do it with big data analytics at machine scale. We are taking social computing
and multi-dimensional data sets and actually applying network theory and social
computation, on how people and ideas come together.
What if, out of your hundred ideas, we could tell you which two you should try first –
based on market place positioning, your customers and your probability for success.
These are the algorithms we are building and testing.
Our algorithms are similar to the network analysis techniques used to track terrorists.
A government security agency once wanted our help tracking down some suspected
hackers. We were actually able to predict their location based on analyzing social and
multi-dimensional data. But that’s the most I can tell you!
It is not that Kodak was
unaware of digital
photography, in fact, they were
pioneers. But they failed to
notice how digital innovations
were changing customer
behaviors.
With what motives and vision did you start the Bank Innovators Council?
The Bank Innovators Council is a public membership organization that is designed to
support and promote innovation banking. Our motive was simple. Three years ago, I
was a part of a bank that wanted to innovate. I also knew that such people were often
lonely, because they were surrounded
by what we called the “Business
Prevention Department”. Fintech
companies actually have a lot of support,
in the form of incubators, accelerators
and venture capitalists, but banks were
on their own.
We wanted to reach out to bankers who
were trying to innovate and create a change,
and give them a place to connect, support
one another, and discover new ideas.
Two years ago, we launched the Bank
Innovators Council in New York during
Finovate Fall . Today, we have members
in 65 countries.
In your interview with Money
Summit companies you said: That if Consumers engage directly with Fintech
companies instead of banks, then banks become a commodity behind the
scenes. To illustrate your point, you talked about companies like Kabbage or
Moven or Prosper that team up with a banking entity. Why did you make this
statement? Can you please elaborate?
Harvard professors — John Haggle and Marc Singer—formulated a concept called
unbundling the corporation. There was a similar concept brought out by Michael
Treacy and Fred Wiersem in their book called, “The discipline of market leaders.”
Each of those two groups came up with similar positions, even though they use
slightly different terminology. Let me explain.
There are three main domains, which you can master in any business:
If consumers
engage directly
with fintech
companies instead
of banks, then
banks become a
commodity behind
the scenes.
7
- an infrastructure manager
- being customer intimate
- a product innovator
I believe that very few banks will be product innovators, maybe a handful across the
globe.
When asked, most banks think that they are customer intimate. Just last week, I was a
keynote speaker at an event. I asked the audience what single word they think
differentiates them from everybody else. Most people simultaneously said the same
thing; service.
Hence, even though banks think they are customer intimate, they are not—they are all
trying to compete on the same dimension. Realistically, most of them focus on
infrastructure. Banks pay attention to economies of scale, standardization and cost
reduction; all three far from customer intimacy.
So if banks cannot truly be customer intimate, they are doomed to be just dumb
commodities, acting behind the scenes, like utilities. The problem arises when we
think about how many of these banks we really need. In the US, there are over 6,000
banks, and we certainly don’t need 6,000 utilities. What we need is a bank that is
intimate with a group of customers that truly thinks about their needs, ambitions and
problems.
43 percent of U.S. customers believe their primary bank does not understand
their needs. How can you explain this?
I think there are two primary causes for this:
Even though banks think they
are customer intimate, they are
not—they are all trying to
compete on the same
dimension.
8
The first, is that for thousands of years, banks have only competed with one another.
They didn’t have to provide meaningful benefits to their customers. They just needed
to be better than the worst bank. Technology has completely changed this.
The second, is that the current era is one that is in the context of the aftermath of a
global financial crisis. The focus for many since the crisis has been on standardizing
and improving internal processes and quantifying and reducing risks, and not enough
banks have been truly focused on taking care of the customer. This focus has been
driven by regulators’ concerns about banks’ stability and compliance, and with
eliminating unfair and deceptive practices. Banks don’t have a choice to be compliant,
but the regulators are typically focused on what negative behaviors to avoid, not what
positive, customer-centric behaviors to embrace. All of this tends to reinforce the
necessity of focusing on infrastructure.
The problem with losing customers is, it doesn’t hurt overnight. If you quietly leak a
few customers every year, it’s easy to misdiagnose what went wrong, and you keep
making small adjustments to improve customer experience. Meanwhile, the gap
between the experience you are providing and what your customer needs keeps
widening.
A customer who spends his days using customer friendly apps like Uber, Netflix,
even Starbucks, feels a huge disconnect when he walks into a bank branch. Bankers
don’t even recognize this disconnect.
How do you think banks can understand their customers better, and become a
part of their customers’ lives?
If banks cannot truly be
customer intimate, they are
doomed to be just dumb
commodities, acting behind the
scenes, like utilities.
That’s simple. They need to analyse customer data. Data from social media,
merchants, and transactions is readily available to banks. They can create buyer
personas around their customers. Banks can buy aggregated data from companies like
Yodlee, Xignite, and others. Merchants like Nordstorm, Walmart and Target have a
lot of customer data, and they are very good at analyzing it. Most merchants are
pretty proprietary about that data, but a strong partnership that combines merchant
purchase data with banks’ income and other data would create even deeper insights to
provide a more intimate customer experience.
Major banks sit on troves of data. However, less than 10% of this datais
readily accessible, and less than 1% is actually used for any analytics. So, how
can banks better exploit the power of data?
The good news is that even the worst
banks have thousands, if not millions,
of customers, and a lot of data on those
customers. They know what their
customers own and what they owe,
what comes in and what goes out,
when it goes and where it goes. You
are absolutely right that they have
done very little with it so far. However,
they are investing in big data analytics,
in better ways to harness the data. There
are many even looking for partnerships
with big data firms and customer-facing
technology firms. In my opinion,
the winners of the future will be the ones
who successfully adopt big data
technologies.
As for those who don’t, I think they will just quietly merge with somebody who
understands how to monetize their customer data. Lack of innovation is never put on
a banks’ tombstone when it dies.
BBVA, Capital One, Wells Fargo, are just some of the banks starting to experiment
with big data. To quote Francisco Gonzales, chairman of BBVA, “BBVA will be a
software company in the future.”
What we need is a
bank that is
intimate with a
group of customers
that truly thinks
about their needs,
ambitions and
problems.
10
Even more important than
technology is a very strong
focus on customer intimacy.
There are a number of banks that are using cutting-edge innovative tech. Can
you give us some examples of banks that are doing well in digital
personalization and the big data space?
Capital One is a credit card company turned bank that is trying hard to personalize
offers for their customers.
Umqua Bank in Portland, Oregon takes a bit of a unique approach. They aren’t really
high tech, and their personalization mostly comes from building engaging branch
environments. In the long run, we will need fewer branches overall in banking, but
banks like Umqua will do well with branches.
Barclays is experimenting with tech startups that tackle different facets of consumer
issues. I think this works for bigger banks who can afford to invest in this kind of
approach.
It’s getting harder and harder for small banks on one hand, but on the other,
technology has never been more easily accessible. Small banks like Live Oak Bank and
CBW are examples of such banks, that have embraced technology despite their size.
Even more important than their use of technology though, is a very strong focus on
customer intimacy. They are very clear about who their customers are, and who they
aren’t. Most banks cannot be all things to all people, and they shouldn’t try.
What is the future of banking?
As far as I’m concerned, there are two trends.
The first, is what Francisco Gonzalez said, Successful banks are going to be more like
technology companies.
11
The second, is that we will have fewer banks. Banks that were built in the era of brick
and mortar either have to upgrade themselves, or risk being burnt to the ground.
I think these two trends will combine in pretty powerful ways, and the most successful
banks will be the ones that are digital.
Highlights
• If consumers engage directly with FinTech
companies instead of banks, then banks
become a commodity behind the scenes.
• Even though banks think they are customer
intimate, they are not—they are all trying to
compete on the same dimension.
• The focus for many banks has been on
standardizing and improving internal
processes and quantifying and reducing
risks, and not enough banks have been truly
focused on taking care of the customer.
• We will have fewer banks. Banks that were
built in the era of brick and mortar either
have to upgrade themselves, or risk being
burnt to the ground.
Go back to the Table of Content
Chapter Two
On the past, present,
and future of banking
Interviewed by Srikant Sastri
Co-founder, Crayon Data
Vik Atal
Former Executive Vice President,
Citigroup
For banks, using data analytics
for better customer satisfaction
and deeper engagement is like
developing a muscle that’s
never been completely used.
ell us a little about yourself, outside of the informationthat is publicly
available online.
Ah, that’s a tricky one.
Well, it may be interesting to note that before I started my career in finance, I had
explored the option of doing an advanced degree at ISI (Kolkatta). Eventually, I
opted to pursue finance instead, but with my recent shift in focus to information,
analytics and insights, I feel like I’ve come back full circle!
In the initial stages of my career, I focused on traditional finance. However, for the
past 15 years, I have worked on a wide range of consumer-oriented roles in business
management. Interestingly, both have straddled the banking and retail sectors. To
work in these sectors has been an incredible learning experience for me. It has given
me the opportunity to gain remarkable insights into the mind of both, customers and
retailers while remaining focused on the business and profit dynamics of banking.
Most recently, I’ve been exploring how to leverage information and analytics to drive
business performance. This curiosity was heightened due to my learnings from the
global financial crisis. I think the chaos it left in its wake could probably have been
reduced, to some extent, with predictive analytics.
As the Executive Vice President of CitiBank, one of the largest banks in the
world, you watched the world endure and recover from the worst financial
crisis since the 1930s. What were your key learnings?
T
14
During the financial crisis, I was asked to manage high-risk global accounts for Citi
Bank. At the time, the approach we adopted was largely focused on collections and
repayments. However, by the time a customer showed evidence of risk, it was often
too late to take action.
Hence, the question became – how could we change our approach to identify and
manage high-risk accounts better? We did try to use predictive analytics to determine,
which customers demanded immediate action and, which ones could be tended to
later. But we soon realized that business processes and models were just not calibrated
effectively enough at the time for predictive analytics.
Post the financial crisis, the efficacy of financial models was thoroughly scrutinized
for what techniques and information sets might be applicable. Unanimously, the
conclusion arrived at suggested that there was enormous opportunity for banks to
leverage data and improve their performance substantially.
If you compare banks to companies like Google, it’s evident that banks are still at the
nascent stage of the digital and data revolution. Banks have very complex embedded
business processes and business models. It is, therefore, a significant challenge for
banks to migrate to a new state.
I view this challenge as a significant opportunity since it has provided a clear rationale
for bringing solutions to the financial services industry across their needs – building
scalable(and low cost) customer acquistions, moving towards real-time processes,
laying out a framework for becoming information centric and similar activities.
Can you tell us about your role at Crayon Data? What excites you most about
your work at Crayon Data?
If you compare banks to
companies like Google, it’s
evident that banks are still at the
nascent stage of the digital and
data revolution.
To be honest, my role at Crayon evolved quite dramatically!
I was having a casual cup of coffee with Srikant, discussing the work Crayon had
been doing in Asia.
Srikant wanted to explore the opportunities in the U.S market for Crayon. The U.S
market is unique in that companies in the U.S gain credibility only by actually working
in the U.S.
And before I knew it, we were enthusiastically chalking out a plan for Crayon to
penetrate one of the most competitive markets in the world.
I’ve sat through a number of
Crayon’s business meetings and
presentations to clients. In all of
them, I’ve noticed that there has not
been a single client interaction at
the end of which the client did not
concur with Crayon’s vision,
approach, and highly practical
recommendations.
What excites me most about Crayon
is that I’m proud to say that I have
partnered with a credible organization
whose product clearly meets the needs
of the modern consumer.
What is your view on how
the financial services sector &
insurance space in the US is
changing with the advent of
big data analytics?
Right now, banks are being confronted with the realization that the boundaries of
what is possible and, in tandem, customer expectations are shifting dramatically. Their
business models are no longer as successful as they were in the past.
Banks have very
complex
embedded business
processes and
business models. It is,
therefore, a
significant challenge
for banks to migrate
to a new state.
16
Banks are only now starting to lay the foundation for a completely new business
model. They are shifting their focus to consumers, trying to figure out how to get new
customers, deepen relationships and meet demanding customer expectations. They
are making efforts to go digital and even employ big data analytics, but the practical
state of this migration, on a scale of 1 to 100, is still in the teens.
Accenture estimates that competition from non-banks could erode one-third of
traditional bank revenues by 2020. Companies like Paypal, Apple Pay, and
Google Wallet. How can banks respond to these threats?
Yes, these companies are stealing away a decent chunk of revenue from banks.
But let’s not forget, there are multiple drivers of banking revenue – lending,
transactions, and savings. And neither Apple nor Google or Pay pal are interested in
lending or savings because it is heavily regulated and extremely complex.
Banks need to focus more on how to drive market share in traditional asset side
lending and think less about external competitors like Google, because the core
lending business isn’t going anywhere in the foreseeable future.
With specific regard to Google, Apple, and Paypal, they have caused two problems for
banks:
• Banks lose a portion of a revenue stream – revenue they receive from
transactions done by their customers – that is high volume and very low risk;
• Banks now have one more platform on which they need to compete for shelf
space and allocate scarce marketing resources.
Banks business models are no
longer as successful as they
were in the past.
17
Allow me to explain. For a bank, it’s not enough to have an Apple iOS or Mac
application. Since all banks are on the Apple ecosystem, each bank has to figure out
how to make their product stand out for a customer to, say, use their credit card.
According to a Transunion study, 8 million credit card users are “inactive”.
How can banks get their customers to use credit cards?
Firstly, it’s more than 8 million. It’s probably, multiples of that.
• Customers that use their credit card actively for sales transactions.
• Customers that take a credit card because of low-interest Let’s say a customer
gets 0% interest rate for 18 months. There are many customers who will just use
the credit card for those 18 months and then become inactive. This set of
customers is extremely unprofitable for banks because they spend lots of money
to acquire customers, who eventually become inactive.
• Customers who take credit cards but never use them. These customers are
completely inactive.
Customers need to be approached differently, depending upon which of the above
buckets they belong to. A long standing customer who got tired of a product, for
instance, can be enticed to migrate back to the bank with a new product.
Hence, when we talk about inactive customers, identification of the source of that
inactivity is an extremely important metric to create an approach for that customer.
Banks need to focus more on
how to drive market share in
traditional asset side lending
and think less about external
competitors like Google,
Paypal, and Amazon.
43 percent of U.S. customers believe their primary bank does not understand
their needs; 31 percent feel their bank is not helping them reach their primary
financial goals. Why aren’t banks able to understand their customers?
Because understanding every individual customer has never been a part of a banks’
business model. The top five to six credit card players hold a ninety percent share of
the credit card industry in the U.S. These players operate on a very large scale. Citi and
JP Morgan each have active credit customers (customers who get a statement every
month) at well over sixty million. Shifting from an “actuarial” segmentation structure.
to a one-to-one relationship is an extremely complex endeavor. This is a problem for
all the main banks.
Banks sit on troves of big data and, according to Tresata, only 1 % of this data
is used for analytics. How can banks make better use of data, to understand
their customers better?
People say banks don’t use
transaction data efficiently.
This is not only true but is
a part of the bigger problem!
For them, using data analytics for
better customer satisfaction and
deeper engagement is like developing
a muscle that’s never been completely
used. It requires intense focus,
discipline, and persistence.
Further, transaction data provides
only limited insight into the mind
of a customer. It would be an
enormous mistake for banks to
leverage only their internal data.
They now have to rethink not
only their approach towards their
own data, but also account for the existence of massive and growing pools of
external data.
When we talk about
inactive customers,
identification of the
source of that
inactivity is an
extremely important
metric to create an
approach for that
customer.
19
Highlights
• If you compare banks to companies like
Google, it’s evident that banks are still at
the nascent stage of the digital and data
revolution.
• Banks are making efforts to go digital and
even employ big data analytics, but the
practical state of this migration, on a scale
of 1 to 100, is still in the teens.
• Companies like Paypal, Google and Apple
pay are stealing away a decent chunk of
revenue from banks.
• Understanding every individual customer
has never been a part of a banks’ business
model.
• Transaction data provides only limited
insight into the mind of a customer. It would
be an enormous mistake for banks to
leverage only their internal data.
Go back to the Table of Content
Chapter Three
The challenge for banks
isn't becoming digital;
but providing
personalization
Interviewed by Bhaskar V
Crayon Data
Eric Schneider
Asia Pacific Head,
MasterCard Advisors
With the shift towards digital,
consumers are bombarded with
competing messages. Banks
have to truly understand their
customers to pinpoint how to
cut through the clutter and
convert customers.
ell us a little about yourself
I’ve been with MasterCard since 2001, and I am currently heading MasterCard
Advisors, the professional services arm of the company, in the Asia Pacific region.
The most exciting aspect of my job is to witness and be a part of the growth of our
data and analytics business.
We’ve been doing – and more importantly, applying – Big Data long before anyone
called it that way. We discovered early on that spending data – even when completely
stripped of all personal information, which, by design, MasterCard does not collect,
need or want – can be invaluable for a multitude of reasons. It helps us better
understand consumer behaviour, target marketing programs, design better-fitting
products, make smarter risk decisions and much more. You don’t have to be a techie
or data jock to love data.
You have extensive experience in customer acquisition. Can you tell us the
most important ingredient of a successful customer acquisition strategy?
With the shift towards digital, consumers are bombarded with competing messages.
Businesses have to truly understand their customers to pinpoint how to cut through
the clutter and convert customers. More than just mining more data, businesses need
the right, smart data that answers their questions and provides actionable insights.
T
22
MasterCard Advisors offers unparalleled insight into the retail spending trends,
drawing from 43 billion anonymized and aggregated transactions processed each year.
We pair this with rigorous data science, reinforced by strict data privacy and
confidentiality policies, to turn big data into smart data for our customers.
Many businesses have a solid understanding of their customers’ spend habits, but they
don’t have the line of sight into broader marketplace trends. For example – who are
their most valuable customers? What experiences are they seeking? What do they do
before and after they shop? What is our share of wallet? We have that knowledge, and
we put that to work for companies of all sizes to help them attract and retain
customers, and deliver better marketing campaigns to reach the right customers at the
right time with the right content.
How do you think financial institutions can understand their customers better,
and become a part of their customers’ lives?
With many customers forging life-long relationships that can involve cards,
mortgages, checking and other accounts, financial institutions are in a unique position
to truly get to know their customers’ needs, wants and desires. There are so many
incredible opportunities across a customer’s lifecycle to create enhanced experiences
that deliver real value to deepen the relationship.
Additionally, financial institutions can benefit greatly from understanding how their
customer segments engage across the marketplace. By building robust customer
segmentations, we help our clients understand their customers better, so they can
devise strategies that will drive their businesses.
Today, we see an increasing demand for mobile and digital capabilities. How
Financial institutions can benefit
greatly from understanding how
their customer segments
engage across the
marketplace.
are the expectations of MasterCard’s customers changing, and how is
MasterCard planning to meet these expectations?
As we transition into an increasingly digitally connected lifestyle, the payments
industry will see even greater demand for simple, convenient and secure solutions.
The team at MasterCard are
continuously working with our
partners in the payments ecosystem
to meet these growing demands for
mobile and digital capabilities, and
To deliver innovative, scalable
solutions to our customers.
A good example is MasterPass,
which was launched in early 2013.
Since then, it has been rolled out to
27 markets around the world. It is
our digital payments platform that
enables consumers to store all
their card, shipping and billing
information in one place for
a simpler, safer and more convenient
checkout experience when shopping
online or on their mobile device.
MasterPass is now available to
over 40 million consumers in
the Asia Pacific alone, and this
growth is expected to continue.
Looking forward, the unprecedented
convergence of the physical and
the digital world presents new
challenges. Just as consumers have
embraced more secure and convenient
ways to make payments; criminals are also adapting, using increasingly advanced
technology to commit cybercrime and fraud. There is no one solution to deal with
cybercrime, and it needs a multifaceted approach to combat it as best as we can. In
our view, collaboration is the key – a universal commitment between financial
The team at
MasterCard is
continuously
working with our
partners in the
payments
ecosystem to meet
these growing
demands for
mobile and digital
capabilities, and to
deliver innovative,
scalable solutions
to our customers.
24
institutions, retailers, payment networks, governments as well as greater vigilance
among consumers themselves, is required.
Collaboration is MasterCard’s motivation behind our annual Global Risk Leadership
Conference, which was recently hosted in Singapore, where we bring together
customers, merchants, issuers, banks, and legislators to share best practice, ideas, and
have robust discussions on how to continue our fight in the battle against fraud and
cybercrime.
In what ways do you see big data (potentially) making an impact on traditional
payments & card companies?
MasterCard is committed to expanding our services portfolio, delivering deeper
insights and broader capabilities to help our clients grow their businesses. Having the
right data is a critical part of how we evolve our business. Being in a position to help
clients make smart, sound decisions based on MasterCard Advisors insights is
incredible. And yet it’s astounding to see how many people still fly blind when it
comes to making decisions that should be based on solid data.
It was a challenge to make people see the value when the concept of Big Data
emerged. That has since come to pass. What matters now is making it clear to
customers that not all Big Data delivers value. All data is not created equal. You can
have the best data in the world but without smart people and precise, proven
analytics, what you end up deciding to do with that data may fall flat. And vice versa.
You need both, and we as an industry need to do a better job of educating people
You can have the best data in
the world but without smart
people and precise, proven
analytics, what you end up
deciding to do with that data
may fall flat.
25
about what that truly means.
Be it payments, funds transfer or even credit scoring, banking is being
unbundled by FinTech players. How do you think banking can respond?
Most consumers are looking for convenience, security and value. While some FinTech
players have identified and delivered innovative solutions that consumers use today,
banks still play a unique and integral role in money management. They ultimately
‘own’ customer deposit and lending relationships, and consumer surveys have shown
time and again that people trust their banks more than anyone with their money.
Also, consumers are increasingly going mobile, especially in Asia with India joining
China as the only two countries in the world to have over 1 billion smartphone users.
However, at the same time, banks also have a reputation for being slower to adapt
when it comes to innovation, and also bogged down in regulation that is often there
to keep our money safe in the first place. So the banks need to get past their historical
penchant for building everything themselves and instead embrace the explosion of
experimentation and innovation that the FinTech players breed including payments,
micro-lending, risk management and marketing. These provide opportunities for
partnerships and acquisitions that can help the banks innovate faster and stay
competitive.
By working with more players and developing in-house technologies, banks can
combine the newer services that consumers have found compelling with their
existing offerings to develop an even more robust offering in the future.
While some FinTech players
have identified and delivered
innovative solutions that
consumers use today, but banks
still play a unique and integral
role in money management.
Given the digital wave, how is the merchant network evolving? What role, if
any, do you see the merchant networks playing, to strengthen a bank’s
proposition?
If we go back to the beginning of card payments, MasterCard has connected millions
of consumers and their banks with millions of merchants and their banks – without
any of them necessarily having any direct relationship with one another. The
merchant doesn’t have to vet the customer’s creditworthiness nor is the merchant’s
sale dependent on how much cash the customer has in her wallet. We are there to
make the payment simple, convenient and safe for both parties. You don’t hear a lot
of people or merchants complain about how complicated, or inconvenient card
payments are. The days of long checkout processes are far behind us, and we are now
seeing people pay with their cards – often tapping rather than swiping or dipping –
and speeding through the checkout process.
Digital is changing the form factor,
but the goal remains the same:
a singular focus on making it even safer
and simpler. What was a plastic card
representing a bank account will
increasingly be a mobile wallet or
a virtual card number within an app,
such that payment is a tap away on
our mobile devices.
With our state-of-the-art tokenization
technology, MasterCard is at the cutting
edge of all of this, encrypting cardholder’s
actual card number behind the scenes for
every single digital transaction into
a one-time use number, called a ‘token’.
Even in the unlikely situation of a merchant
data breach, this token would be rendered
useless as it is insufficient to complete
the transaction.
And if that doesn’t already provide consumers with enough cause for peace of mind,
if cardholders notice the unauthorized use of their MasterCard card, they are
Digital is
changing the
form factor, but
the goal remains
the same: a
singular focus on
making it even
safer and
simpler.
27
More than just mining more
data, businesses need the right,
smart data that answers their
questions and provides
actionable insights.
protected from the cost of the unauthorized transaction as long as they have taken
reasonable steps to protect themselves from fraud.
What is the biggest change we are going to see in the financial services
industry in the next 5 years?
Throughout history, the middle and affluent classes have enjoyed easy access to
financial services. However, on the other end of the spectrum, the majority of less
affluent populations have kept their life savings under a mattress or worn on their
bodies. Just as they pay a premium for buying basic staples in small quantities, they
pay a premium for lack of access to conventional financial services. This leaves them
susceptible to theft, punitively high fees, and extortion.
On a recent trip to Myanmar, I listened to villagers sharing about having money
transmitted to them from relatives working in Yangon or abroad through multiple
middlemen all taking big cuts. But two big trends are changing that. One is the simple
fact that the banked middle class is growing very quickly – especially in Asia and
Africa. At the same time, technology is making financial services increasingly
accessible to the poor. Mobile phones, e-commerce, and electronic payments play a
big part of that, and MasterCard’s right in the center of it.
For example, we have partnered with the Unique Identification Authority of India
(UIDAI) to develop biometric authentication services for the Aadhaar program, the
largest biometric identity program in the world and the cornerstone for achieving
financial inclusion in India. Since its launch seven years ago, Aadhaar has enrolled
over 900 million Indians.
28
That’s just one step on our journey to our stated goal of making financial services
available to 500 million more people by 2020. Doing well and doing good need not be
mutually exclusive, and if we create the right model for the new equation, we can
bring those left behind into the formal economy.
Highlights
• There are so many incredible opportunities
across a customer’s lifecycle to create
enhanced experiences that deliver real
value to deepen the relationship.
• As we transition into an increasingly digitally
connected lifestyle, the payments industry
will see even greater demand for simple,
convenient and secure solutions.
• You can have the best data in the world
but without smart people and precise,
proven analytics, what you end up
deciding to do with that data may fall flat.
• Banks need to get past their historical
penchant for building everything
themselves and instead embrace the
explosion of experimentation and
innovation that the FinTech players breed.
Go back to the Table of Content
Chapter Four
Both the physical and
digital worlds present
new challenges for
banks
Ron Shevlin
Director of Research,
Cornerstone Advisors
Interviewed by Manu Jeevan Prakash
Sub-editor, Big Data Made Simple
Too much of the big data hype
focuses on predicting what a
single consumer will buy. But a
better use of “big data” is to
understand consumers
purchase journey or decision-
making process.
ell us a little bit about yourself? (something that we can’t find online)
It’s 2016. The age of Big Data, Google, and the NSA. Everything you could
possibly want to know about me could be found online. Sadly, things you wouldn’t
want to know about me can probably be found online.
Banks sit on troves of big data. How can banks realize greater value from their
Data?
By starting with a more granular definition of what problems they’re trying to
address, or business questions they’re trying to answer. That’s probably obvious to
professionals with strong quantitative marketing skills, but the press and pundits (and
unfortunately, many consultants) have led non-quantitatively oriented banking execs
to think that Big Data—in and of itself—will predict what consumers will buy, and
become some kind of magical competitive advantage.
Too much of the Big Data hype focuses on predicting what a single consumer will
buy. But a better use of “big data”—and by that I mean new types of data not
typically or historically used by banks, for example, mobile location or other digital
channel activity—is understanding the “macro” (vs. “micro”) environment, to identify
trends in the market regarding what consumers in general are buying, and
understanding their purchase journey or decision-making process.
I would, however, challenge your statement that “banks sit on troves of big data.”
T
31
Banks sit on troves of data. Distinguishing “big” data from other kinds of data—
some people now like to say that banks need to do a better job of using their “little”
data—is nonsense. Data is data.
How can banks become a part of everyday life of a customer and provide daily
value based on a consumer’s personal needs, habits, and preferences?
The key to this lies in the development and deployment of mobile apps that serve
very focused purposes, for example, tracking expenses against a budget, monitoring
the market to check prices for an intended purchase, guiding the wedding planning
process, or assisting with a home or auto purchase.
Mobile apps are key because of the role mobile devices play in our lives. Few people
want to come home from work, eat dinner, watch TV, then sit down and log on to
their bank account to analyze their financial lives or do research about investments or
purchases. Mobile apps enable people to do these things as they’re engaged in the
relevant processes during the day.
The other aspect that’s critical here is the provision of advice, guidance, and help in
the decision-making process. Even enabling a more-convenient process by tracking
activities and expenses could be helpful.
But overall, simply providing mobile access to bank accounts to check balances or
transfer funds isn’t enough to drive additional customer engagement.
The challenge for banks isn’t
becoming “digital”—it’s
providing value that is
perceived to be in line with the
cost—or better yet, providing
value that consumers are
comfortable paying for.
I recently had a conversation with Vikram Atal, Executive Vice president of
CITI bank. He said that banks have complex business models because of
which they are still in the nascent stage of the digital and data revolution. Can
you tell us what is wrong with banks’ business model?
Banks had complex business models
long before the digital and data
revolution. In the United States
at least, banks have had complex
business models because of regulatory
requirements, the conglomeration of
various lines of business providing very
different products and services to a wide
variety of customers, and the rapid
consolidation of the industry.
At the retail level, the business model is
flawed primarily because of the misalignment
of value and cost. With the advent of
free checking, what consumers ended up
paying for was overdraft fees, and then
ATM fees, and extraordinarily high fees
for services like stop payments or expedited
bill payments. The problem is that consumers
don’t perceive the value they get from
these services to be in line with the value
provided.
The challenge for banks isn’t becoming
“digital”—it’s providing value that is
perceived to be in line with the cost—
or better yet, providing value that consumers are comfortable paying for.
I read the following quote made by you in the Next Bank USA summit “Who
will rule banking in the future – Banks or Fintech’s?
“Don’t be a fool”
“Fintech won’t rule”
Banks had complex
business models
long before the
digital and data
revolution. In the
United States at
least, banks have
had complex
business models
because of
regulatory
requirements.
33
“No doubt that they’re cool”
“But they’re just a banks tool”
You said that Fintech won’t rule the financial industry. Can you tell us why Fintechs’
are just banks tool?
As Mr. Atal can attest to, banks are complex organizations with multiple lines of
business serving a multitude of customer segments (whether it’s retail, commercial, or
institutional investing). The overwhelming majority of fintech startups are focusing
on niches in the market—whether it’s by a narrow customer segment or by a narrow
set of products or services. Some of these startups will certainly survive, but scaling
beyond a narrow niche isn’t easy and it isn’t cheap. Established firms—whether it’s
existing banks or other types of companies—are better positioned to help startups
grow. In the end, the path to cashing out for many fintech startups will be selling off
to existing banks. Hence, banks win. Not that fintech startups lose. The premise of
the debate was pretty stupid since it’s not an either/or win/lose situation.
How can banks help their customers understand how to maximize
opportunities and build wealth?
This is too difficult a question to answer. Consumers’ attitudes, approaches, and
behaviors regarding financial management vary so widely that it’s impossible to boil it
down to a single easy answer. Banks have to: 1) segment consumers by their needs,
and 2) figure out which segments they (the banks) are best able to serve.
Consumers’ attitudes,
approaches, and behaviors
regarding financial
management vary so widely
that it’s impossible to boil it
down to a single easy answer.
34
Francisco Gonzales, chairman of BBVA, said that “BBVA will be a software
company in the future.” What is your view on his statement?
You really like to pit me against other people in the industry, don’t you?
With no intended disrespect to Mr. Gonzales, the statement makes little sense, and if
he really believes what he said, that could be really bad news for his bank. I would
assert that few software companies are known for their superior customer service, let
alone provide good customer service. Is superior software going to be the key to
competitive advantage in banking in the years ahead? Or will it be superior service
and a superior customer experience?
Now, one could argue that since that customer experience is likely to be even more
digital in the years ahead, that software is the key. But the key to a superior customer
experience isn’t superior software development—it’s superior understanding of
customer needs, design and a whole host of other capabilities. Software development
can be—and is—outsourced.
The title of your book is ‘Smarter Bank’. Who is the target audience for your
book and how will your book benefit them?
Target audience is bank/credit union executives, fintech executives, and consultants
serving the financial services industry. The book will primarily do two things for
them: 1) Help them understand how technology, consumers, and business model
trends will impact banks, and what they should do about it, and 2) Make them laugh.
Most business books are boring snoozefests. Not Smarter Bank!
The key to a superior customer
experience isn’t superior
software development—it’s
superior understanding of
customer needs.
There are a number of banks that are using cutting-edge innovative
technology. Can you give us some examples of banks that are doing well in
digital personalization and the big data space?
Interesting way to word the question. There are certainly examples—and good
ones at that—of banking using cutting-edge innovative technology. But “doing well in
digital personalization”? My take is that the whole “personalization” thing is
overblown.
The best examples of uses of technology
In banking are for providing real-time
advice/guidance, added convenience,
improved process execution, and
enhanced customer experience.
With apologies to everyone outside of
the U.S., my favorite examples come from
the U.S. because that’s the market I focus
on. I’m sure there are plenty of good
examples from outside the U.S., but here
two great examples of companies making
great use of “cutting-edge innovative”
technology are:
1) USAA. USAA’s use of mobile
technologies for home and auto buying —
not just the lending part of the process —is
redefining how their members buy homes
and cars.
2) Moven. Moven continues to lead
the industry in personal financial
management features to help its
customers better manage their financial lives.
The best
examples of uses
of technology in
banking are for
providing real-
time
advice/guidance,
added
convenience,
improved process
execution, and
enhanced
customer
experience.
36
Highlights
• Simply providing mobile access to bank
accounts to check balances or transfer
funds isn’t enough to drive additional
customer engagement.
• The challenge for banks isn’t becoming
“digital”—it’s providing value that is
perceived to be in line with the cost—or
better yet, providing value that consumers
are comfortable paying for.
• Banks have to: 1) segment consumers by
their needs, and 2) figure out which
segments they (the banks) are best able to
serve.
• The key to a superior customer experience
isn’t superior software development—it’s
superior understanding of customer needs.
Go back to the Table of Content
Chapter Five
We’re witnessing the
creative destruction of
financial services
Arvind Sankaran
Global Business Leader, Retail,
Banking & Wealth Management
Interviewed by Manu Jeevan Prakash
Sub-editor, Big Data Made Simple
We’re witnessing the creative
destruction of financial services,
rearranging itself around the
consumer.
ell us a little about yourself
I am a chemical engineer by training from Bits Pilani. After graduation, I
spent a very interesting year as a trainee “grease monkey” at the ITC factory in
Bangalore! Then I went on to do an MBA in finance at IIM Calcutta. Not many folks
would know that I then spent a year at New York University pursuing a Ph.D. which I
then dropped out of!
As a banker, I was fortunate to have opportunities over two decades to build and run
businesses in branch banking, credit cards, lending and wealth management.
Stints at Citibank, Barclays and HSBC took me to five countries in Asia and EMEA
which were fantastic professional and cultural experiences for my family and me.
Arvind, I understand one of your areas of expertise is in wealth management;
you are a strategic advisor for banks in big data space. How did you get into
big data?
I actually spent time initially on the lending side of banking then I moved to wealth
management in the last 12-15 years.
Very early on at Citibank, I was immersed in the use of Analytics. In the early to late
90′s, there was no big data, and primarily the risk community used analytics to create
lending scorecards and strategies — I was very involved in that. Being an engineer by
training, I was fascinated by analytics, statistics, and models. In the early years of the
new millennium, when I moved to wealth management, I found that analytics in this
area was at a very rudimentary level to model the behaviour of the investor or the
markets. The tools that were being used were static model-based and with low
efficacy.
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39
Big data and analytics have been intensively used in wealth management space only in
the last five years or so. Both at Citibank and HSBC, where we used data-driven
analytics, the modelling work done was largely driven off internal transaction data.
But since then, the big data space has gained rapid sophistication with players like
Crayon. The work Crayon Data does to bring external data sets to work for the
enterprises is amazing in terms of what it can do for the Banking industry.
Can you tell us more about your role at Crayon Data? What excites you most
about your work at Crayon?
Last year, Suresh and I got talking about the exciting landscape for consumer brands
in Asia, and in particular financial services which are being driven by growing
affluence of the middle class, expanding lifestyle choices, and discretionary spend.
Before I knew it, I was completely taken in by the Crayon story. Maya’s product
capability(product of Crayon) is something I had been searching high and low for
years as a retail bank marketing and sales leader. And so here I am now as a strategic.
advisor to Crayon. What it means is that I’m very interested in making Crayon even
more successful than it is today. What excites me very much?
Firstly, Crayon is operating at the cutting edge and is changing the way the
marketplace and brands engage with consumers. I really like the vision that Crayon
has set for itself – to solve the world’s problem of choice. That is BIG and BOLD!
Secondly, working with the young, smart, next generation of engineers and data
scientists- bright sparks who are at the forefront of creating and delivering Crayon’s
vision.
Thirdly, and I get a personal kick out of this! Now I am advising a venture that is
disrupting and revolutionizing the way financial services are marketed, the very
Big data and analytics have
been intensively used in wealth
management space only in the
last five year.
domain that I was a part of!
Your role at Crayon is that of a Strategic Advisor. Can you tell us more about
your role as a strategic advisor, can you be more specific about your role?
As a strategic advisor, there are a few things I bring to the table: The first is, of
course, subject matter expertise. For Crayon, winning in the banking vertical is critical;
this is where I bring my immediate value add. I work with product and client delivery
teams so that their product development work is laser-focused on client needs.
The second value I add is helping Crayon
with its client-facing activities and in its
effort to build a robust business pipeline.
In the immediate term, that means focusing
on as many wins for Maya Lifestyle
(product of Crayon) with payment
product businesses. I help open doors
and put Crayon in front of key industry
decision makers. Most of my banking
career was in client-facing roles, so I love
attending as many Crayon pitches as I can!
Third is to help Crayon with its fundraising
activities. As you know, Crayon successfully
closed CN2 and it has been a successful
funding round. Through my years and
network in the industry, I help bring
strategic investors to participate in
the future success of Crayon Data.
Now, let’s talk about changes in
the industry. How has the financial services and insurance sectors in the APAC
changed, with the advent of big data analytics?
Firstly, I’d like to clarify that insurance players are very much a part of the financial
services industry. The retail financial services industry is comprised of banking, asset
management, insurance and brokerage with large local and global players competing
in the Asian marketplace.
Banks are looking
for efficient ways
to deliver services
to clients and in
doing so, the
traditional physical
branch channels
are beginning to
be supplanted by
a digital strategy.
41
Coming to your question about how this sector is changing with the advent of big
data. Until recent years, financial services firms had very limited understanding of
their clients.
Big data was initially driven by internal data warehouse teams, who collected
transactional data within the enterprise, and the models that were used were largely
limited. As technology has advanced, memory became cheaper, the size of the data
repository increased, and computing power quadrupled, financial services companies
were able to deploy models and analytical capabilities that were massive.
With that, new insights were discovered that provided granular understanding of
prospects, their choices, the way they consumed the financial products. And that has
changed the way financial services companies create their market entry strategies, the
way they build consumer products and large marketing campaigns. This has been
simply transformational.
Yet, we are only scratching the surface, because where we are going with this, it is
going to completely change the way financial brands engage with consumers. From a
last-century approach of blunt segmentation, mass customisation of offers and
communication channels out of sync with customer time and context, the future is all
about ultra-personalisation of product offers, driven by sophisticated insights,
through multiple proprietary algorithms and models that work off massive internal
and external data sets, delivered through a device of choice in complete sync with
customer time and context.
Every bank now has or is
involved with a fintech
bootcamp, incubator or
accelerator- programmes that
help plug into startups to work
on ideas.
42
We’re witnessing the creative destruction of financial services, rearranging itself
around the consumer. Whoever does this in the most relevant, exciting way using data
and digital, wins!
Next, let’s talk Fintech. You know how Fintech start-ups are innovating more
easily and rapidly compared with big banks. How can banks keep pace? Yes,
their business models are complex, and they have very complicated systems –
is it even possible for banks to replicate the agile innovation mindset of the
Fintech startup?
This question is what is keeping many banking leaders awake at night! In recent times,
the economics of financial services industry has changed dramatically. Operational
margins are down, the cost of acquiring and retaining staff is up, the cost of
compliance is up, and technology is obsolete; as a result, profitability has significantly
declined.
Banks are looking for efficient ways to deliver services to clients and in doing so, the
traditional physical branch channels are beginning to be supplanted by a digital
strategy. But this new agenda is moving slowly because of rigid structures and
processes that don’t allow banks to act with agility. So what banks are doing is to
foster innovation within to break down internal barriers and drive this change.
Internal innovation is however always a hard thing to do for a large enterprise.
The other option is to look at external innovation, partnering with fintech startups,
who are small and agile. Every bank now has or is involved with a fintech bootcamp,
With big data analytics, new
insights were discovered that
provided granular
understanding of prospects,
their choices, the way they
consumed the financial
products.
incubator or accelerator- programmes that help plug into startups to work on ideas.
Who are able to provide widgets and APIs delivering value to the bank, which is
relatively low risk and of high impact in a short time.
As these startups- mobile payments,
robo advisors, authentication, social
lending etc..- begin to build things
that are valuable, the banks are likely
to take a stake, acquire them or get into
long-term strategic alliances. I think this is
the way the market is going to progress.
Next, there was an interesting study
conducted by Millenial Deception
Index. According to that, 53% of
millennials don’t think their bank is
any different from other banks. So,
what do you think the banks can do
to be more appealing to the next
generation millennials, in terms of
financial services, to be more attractive?
This is something that is obviously going to be a make-or-break for banks. If you
look at the skew of global demographics, you have many western societies ageing
rapidly and the profile of the customer base there is largely the middle to older age
set. They have a specific set of financial needs and they are probably not digital
natives.
On the other hand, you have the emerging markets where the demographics is skewed
towards the young. For example, if you take the Indian market, two-thirds of the
population are under the age of 35 and that’s the same case when you look at any
other emerging market like Indonesia. You’ll find that the millennials are a huge part
of the demographic.
Any financial services player that wants to win in this marketplace has to go digital. If
any bank wants to engage with this set, it needs to put a digital bank out there.
Therefore, you see a lot of traditional banks who are building a “bank within a
bank.” You have the larger bank, which is the traditional brick and mortar bank,
Any financial
services player
that wants to
attract the
millennials has to
go digital.
44
If any bank wants to engage
with millennials, it needs to put a
digital bank out there.
serving consumer who wants high human interaction, physical touch, the familiar
environment of a bank branch. The same bank is building a digi-bank within itself,
serving the millennials. As they build this digibank, banks will have to work with
partners and product providers who can dovetail into digibank platform. That’s where
fintech partners will come into play.
Definitely. The kind of personalisation I get from an app like Paytm, for
example, is not something I get from my bank. Apps like Oxygen Wallet make
it so easy for me to shop online and are more appealing than banks.
Absolutely. Some financial players like insurance companies have a bigger risk.
Insurance companies have traditionally been dis-intermediated. Their products have
always been delivered by an insurance agent or a bank sales representative.
As a result, they do not possess a deep level of understanding of their policyholders.
To compound the situation, insurance is not a high contact product- a typical client
meets the insurance agent or sales representative maybe once a year to talk about
insurance and renewal of the policy. So, there’s also the risk of sparse data that is at
the disposal of the insurance firm. They need to go digital very quickly to acquire
data-driven insights and build that conversation directly with their end consumer.
Otherwise, they are going to find themselves even more removed from the
marketplace.
In 2014, there were approximately 40 billion debit card transactions at an
average swipe fee of 31 cents each, equaling $12.4 billion in total.
How can financial institutions grow their share of this pie by winning more
account holders through advocacy, they stand to reap tremendous profits?
45
If you look at the traditional consumer wallet of payment products, credit cards have
generally been preferred over debit. Credit card companies offer more attractive
products propositions as well as promotions, on the back of relatively higher profit
margins available to deploy into campaigns and benefits. Credit card transactions are
also generally of a higher average ticket size, larger volume as compared to debit card
bill transactions.
At the same time, debit card transactions originate from the savings or checking
account of the banking customer. That pool of savings and checking balances is
significantly larger than credit card limits and spend globally. As more young adults
join the workforce, earn salaries and spend disposable income on discretionary
lifestyle-driven items, expenses, debit cards are very well-positioned to be a payment
product of choice. But the player that is going to capture a sizable share of this
particular pool will need to intensively harness data-driven insights to be able to offer
their debit card holders ultra-personalised choices that are time- and context-relevant.
Finally, to wrap things up, where do you see banking in the next 5 years? And
in the next 20?
There are many themes that are coming through. One is local vs. global. In the
previous era, the global banks ruled; in the new era, it is likely to be the local banks
that are going to rule. For example, in Asia from the 90′s till the first half of the new
millennium, foreign banks like Citibank, StanC, HSBC, etc. pretty much owned the
space of consumer banking innovation and service excellence. Whereas, if you see in
the last 5-7 years, local banks like DBS and OCBC in Singapore, BCA in Indonesia,
CIMB in Malaysia, HDFC and Yes Bank in India, they have all rapidly gained ground
and are now relatively in very good position. With relatively robust balance sheets that
were less affected by the GFC, global-standard infrastructure, and governance and
Banks need to go digital very
quickly to acquire data-driven
insights and build that
conversation directly with their
end consumer.
build up of the strong talent pool, they are in a very good position to win the market
going forward.
The second theme is that, physical vs. digital.
Previously, we had the traditional brick &
mortar, high human touch-centric delivery
model. We are entering a digital
omnichannel paradigm now.
Third is innovation – previously, innovation
was incremental, largely process-centred;
whereas, going forward, it is going to be
rapid innovation, which is going to be
partner-driven, where you have Fintech
players co-create new ideas. All these are
in the next 5 years.
In the coming 20 years, it is hard to
crystal-gaze. It appears that politicians want
to go back to where banking was at
the turn-of-the-century! Serving a societal
objective, serving the needs of
the everyday consumer, safeguarding
small savings.
We might see the industry morph into two ecosystems. One, which is a large utility-
oriented industry serving the small saver, highly regulated; and another a niche
industry not funded by the taxpayer, catering to the more sophisticated consumer. I
think that there will, however, be a few secular drivers: digital, omnichannel, global,
and big-data driven business actions.
If you look at
the traditional
consumer wallet
of payment
products, credit
cards have
generally been
preferred over
debit.
47
Highlights
• We’re witnessing the creative destruction of
financial services, rearranging itself around
the consumer. Whoever does this in the
most relevant, exciting way using data and
digital, wins!
• Every bank now has or is involved with a
fintech bootcamp, incubator or
accelerator- programmes that help plug
into startups to work on ideas.
• If any bank wants to engage with
millennials, it needs to put a digital bank out
there.
• Banks need to go digital very quickly to
acquire data-driven insights and build that
conversation directly with their end
consumer.
Go back to the Table of Content
Big Data Made Simple (BDMS) is one of the fastest growing big
data content websites today. It is powered by Singapore based Big
Data start-up Crayon Data. BDMS was launched in 2014 with a
vision to build a global big data community, and to create a one-
stop comprehensive information resource on everything Big Data.
BDMS curates and generates content for almost 25 verticals. The
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Big data made simple ppp five experts talk

  • 1. Interviews with FIVE BIG DATA EXPERTS IN BANKING Powered by
  • 2. Introduction Banks have to upgrade themselves, or risk being burnt to the ground TABLE OF CONTENTS Interview with banking expert JP Nicols 1 2 3 4 5 On the past, present, and future of banking Interview with banking expert Vik Atal The challenge for banks isn't becoming digital; but providing personalization Interview with MasterCard’s Eric Schneider Both the physical and digital worlds present new challenges for banks Interview with Ron Shevlin We’re witnessing the creative destruction of financial services Interview with banking expert Arvind Sankaran
  • 3. INTRODUCTION Baiju NT, Editor, Big Data Made Simple Read interviews by five thought leaders in banking and their views on Big Data for banking. igital personalization. FinTechs. Business models of banks. Innovation in the banking industry. Big data Analytics. In order to compete today, every bank must embrace these and other techniques that were irrelevant a generation ago. These topics continue to evolve, and new theories and practices are created and discarded constantly. That means that the typical search-engine approach can yield conflicting or out-of-date information. Really, the only way to get accurate and complete information is to ask people with hands-on experience in the industry. So that’s what we did. Over the past few months we have been lucky to conduct in- depth interviews with five experts in the banking industry for bigdata- madesimple.com. The five interviewees have varied roles and focus areas: from strategic advisors to consultants, to those working at established companies. The raison d'etre of this PDF version: we wanted to make the interviews easily accessible to the community. You can read this ebook in any order. Each interview is standalone, so feel free to skip around to the topics that interest you. This is second ebook in the Masters of Big Data series. We hope you enjoy the read and thanks again to all our expert interviewees! D
  • 4. Chapter One BANKS HAVE TO UPGRADE THEMSELVES, OR RISK BEING BURNT TO THE GROUND Interviewed by Manu Jeevan Prakash Sub-editor, Big Data Made Simple JP NICOLS Co-founder, Bank Innovators Council
  • 5. For decades, banks have only competed with one another, on the same terms. As an industry not very used to change, the banking sector is currently undergoing a radical transformation. or decades, banks have only competed with one another, on the same terms. FAs an industry not very used to change, the banking sector is currently undergoing a radical transformation. JP Nicols, a veteran from the banking sector, has spent twenty years in the space. For the past eight years, his work has been at the intersection of banking and fintech. In this interview, Nicols shares his perspectives on the transformation of the banking sector. You are the COO of Innosect.com. What exactly does Innosect do and what is your role as a COO at Innosect? At Innosect, we believe innovation is the intersection of human capacity and ideas. Ideas alone are a dime a dozen. What matters is how you organize people around those ideas to bring them to life. I often tell banking audiences about what happened to Kodak . It is not that Kodak was unaware of digital photography, in fact they were actually pioneers of the technology. However, they failed to get the company focused on how digital innovations in the industry were changing customer behaviors. All businesses want to move forward. To do so, they not only have to create ideas but implement them and turn them into revenue. That’s where Innosect comes in. We mobilize companies to turn ideas into action, 5
  • 6. often that is under the heading of innovation, but it may also be a product manager or a business line executive that just wants help generating new sources of revenue or new cost savings. What kind of analytics techniques do you use at Innosect.com? Founder and chairman of Innosect, Jay Van Zyl, has been a pioneer in social innovation. Social innovation is the concept of getting people involved throughout the organization, in the process of innovation. He helped FNB (number one bank in South Africa) to be named the most innovative bank in the world in 2012, he did that using the social innovation approach. He got people across the whole organization involved in ideas. Now, we do it with big data analytics at machine scale. We are taking social computing and multi-dimensional data sets and actually applying network theory and social computation, on how people and ideas come together. What if, out of your hundred ideas, we could tell you which two you should try first – based on market place positioning, your customers and your probability for success. These are the algorithms we are building and testing. Our algorithms are similar to the network analysis techniques used to track terrorists. A government security agency once wanted our help tracking down some suspected hackers. We were actually able to predict their location based on analyzing social and multi-dimensional data. But that’s the most I can tell you! It is not that Kodak was unaware of digital photography, in fact, they were pioneers. But they failed to notice how digital innovations were changing customer behaviors.
  • 7. With what motives and vision did you start the Bank Innovators Council? The Bank Innovators Council is a public membership organization that is designed to support and promote innovation banking. Our motive was simple. Three years ago, I was a part of a bank that wanted to innovate. I also knew that such people were often lonely, because they were surrounded by what we called the “Business Prevention Department”. Fintech companies actually have a lot of support, in the form of incubators, accelerators and venture capitalists, but banks were on their own. We wanted to reach out to bankers who were trying to innovate and create a change, and give them a place to connect, support one another, and discover new ideas. Two years ago, we launched the Bank Innovators Council in New York during Finovate Fall . Today, we have members in 65 countries. In your interview with Money Summit companies you said: That if Consumers engage directly with Fintech companies instead of banks, then banks become a commodity behind the scenes. To illustrate your point, you talked about companies like Kabbage or Moven or Prosper that team up with a banking entity. Why did you make this statement? Can you please elaborate? Harvard professors — John Haggle and Marc Singer—formulated a concept called unbundling the corporation. There was a similar concept brought out by Michael Treacy and Fred Wiersem in their book called, “The discipline of market leaders.” Each of those two groups came up with similar positions, even though they use slightly different terminology. Let me explain. There are three main domains, which you can master in any business: If consumers engage directly with fintech companies instead of banks, then banks become a commodity behind the scenes. 7
  • 8. - an infrastructure manager - being customer intimate - a product innovator I believe that very few banks will be product innovators, maybe a handful across the globe. When asked, most banks think that they are customer intimate. Just last week, I was a keynote speaker at an event. I asked the audience what single word they think differentiates them from everybody else. Most people simultaneously said the same thing; service. Hence, even though banks think they are customer intimate, they are not—they are all trying to compete on the same dimension. Realistically, most of them focus on infrastructure. Banks pay attention to economies of scale, standardization and cost reduction; all three far from customer intimacy. So if banks cannot truly be customer intimate, they are doomed to be just dumb commodities, acting behind the scenes, like utilities. The problem arises when we think about how many of these banks we really need. In the US, there are over 6,000 banks, and we certainly don’t need 6,000 utilities. What we need is a bank that is intimate with a group of customers that truly thinks about their needs, ambitions and problems. 43 percent of U.S. customers believe their primary bank does not understand their needs. How can you explain this? I think there are two primary causes for this: Even though banks think they are customer intimate, they are not—they are all trying to compete on the same dimension. 8
  • 9. The first, is that for thousands of years, banks have only competed with one another. They didn’t have to provide meaningful benefits to their customers. They just needed to be better than the worst bank. Technology has completely changed this. The second, is that the current era is one that is in the context of the aftermath of a global financial crisis. The focus for many since the crisis has been on standardizing and improving internal processes and quantifying and reducing risks, and not enough banks have been truly focused on taking care of the customer. This focus has been driven by regulators’ concerns about banks’ stability and compliance, and with eliminating unfair and deceptive practices. Banks don’t have a choice to be compliant, but the regulators are typically focused on what negative behaviors to avoid, not what positive, customer-centric behaviors to embrace. All of this tends to reinforce the necessity of focusing on infrastructure. The problem with losing customers is, it doesn’t hurt overnight. If you quietly leak a few customers every year, it’s easy to misdiagnose what went wrong, and you keep making small adjustments to improve customer experience. Meanwhile, the gap between the experience you are providing and what your customer needs keeps widening. A customer who spends his days using customer friendly apps like Uber, Netflix, even Starbucks, feels a huge disconnect when he walks into a bank branch. Bankers don’t even recognize this disconnect. How do you think banks can understand their customers better, and become a part of their customers’ lives? If banks cannot truly be customer intimate, they are doomed to be just dumb commodities, acting behind the scenes, like utilities.
  • 10. That’s simple. They need to analyse customer data. Data from social media, merchants, and transactions is readily available to banks. They can create buyer personas around their customers. Banks can buy aggregated data from companies like Yodlee, Xignite, and others. Merchants like Nordstorm, Walmart and Target have a lot of customer data, and they are very good at analyzing it. Most merchants are pretty proprietary about that data, but a strong partnership that combines merchant purchase data with banks’ income and other data would create even deeper insights to provide a more intimate customer experience. Major banks sit on troves of data. However, less than 10% of this datais readily accessible, and less than 1% is actually used for any analytics. So, how can banks better exploit the power of data? The good news is that even the worst banks have thousands, if not millions, of customers, and a lot of data on those customers. They know what their customers own and what they owe, what comes in and what goes out, when it goes and where it goes. You are absolutely right that they have done very little with it so far. However, they are investing in big data analytics, in better ways to harness the data. There are many even looking for partnerships with big data firms and customer-facing technology firms. In my opinion, the winners of the future will be the ones who successfully adopt big data technologies. As for those who don’t, I think they will just quietly merge with somebody who understands how to monetize their customer data. Lack of innovation is never put on a banks’ tombstone when it dies. BBVA, Capital One, Wells Fargo, are just some of the banks starting to experiment with big data. To quote Francisco Gonzales, chairman of BBVA, “BBVA will be a software company in the future.” What we need is a bank that is intimate with a group of customers that truly thinks about their needs, ambitions and problems. 10
  • 11. Even more important than technology is a very strong focus on customer intimacy. There are a number of banks that are using cutting-edge innovative tech. Can you give us some examples of banks that are doing well in digital personalization and the big data space? Capital One is a credit card company turned bank that is trying hard to personalize offers for their customers. Umqua Bank in Portland, Oregon takes a bit of a unique approach. They aren’t really high tech, and their personalization mostly comes from building engaging branch environments. In the long run, we will need fewer branches overall in banking, but banks like Umqua will do well with branches. Barclays is experimenting with tech startups that tackle different facets of consumer issues. I think this works for bigger banks who can afford to invest in this kind of approach. It’s getting harder and harder for small banks on one hand, but on the other, technology has never been more easily accessible. Small banks like Live Oak Bank and CBW are examples of such banks, that have embraced technology despite their size. Even more important than their use of technology though, is a very strong focus on customer intimacy. They are very clear about who their customers are, and who they aren’t. Most banks cannot be all things to all people, and they shouldn’t try. What is the future of banking? As far as I’m concerned, there are two trends. The first, is what Francisco Gonzalez said, Successful banks are going to be more like technology companies. 11
  • 12. The second, is that we will have fewer banks. Banks that were built in the era of brick and mortar either have to upgrade themselves, or risk being burnt to the ground. I think these two trends will combine in pretty powerful ways, and the most successful banks will be the ones that are digital. Highlights • If consumers engage directly with FinTech companies instead of banks, then banks become a commodity behind the scenes. • Even though banks think they are customer intimate, they are not—they are all trying to compete on the same dimension. • The focus for many banks has been on standardizing and improving internal processes and quantifying and reducing risks, and not enough banks have been truly focused on taking care of the customer. • We will have fewer banks. Banks that were built in the era of brick and mortar either have to upgrade themselves, or risk being burnt to the ground. Go back to the Table of Content
  • 13. Chapter Two On the past, present, and future of banking Interviewed by Srikant Sastri Co-founder, Crayon Data Vik Atal Former Executive Vice President, Citigroup
  • 14. For banks, using data analytics for better customer satisfaction and deeper engagement is like developing a muscle that’s never been completely used. ell us a little about yourself, outside of the informationthat is publicly available online. Ah, that’s a tricky one. Well, it may be interesting to note that before I started my career in finance, I had explored the option of doing an advanced degree at ISI (Kolkatta). Eventually, I opted to pursue finance instead, but with my recent shift in focus to information, analytics and insights, I feel like I’ve come back full circle! In the initial stages of my career, I focused on traditional finance. However, for the past 15 years, I have worked on a wide range of consumer-oriented roles in business management. Interestingly, both have straddled the banking and retail sectors. To work in these sectors has been an incredible learning experience for me. It has given me the opportunity to gain remarkable insights into the mind of both, customers and retailers while remaining focused on the business and profit dynamics of banking. Most recently, I’ve been exploring how to leverage information and analytics to drive business performance. This curiosity was heightened due to my learnings from the global financial crisis. I think the chaos it left in its wake could probably have been reduced, to some extent, with predictive analytics. As the Executive Vice President of CitiBank, one of the largest banks in the world, you watched the world endure and recover from the worst financial crisis since the 1930s. What were your key learnings? T 14
  • 15. During the financial crisis, I was asked to manage high-risk global accounts for Citi Bank. At the time, the approach we adopted was largely focused on collections and repayments. However, by the time a customer showed evidence of risk, it was often too late to take action. Hence, the question became – how could we change our approach to identify and manage high-risk accounts better? We did try to use predictive analytics to determine, which customers demanded immediate action and, which ones could be tended to later. But we soon realized that business processes and models were just not calibrated effectively enough at the time for predictive analytics. Post the financial crisis, the efficacy of financial models was thoroughly scrutinized for what techniques and information sets might be applicable. Unanimously, the conclusion arrived at suggested that there was enormous opportunity for banks to leverage data and improve their performance substantially. If you compare banks to companies like Google, it’s evident that banks are still at the nascent stage of the digital and data revolution. Banks have very complex embedded business processes and business models. It is, therefore, a significant challenge for banks to migrate to a new state. I view this challenge as a significant opportunity since it has provided a clear rationale for bringing solutions to the financial services industry across their needs – building scalable(and low cost) customer acquistions, moving towards real-time processes, laying out a framework for becoming information centric and similar activities. Can you tell us about your role at Crayon Data? What excites you most about your work at Crayon Data? If you compare banks to companies like Google, it’s evident that banks are still at the nascent stage of the digital and data revolution.
  • 16. To be honest, my role at Crayon evolved quite dramatically! I was having a casual cup of coffee with Srikant, discussing the work Crayon had been doing in Asia. Srikant wanted to explore the opportunities in the U.S market for Crayon. The U.S market is unique in that companies in the U.S gain credibility only by actually working in the U.S. And before I knew it, we were enthusiastically chalking out a plan for Crayon to penetrate one of the most competitive markets in the world. I’ve sat through a number of Crayon’s business meetings and presentations to clients. In all of them, I’ve noticed that there has not been a single client interaction at the end of which the client did not concur with Crayon’s vision, approach, and highly practical recommendations. What excites me most about Crayon is that I’m proud to say that I have partnered with a credible organization whose product clearly meets the needs of the modern consumer. What is your view on how the financial services sector & insurance space in the US is changing with the advent of big data analytics? Right now, banks are being confronted with the realization that the boundaries of what is possible and, in tandem, customer expectations are shifting dramatically. Their business models are no longer as successful as they were in the past. Banks have very complex embedded business processes and business models. It is, therefore, a significant challenge for banks to migrate to a new state. 16
  • 17. Banks are only now starting to lay the foundation for a completely new business model. They are shifting their focus to consumers, trying to figure out how to get new customers, deepen relationships and meet demanding customer expectations. They are making efforts to go digital and even employ big data analytics, but the practical state of this migration, on a scale of 1 to 100, is still in the teens. Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020. Companies like Paypal, Apple Pay, and Google Wallet. How can banks respond to these threats? Yes, these companies are stealing away a decent chunk of revenue from banks. But let’s not forget, there are multiple drivers of banking revenue – lending, transactions, and savings. And neither Apple nor Google or Pay pal are interested in lending or savings because it is heavily regulated and extremely complex. Banks need to focus more on how to drive market share in traditional asset side lending and think less about external competitors like Google, because the core lending business isn’t going anywhere in the foreseeable future. With specific regard to Google, Apple, and Paypal, they have caused two problems for banks: • Banks lose a portion of a revenue stream – revenue they receive from transactions done by their customers – that is high volume and very low risk; • Banks now have one more platform on which they need to compete for shelf space and allocate scarce marketing resources. Banks business models are no longer as successful as they were in the past. 17
  • 18. Allow me to explain. For a bank, it’s not enough to have an Apple iOS or Mac application. Since all banks are on the Apple ecosystem, each bank has to figure out how to make their product stand out for a customer to, say, use their credit card. According to a Transunion study, 8 million credit card users are “inactive”. How can banks get their customers to use credit cards? Firstly, it’s more than 8 million. It’s probably, multiples of that. • Customers that use their credit card actively for sales transactions. • Customers that take a credit card because of low-interest Let’s say a customer gets 0% interest rate for 18 months. There are many customers who will just use the credit card for those 18 months and then become inactive. This set of customers is extremely unprofitable for banks because they spend lots of money to acquire customers, who eventually become inactive. • Customers who take credit cards but never use them. These customers are completely inactive. Customers need to be approached differently, depending upon which of the above buckets they belong to. A long standing customer who got tired of a product, for instance, can be enticed to migrate back to the bank with a new product. Hence, when we talk about inactive customers, identification of the source of that inactivity is an extremely important metric to create an approach for that customer. Banks need to focus more on how to drive market share in traditional asset side lending and think less about external competitors like Google, Paypal, and Amazon.
  • 19. 43 percent of U.S. customers believe their primary bank does not understand their needs; 31 percent feel their bank is not helping them reach their primary financial goals. Why aren’t banks able to understand their customers? Because understanding every individual customer has never been a part of a banks’ business model. The top five to six credit card players hold a ninety percent share of the credit card industry in the U.S. These players operate on a very large scale. Citi and JP Morgan each have active credit customers (customers who get a statement every month) at well over sixty million. Shifting from an “actuarial” segmentation structure. to a one-to-one relationship is an extremely complex endeavor. This is a problem for all the main banks. Banks sit on troves of big data and, according to Tresata, only 1 % of this data is used for analytics. How can banks make better use of data, to understand their customers better? People say banks don’t use transaction data efficiently. This is not only true but is a part of the bigger problem! For them, using data analytics for better customer satisfaction and deeper engagement is like developing a muscle that’s never been completely used. It requires intense focus, discipline, and persistence. Further, transaction data provides only limited insight into the mind of a customer. It would be an enormous mistake for banks to leverage only their internal data. They now have to rethink not only their approach towards their own data, but also account for the existence of massive and growing pools of external data. When we talk about inactive customers, identification of the source of that inactivity is an extremely important metric to create an approach for that customer. 19
  • 20. Highlights • If you compare banks to companies like Google, it’s evident that banks are still at the nascent stage of the digital and data revolution. • Banks are making efforts to go digital and even employ big data analytics, but the practical state of this migration, on a scale of 1 to 100, is still in the teens. • Companies like Paypal, Google and Apple pay are stealing away a decent chunk of revenue from banks. • Understanding every individual customer has never been a part of a banks’ business model. • Transaction data provides only limited insight into the mind of a customer. It would be an enormous mistake for banks to leverage only their internal data. Go back to the Table of Content
  • 21. Chapter Three The challenge for banks isn't becoming digital; but providing personalization Interviewed by Bhaskar V Crayon Data Eric Schneider Asia Pacific Head, MasterCard Advisors
  • 22. With the shift towards digital, consumers are bombarded with competing messages. Banks have to truly understand their customers to pinpoint how to cut through the clutter and convert customers. ell us a little about yourself I’ve been with MasterCard since 2001, and I am currently heading MasterCard Advisors, the professional services arm of the company, in the Asia Pacific region. The most exciting aspect of my job is to witness and be a part of the growth of our data and analytics business. We’ve been doing – and more importantly, applying – Big Data long before anyone called it that way. We discovered early on that spending data – even when completely stripped of all personal information, which, by design, MasterCard does not collect, need or want – can be invaluable for a multitude of reasons. It helps us better understand consumer behaviour, target marketing programs, design better-fitting products, make smarter risk decisions and much more. You don’t have to be a techie or data jock to love data. You have extensive experience in customer acquisition. Can you tell us the most important ingredient of a successful customer acquisition strategy? With the shift towards digital, consumers are bombarded with competing messages. Businesses have to truly understand their customers to pinpoint how to cut through the clutter and convert customers. More than just mining more data, businesses need the right, smart data that answers their questions and provides actionable insights. T 22
  • 23. MasterCard Advisors offers unparalleled insight into the retail spending trends, drawing from 43 billion anonymized and aggregated transactions processed each year. We pair this with rigorous data science, reinforced by strict data privacy and confidentiality policies, to turn big data into smart data for our customers. Many businesses have a solid understanding of their customers’ spend habits, but they don’t have the line of sight into broader marketplace trends. For example – who are their most valuable customers? What experiences are they seeking? What do they do before and after they shop? What is our share of wallet? We have that knowledge, and we put that to work for companies of all sizes to help them attract and retain customers, and deliver better marketing campaigns to reach the right customers at the right time with the right content. How do you think financial institutions can understand their customers better, and become a part of their customers’ lives? With many customers forging life-long relationships that can involve cards, mortgages, checking and other accounts, financial institutions are in a unique position to truly get to know their customers’ needs, wants and desires. There are so many incredible opportunities across a customer’s lifecycle to create enhanced experiences that deliver real value to deepen the relationship. Additionally, financial institutions can benefit greatly from understanding how their customer segments engage across the marketplace. By building robust customer segmentations, we help our clients understand their customers better, so they can devise strategies that will drive their businesses. Today, we see an increasing demand for mobile and digital capabilities. How Financial institutions can benefit greatly from understanding how their customer segments engage across the marketplace.
  • 24. are the expectations of MasterCard’s customers changing, and how is MasterCard planning to meet these expectations? As we transition into an increasingly digitally connected lifestyle, the payments industry will see even greater demand for simple, convenient and secure solutions. The team at MasterCard are continuously working with our partners in the payments ecosystem to meet these growing demands for mobile and digital capabilities, and To deliver innovative, scalable solutions to our customers. A good example is MasterPass, which was launched in early 2013. Since then, it has been rolled out to 27 markets around the world. It is our digital payments platform that enables consumers to store all their card, shipping and billing information in one place for a simpler, safer and more convenient checkout experience when shopping online or on their mobile device. MasterPass is now available to over 40 million consumers in the Asia Pacific alone, and this growth is expected to continue. Looking forward, the unprecedented convergence of the physical and the digital world presents new challenges. Just as consumers have embraced more secure and convenient ways to make payments; criminals are also adapting, using increasingly advanced technology to commit cybercrime and fraud. There is no one solution to deal with cybercrime, and it needs a multifaceted approach to combat it as best as we can. In our view, collaboration is the key – a universal commitment between financial The team at MasterCard is continuously working with our partners in the payments ecosystem to meet these growing demands for mobile and digital capabilities, and to deliver innovative, scalable solutions to our customers. 24
  • 25. institutions, retailers, payment networks, governments as well as greater vigilance among consumers themselves, is required. Collaboration is MasterCard’s motivation behind our annual Global Risk Leadership Conference, which was recently hosted in Singapore, where we bring together customers, merchants, issuers, banks, and legislators to share best practice, ideas, and have robust discussions on how to continue our fight in the battle against fraud and cybercrime. In what ways do you see big data (potentially) making an impact on traditional payments & card companies? MasterCard is committed to expanding our services portfolio, delivering deeper insights and broader capabilities to help our clients grow their businesses. Having the right data is a critical part of how we evolve our business. Being in a position to help clients make smart, sound decisions based on MasterCard Advisors insights is incredible. And yet it’s astounding to see how many people still fly blind when it comes to making decisions that should be based on solid data. It was a challenge to make people see the value when the concept of Big Data emerged. That has since come to pass. What matters now is making it clear to customers that not all Big Data delivers value. All data is not created equal. You can have the best data in the world but without smart people and precise, proven analytics, what you end up deciding to do with that data may fall flat. And vice versa. You need both, and we as an industry need to do a better job of educating people You can have the best data in the world but without smart people and precise, proven analytics, what you end up deciding to do with that data may fall flat. 25
  • 26. about what that truly means. Be it payments, funds transfer or even credit scoring, banking is being unbundled by FinTech players. How do you think banking can respond? Most consumers are looking for convenience, security and value. While some FinTech players have identified and delivered innovative solutions that consumers use today, banks still play a unique and integral role in money management. They ultimately ‘own’ customer deposit and lending relationships, and consumer surveys have shown time and again that people trust their banks more than anyone with their money. Also, consumers are increasingly going mobile, especially in Asia with India joining China as the only two countries in the world to have over 1 billion smartphone users. However, at the same time, banks also have a reputation for being slower to adapt when it comes to innovation, and also bogged down in regulation that is often there to keep our money safe in the first place. So the banks need to get past their historical penchant for building everything themselves and instead embrace the explosion of experimentation and innovation that the FinTech players breed including payments, micro-lending, risk management and marketing. These provide opportunities for partnerships and acquisitions that can help the banks innovate faster and stay competitive. By working with more players and developing in-house technologies, banks can combine the newer services that consumers have found compelling with their existing offerings to develop an even more robust offering in the future. While some FinTech players have identified and delivered innovative solutions that consumers use today, but banks still play a unique and integral role in money management.
  • 27. Given the digital wave, how is the merchant network evolving? What role, if any, do you see the merchant networks playing, to strengthen a bank’s proposition? If we go back to the beginning of card payments, MasterCard has connected millions of consumers and their banks with millions of merchants and their banks – without any of them necessarily having any direct relationship with one another. The merchant doesn’t have to vet the customer’s creditworthiness nor is the merchant’s sale dependent on how much cash the customer has in her wallet. We are there to make the payment simple, convenient and safe for both parties. You don’t hear a lot of people or merchants complain about how complicated, or inconvenient card payments are. The days of long checkout processes are far behind us, and we are now seeing people pay with their cards – often tapping rather than swiping or dipping – and speeding through the checkout process. Digital is changing the form factor, but the goal remains the same: a singular focus on making it even safer and simpler. What was a plastic card representing a bank account will increasingly be a mobile wallet or a virtual card number within an app, such that payment is a tap away on our mobile devices. With our state-of-the-art tokenization technology, MasterCard is at the cutting edge of all of this, encrypting cardholder’s actual card number behind the scenes for every single digital transaction into a one-time use number, called a ‘token’. Even in the unlikely situation of a merchant data breach, this token would be rendered useless as it is insufficient to complete the transaction. And if that doesn’t already provide consumers with enough cause for peace of mind, if cardholders notice the unauthorized use of their MasterCard card, they are Digital is changing the form factor, but the goal remains the same: a singular focus on making it even safer and simpler. 27
  • 28. More than just mining more data, businesses need the right, smart data that answers their questions and provides actionable insights. protected from the cost of the unauthorized transaction as long as they have taken reasonable steps to protect themselves from fraud. What is the biggest change we are going to see in the financial services industry in the next 5 years? Throughout history, the middle and affluent classes have enjoyed easy access to financial services. However, on the other end of the spectrum, the majority of less affluent populations have kept their life savings under a mattress or worn on their bodies. Just as they pay a premium for buying basic staples in small quantities, they pay a premium for lack of access to conventional financial services. This leaves them susceptible to theft, punitively high fees, and extortion. On a recent trip to Myanmar, I listened to villagers sharing about having money transmitted to them from relatives working in Yangon or abroad through multiple middlemen all taking big cuts. But two big trends are changing that. One is the simple fact that the banked middle class is growing very quickly – especially in Asia and Africa. At the same time, technology is making financial services increasingly accessible to the poor. Mobile phones, e-commerce, and electronic payments play a big part of that, and MasterCard’s right in the center of it. For example, we have partnered with the Unique Identification Authority of India (UIDAI) to develop biometric authentication services for the Aadhaar program, the largest biometric identity program in the world and the cornerstone for achieving financial inclusion in India. Since its launch seven years ago, Aadhaar has enrolled over 900 million Indians. 28
  • 29. That’s just one step on our journey to our stated goal of making financial services available to 500 million more people by 2020. Doing well and doing good need not be mutually exclusive, and if we create the right model for the new equation, we can bring those left behind into the formal economy. Highlights • There are so many incredible opportunities across a customer’s lifecycle to create enhanced experiences that deliver real value to deepen the relationship. • As we transition into an increasingly digitally connected lifestyle, the payments industry will see even greater demand for simple, convenient and secure solutions. • You can have the best data in the world but without smart people and precise, proven analytics, what you end up deciding to do with that data may fall flat. • Banks need to get past their historical penchant for building everything themselves and instead embrace the explosion of experimentation and innovation that the FinTech players breed. Go back to the Table of Content
  • 30. Chapter Four Both the physical and digital worlds present new challenges for banks Ron Shevlin Director of Research, Cornerstone Advisors Interviewed by Manu Jeevan Prakash Sub-editor, Big Data Made Simple
  • 31. Too much of the big data hype focuses on predicting what a single consumer will buy. But a better use of “big data” is to understand consumers purchase journey or decision- making process. ell us a little bit about yourself? (something that we can’t find online) It’s 2016. The age of Big Data, Google, and the NSA. Everything you could possibly want to know about me could be found online. Sadly, things you wouldn’t want to know about me can probably be found online. Banks sit on troves of big data. How can banks realize greater value from their Data? By starting with a more granular definition of what problems they’re trying to address, or business questions they’re trying to answer. That’s probably obvious to professionals with strong quantitative marketing skills, but the press and pundits (and unfortunately, many consultants) have led non-quantitatively oriented banking execs to think that Big Data—in and of itself—will predict what consumers will buy, and become some kind of magical competitive advantage. Too much of the Big Data hype focuses on predicting what a single consumer will buy. But a better use of “big data”—and by that I mean new types of data not typically or historically used by banks, for example, mobile location or other digital channel activity—is understanding the “macro” (vs. “micro”) environment, to identify trends in the market regarding what consumers in general are buying, and understanding their purchase journey or decision-making process. I would, however, challenge your statement that “banks sit on troves of big data.” T 31
  • 32. Banks sit on troves of data. Distinguishing “big” data from other kinds of data— some people now like to say that banks need to do a better job of using their “little” data—is nonsense. Data is data. How can banks become a part of everyday life of a customer and provide daily value based on a consumer’s personal needs, habits, and preferences? The key to this lies in the development and deployment of mobile apps that serve very focused purposes, for example, tracking expenses against a budget, monitoring the market to check prices for an intended purchase, guiding the wedding planning process, or assisting with a home or auto purchase. Mobile apps are key because of the role mobile devices play in our lives. Few people want to come home from work, eat dinner, watch TV, then sit down and log on to their bank account to analyze their financial lives or do research about investments or purchases. Mobile apps enable people to do these things as they’re engaged in the relevant processes during the day. The other aspect that’s critical here is the provision of advice, guidance, and help in the decision-making process. Even enabling a more-convenient process by tracking activities and expenses could be helpful. But overall, simply providing mobile access to bank accounts to check balances or transfer funds isn’t enough to drive additional customer engagement. The challenge for banks isn’t becoming “digital”—it’s providing value that is perceived to be in line with the cost—or better yet, providing value that consumers are comfortable paying for.
  • 33. I recently had a conversation with Vikram Atal, Executive Vice president of CITI bank. He said that banks have complex business models because of which they are still in the nascent stage of the digital and data revolution. Can you tell us what is wrong with banks’ business model? Banks had complex business models long before the digital and data revolution. In the United States at least, banks have had complex business models because of regulatory requirements, the conglomeration of various lines of business providing very different products and services to a wide variety of customers, and the rapid consolidation of the industry. At the retail level, the business model is flawed primarily because of the misalignment of value and cost. With the advent of free checking, what consumers ended up paying for was overdraft fees, and then ATM fees, and extraordinarily high fees for services like stop payments or expedited bill payments. The problem is that consumers don’t perceive the value they get from these services to be in line with the value provided. The challenge for banks isn’t becoming “digital”—it’s providing value that is perceived to be in line with the cost— or better yet, providing value that consumers are comfortable paying for. I read the following quote made by you in the Next Bank USA summit “Who will rule banking in the future – Banks or Fintech’s? “Don’t be a fool” “Fintech won’t rule” Banks had complex business models long before the digital and data revolution. In the United States at least, banks have had complex business models because of regulatory requirements. 33
  • 34. “No doubt that they’re cool” “But they’re just a banks tool” You said that Fintech won’t rule the financial industry. Can you tell us why Fintechs’ are just banks tool? As Mr. Atal can attest to, banks are complex organizations with multiple lines of business serving a multitude of customer segments (whether it’s retail, commercial, or institutional investing). The overwhelming majority of fintech startups are focusing on niches in the market—whether it’s by a narrow customer segment or by a narrow set of products or services. Some of these startups will certainly survive, but scaling beyond a narrow niche isn’t easy and it isn’t cheap. Established firms—whether it’s existing banks or other types of companies—are better positioned to help startups grow. In the end, the path to cashing out for many fintech startups will be selling off to existing banks. Hence, banks win. Not that fintech startups lose. The premise of the debate was pretty stupid since it’s not an either/or win/lose situation. How can banks help their customers understand how to maximize opportunities and build wealth? This is too difficult a question to answer. Consumers’ attitudes, approaches, and behaviors regarding financial management vary so widely that it’s impossible to boil it down to a single easy answer. Banks have to: 1) segment consumers by their needs, and 2) figure out which segments they (the banks) are best able to serve. Consumers’ attitudes, approaches, and behaviors regarding financial management vary so widely that it’s impossible to boil it down to a single easy answer. 34
  • 35. Francisco Gonzales, chairman of BBVA, said that “BBVA will be a software company in the future.” What is your view on his statement? You really like to pit me against other people in the industry, don’t you? With no intended disrespect to Mr. Gonzales, the statement makes little sense, and if he really believes what he said, that could be really bad news for his bank. I would assert that few software companies are known for their superior customer service, let alone provide good customer service. Is superior software going to be the key to competitive advantage in banking in the years ahead? Or will it be superior service and a superior customer experience? Now, one could argue that since that customer experience is likely to be even more digital in the years ahead, that software is the key. But the key to a superior customer experience isn’t superior software development—it’s superior understanding of customer needs, design and a whole host of other capabilities. Software development can be—and is—outsourced. The title of your book is ‘Smarter Bank’. Who is the target audience for your book and how will your book benefit them? Target audience is bank/credit union executives, fintech executives, and consultants serving the financial services industry. The book will primarily do two things for them: 1) Help them understand how technology, consumers, and business model trends will impact banks, and what they should do about it, and 2) Make them laugh. Most business books are boring snoozefests. Not Smarter Bank! The key to a superior customer experience isn’t superior software development—it’s superior understanding of customer needs.
  • 36. There are a number of banks that are using cutting-edge innovative technology. Can you give us some examples of banks that are doing well in digital personalization and the big data space? Interesting way to word the question. There are certainly examples—and good ones at that—of banking using cutting-edge innovative technology. But “doing well in digital personalization”? My take is that the whole “personalization” thing is overblown. The best examples of uses of technology In banking are for providing real-time advice/guidance, added convenience, improved process execution, and enhanced customer experience. With apologies to everyone outside of the U.S., my favorite examples come from the U.S. because that’s the market I focus on. I’m sure there are plenty of good examples from outside the U.S., but here two great examples of companies making great use of “cutting-edge innovative” technology are: 1) USAA. USAA’s use of mobile technologies for home and auto buying — not just the lending part of the process —is redefining how their members buy homes and cars. 2) Moven. Moven continues to lead the industry in personal financial management features to help its customers better manage their financial lives. The best examples of uses of technology in banking are for providing real- time advice/guidance, added convenience, improved process execution, and enhanced customer experience. 36
  • 37. Highlights • Simply providing mobile access to bank accounts to check balances or transfer funds isn’t enough to drive additional customer engagement. • The challenge for banks isn’t becoming “digital”—it’s providing value that is perceived to be in line with the cost—or better yet, providing value that consumers are comfortable paying for. • Banks have to: 1) segment consumers by their needs, and 2) figure out which segments they (the banks) are best able to serve. • The key to a superior customer experience isn’t superior software development—it’s superior understanding of customer needs. Go back to the Table of Content
  • 38. Chapter Five We’re witnessing the creative destruction of financial services Arvind Sankaran Global Business Leader, Retail, Banking & Wealth Management Interviewed by Manu Jeevan Prakash Sub-editor, Big Data Made Simple
  • 39. We’re witnessing the creative destruction of financial services, rearranging itself around the consumer. ell us a little about yourself I am a chemical engineer by training from Bits Pilani. After graduation, I spent a very interesting year as a trainee “grease monkey” at the ITC factory in Bangalore! Then I went on to do an MBA in finance at IIM Calcutta. Not many folks would know that I then spent a year at New York University pursuing a Ph.D. which I then dropped out of! As a banker, I was fortunate to have opportunities over two decades to build and run businesses in branch banking, credit cards, lending and wealth management. Stints at Citibank, Barclays and HSBC took me to five countries in Asia and EMEA which were fantastic professional and cultural experiences for my family and me. Arvind, I understand one of your areas of expertise is in wealth management; you are a strategic advisor for banks in big data space. How did you get into big data? I actually spent time initially on the lending side of banking then I moved to wealth management in the last 12-15 years. Very early on at Citibank, I was immersed in the use of Analytics. In the early to late 90′s, there was no big data, and primarily the risk community used analytics to create lending scorecards and strategies — I was very involved in that. Being an engineer by training, I was fascinated by analytics, statistics, and models. In the early years of the new millennium, when I moved to wealth management, I found that analytics in this area was at a very rudimentary level to model the behaviour of the investor or the markets. The tools that were being used were static model-based and with low efficacy. T 39
  • 40. Big data and analytics have been intensively used in wealth management space only in the last five years or so. Both at Citibank and HSBC, where we used data-driven analytics, the modelling work done was largely driven off internal transaction data. But since then, the big data space has gained rapid sophistication with players like Crayon. The work Crayon Data does to bring external data sets to work for the enterprises is amazing in terms of what it can do for the Banking industry. Can you tell us more about your role at Crayon Data? What excites you most about your work at Crayon? Last year, Suresh and I got talking about the exciting landscape for consumer brands in Asia, and in particular financial services which are being driven by growing affluence of the middle class, expanding lifestyle choices, and discretionary spend. Before I knew it, I was completely taken in by the Crayon story. Maya’s product capability(product of Crayon) is something I had been searching high and low for years as a retail bank marketing and sales leader. And so here I am now as a strategic. advisor to Crayon. What it means is that I’m very interested in making Crayon even more successful than it is today. What excites me very much? Firstly, Crayon is operating at the cutting edge and is changing the way the marketplace and brands engage with consumers. I really like the vision that Crayon has set for itself – to solve the world’s problem of choice. That is BIG and BOLD! Secondly, working with the young, smart, next generation of engineers and data scientists- bright sparks who are at the forefront of creating and delivering Crayon’s vision. Thirdly, and I get a personal kick out of this! Now I am advising a venture that is disrupting and revolutionizing the way financial services are marketed, the very Big data and analytics have been intensively used in wealth management space only in the last five year.
  • 41. domain that I was a part of! Your role at Crayon is that of a Strategic Advisor. Can you tell us more about your role as a strategic advisor, can you be more specific about your role? As a strategic advisor, there are a few things I bring to the table: The first is, of course, subject matter expertise. For Crayon, winning in the banking vertical is critical; this is where I bring my immediate value add. I work with product and client delivery teams so that their product development work is laser-focused on client needs. The second value I add is helping Crayon with its client-facing activities and in its effort to build a robust business pipeline. In the immediate term, that means focusing on as many wins for Maya Lifestyle (product of Crayon) with payment product businesses. I help open doors and put Crayon in front of key industry decision makers. Most of my banking career was in client-facing roles, so I love attending as many Crayon pitches as I can! Third is to help Crayon with its fundraising activities. As you know, Crayon successfully closed CN2 and it has been a successful funding round. Through my years and network in the industry, I help bring strategic investors to participate in the future success of Crayon Data. Now, let’s talk about changes in the industry. How has the financial services and insurance sectors in the APAC changed, with the advent of big data analytics? Firstly, I’d like to clarify that insurance players are very much a part of the financial services industry. The retail financial services industry is comprised of banking, asset management, insurance and brokerage with large local and global players competing in the Asian marketplace. Banks are looking for efficient ways to deliver services to clients and in doing so, the traditional physical branch channels are beginning to be supplanted by a digital strategy. 41
  • 42. Coming to your question about how this sector is changing with the advent of big data. Until recent years, financial services firms had very limited understanding of their clients. Big data was initially driven by internal data warehouse teams, who collected transactional data within the enterprise, and the models that were used were largely limited. As technology has advanced, memory became cheaper, the size of the data repository increased, and computing power quadrupled, financial services companies were able to deploy models and analytical capabilities that were massive. With that, new insights were discovered that provided granular understanding of prospects, their choices, the way they consumed the financial products. And that has changed the way financial services companies create their market entry strategies, the way they build consumer products and large marketing campaigns. This has been simply transformational. Yet, we are only scratching the surface, because where we are going with this, it is going to completely change the way financial brands engage with consumers. From a last-century approach of blunt segmentation, mass customisation of offers and communication channels out of sync with customer time and context, the future is all about ultra-personalisation of product offers, driven by sophisticated insights, through multiple proprietary algorithms and models that work off massive internal and external data sets, delivered through a device of choice in complete sync with customer time and context. Every bank now has or is involved with a fintech bootcamp, incubator or accelerator- programmes that help plug into startups to work on ideas. 42
  • 43. We’re witnessing the creative destruction of financial services, rearranging itself around the consumer. Whoever does this in the most relevant, exciting way using data and digital, wins! Next, let’s talk Fintech. You know how Fintech start-ups are innovating more easily and rapidly compared with big banks. How can banks keep pace? Yes, their business models are complex, and they have very complicated systems – is it even possible for banks to replicate the agile innovation mindset of the Fintech startup? This question is what is keeping many banking leaders awake at night! In recent times, the economics of financial services industry has changed dramatically. Operational margins are down, the cost of acquiring and retaining staff is up, the cost of compliance is up, and technology is obsolete; as a result, profitability has significantly declined. Banks are looking for efficient ways to deliver services to clients and in doing so, the traditional physical branch channels are beginning to be supplanted by a digital strategy. But this new agenda is moving slowly because of rigid structures and processes that don’t allow banks to act with agility. So what banks are doing is to foster innovation within to break down internal barriers and drive this change. Internal innovation is however always a hard thing to do for a large enterprise. The other option is to look at external innovation, partnering with fintech startups, who are small and agile. Every bank now has or is involved with a fintech bootcamp, With big data analytics, new insights were discovered that provided granular understanding of prospects, their choices, the way they consumed the financial products.
  • 44. incubator or accelerator- programmes that help plug into startups to work on ideas. Who are able to provide widgets and APIs delivering value to the bank, which is relatively low risk and of high impact in a short time. As these startups- mobile payments, robo advisors, authentication, social lending etc..- begin to build things that are valuable, the banks are likely to take a stake, acquire them or get into long-term strategic alliances. I think this is the way the market is going to progress. Next, there was an interesting study conducted by Millenial Deception Index. According to that, 53% of millennials don’t think their bank is any different from other banks. So, what do you think the banks can do to be more appealing to the next generation millennials, in terms of financial services, to be more attractive? This is something that is obviously going to be a make-or-break for banks. If you look at the skew of global demographics, you have many western societies ageing rapidly and the profile of the customer base there is largely the middle to older age set. They have a specific set of financial needs and they are probably not digital natives. On the other hand, you have the emerging markets where the demographics is skewed towards the young. For example, if you take the Indian market, two-thirds of the population are under the age of 35 and that’s the same case when you look at any other emerging market like Indonesia. You’ll find that the millennials are a huge part of the demographic. Any financial services player that wants to win in this marketplace has to go digital. If any bank wants to engage with this set, it needs to put a digital bank out there. Therefore, you see a lot of traditional banks who are building a “bank within a bank.” You have the larger bank, which is the traditional brick and mortar bank, Any financial services player that wants to attract the millennials has to go digital. 44
  • 45. If any bank wants to engage with millennials, it needs to put a digital bank out there. serving consumer who wants high human interaction, physical touch, the familiar environment of a bank branch. The same bank is building a digi-bank within itself, serving the millennials. As they build this digibank, banks will have to work with partners and product providers who can dovetail into digibank platform. That’s where fintech partners will come into play. Definitely. The kind of personalisation I get from an app like Paytm, for example, is not something I get from my bank. Apps like Oxygen Wallet make it so easy for me to shop online and are more appealing than banks. Absolutely. Some financial players like insurance companies have a bigger risk. Insurance companies have traditionally been dis-intermediated. Their products have always been delivered by an insurance agent or a bank sales representative. As a result, they do not possess a deep level of understanding of their policyholders. To compound the situation, insurance is not a high contact product- a typical client meets the insurance agent or sales representative maybe once a year to talk about insurance and renewal of the policy. So, there’s also the risk of sparse data that is at the disposal of the insurance firm. They need to go digital very quickly to acquire data-driven insights and build that conversation directly with their end consumer. Otherwise, they are going to find themselves even more removed from the marketplace. In 2014, there were approximately 40 billion debit card transactions at an average swipe fee of 31 cents each, equaling $12.4 billion in total. How can financial institutions grow their share of this pie by winning more account holders through advocacy, they stand to reap tremendous profits? 45
  • 46. If you look at the traditional consumer wallet of payment products, credit cards have generally been preferred over debit. Credit card companies offer more attractive products propositions as well as promotions, on the back of relatively higher profit margins available to deploy into campaigns and benefits. Credit card transactions are also generally of a higher average ticket size, larger volume as compared to debit card bill transactions. At the same time, debit card transactions originate from the savings or checking account of the banking customer. That pool of savings and checking balances is significantly larger than credit card limits and spend globally. As more young adults join the workforce, earn salaries and spend disposable income on discretionary lifestyle-driven items, expenses, debit cards are very well-positioned to be a payment product of choice. But the player that is going to capture a sizable share of this particular pool will need to intensively harness data-driven insights to be able to offer their debit card holders ultra-personalised choices that are time- and context-relevant. Finally, to wrap things up, where do you see banking in the next 5 years? And in the next 20? There are many themes that are coming through. One is local vs. global. In the previous era, the global banks ruled; in the new era, it is likely to be the local banks that are going to rule. For example, in Asia from the 90′s till the first half of the new millennium, foreign banks like Citibank, StanC, HSBC, etc. pretty much owned the space of consumer banking innovation and service excellence. Whereas, if you see in the last 5-7 years, local banks like DBS and OCBC in Singapore, BCA in Indonesia, CIMB in Malaysia, HDFC and Yes Bank in India, they have all rapidly gained ground and are now relatively in very good position. With relatively robust balance sheets that were less affected by the GFC, global-standard infrastructure, and governance and Banks need to go digital very quickly to acquire data-driven insights and build that conversation directly with their end consumer.
  • 47. build up of the strong talent pool, they are in a very good position to win the market going forward. The second theme is that, physical vs. digital. Previously, we had the traditional brick & mortar, high human touch-centric delivery model. We are entering a digital omnichannel paradigm now. Third is innovation – previously, innovation was incremental, largely process-centred; whereas, going forward, it is going to be rapid innovation, which is going to be partner-driven, where you have Fintech players co-create new ideas. All these are in the next 5 years. In the coming 20 years, it is hard to crystal-gaze. It appears that politicians want to go back to where banking was at the turn-of-the-century! Serving a societal objective, serving the needs of the everyday consumer, safeguarding small savings. We might see the industry morph into two ecosystems. One, which is a large utility- oriented industry serving the small saver, highly regulated; and another a niche industry not funded by the taxpayer, catering to the more sophisticated consumer. I think that there will, however, be a few secular drivers: digital, omnichannel, global, and big-data driven business actions. If you look at the traditional consumer wallet of payment products, credit cards have generally been preferred over debit. 47
  • 48. Highlights • We’re witnessing the creative destruction of financial services, rearranging itself around the consumer. Whoever does this in the most relevant, exciting way using data and digital, wins! • Every bank now has or is involved with a fintech bootcamp, incubator or accelerator- programmes that help plug into startups to work on ideas. • If any bank wants to engage with millennials, it needs to put a digital bank out there. • Banks need to go digital very quickly to acquire data-driven insights and build that conversation directly with their end consumer. Go back to the Table of Content
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