Who owns your data?
If this question has not yet occurred to the masses, it soon will. From Facebook to Google to Amazon, in recent years consumers have become more aware of the fact that they do not actually own their own information.
And by extension, they don’t control what happens to that data and how it can affect them. If you want proof, just try listening to your favourite song on iTunes after you switch to an Android phone.
Fintech companies are starting to wrestle with some troubling implications of this reality. They have begun to bring forth some novel innovations in recent years, from real-time payments to flat conversion to cryptocurrency wallets. Consumers’ access to financial tools has never been as strong and varied. But it comes at a heavy price.
The answer to competition is not to block access to customer data.
Today, one can use tools to round up their e-commerce and brick-and-mortar purchases and direct the difference into a savings account. We can use web tools to search for any available discounts on websites at points of purchase. We can even use AI to help save for retirement and reach our financial goals. Yet most of the core financial data still resides with banks and financial institutions, as users of person-to-person payments app Venmo are discovering. As a shot across the bow to Venmo, a consortium of banks launched Zelle, a payments app that returns control of user data to financial institutions.
The issue with third-party apps
Customers of PNC Bank have recently reported problems integrating Venmo with their PNC-housed accounts. Upon complaining, they have been told to consider using Zelle, which just happens to be controlled by PNC, among others. When questioned about Venmo integration, PNC spokespeople claimed they cannot be sure of general aggregators accessing customer data. Given that this involves PNC customers requesting access to their own accounts and funds, where does the problem lie?
The problem is that banks are realising that the democratisation that fintech companies bring to consumers is causing a disruption to their business models, and likely to what draws in their customers. Cab companies went through similar issues with Uber and Lyft and launched a variety of their own competing solutions. This is an almost identical situation, even though it’s in a different industry.
The benefit to this competition is that it has spawned innovation. Cab companies have long been the lazy recipients of the needs of people in urban centres. Uber and Lyft prompted them to change their business models to increase customer options, and hopefully, customer satisfaction. Will banks follow suit? They must, and just maybe Zelle is the first step.
Disruption in finance
The answer to competition is not to block access to customer data, especially when access is requested by the customer. Banks must embrace this bold new order or risk being left behind by the very fintech companies they fear most.
Change is already beginning. Wyoming, in an effort to recruit more forward-thinking businesses to the state, has modified regulations to enable fintech companies to broaden their offerings. At least one cryptocurrency exchange appears to be making motions to become a quasi-bank, allowing for potentially easier crypto to Fiat movement. In time, this will enable easier access to real-time payments, which in time will enable cross border payments, and so on.
Technological disruption has occurred in almost every industry, but due to the regulations imposed in the finance sphere, they have managed to survive without many new competitors arising. As consumers become more aware and intelligent, they will start to expect more from their banks. Innovation and disruption is going to become necessary in the industry to keep customers happy. It will always be a challenge for incumbents in any industry to embrace change, but in order to survive, companies must be willing to cannibalise parts of their businesses. Start-ups recognise this, and it is time that big banks did too. Evolution is one-part construction, one-part destruction. Think of it this way: why didn’t Maxwell House become Starbucks? Or if you’re looking for a more recent example, why didn’t Yahoo become Google?
The future of banking
Where this leads will play out in the years to come. The Clearing House has already launched a US-based, real-time payments platform for American banks and financial institutions. The Federal Reserve has also announced plans for a similar platform that will launch by 2022.
Fintechs are responding to consumer needs, wants and demands faster than most legacy banks can tackle. There will likely be some mergers and acquisitions in this space; in fact, much of this has already started. Yet the consumer will always want more. In time, this will likely mean a rethinking of data stewardship, which will create a need for more updated legislation, regulation and oversight.
By Chuck Fried, CEO and president of TxMQ.
Great piece and it correctly hits on the key challenges…and opportunities. By contrast, the roadblocks mentioned are being addressed in a completely different manner in places like the UK and Brazil, where fintech investment and digitization of financial services is exploding. The main difference is the regulators have stated and mandated that incumbent banks and the banking system will share cust. data with the APIs behind the fintech companies developing them. They’re opening up the system, so that such incumbent roadblocks (i.e. – resistance to competition) are not an impediment to digital access to a myriad of services average citizens, many unbanked, have not had access to. We need a similar effort here if we want the “democratization” of financial services to reach its potential.