Banks hold a tremendous amount of data about their customers, but 2016 could be a breakthrough year for putting it to work.
The popularity of data analytics has been building for a few years now, but should regulatory costs begin to level off, observers predict that banks will invest heavily in software or services that help them use the data to make smarter business decisions.
"There's a greater appetite from banks to invest in analytics tools," said Ed O'Brien, director of the banking channels practice at Mercator Advisory Group, who wrote in a recent research note that tech will be one of the biggest investment areas for banks in 2016 and beyond.
"For the first time in a while, there's a discretionary budget," he said. "There's not as much money going towards regulatory compliance as the last few years; some of that has freed up."
In some instances bankers are responding to their customers' requests. For example, clients of State Street and other custody banks are said to be overwhelmed with the amount of data they can access and are turning to their banks for help.
"Clients have a real need to turn data into information," said Lou Maiuri, who heads State Street's Global Exchange, a unit the bank created in 2010 dedicated to data and analytics. It has 700 employees.
Maiuri said he is "pretty bullish" about the increased demand for data analytics tools in 2016.
Risk management is one of the hottest areas for Maiuri's group. Earlier this year, it formed a consortium with UC Berkeley and Stanford University on a new research center focused on applying advanced data-science techniques to manage and mitigate economic and financial risk.
For more traditional lenders, data analytics are being adopted to improve the user experience. The tools help banks offer customers more personalized and customized services and products, O'Brien said.
"There's always been an interest from line-of-business heads [in analytics tools], but now we're starting to see even more excitement," added O'Brien. "Banks understand that in order to deliver an outstanding customer experience, they need to know more about their customers."
The largest banks, such as the Royal Bank of Scotland, are using analytics to recreate the personal touch that is often lost in such institutions. Such services include things like alerting customers when they paid for something twice or alerting them when they forgot to take their cash from the ATM.
The trend of investing in analytics extends to smaller banks, too, said Frank Rohde, president of San Francisco-based Nomis, which provides pricing optimization analytics tools to banks.
"They may not need the same level of sophistication, but a number of executives in smaller banks are investing in analytics tools, knowing they need that capability to compete and be viable," he said.
Rohde also agrees that 2016 will be a banner year for investment in analytics by banks, largely because there are a lot of banks that have yet to explore analytics.
"We're surprised [when meeting with banks] at the lack of technology they have deployed into understanding customers and customer behavior, and that's something they're starting to invest a lot in," Rohde said.
Ovum, a London-based financial research firm, predicted in a report earlier this year that bank technology spending worldwide would increase by 4.7 percent in 2015 over 2014, and predicted similar levels of growth through 2019.
"Data and analytics will be key to the developments in digital channels," said Kieran Hines, the lead for the financial services technology practice, in the report. "In the next round of major platform developments though, it will be the use of data analytics in real-time that will act as the key differentiator."