In banking, brokerage, and insurance, it has long been assumed that the data generated about how much a consumer has, wants or could obtain are not the consumer’s, but rather the property of the financial institution and that of any other entity with which the company partners for profit. Indeed, a recent McKinsey report urges banks to “reclaim their rightful ownership of the customer relationship.” But recent steps by the Consumer Financial Protection Bureau call that ownership into question.
The CFPB’s new data-aggregation principles posit a de facto ownership right of personal financial data by, for and to the consumer. More recently, outgoing CFPB Director Richard Cordray sent letters to CEOs of traditional financial institutions urging them “to think creatively about how you can put more control directly in the hands of your customers.”
Fintech companies stand with consumers in asserting such rights over their traditional financial providers. Precisely because of the importance of personal data to fintechs’ own business model, platform companies do not need to learn that data ownership and access create a new financial value chain for which their business models — not those of traditional banks — are already designed.
The most important policy question facing banking, brokers and insurance companies thus isn’t the heft of new capital rules, the barriers between banking and commerce, or even cybersecurity. It’s setting a financial-policy framework in place that very quickly defines financial data ownership rights across the financial value chain. Fail to do so now and all the regulatory impediments to direct fintech entry will be no defense against a future in which banks, brokers and insurers have only limited distribution rights to product delivery or are relegated or even disintermediated into the type of oblivion known all too well to the platform company’s prior targets.
Fans of fintech may accuse me of being alarmist about the franchise-value challenge posed by platform companies with consumer data firmly in their hands. Surely, these skeptics say, secure within a regulatory fortress that recoils intruders, traditional providers will control the pace of change, keeping consumer data in the strategic equivalent of the vault. Banks will, it is said, partner with fintech firms, not fall prey to them.
This strikes me as the same sort of franchise-value fantasy to which some community banks clung when they claimed that their customers wouldn’t flee to big-city banks because everyone wants to be called by name upon entering a bank branch. Large banks know that customers don’t come to banks to feel warm all over. They dispense with friendship and coffee to control customer data and determine from it which mix of manufactured and distributed financial products generates the largest return on equity under the increasingly draconian rules that now define retail finance. The mix of intermediation, trading, advisory, asset-management and infrastructure gives the largest banks protection where products are not premised on data control and consumer choice but rather on unique access to central banks, statutory requirements or other factors.
Still, large bank charters can be easily hollowed out, especially when the bank’s business model is fundamentally retail-product delivery. Robo-advice, “comparison-shopping” sites and other fintech products also pose significant risk, and not just to large banks. Even without new law or rule, the barriers between banking and fintech are, at best, porous.
The fallacy in all of these traditional-finance strategies is that the traditional provider manufactures the one thing the consumer has to have and thus controls the distribution chain because the consumer gets to the product only through the traditional provider’s portal. In short, you get to see which shoes are right for you only by walking into the store with your feet.
Of course, one can keep one’s feet comfortably at home and see all the shoes you could ever want, trying them on upon arrival and sending back the rejects without ever going beyond your front door. Basel’s recent consultation on the challenges posed by fintech captured this. Regulatory barriers are weak to slow down aggressive nonbank competitors devouring the most profitable parts of the intermediation value chain. As I detailed in a recent talk, Basel surveys the product landscape and concludes that banks face only three likely futures: becoming distributional outlets for nonbanks, finding themselves relegated to core services such as costly deposit-taking or infrastructure, or being cherry-picked into a disintermediated death.
Basel says banks can beat back these grim futures by becoming what it calls “better banks,” but it is remarkably pessimistic about this prospect. Further, a new Financial Stability Board report on artificial intelligence and machine learning shows how platform companies could quickly become dominant purveyors due to de facto ownership and control of customer financial data.
Financial policy decision points
Financial policy will not provide the barrier to fintech entry for which many traditional providers desperately pray. Indeed, many policymakers are pushing for fintech to crowd out traditional providers as quickly as possible. The European Union’s new rules dictate that consumers own their personal financial data, radically redefining retail finance as a business in which traditional providers search desperately for applications and partnerships that let them keep at least a bit of the value chain. The U.K. has gone even farther, aggressively opening up benefits to fintech so that traditional providers face such stiff competition that many are replaced. U.S. legislation proposing “sandboxes” and regulatory proposals for special-purpose charters are also premised on the benefits of fintech innovation outside the boundaries of long-established financial institutions and to some degree also of their regulators.
However, financial companies are different than shoe companies, not least because financial companies can cause crises, macroeconomic growth depends on them, and economic equality suffers when financial services are hard to get. As a result, who owns a customer’s financial data and what is done with it in financial transactions has greater structural impact than the changing construct of retail commerce. The question of financial-product delivery goes beyond traditional efficient-market rationales and must involve careful consideration of safety, stability and financial inclusion.
How best to make the case for a traditional franchise in the face of reconfigured data ownership rights and a dizzying array of new technologies? Many banks are busy building partnerships with fintech companies, digitizing internal operations and otherwise tidying up their tech profiles. This takes a lot of time and more money than many companies can readily part with. But an incremental strategy based on near-term improvement misses the fundamental tectonic change occurring beneath traditional banks, brokers and insurers. Without a coherent vision of the consumer-data relationship and what can best be done to serve the consumer through it, companies risk becoming as anachronistic as the carriage-makers who thought they could prosper as automobiles were introduced by building chassis. Once Henry Ford and Alfred Sloan figured out how to control both manufacturing and distribution, traditional providers were toast.