Last week, we released our analysis of the Consumer Financial Protection Bureau's request for information (RFI) on data-aggregation services. Like many CFPB initiatives, this one has been widely discounted on grounds that the CFPB will soon be disemboweled. Maybe so, but the data-aggregation debate isn't a typical one between financial institutions and consumer advocates. It's a critical battle between different industry sectors over the most precious asset owned now by every established financial services firm: its customer database. If third-party service providers unlock this door to targeted marketing and cross-sell cherry-picking, the fundamental structure of every diversified financial services company will be profoundly undermined. Talk about a disruptor.
Decades ago, Walter Wriston, CEO of Citibank, said, "Banking is a branch of the information business." He proved it then by turning Citi into a global retail-finance giant brought low only years later by actions far away from this game-changing insight. Since his era, all the big-bank CEOs agree with the Wriston dictum — yes, it's that iconic — as does every CEO I know at large brokerage, insurance, and retail asset management shops.
However, like many sanctimonious statements, bowing before the information gods has generally not led to strategic action to propitiate them. Secure in the "stickiness" of consumer accounts because of the time it takes to change a financial services provider, most diversified financial companies have done little to make their consumers really happy or to effectively cross-sell (see my prior comment on cross-selling post-Wells Fargo for examples of failure here).
CEOs don't have this comfort zone anymore. Consumer accounts aren't close to sticky because data aggregators have their WD40 readily at hand. The CFPB's RFI clearly thinks that allowing these nonbank service providers and cross-marketers into proprietary consumer data is — assuming consumer consent — a very good thing. The RFI is replete with CFPB observations about how data aggregation could promote financial inclusion — a sweet thought, but hard to accomplish unless aggregators are a good deal more philanthropic than I suspect them to be. The bureau also talks much about the benefits consumers would achieve if, for example, a third party reached into their data, saw a bit of cash lying around, and then proffered commercial products such as vacation packages.
The New York Times on Wednesday had a story about subprime auto finance that starts with the tale of an older woman living on a small fixed income sold a used car with a $20,000 loan because she liked the idea of getting the "pearl" necklace and fishing pole that came with the car. Her fishing pole was real, but the image is a compelling one for data aggregation — give third parties a line into our data and we could well get painfully hooked.
Are big, diversified financial companies stalwart champions of the consumer data they now control? Of course not. Wells Fargo is a sad testament to the sorry state of cross-selling. However, it's important to recognize that the cross-sell scandal at Wells isn't the result of data use — it's the consequence of inappropriate incentive compensation. Wells employees didn't use data to find vulnerable customers — they reportedly ran to nursing homes, bus stops and similar venues to snag the unwary even as they stole data to open fraudulent accounts.
What's to stop a third-party aggregator from establishing incentive structures that make Wells' look ladylike? No rules apply and startup business models almost surely mean that the heat will be on for sales, and lots of it.
The battle over data aggregation thus is not only about saving the franchise value of diversified retail-finance companies. It's also about recognizing that personal financial data is different from video-streaming or coffee-maker shopping selections. Big data may well expand our purchasing options when it comes to these nonfinancial products — although what I've seen on offer makes me doubt this increasingly axiomatic assumption. But financial data is different.
Financial data is the future of each individual and household in terms of wealth accumulation, educational access, retirement security and other life-critical objectives far, far different than getting a really good deal on a pair of socks in my size and preferred color. Large financial services firms are right to fight data-aggregation access to protect their franchises, but they'll lose this fight to arguments based on innovation and "inclusion" if they do not quickly enhance their own value proposition so that explaining why a regulated company protects consumers better than highflying startups is a truly credible defense to a very skeptical Congress, CFPB and Trump administration.
Karen Shaw Petrou is managing partner of Federal Financial Analytics.
Corrected December 5, 2016 at 1:46PM: The following originally appeared on the Federal Financial Analytics website.