Disrupting payments and unlocking the value of data

(First published on Instapay Today)

PSD2: the latest tightening of data regulations will require strategic, operational and infrastructural changes for banks and financial institutions. 

Is it an opportunity or a threat though? Judging from current opinion, it appears the financial industry hasn’t quite made up its mind. If there’s anything worse for the sector than a clear and present threat, it’s uncertainty.

In a recent survey conducted by open banking platform Tink, one thing is clear, financial institutions dislike regulation. They named it as the biggest threat to their current business models. With the final PSD2 deadline looming on the horizon, there is little time for firms to get wrapped up in an existential crisis though. Most are soldiering on, despite their doubts, to ensure they can comply with the new directive. They are investing in digitization, greater security and privacy. 

However, it’s clear that they need to do more than the bare minimum in order to not only survive, but thrive, in this new ecosystem. For banks, payment service providers (PSPs) and other players, PSD2 unearths an opportunity for them to innovate and compete.

Data should increasingly be viewed as a natural resource like oil. Yes, data is the new oil is a somewhat tiresome cliché, but sitting on an oilfield is not much use unless you have the right tools, infrastructure and capabilities to make something out of it. In that sense, firms need to grapple with how they can turn what is essentially a commodity, into a competitive advantage.

To benefit from the opportunities that will arise from PSD2, there are two key approaches any financial or payments services firms can take in the new landscape:

1. Monetize their data – Increasingly, no one party will have a monopoly on data. This means firms will need to start thinking about how to leverage their distinctive data sets as part of a data monetization strategy – without compromising sensitive personal information.

When it comes to monetizing data, many are enticed by the opportunity, but they may view it as a challenge. They may raise questions over data ownership and privacy. 

However, there is great value in anonymized, aggregated information that is used for business or investment insights. In finance, the interest is in identifying broad trends and patterns – the focus is never on the who but the what and how much. That means it’s possible to extract value from this data while preserving privacy.

Outside finance, there are other examples of how sensitive data can be used in a way that benefits the public. For instance, Uber shares anonymized data aggregated from billions of trips taken by its users in order to help urban planning around the world. 

Transparent and responsible use of this data can open the door to new revenue streams. Data might not be the core business for many of these firms, but revenue from this can quickly become meaningful as the quantity and quality of data grow over time. 

The value of their data can also increase when combined with multiple sources for consumption by third parties.

It can sound counterintuitive to deal with the threat posed by open data by sharing it even more widely. But this allows firms to strengthen existing data and play a more important role in the transactional ecosystem. Payments providers are well-positioned because they have unique insights into both merchants and consumers. 

2) Get better customer insights – The changes that will be brought on by PSD2 will show that no incumbent can afford to rest on their laurels. The classic mindset of getting all your financial services from one provider is going to change. Many payment experiences will change and become more seamless.

One hot topic is instant payments. While consumers are the biggest benefactors of this trend, merchants can also benefit from it in a number of ways. Instant payments are data-rich so they can leverage real-time data like never before. 

What does this mean for firms in this industry both big and small? Well, it will become more important than ever to convert data to actionable insights. They can use such insights to improve the customer experience, drive loyalty and even introduce better offerings.

This can help incumbents become much more data-driven and customer-centric in their approach, leading to better decision-making. Meanwhile, smaller players that can nimbly respond to these insights can outmaneuver bigger competitors and eat away at their market share. 

Ultimately, firms need to tackle PSD2 from a strategic perspective and not just from a compliance perspective. The ones that proactively capitalize on these opportunities can future-proof their business and disrupt, rather than be disrupted.

An Alternative Way of Seeing Data Monetization

From early-stage payments fintechs to giant acquirers, every company is asking themselves the same question: “How can we turn our data into dollars?”

After all, most companies these days are to some extent data companies, whether they are aware of it or not. Many businesses try to leverage certain types of data they capture, but there’s also a lot of valuable ‘data exhaust’ they could use without ever sharing any personal or sensitive information. This is known as alternative data and it is being rapidly monetized and shared in the US and Europe.

What is data exhaust?

No, it doesn’t refer to the exhausting nature of big data. (Though there is something to be said about that too!)

Data exhaust refers to the excess data that is generated as a byproduct of a company’s operations. Simply put, it’s all the data the firm might not know what to do with, or might not think is relevant to its core business. This amount is much bigger than you think – Forrester reported that on average, between 60% to 73% of all data within an enterprise goes unused.

However, with advances in IoT, machine learning and artificial intelligence, this rapidly growing volume of exhaust could hold much untapped potential. In fact, this data exhaust could end up being converted into valuable fuel, whether for better decision-making or new ancillary revenue.

Why is data monetization so hard?

Firstly, many firms struggle with what data monetization actually means. Some paths to data monetization are more obvious than others. We’re living in an era when exploiting data for advertising or marketing purposes has become a huge concern. Even when there is no threat to personal privacy, organizations still have to navigate reputational risks if there is even a whiff of data misuse.

Secondly, trying to glean insights from all this raw and unstructured data can be like finding a needle in the haystack. It’s a significant challenge in terms of resources and infrastructure, requiring data expertise that is usually not found in-house.

So what can companies do to tackle this?

Two routes to monetization

These are the two primary paths to data monetization that companies can choose to take, though they are not mutually exclusive. In fact, both paths can intersect and one can lead you down the other:

1) Getting new business insights – This is an internally focused path that may not directly lead to money on the table. But it’s about leveraging data to improve operations or the customer experience. In turn, this could lead to higher profitability or greater efficiencies that result in reduced costs.

Alternative data can yield insights that we may have otherwise not considered. But it’s easier said than done because, as Forbes reports, 87% of executives are still not confident they’re able to leverage all customer data.

But first, every organization needs to take stock of its data assets and figure out which types of data potentially hold value. Then they need to assess whether they have the data management infrastructure, tools and resources to be able to extract value from it.

2) “Externally” monetize data – These days, the mere mention of “selling data” conjures negative reactions. But there are ways of monetizing non-personal data that is aggregated and anonymized. This can be valuable to people you may not be thinking of in ways you might not have imagined.

Opportunities may exist in markets that are new and unfamiliar to the data owner. For instance, firms can open up new revenue streams by selling their data to economists, analysts, investors and any other parties that are seeking to gain new and unique insights.

Raw data by itself can be one-dimensional. It is when data from different companies and sectors is combined and enriched with complementary data sets that real value is created. For instance, a company working with vendors across the country might have data on national beverage sales. It could track these sales and provide additional insights back to the vendors to help them improve sales and promotions. The company could also share this data with beverage brands so they can finetune and optimize marketing by city.

Think about it this way: Doing nothing with your data is the equivalent of keeping all your savings under the mattress. It seems like a safe bet, but it’s outdated and you get zero returns. Data monetization is a smarter investment – it seems daunting at first but if you can find a safe, meaningful use case, your company’s data becomes a revenue driver rather than a sleeping asset.