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Retail banking - Cracking the vault

The grip banks have over their customers is weakening

Oct 24th 2015

A FEW dollars spent at Starbucks, a monthly mortgage payment, a Netflix fee,

Starbucks again: bank-account statements are not exactly exciting stuff. But

there is gold hidden in this by-product of our financial lives, or so many

budding technology firms believe. A host of startups crave access to the data

and are pitching services, from budgeting apps to cheaper loans, to those who

open their books to them. Yet banks worry that co-operating is the first step

towards losing the lucrative grip they have on their customers.

Squeezing insights out of a bank statement is hardly at the cutting edge of big

data. Years of salary payments confirm stable employment; bounced cheques hint

at carelessness; regular green fees suggest an interest in golf. Banks

implicitly use balance and income information when making loan decisions. That

has typically given them a leg up over such rivals as consumer-lending

companies, which have to base offers of credit on less detailed information.

Add the fact that switching bank accounts is seen as a chore, and incumbents

are in effect shielded from competition. But three things have changed in

recent years. The first is the plethora of fintech competitors trying to take

on banks. The second is internet banking, which has given nearly everyone

access to reams of their own financial information in handy digital form. The

third is regulation, which is swinging in favour of the upstarts by forcing

banks to share the data generated by all those trips to the coffee shop.

Data are already seeping out of banks digital vaults and, in the process,

giving a sense of why such leaks are damaging. A slew of firms, such as Mint in

America, offer to aggregate the data from customers various bank accounts,

credit-card statements and retirement-savings plans in a single place. This

gives customers a comprehensive view of their finances. Because these firms

have a startup s focus on being easy and appealing to use, their apps make most

banks mobile offerings look clunky.

Worse, banks efforts to sell multiple products to current-account holders are

being undercut by the financial aggregators, which pitch financial products to

customers using the data they have accumulated. If we see you are paying 4% on

your mortgage and there is a product in the market that would let you pay 2%,

we think you will want to know about it, says Joan Burkovic of Bankin , a

French aggregator. Your bank would rather you didn t.

Among the keenest potential users of personal bank data are peer-to-peer

lenders, platforms that match those wanting to borrow money with those wanting

to lend it. The likes of Zopa in Britain and Lending Club in America boast

about their algorithms ability to sift good credit risks from bad ones. But

the computer programs are only as good as the data fed into them. Information

from credit bureaus is useful but limited. Bank-account information is

probably the most valuable data source for underwriting credit that isn t in

widespread use, says Martin Kissinger from Lendable, a peer-to-peer firm.

Not only the balance and cashflow are interesting; individual transactions can

be revealing, too. How much a small business pays in taxes, say, can give

insight into its profitability months before it files its accounts, says Anil

Stocker of MarketInvoice, a lending platform. Payments to and from directors,

or refunds to customers, can also help gauge its financial health.

Banks are understandably hesitant to send their customers information to

potential competitors, even with the customer s consent. In America banks have

long allowed customers to download their data to compile tax returns; that

capability is now being jerry-rigged to feed into other services (Mint belongs

to Intuit, a purveyor of tax software). Regulators compel British banks to

allow customers to download data in a standard-format spreadsheet.

If banks are not willing or obliged to share, there are services that will

retrieve current-account data without the bank s approval. These startups ask

customers to share their online banking passwords, in order to log into their

accounts and copy and paste page upon page of online statements. Such scraping

happens in a legal grey area. Banks moan about their terms of service being

breached. British regulators frown upon it, for security reasons, making life

difficult for would-be Mints; American regulators are said to be unhappy as

well. Services such as Yodlee, a Californian outfit, offer to scrape or

download bank records, whichever is least inconvenient.

Online lending platforms are wary of scraping: customers are understandably

reluctant to hand over their passwords. Only people turned away for credit

elsewhere (often for a reason) are likely to do so. Instead, aggregators often

make do with data which are patchy or delayed. The likes of Zopa and Lending

Club, for example, merely ask for smartphone snapshots of bank statements a

retrograde step, by fintech s standards, and one that limits the insights they

can gather.

Policymakers in Europe have concluded that forcing banks to share data at

consumers request will yield big benefits for the banking public. Earlier this

month the European Union adopted a directive on payment services, which will in

effect force banks to impart data to third parties in a convenient format.

Customers will also be able to authorise fintech firms to make payments from

their bank accounts.

Banks say publicly they are open to the idea of more competition. Some are

starting to release data more readily. But many fear they are fighting fintech

with one hand tied behind their backs. Startups operate with the privacy mores

of the technology sector; consumers opt in to their products, and so expect to

be bombarded with ads. Banks are more like utilities, trusted to safeguard

information rather than use it. When ING, a Dutch bank, last year mulled

offering advertisers the opportunity to pitch to its customers based on their

spending data, an outcry forced a quick reversal.

Having seen consumers desert their branches, banks now worry that customers

will desert their apps and websites, too. Bosses glimpse a future where

customers use banks merely as a utility, depositing their money there but using

unregulated startups to manage it. Smoother data-sharing would make that a

reality. It is a prospect that should indeed frighten bankers as much as it

delights their customers.