FinTech’s Data Power and Data Control
Data and its use and control, more than any technology innovation, took a primary position at this year’s Money20/20 conference and exhibition. This year’s annual event brought more than 10,000 financial-services executives, entrepreneurs, and technologists to Las Vegas for a whirlwind of meetings, presentations, and demonstrations.
From a competitive standpoint, data, analytical power, and the ways to use them to enhance the consumer’s financial experience, whether retail or B2B, showed both the direction of innovation and the thrust of regulation. A good number of conversations we had with European and U.S. bankers and payments-technology providers noted the dearth of innovative ideas at the show.
This is not a bad thing. We were struck more by refinements made to existing ideas and technologies, a solidifying of financial innovations from the past several years, as they move along the product development cycle from bleeding edge to cutting edge to state of the art.
The digital product challenge in the United States still is the 40-something year old payments infrastructure and the need to bring it up to realtime speed. It was fascinating to hear the limitations of the U.S. payments system reported on by the team at United Kingdom-based VocalLink.
The provider of realtime payments infrastructure, notably in the U.K., Singapore, and Indonesia, presented results of a survey of U.S. millennials and their attitudes and practices toward payments, showing that they put the most trust in banks when it comes to payments. “When we told them that immediate payments were available in other parts of the world, they would say, ‘Why don’t we have that here?’” said Cara O’Nions, VocaLink’s director of marketing and customer insights.
Why indeed. Innovation in payments and FinTech is on the top, customer-facing service layer. The delivery and infrastructure layers are largely untouched. “Financial services has not been transformed at the core,” said Adam Ludwin, CEO at Chain, which provides blockchain infrastructure designed for financial institutions. Chain made a splash with an announcement of a B2B payments network with Visa and the release of its core protocol to developers on the open-source Github code repository.
The session on the U.S. Federal Reserve’s guidance of faster payments solutions highlighted the difficulties and different approaches. The differences concern the amount and type of data that the various solutions can handle. The card networks seeking to speed settlement are thin on data, and the cryptofinance solutions redesigning infrastructure for the internet, in their present form, are not robust enough.
They seem suitable for consumer-oriented retail payments but inadequate for large-scale B2B corporate payments. The international approach seeks to couple international payment data standards with immediate funds available to handle robust data for payment reconciliation.
I’m sure this is why the Fed has said it will likely accept different approaches to faster payments in the United States. It will make it easier if not better to reconcile the differences in approach and their implications for the balance of power between large financial institutions and small financial institutions, corporations and small business, and consumers.
Alternative Lending is not Alternative Anymore
Data is a competitive advantage and differentiator in the lending sector, too. I spent a lot of time talking to executives from firms that generally are lumped together in the category “alternative lending.” It’s been a decent tagline to use for P2P, asset-based, marketplace, and any other lending model that seeks to make loans that banks cannot, using technology, analytics, and alternate credit data to lend to individuals and businesses that fall outside bank underwriting criteria.
What impressed me here is that the “alternative” tag doesn’t seem to fit so much, with well-established businesses making billions of dollars in loans. Granted the numbers pale in comparison to the large banks, especially on the consumer side, but they are serving an underserved market, especially as they look to small business lending.
Some of these lenders are working in partnership with banks, as a source to refer business that the banks cannot write, as a named lending partner for some customer segments, or as a lending technology platform provider. Financial services law and consulting firm Manatt, Phelps & Phillips released a survey showing that some 81 percent of regional and community banks are already working in tandem with FinTech firms.
Money20/20 marked the debut of Lantern Credit, which seeks to partner with banks on the consumer credit-card side of the lending business. On the consumer side, Lantern presents credit reports and card offers like Credit Karma but with enhancements like an interactive credit profile and, Lantern claims, a more accurate underwriting data model. The service seeks to have a higher acceptance rate for the offers it presents or to work with a single bank’s card portfolio, presenting the best options based on its credit-scoring data.
Like many new FinTech services, data, analytics, and usability are the keys to product differentiation and consumer acceptance. Lantern supplements its Vantage credit scores with bank-account data obtained through Envestnet Yodlee and Plaid bank account-aggregation services.
At the same time, the nonbank lenders look to cash-flow based transaction data, provided through bank statements if not through aggregation services, for their decisions. Payment processors PayPal and Square both use the transaction data from their point-of-sale systems as a gauge of credit-worthiness for their small-business lending operations.
Who has control of all those data came immediately to the forefront at the beginning of the conference. At issue is customer permission to access bank data. The banks would just as soon maintain control over data within their institutions, the data aggregators want to make sure they can maintain data access, and the nonbank payment services give a little access.
Richard Cordray, director of the Consumer Financial Protection Bureau, was not silent. During his prepared remarks to the conference, he said he was “gravely concerned” by reports that some banks are looking to “limit or even shut off, access to financial data” rather than find ways to grant safe, secure access. “We believe consumers should be able to access this information and give their permission for third-party companies to access this information as well.”
The banking industry took note.
A number of technologists and bankers I talked to also took note, warning about the United States going down the path of the European Union. The European Payment Systems Directive 2 (PSD2), which gives consumers control over their bank data and dramatically limits bank revenues from payments. They also must give any licensed entity access to bank data with only the account holder’s permission.
It’s a tension that’s sure to continue, in all areas of the business. “Sending money should be like email. You should be able to send it anywhere in the world, and it should be free,” said Brian Armstrong, founder and CEO of Coinbase, the leading bitcoin exchange. He made a compelling case for the future of bitcoin during a digital currency session.
Unless you are a bank or a card network. The FinTech ideal has not made as much of a dent in financial services, noted banking author and analyst Chris Skinner in the introduction to his digital banking session. Large banks have only grown larger as FinTech firms have started their product development.
But they’re also “in denial,” he said. The data and network advantages remain strong, but so are the technological and regulatory pressures.