Why Big Data and Big Brother are Big Deals for Small FIs

 Author: Lee Wetherington, lwetherington@profitstars.com

Google is watching you. It recognizes your face. It knows what you like, where you are, and what you’re looking for. It has both satellite and street-view pictures of your house. It monitors your email and online chats. And it knows about your secret passion for knitting Hello Kitty® hats.

But don’t worry. Google has a privacy policy. 

Google’s newly consolidated privacy policy has drawn a lot of criticism and generated a lot of buzz. At the heart of the debate is a struggle to balance privacy against relevance and convenience. The trade-offs are nuanced, and opinions vary wildly by age and geography, but the debate is one that has significant implications for the future of financial services.

The Big Deal with Big Data and Big Brother

Historically, community banks and credit unions have been very conservative with their customers’ and members’ data, and for good reason. Security, regulation, and privacy are paramount in financial services. Beyond anomaly detection for fraud, however, many institutions literally ignore the data they so diligently protect.

That’s about to change. It must change for community financial institutions to remain viable, relevant, and, ironically, trusted long term. This doesn’t mean banks and credit unions have to “sell out” or compromise the security or privacy of the data they safeguard. Rather, they can intelligently and transparently mine that data to provide better financial advice, products, and services. Failing to do so will ultimately place them at a clear, competitive disadvantage.

The good news is that banks and credit unions enjoy three very distinct advantages in a data-driven world, and they should leverage these advantages to the hilt.

The FI Trust Advantage: 3‐to‐1

In a world where consumers’ every move is tracked, stored, and analyzed by third parties like Google, Apple, and Facebook, there’s a lot of paranoia, and, fortunately for banks and credit unions, a higher premium on trust.

Financial institutions enjoy a 3‐to‐1 trust advantage over third parties, merchants, and billers. According to Javelin Strategy & Research, about 38% of consumers are comfortable or very comfortable with letting their banks or credit unions track/analyze their transactions in order to provide better service. By comparison, only 10% of consumers are comfortable permitting third parties, merchants, or billers to do so.

Financial Institutions Already Do Data Analytics

While many financial institutions forswear ever doing anything with or to their customers’ and members’ data, they discount all of the data analysis, correlation, and anomaly detection they’re already doing in the fight against fraud—often by way of sharing data and collaborating with other financial institutions and crime enforcement agencies—to better protect those they serve.

In short, banks and credit unions already employ data analytics to fight fraud, and this rather common means of protecting consumers builds trust, not the opposite. If financial institutions are already closely monitoring customer and member data, why not also use that analysis to help those same customers and members better understand their finances and make better financial decisions?

This is already happening, and it’s called Personal Financial Management (PFM), the second generation of online banking. To immunize your institution against privacy concerns, allow customers and members to opt in or out of this better, more personalized service.

The Information Advantage: Transaction Data is the Holy Grail of a Data-Driven World

It’s easy to be intimidated by goliaths like Google. Google enjoys a 78% share of online search, and its Android operating system drives almost half of all smartphones globally. It also boasts a fifth of all Internet browsers and almost half of all online advertising.

From these enterprises, Google derives massive amounts of online/mobile behavior, search, and geo-location data, but it lacks the holy grail of predictive analytics: native demand-deposit account transaction data.

Banks and credit unions are sitting atop the most valuable, reliable, and actionable information available in the age of Big Data. If they employ the same level of intelligence and responsibility mining transaction data to improve personal financial management as they do already to fight fraud, financial institutions will enhance their trust advantage and gain loyalty from those they serve.

Just don’t wear the Hello Kitty® hat. Some things should remain private.