To access to an extended paper which expands on the concepts introduced here, click the link at the end of this blog to download 'Establishing the trust anchor in the digital economy: the case for banks to become 'Data Custodians'. The original article was initially published in the Journal of Payments Strategy & Systems (peer-reviewed).
Banks' traditional role as 'Money Custodian' is increasingly threatened by the entry of non-bank and/or non-financial players into the payments and banking space. Now is the time for bank executives to embark on new strategic initiatives to assume the role of 'Data Custodian' in the digital economy.
This new role will support banks in securing their future relevance by establishing themselves as the trust anchor in the digital economy. Banks will provide the secure and reliable exchange and management of data-driven digital transactions in today's world of open, digital ecosystems.
To support banks to assume this new role of Data Custodian, INNOPAY has developed a strategic roadmap and highlighted key implications and critical success factors for bank executives to consider on their transformation journey.
Why should banks assume the new role of data custodian?
There are a number of compelling reasons why banks should now seek to evolve from being a Money Custodian to also become customers' preferred Data Custodian in the digital economy.
1. Banks are at risk of losing their trusted position in payments
Competition in the payments and banking space is becoming increasingly frenetic, and banks no longer possess a monopoly of payments and other financial products. New regulations have lowered the barriers to entry for non-banks, and new entrants from different backgrounds are driving innovation and competition by embedding financial services in customer journeys.
2. Regulatory reforms that aim to democratise access to data, open up new opportunities
Supported by a raft of reforms and proposed regulations, customers are becoming increasingly savvy about the value that their data represents and will seek to capitalise on this. As a consequence, there is an emerging need for Data Custodians to enable the seamless and trusted exchange of data, while safeguarding the interests of customers. By assuming this role, banks can secure customer relevance and new business beyond digital payments.
3. Banks can secure their future relevance by becoming the Data Custodian in data-driven digital transactions
Banks which act as Data Custodians will help to secure their future relevance in several ways:
- Increased brand relevance by providing customers with a single point of control for their data assets
- Creation of new digital services that are enabled by data-driven digital transactions
- Reversing the dynamic for large platform companies to monopolise customer data
4. Banks are well-positioned to become Data Custodians and facilitate digital transactions
Banks have the credibility and experience to facilitate data-driven digital transactions at scale. They already have a trusted relationship with their customers, and they have further strengthened their technological and operational capabilities through their PSD2, digital identity and Open Banking investments.
Strategic roadmap for banks to become data custodians
Banks can become Data Custodians through three mutually reinforcing roles: Open Bank, Digital Identity Provider and ultimately Data Custodian.
Role 1: Open Bank
Open Bank is a role in which banks facilitate their customers to safely re-use (financial) bank data and functionality in digital ecosystems. Banks are well-positioned for this role as it relates closely to their existing PSD2 and Open Banking initiatives. As such they have already developed important building blocks for consent-based access which are essential to become a Data Custodian.
Role 2: Digital Identity Provider
Next to being an Open Bank, banks can evolve towards becoming a Digital Identity Provider. The need for digital identity is growing, and banks are well-positioned in comparison to BigTechs due to their trusted position in payments and their current digital identity capabilities. Managing digital identities will help banks to increase relevance and brand awareness in their customers’ digital lives, generate new revenue streams and potentially drive efficiency in their own compliance processes.
Role 3: Data Custodian
Building on their capabilities as Open Banks and Digital Identity Providers, the future anchor product of banks (as Data Custodians) revolves around servicing customers with tools for digital identity, consent management and data sharing. Banks can exploit new services in these areas and potentially generate new revenue streams from customer-centric propositions that facilitate control over data and a fair distribution of the benefits created from data.
In the extended Paper, we look in detail at the key implications for banks to consider across these three mutually reinforcing roles, focusing on: strategic decision-making to secure future relevance; re-using existing capabilities to develop new data-driven, customer-centric propositions; and monitoring existing standardisation initiatives and participating where relevant.
Three critical transformation success factors for banks
Banks need to consider three critical transformation success factors as they embark on the journey to becoming a Data Custodian:
1. Agreed vision and strategic plan
For bank executives, the focus should be on developing a solid understanding of the different roles they can take in the digital economy to inform decision-making about the bank’s preferred role. They will need to perform a review of their strategy, objectives and technological and operational capabilities, concentrating on:
- Shaping the vision and strategy
- Identifying and prioritising opportunities
- Defining an action plan and capabilities
2. Defined approach for partnerships and industry collaboration
Based on the vision and strategy, banks need to identify potential partnerships to enable and/or accelerate the realisation of selected opportunities. Two types of collaboration are relevant for banks to progress their strategic objectives: partnerships and industry collaboration.
3. Future-proofed the operating model
Many banks have been slow to recognise the importance of fully integrating their Open Banking strategy and activities within their existing operating model. Similarly with regards to the role of Data Custodian, bank executives must realise that their Target Operating Model needs to evolve. Executives must transform and future-proof their operating model to meet the growing imperatives for:
- Development of customer-centric propositions
- Adaptation to collaborative ecosystems and open business models
- Modern IT infrastructure
Key recommendations for bank executives
As their role as Money Custodian diminishes, the time is right for banks to secure their future relevance by assuming the role of Data Custodian. As bank executives embark on their transformation journey, we make three recommendations:
1. Acknowledge that the role of Data Custodian is crucial to ensuring future relevance for banks in the digital economy
Executives should recognise that providing their customers with a single point of control for their data assets will enable them to:
- Capture new types of frequently occurring digital transactions
- Become the new trust anchor in the digital economy
- Generate new revenue streams
2 Leverage existing capabilities and participate in standardisation initiatives (where relevant) as banks transform towards the role of Data Custodian
Banks should re-use their Open Banking capabilities to develop new customer-centric services as Data Custodians. Additionally, executives should define an approach for bilateral partnerships and industry collaboration to develop value-adding capabilities, as well as aligning with existing market standards to increase interoperability and maximise reach in the digital economy.
3. Future-proof the operating model to move from strategy to execution
Once their Data Custodian strategy has been established, bank executives should transform and future-proof their operating model to meet the growing needs regarding customer-centric data propositions, collaboration in ecosystems based on open business models, and modern IT infrastructure to support data-driven digital transactions.
In summary, assuming the role of Data Custodian is the strategic choice for banks which intend to establish themselves as the trust anchor in the digital economy. By preparing today, banks will be able to better serve their customers and their ever-evolving data needs of tomorrow.