How financial institutions can drive growth by tapping the hidden value of payments data

The transition to cashless societies is picking up speed as consumers and businesses become accustomed to the multiple benefits of digital payments. Both the business-to-business (B2B) and business-to-consumer (B2C) payments markets are expecting rapid growth. B2B instant payments alone are forecast to surge 40% by 2028, on the back of the infrastructure and systems that make such payments possible – the ‘rails’ – becoming better and more integrated, enabling its adoption in emerging markets.

With this trend, and the emergence of new standards to exchange payments information like ISO 20022, comes more and increasingly granular data. At the same time, open banking regulations in markets like the UK, EU and Australia are encouraging the sharing of data between traditional financial institutions and third-party financial service providers to foster product innovation. 

All this means a more level playing field that will benefit new entrants and end-customers as services grow ever more personalized and seamless. But it will also create compelling opportunities for incumbent institutions who take the right steps to leverage a broader and richer range of data resources.  

Payments data put to work

While they emerged because of the need to meet consumer expectations and remove bottlenecks, developments such as the EU’s Payment Services Directive 2 (PSD2) and the improved ISO 20022 messaging standard are creating frameworks for financial institutions to securely share richer customer financial data with third-party providers, enabling the data monetization trend to take off. 

Monetizing data is sometimes understood as selling information or insights the organization has gathered to third parties. However this can be problematic from privacy and compliance perspectives for banks in particular, and in reality is only a small part of the commercial potential payments data presents. Harnessed correctly, the data generated by payments can help organizations do much more: reduce costs, enhance transparency and remove friction across their operations, and for their customers.

It is difficult to overstate how positive a force better payments data and more efficient payments systems can be. Trustworthy and predictable payments underpin the success of almost all businesses, whether a small retailer, a marketplace or a global commodity trader. As concerns about financial crime and false identities surge, faster payments and richer messaging will allow institutions to better capture and understand the source, purpose and recipient details of payments, dispelling ambiguity and strengthening compliance. 

Making a payment is also a form of commitment from a customer. When seen in that light, it represents a moment of truth for the service provider. From each transaction, merchants can deduce what, when, where and how a customer buys. Understanding these insights can help merchants improve the customer’s experience when they visit next and recommend the right products to the right person at the right time.

Merchants of all kinds can analyze payments data for clues on customer preferences and channel those insights into developing more relevant product features, services and experiences. Already we’re seeing insurers tap payments data to identify where, how and what policies their customers purchase, using this knowledge to improve access to relevant insurance products or to recommend those that complement a customer’s existing portfolio.

Banks, meanwhile, can leverage payments data to vastly increase understanding of customers’ spending and saving behavior. Combined with other data sources, these insights can enable institutions to identify unusual spending patterns and preemptively reach out to the customer with relevant solutions or advice; or offer tailored loan, insurance, payment or investment products, contributing to engagement and retention. For corporate clients, there may be opportunities to identify and recommend efficiencies or improvements in cashflow management and financing arrangements, and to develop new or enhanced services. 

Payments data can also refine credit scoring and loan underwriting. For example, while credit bureaus are taking steps to close the loophole, users of increasingly popular buy now pay later (BNPL) offers do not always have these liabilities reflected in their credit scores. In such instances, credit issuers can supplement data from credit bureaus with payments data to develop a more holistic view of the customer’s financial health. Already in early adopters such as India there is a visible shift to this ‘information collateral’ from asset collateral in lending decisions. 

Unlocking the use cases

For all the promise that payments data holds, many banks still struggle to access and integrate the data they collect, typically because it’s spread across multiple locations and business functions that operate in silos. Building the kind of platforms that permit the level of control that retail and enterprise customers increasingly need and expect can also be a challenge for traditional institutions more accustomed to tightly managed, on-premise infrastructure.  

As technological and regulatory developments accelerate the scale and breadth of payments data possibilities – the UK, for example, is poised to launch next-generation payments architecture and has pledged to reduce barriers around the data trade – the need for financial institutions to solve their legacy infrastructure and data platform challenges has taken on new urgency. 

At the same time, it’s essential to get the security and consent approach right to ensure any data monetization initiatives rest on sustainable foundations. Effective data monetization doesn’t stop with delivering experiences informed by or enriched with data; it is also critical for organizations to be able to explain how they got the data, what they’re doing with it and where it’s going. In moving to a ‘cookieless’ world where access to data will depend on customers explicitly opting in, consent becomes more important, and the institutions that are able to secure and demonstrate consent in their data resources will gain competitive advantage. 

As one of the earliest champions of ethical data frameworks, we have partnered with financial institutions in some of the world’s most dynamic economies to envision and develop their payments infrastructure, and prepare their systems and processes for a new stage of data monetization and the business models that come with it. Many institutions are overlooking one of their greatest resources, which through the right platforms and practices, can be rapidly unlocked to drive new revenue streams, innovation and customer loyalty.