Data continues to be a hot topic, with recent breakthroughs such as ChatGPT highlighting even more the transformational effect that AI and data will have on the way we live and work, and how service providers engage with customers. The key thing to remember, however, is that the true power of AI – and the value it can bring – relies on the quality of underlying data and how well it is used.

Large banks are still limited in their ability to harness the exponentially growing amount of customer data available to them. Whenever someone makes a purchase, the bank only comes in at the end of that process to complete the transaction. It builds a customer profile based on a very narrow selection of information retained at the point of sale, missing the fuller context (the behaviours, preferences and events) that contributed to the customer’s decision to make that transaction. This means that the bank cannot offer customised and timely recommendations of where to eat, shop or visit next, leaving it stuck as simply a conduit for transactions between merchants and consumers.

Next generation payment providers and fintechs continue to stake their claim in the market and challenge the core role that banks have held for many years so, unless they act fast to modernise their data ecosystem, banks risk becoming disintermediated over time and losing relevance for consumers. Driven by fast-advancing technologies, consumer expectations have shifted considerably – people want to receive quick and seamless personalised suggestions from all their service providers based on their preferences.

To enhance the user experience, banks need to gain a more in-depth understanding of customers by ensuring they have the capabilities to aggregate data from various touchpoints of a person’s life. The eventual goal is to become the go-to platform any time a customer wants to make a purchase or find a service, similarly to how Amazon operates. For now, it is crucial that banks stop working in isolation and integrate themselves higher up in the decision-making process.

Once they attain a more comprehensive picture of the customer, banks can start delivering greater value by making tailored, proactive recommendations based on that. While born-digital providers such as Revolut already have that ability built-in, traditional banks can play to their own strengths. For instance, they hold extensive and long-term customer relationships and already have a view of both sides of the transaction, making it far easier for them to start aggregating all that data better.

Delivering on the promise of open banking

The advent of open banking several years ago signalled a game-changing shift for the industry. The number of consumers and SMEs in the UK using open banking powered services hit a milestone in February, reaching seven million users for the first time. This is a significant step forward but adoption numbers by now have the potential to be in the region of tens of millions. Without data modernisation banks will be unable to capture the value of customer data to finally realise the full potential open banking offers.

Open banking can tap into the unprecedented advancements in digitalisation and AI, as it is based around APIs, which enable the training of algorithms to analyse all the data that customers have allowed to be shared between banks and third-party providers to make improved predictions and suggestions. With the emergence of open finance, the possibilities multiply further, opening the door to creating more innovative products and services to get closer to the customer.

The current challenge is that banks are not structured in a way that allows them to efficiently gather, process and evaluate data to generate meaningful insights. Certainly, many have invested in setting up large data lakes and new platforms, but they continue to store the same basic transaction slips as previously. There could be several reasons behind the lag, from banks still being held back by legacy infrastructure to fears around storing more data due to the heavy ramifications of breaching personal data safeguarding regulations.

Encouragingly, the policy landscape is evolving, as in the case of the recent reintroduction to Parliament of the Data Protection and Digital Information Bill. The bill aims to establish a framework where privacy and data are securely protected, allowing customers to create verified digital identities while making safe data sharing much easier. In fact, it promises to save an estimated £4 billion for the economy over the coming decade. Additionally, recent weeks saw the Joint Regulatory Oversight Committee release its recommendations for the next phase of open banking in the UK, with one of the top priorities being the adoption of a scalable model for future data sharing. It also supports proposals for smart data legislation and outlines its vision for how open banking can boost innovation and competition to benefit consumers, organisations and economic growth.

Banks can only capture the full value of end user data through effective data modernisation. Doing so will not only lead to tremendous new business opportunities and revenue streams but also add substantial value to the customer.