Dec 14, 2005

Finding hidden revenue in electronic payments data

Greater use of data embedded in payments transactions could create new revenue streams for banks and drive the transformation of financial services companies into financial-and-information-services companies, according to DiamondCluster consultants in the Nov./Dec. issue of BAI Banking Strategies magazine. The article shows how payments data mining can be used to provide analytical and marketing services to retailers; engage in more effective cross-selling; and open the door to developing and selling information products to commercial clients.

“When bankers reflect on the benefits to be gained by the increased electronification of payments, they tend to think of cost savings in the back office,” write Resnick and Hugener, of DiamondCluster's financial services practice. “Yet there are potential revenue opportunities as well. The digitizing of payments information opens the door for financial institutions to capture and then leverage that information. Banks could, for example, provide analytical and marketing services to retailers; engage in more effective cross-selling to their own customers; and develop and sell information products to commercial clients.”

The report suggests that banks could monetize a significant portion of the value hiding in payments data by partnering with retailers and charging them either direct fees or bundled pricing, for example in the form of higher interchange.

“Bank-managed data could help retailers identify their best customers and prospects. It could also suggest ways to best entice customers to visit the retailer - either for the first time or for repeat patronage. Working with retailers, for example, banks can develop algorithms to print targeted offers on monthly billing statements. Infrequent customers would receive well-timed reminders to entice them back to the store.”

“Private label credit card providers currently offer such products. However, their limited variety and lack of versatility inhibit private label credit card acceptance by customers. Banks can solve these shortcomings by tying those flexible product features to general purpose credit cards, which are accepted at millions more places than any private label card.”

The authors recommend that banks should develop payment data products not necessarily linked to a single payment instrument, for example by linking the services to debit cards as well. This would attract more customers, which in turn would increase adoption and generate more banking business. “The result is that banks would capture more of the data that is necessary for conducting the information analyses and creating the offers outlined here,” write the authors.

At the same time, the report identifies significant challenges that banks face in implementing these strategies. Banks need to develop a core competency in creating information-based products, which includes acquiring assets and capabilities in retail and consumer marketing, customer relationship management (CRM) and analytics, and database management and integration. Banks may also face consumer privacy issues, and will need to deal with retailers' desire for customer control.

Many of these challenges exist because the report assumes that the data will be collected and analysed centrally, sometime after the actual payment transaction has occurred, and that the data mining will be used for example to print targeted offers on monthly billing statements. The whole approach does indeed require banks to develop new skills, and could indeed raise privacy issues with customers as well as data ownership issues with retailers. Since the authors are US based and perhaps not entirely familiar with EMV capabilities available to banks in other parts of the world, these assumptions are probably natural.

When EMV transaction data is used immediately at the moment of payment to pursue the same revenue opportunities presented in the report, the challenges that the authors raise virtually disappear. Imagine you go to Carrefour from time to time, but not very frequently. Imagine receiving a special offer from Carrefour inserted in your monthly bank statement, which you receive at home several weeks after you last went to Carrefour. You probably understand that your bank is somehow tracking your buying habits and is trying to encourage you to go to Carrefour. Compare that to receiving the same offer on your credit or debit card receipt while you are paying at Carrefour. The effect is completely different. You receive an offer at Carrefour encouraging you to shop more at Carrefour. We have never run into the challenges raised in the DiamondCluster report.

I don’t want to go negative on an otherwise excellent report. This consulting firm has produced other similarly excellent reports in the past, all useful and relevant to our business. For example, see DiamondCluster’s earlier report from April, “Banking on Payments”.

Source: Decoding the Value in Payments Data

1 comment:

adrian-i always read your blog-williamson said...


several years ago, the South Korean government provided tax incentives to encourage card usage as there was a huge tax evasion problem especially in the SME market. This resulted in a mega boom in the business card sector. The knock on effect was that there was a huge increase in merchant acceptance points which benefited the personal card users as well.

perhaps this would be an incentive program which China can look into instead of the stick that it currently employs.