- Big data is becoming more and more important to the banking industry.
- Companies like ZestFinance are finding ways to make loans more efficiently and more effectively through the use of big data.
- Maybe banks... and financial institutions... are really just joining the information technology sector.
It is becoming more and more apparent that the foundation of the evolution of banking… and finance… is going to be data and the handling of data.
As readers of this post know very well, I believe that finance, in the first place, is nothing more than information… nothing more than zeros and ones.
So, it makes perfect sense that the essence of banking in the future is going to center around those organizations that can collect, store, and use, big data to the fullest extreme.
One of the distinguishing characteristics of financial organizations that I have written about over the past five years that would be considered to be alternative financial institutions… or shadow banks… is their sophisticated use of data. And, this extends to even some of the smaller ones.
Popular thinking about the evolution of banking has tended to focus upon the use of mobile phones and electronic transactions. This seems to let even the smallest community banks into the picture.
But the future of finance is in big data and how it is connected and how it is used.
In the past, banking… and especially lending… has been based upon knowing your customers, individually as real persons, and using personal judgments in the advancing of credit.
I don't believe that all lending will become impersonal in the future… there will still be a need for personal interaction at one level or another.
But, for the most part, banking is going to become very impersonal in the sense that most financial transactions are going to be handled electronically.
What am I talking about?
Take a look at ZestFinance. Here is how they describe who they are:
"ZestFinance was founded by a team of (mostly) ex-Google and Capital One folks who came together with a mission - to save the underbanked billions of dollars. Since then, the team has grown to more than a hundred crazy smart data geeks, mathematicians and computer scientists, all working together to re-invent underwriting and make more credit available to the people who need it most."
What do they do?
"Our big data underwriting model provides a 40% improvement over the current best-in-class industry score. That translates into more accurate credit decisions, which leads to increased credit availability for borrowers and higher repayment rates for lenders."
And, they then proudly boast: This approach will save you money. Lots of money.
But what it does is that it makes more money available to more people, people who were not always able to get credit before… or people that had to pay really outrageous interest rates to get their money.
This may not be as personal as walking into a bank branch and talking with a manager about your loan… or, dealing with a loan officer to discuss your business prospects.
But what's the most important thing? It is getting the loan that you need… and getting it as efficiently and as quickly as possible.
Furthermore, do you think the current crop of teens… individuals that have grown up on ubiquitous electronic tools and communications from their earliest memory… are going to NOT use these electronic opportunities to get what they need in life?
Anyhow, when have you been in a bank branch recently? When have you actually worked with someone in the bank that actually has any role in a decision about your accounts or about your loan? When have you actually gone into a bookstore and purchased a book? Where do you get most of your information on the quality of a restaurant… or a hotel… or a (you name it)?
Bank loans may not be quite going the way of the horse drawn carriage yet, but the aggregate data indicate that more and more loans are going to institutions not considered to be commercial banks, thrift institutions, or credit unions.
And, one of the major reasons for this is that more and more people and businesses are finding other ways to finance what they need. Corporations are going directly to the market for short-term funds using commercial paper and other sources. More and more, these organizations are going to the bond markets for term financing. And, the technological advances in these areas are amazing.
Furthermore, why do we need demand deposits? I, for example, don't have a demand deposit, yet I can write all the checks I want. John Authers writes in the Financial Times, "In Africa, payment services have even leapfrogged the west and introduced ways to pay over a mobile phone that exclude the bank as intermediary altogether."
Who knows what PayPal has in store for us in the near future. So, while we are doing this evolving… let' s just get rid of demand deposits in the process.
Again, getting rid of demand deposits is just finding another way to store data and then adjust the information in the data base to where people want to place it.
Banking… and all finance… in the future is going to revolve around big data and the use of this big data. To find the winning investments in the banking and finance space, one is going to have to identify those that are making the most of the evolving technology.
Maybe, going forward, finance will just be considered a sub-sector of the information technology space.