Fire your bank analyst – hire a data scientist
Both running a bank and investing in a bank are being transformed by data analytics, writes Brian Caplen.
Your bank is about to buy a domestic competitor and you know that the resulting entity will breach competition rules. How many branches will you be required to divest?
Alternatively, you are an investor and you want to track the merger’s cost synergies – how many branches will be closed down?
In the old days you might have called in a bank analyst to try and make sense of it. Now you should call in a data scientist to help out. Big data has been a buzzword for some time but now it is becoming clear as to how fundamentally the business world is about to be shaken up.
I have adapted my bank merger example from one given in a Schroders paper called Harnessing the Data Science Revolution, which deals with UK betting shops. The asset manager used customer location data combined with its knowledge of the competition rules to estimate how many shops would have to be divested in the Ladbrokes/Gala Coral merger first proposed in 2015. Schroders claims it reached the right answer in a few hours whereas it took more than a year before the regulator announced the same result.
The replacement in the investment world of the active fund manager by passive index trackers has been long predicted. But banks with asset management arms should note the equally precipitous moves in the other direction towards data-driven investing.
Satellite images of crops or oil rigs to determine yields and commodity prices, drone-taken photos of the number of cars in a supermarket car park to determine retail strength, and the tracking of passenger numbers at airports to predict airline revenues – the list of data-investment applications is growing by the week.
In the US, State Street has launched a sentiment analytics product that taps more than 25,000 online media sources to help gauge the attractiveness of individual companies. “The old investment model of meeting with the management, asking questions and forming a hypothesis is giving way to a more technology-driven approach,” says JR Lowry, who is the Europe, Middle East and Africa head of State Street's global exchange, the bank’s provider of data and analytics.
So back to the bank CEO – does that mean no more hard-to-answer questions from bank analysts about loan growth? After all, they should now be able to work it out from analysing consumer and business trends and branding sentiment. We are not quite there yet but the direction of travel is becoming clear.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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