Sumit Agarwal

Fintech firms are giving banks a run for their money, writes Sumit Agarwal.

The phrase ‘leaving money on the table’ implies that in a transaction, one does not take all the profit that one could, but rather leaves behind some benefits for the other party.  

Banks are not known to do this. But lately, fintech companies are giving the banks a run for their money, and what is left behind on the table is customer information. Fintech firms have been making inroads into the market, with some expanding to provide banking services to customers. The main advantage they appear to hold over banks is technology and information. 

Technology enables fintech firms to collect peripheral information about their customers. The data could be about customers’ social media app usage, browsing patterns or shopping behaviour. It allows the firms to derive customers’ risk characteristics and the appropriate type of financing to provide. The information also allows firms to market their products in more targeted ways. 

Banks are lagging in using information

Of course, banks hold customer information. At the start of a customer relationship, such as when customers open an account or takes out a loan, banks know customers’ demographic information such as their age, gender, location, and income. Banks know customers’ broad behavioural patterns and tap artificial intelligence to send targeted ads. At times, some relevant information is shared with external merchants, too.

Remember how your credit card rewards are linked to discounts in certain restaurants or retail outlets? Some information, with the consent of the customer, is shared in this process.    

More recently, banks have been looking at more detailed information from debit and credit card transaction records. Where, when and how much did the customer spend on any given transaction? Did they spend the money on travel, leisure, dining or entertainment? The information allows the banks to place the customers in certain lifestyle categories for better targeting. For example, customers who often fly may be more open to signing up for a credit card that focuses on the redemption of air miles. 

[banks buying receipt-level information] will put them on a par with fintech companies when it comes to information collection

If banks are already making use of all this information, why do I still think that they are leaving information on the table? 

There is a store of information yet untapped. Banks can buy receipt-level information from merchants at the point of sale. Hence, besides knowing that customer A bought £100-worth of products from a supermarket, banks will also know what this £100 is spent on. This practice will put them on a par with fintech companies when it comes to information collection.

Cost of consolidated information 

Let us first discuss the drawbacks of releasing such information to the banks. Consumers may be worried about data protection and revealing too much of their lifestyle preferences to the bank. For example, what did they eat for dinner, what shows did they buy and where are they flying to on their holiday? 

But information related to their lifestyle is already public on their social media platforms for some of the consumers. Some may not mind sharing certain lifestyle information with the bank if it leads to rewards such as discounted purchases. 

The choice would have to lie with the consumer. The onus is on banks to lay out the conditions and usage in a transparent manner and make it easy for consumers to opt out of providing the information. Banks should also adhere closely to data usage regulations. 

Benefits of consolidating information

Currently, a merchant operates two machines at the point of sale when a credit or debit card is used for payment. The first generates a receipt that lists the items purchased. The second churns out a receipt of the total sum charged to the credit card and the information is also passed to the payment network, e.g. Visa or Mastercard. 

What if we used only one machine that combines both functions? There are several benefits.

First, merchants will save time in processing the transaction at the point of sale. They only need to learn to manage one machine (instead of two) that will process the list of items purchased, accept the payment, and transmit the receipt and payment details to the bank. They will also save on procurement costs for the machines. 

banks can track consumers’ carbon footprint and dish out rewards for those who score higher on their carbon scorecard

Second, if electronic receipts become the mainstay, customers will be free from the hassle of handling paper receipts. To verify the correct charges, a simple email check would suffice. Moreover, paper receipts carelessly tossed aside could become fodder for scammers or prying spouses. 

Third, banks that know customers’ detailed spending patterns can provide better marketing and services, as well as perform better in risk management. For example, if the banks know from a receipt that I bought an air ticket for Bali and detected credit card transactions in Bali, they would not need to block my card. 

Knowing an individual’s purchases can help in constructing a carbon scorecard for individuals. As I have mentioned in my previous writings, some purchases are more eco-friendly than others. Imported beef has a larger carbon footprint than homegrown chicken.

Ordering delivery comes with more disposable packaging than dining out or cooking at home. With a consolidated list of most purchases, banks can track consumers’ carbon footprint and dish out rewards for those who score higher on their carbon scorecard. These rewards may urge consumers to act in a more environmentally friendly manner in the long run and benefit society. 

Banks will benefit without leaving information on the table. At the same time, merchants and customers will benefit too. This is a triple-win situation, with the added bonus of shaping more sustainable consumer behaviour. 

 

Sumit Agarwal is Low Tuck Kwong distinguished professor of finance, economics and real estate at the National University of Singapore (NUS) Business School, and head of its department of real estate. He is also the managing director of the NUS Sustainable and Green Finance Institute. A co-author of the “Kiasunomics” book series, he also hosts the Kiasunomics podcast on Singapore economics.

The opinions expressed are those of the writer and do not represent the views and opinions of NUS.  

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