Disrupting the Banking Industry with Big Data and Data Analytics

Bankers seen sipping away the hours over client martini lunches at upscale restaurants and posh clubs are rare these days. The slump in credit demand from the global economic crisis is part to blame but so to is the absence of ‘live’ clients. Branch offices that were once community hangouts on payday look more like empty office spaces for lease. Today bank clients ‘hangout’ virtually, while doing most of their banking online. They lurk in and out web-based services unwittingly leaving behind hundreds of data points (like footprints) that when reconstructed using data analytics algorithms can accurately reveal the client’s real identity. 

At a first-of-its-kind event in Atlanta,Georgia titled, Customer Insights & Analytics in Banking Summit 2013, representatives from various forward-thinking banks and data-analytics service companies presented their combined views to a packed room of financial professionals. Organized by Data-Driven Business (datadrivenbiz.com), a US arm of FC Business Intelligence (a London-based events company), the Summit personified the past, present, and future of banking.  First, it exposed the ugly truths characteristic of a complacent banking culture mindset.  Then it highlighted the extraordinary accomplishments from early-adaptor banks, and, finally, it unveiled a fantastic prediction on how banking could potentially hold the keys to unlocking the value of social media feeds from Twitter, Facebook, and other similar web-based services.

With off-the-shelf, data analytics, software tools, bankers can gain an accurate 360 degree view of their customers on an individual basis just by matching a customer’s banking data (i.e. loans, credit card purchases, investments) with their behavioral patterns online. The technology used to integrate data sets to match behaviors with individual names has advanced remarkably, so much so, that bankers can calculate with reasonable accuracy the ‘lifetime value’ of each customer. This magical step has been demystified by over 150 vendors who specialize in the science of Digital Data Integration or DDI. DDI connects numerous disparate data sets both structured and unstructured using assigned ID numbers. Expert companies in this area include Aster (asterdata.com, a TeraData Company), Actian (actian.com), PrecisionDemand (precisiondemand.com), Convergence Consulting Group (convergenceconsultinggroup.com) and Actuate (actuate.com, a BIRT company). The principle reason bankers want to segment their customers by their future income potential is to allocate their limited resources more efficiently.

Banks that fully integrate their operational data with unstructured social media streams will become the game-changers to watch. Already the Old Florida National Bank boasts of their younger and more agile management team (under 43 years of age) who credit their surging asset growth in the past four years to their data analytics initiatives – (from USD$100m to $1.4b). Their team has the proper bank culture, mindset, and know-how to implement data analytics tools that fully capture a digitally-holistic view of their customers. By mapping where their customers spend most of their time and money, management can target more relevant and timely offerings. Targeted customers unwittingly respond with not only a buying interest but also a willingness to refer the bank to a friend or colleague. …truly a win-win for all.

SunTrust Bank, also based in Florida, uses data analytics to determine not only the location of their next branch office, but also the optimal management qualifications required to operate one of their branches. Another interesting case study came from Wells Fargo. Their data analytics team integrates thirty-two data sets (from both internal and external sources) and presents the results in a customized dashboard format to their managers company-wide. Managers use the service to make better decisions, present data on an ad-hoc basis at meetings, and self-serve their specific research interests using a number of additional data visualization tools for non-techies. The tools they use are off-the-shelf Business Intelligence or BI software packages provided by companies such as Oracle (oracle.com/BI), MicroStrategy (microstrategy.com) and Tableau (tableausoftware.com).

Servicing a more digital client-base has come with its many challenges as well as with its unexpected opportunities. For example, credit bureaus that traditionally deny 96% of consumer credit requests often reject qualified candidates. Using data analytics tools, however, banks can integrate comparative behavioral data with a candidate’s payment history and reassess their risk profile accordingly. The results would qualify more loans that would otherwise have been turned down. Other exciting ways for banks to grow revenues include working with real estate brokers. Banks can determine which of their clients is most prone to purchase a new home and pass the list on to an agent. Agents seeking better leads will more than likely recommend mortgage business back to the bank that shared their intel.

One can just imagine how many more ways bank data can play an integral part in helping companies find their most likely customers and future business. Banks already manage the transactional data in-house and are rapidly gaining the business intelligence experience needed to integrate their customer’s behavioral data and compare their profile with their peers. Under this scenario, one might wonder why any business would not want to work with a bank that not only understands their business but also delivers buying customers.

With this much real-time intel available on customers in one central location, could banks one day become the primary lead source for their business clients? Could this new normal become a significant game-changer in the banking industry?

Despite a rosy future, the business world is not waiting for banks to embrace data analytics any time soon.  Competitive trends point to a number of threats including retailers such as WalMart who will be offering banking services directly to their customers at their retail outlets.

There is also the emergence of the ‘digital wallet’, which for the time being focuses on reducing the clutter of credit cards using available smartphone technology. Eventually one company will umbrella all credit card transactions and offer global behavioral tracking intel. Pioneers on the forefront include Protean Payments (getprotean.com), a recent startup that plans to use bluetooth technology to replace card swiping at  terminals and Wallaby (https://walla.by), a company that helps cardholders maximize points earned prior to making a purchase.  There’s also Ebay’s PayPal (paypal.com), which has released a debit card concept, which it hopes will entice developers worldwide to promote their data analytics services to SMEs.

In online banking, Simple.com does not have a physical presence nor charges the customary fees that traditional banks do. In fact, they offer plenty of financial management reports and suggestions at no charge. …all online, of course. How they make money is best understood when opening an account. Simple.com new accounts cannot be opened unless one is willing to accept ‘cookies’ on their computer, a permission which releases away a user’s complete web history to a third party. Their insistence suggests that they place a greater value in a customer’s behavioral online data than they do in their banking business.

If Simple.com succeeds, could their new business model significantly change the way consumers perceive a bank’s value proposition?  Will consumers demand additional compensation for allowing access to their behavioral online data, since the data is worth more than the interest paid on deposits?

For now, banks who are looking at data analytics for the first time and wondering how and when to take the plunge should heed practical advice from experts who spoke at the event. One individual concluded that for now, those new to data analytics should start with the data they already have and use predictive findings from data analytic tools to start a conversation rather than formulate targeted recommendations.  This advice and the rapidly evolving changes in both consumer and commercial banking remind me of the famous Aesop’s Fable about the race between the tortoise and the hare. This time, however, the winner may be a third and invisible participant called ‘Big Foot’ representing Big Data and Data Analytics.

© 2013 Tom Kadala

Aviation Biofuels, Leading the Way to a New Global Economy

If you are wondering what our future holds with an economy subjected to political gridlock, an overview of an emerging industry called aviation biofuels could offer some interesting insights. 

Airlines today operate on razor thin profit margins with an industry average of less than one half of one percent, largely due to soaring fuel prices that gobble up about 30% of ticket revenues. Many factors are to blame and ultimately the traveling consumer is unwilling or unable to pay the higher ticket prices airlines need to offset their mounting losses. Merger mania among top airlines has played itself out leaving fewer options on the table.  Aside from shaving off more capacity than they have already, airlines are looking elsewhere to stay in business. One area that remains unexplored is the diversification from a one fuel source model to multiple fuel sources, which would include biofuels.

At a recent Aviation Biofuels Development Conference in Washington DC organized by FC Business Intelligence based out of London, thought-leaders, investors, government officials, and private sector industry leaders spent two days evaluating the growing prospects of aviation biofuels. So nascent is this industry that not even the US Government had a handle on its realistic potential and implications. However much they differed in their respective opinions, conference participants did agree on the pressing need to stabilized jet fuel prices through the production of alternative jet fuels. Their target production for 2015 was 600 million gallons per year, which amounts to a mere fraction of the 36 billion gallons per year mandated by Congress for ground transportation fuel blending. What impressed me most between the many animated discussions was the underlying dynamics among so many capable players that for whatever their reasons had been thrust together into the uncharted territory of aviation biofuels.

By the second day, the conference reminded me of the knocking sounds of an engine running with the wrong type of fuel. Was it the engine design or the fuel mismatch that was at fault? …and then it occurred to me. It was neither.  The aviation business model, which in my example would represent the engine, was being forced to change its fuel sourcing strategy from a single fuel pathway (from ground to gas pump) to multiple fuel pathways. Both the engine in my example and the fuel type were up for a complete redesign and eventual realignment, hence the ‘knocking’ sounds.

To appreciate the tectonic impact from a transition to multiple fuel pathways, imagine for a moment what life would be like if every home in the US had its own oil well and processing plant in its ‘backyard’ that could easily produce optimal grade fuel at a price well below today’s market price. “That scenario is absolutely ridiculous!”, you might say under your breath.  …and yet, the emerging aviation biofuels industry speaks directly to this end.

Instead of purchasing fuel from traditional fuel brokers, airports are planning to produce their own fuel at a lower and more stable price using feedstocks and a processing facility located adjacent to the airport’s existing storage tanks. Under this arrangement, airlines would no longer be subjected to volatile energy prices caused, for example, by a political event in the Middle East. Also, by positioning biofuels production facilities in their ‘backyard’, airports can eliminate shipping and port handling costs. Once more, if airports succeed in producing their own fuel source, what would prevent industrial parks around the world to do the same?

The resounding significance from producing fuel at the point of consumption will give both companies as well as groups of companies a far greater and sustainable edge over their competitors.  Just how an energy-decentralized economy will play out in the end will be anyone’s guess.  One thing is for sure. The base of wealth and power both politically and economically will shift significantly.

Considering this new perspective, one can better understand the industry’s current frustrations. On the one hand the US Government is hesitating with its renewable energy strategies not knowing if an untested policy might eliminate entire industries (i.e. fuel transportation), reduce existing business tax revenue streams, and increase unemployment. In the meantime, the DOE (Department of Energy) continues to invest in biofuels R&D and to develop incentives for private investors willing to scale biofuel productions.

The progress in the aviation biofuels industry can be measured by the rapidly growing number of fuel-production pathways.  In fact there may be too many pathways and efforts are underway to standardize a comprehensive evaluation process. Also in play are efforts to improve efficiencies within each pathway such as increasing the energy yield per acre of feedstock. But despite all of these efforts, the price of biofuels per gallon remains well above that of most conventional fuels.

With Republicans unwilling to pay more for energy than the lowest cost fuels available, the future of biofuels remains potentially entangled in a political gridlock. However, as the real threat to the airline industry continues to grow, aviation biofuels may force opposing members of Congress to reconsider their positions.  If and when they do, the production of aviation biofuels may unintentionally trigger the decoupling of crude oil prices globally. When that day arrives, businesses will learn to compete not only on price, but also on their respective ready access to ‘backyard’ biofuels energy.

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Appendix – Conference Overview
The conference organizers did an excellent job of presenting an interactive forum that offered new pathways from the traditional one-pathway strategy discussed in the article.  This section was written for readers with an advanced background in the industry.  New interconnected pathways discussed included:

Investment Strategies, presented by Baker & McKenzie (bakermckenzie.com), focused on parsing project risk into tradable financial instruments to attract diverse groups of investors. For example, project assets would be pledged to a lender using a Special Purpose Vehicle or SPV. The DOE (Department of Energy – energy.gov) spoke of Master Limited Partnerships (MLP’s) where project assets can be assigned to an LLC, tax free, and later IPO’ed to raise cash to finance newer projects.  They are also working on redefining the definition of REIT’s to include biofuels investments.  These changes will qualify more investment funds including foundations and make it easier for private sector participation.

Fuel Processing, presented by GEVO (gevo.com), compared the differences between processing techniques using biology (i.e. enzymes) or chemicals (i.e. catalyst). Their catalyst category included a clever building block platform of iso-butanol a C-4 carbon molecule that like lego pieces can combined to produce not only ethanol but also other lucrative chemicals (i.e. C-8 for gas and C-16 for diesel). As demand shifts for each chemical, the plants daily production can be calibrated to optimize profits. Another company, Byogy Renewables (byogy.com), also a chemical processing company has developed technology to extract 80% of oxygen content in biomass to produce a 100% replacement to jet fuel (no blending required). They are currently partnered with Qatar Airlines.

Feedstock, presented by Paradigm Energies (paradigmbioaviation.com), reminded us that feedstocks or the raw materials used to process biofuels represents 80% of the cost of the biofuel produced. However, in the case of corn ethanol, for example, one of its byproducts can be sold for animal feed at a price close to the corn itself, hence, creating an offset revenue.

Paradigm Energies is in the waste-to-energy business. They source municipal landfills, ‘garbage’, for feedstock and supply a clean jet fuel called syngas that can be liquefied for blending or used to produce electricity. Cities are willingly pay a ‘tipping fee’ to have their waste removed, since landfills are unsightly and expensive to manage. The overall benefits to a city from a social and economic point of view are noteworthy, while the ‘tipping fees’ offer an offset revenue similar to corn. Potentially perceived as a ‘dirty business’, operators of similar waste-to-fuel schemes are mindful of potential negative public opinion for eliminating trash removal jobs, rezoning landfill areas, and other eventualities such as a plane accident that involves the use of a blended biofuel produced from ‘garbage’.

Another company, Solena Fuels (solenafuels.com) is building waste-to-garbage plants adjacent to city refineries in the UK. Cities with a population greater than 1.5 and 2 million can produce the 700,000 tons of garbage needed to operate one of their processing plants. One of its partners, British Airways, has recently placed an order for 5 plants to meet 2% of its annual fuel consumption.

Patents presented by Boeing (boeing.com) has become big business for this conglomerate. In the interest of helping its customers buy more airplanes, Boeing is actively redesigning its engines in an effort to move away from a one fuel model. They see their role as a catalyst to accelerate commercialization of biofuels and are aggressively taking a stake in new IP’s produced. The company uses its brand and influence to advocate policies and other related matters.