Of the various technologies that underpin digital transformation, few have done so with the efficiency of data.  It has enabled companies to gain incredibly rich insight into customers and their behaviors, and then tailor their services accordingly.  The likes of Amazon and Netflix have become masters at this, to the extent that Amazon have even patented predictive consumption that could see products ordered for us based upon nothing but our past purchasing patterns.

In many ways, finance seems to be a notable laggard, as banks do nothing with the data they hold on our transactions and financial history to help us manage our finances better.  A glimpse into the possible is provided in Smart Business, a recently published book that chronicles the rise of Alibaba.

A central element of the company’s success is the microloan business that was developed to financially support the millions of sellers attracted to the platform.  With customer approval, the platform can access vast quantities of data about that user, including transaction behavior, trustworthiness and reputation of the business, financial performance, and even the financial health of that person’s social network or the time they spend working on their business.

All in all it gives the company a much richer insight into each individual, which they can then use to make smarter financial partnerships with them.

Slow to adapt

To date, it’s a level of innovation that traditional banks have struggled to match.  Despite this intransigence however, few have suffered in terms of their revenue, at least not yet.

We have seen a number of challenger banks emerging, including Monzo, Starling and Revolut.  They’ve all had the advantage of starting from a digital offering straight out of the gates, and the majority of these have little in the way of a high-street presence.

This allows them to streamline processes that so often frustrate customers, whether it’s registering for an account, security and fraud prevention or making transactions.  It’s also increasingly common for banks to use this transaction data to make recommendations on ways to save money, make payments or maintain security.

One area that remains somewhat untapped however is the small business market, which despite being worth over £200 billion a year to the UK economy has remained neglected by traditional banks.  It’s an opening that PwC identified back in 2015, but despite the report highlighting the strong desire by SMEs to access innovative digital services, it’s a demand that is not really being met, despite the example being set by Chinese challengers such as Alibaba.

Serving small businesses

It’s something that Fintech company Five Degrees aims to overcome.  They provide a single, intelligent platform that tries to make all interactions with the customer easier, from onboarding through to transactions.  What’s more, the technology sits on top of legacy IT systems so doesn’t require a root and branch overhaul.

The nature of business for many SMEs can also make it hard for banks to identify the value of the opportunity presented to them.  It’s this core challenge that has made Alibaba’s financial offering so attractive as they have such a strong understanding of the businesses using their platform.

It’s a level of insight that few traditional banks can hope to replicate, but there are nonetheless areas for improvement.  For instance, integrating P2P lending, mobile wallets or even blockchain technology are all areas where startups have an interest but are seldom supported by their bank.

“The SME has to go to the bank to do an onboarding process that’s extremely cumbersome process for the customer, but also a very expensive process for the bank,” Martijn Hohmann, CEO of Five Degrees told me recently. “Banks have never embraced modern technology enough, and that’s bad as there are alternatives now that are much faster and better for both bank and customer.”

One of the most successful banks in breaking down these barriers is Starling Bank, who have embraced a marketplace-based approach that gives customers access to something like 25 different partners they can turn to for services.

Banking is a sector that is still in many ways reeling from the credit crisis of a decade ago, and attempts to focus on the future have not really managed to overcome the legacy processes of the past.

“They’re struggling, and struggling big time, and the problem is not budget, because they have plenty of that, and it’s probably not even technology but their culture,” Hohmann says.

Alibaba have shown what’s possible when you take this kind of platform based approach, but it remains to be seen if traditional banks can make that transition.