Blockchain Makes Digital ID a Reality


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The concept of identity has not kept pace in a world of accelerated digitization and data. Nowhere is that more apparent than the cost and friction involved in answering three basic questions simply to engage in commerce:

  • Are you who you say you are?
  • Do you have the mandate you say you have?
  • Can I trust you?

Imagine a world where once these questions are answered the first time, no one else needs to ask them again, or only a subset or new information has to be provided. Archaic identity systems aren’t just frustrating—they’re holding back innovation. The full potential of financial technology and digital global finance, so close at hand, will come about only when a global standard for digital identity does. The technology to make that happen? Blockchain.

A blockchain is a record, or ledger, of digital events, one that’s “distributed” between many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased. With a certain and verifiable record of every single transaction ever made, Blockchain provides the underlying technology to give consumers control over their own portable digital identity.

Blockchain brings digital identity into 2016 (and beyond), opening the full potential of digital innovation to change how we buy and sell goods and services, manage health and wealth, and present our digital identity to the world.

BYO ID
Identity data is everywhere—on all types of devices, applications, private and public networks—but it’s disconnected and doesn’t present a complete, accurate profile of a customer. Plus, it’s personal information: Shouldn’t each person own their identity data and choose what they share and when?

Blockchain is a universal, distributed database that can make it easier for individuals to consolidate, access and reveal what they choose about their own identity data. It’s generally considered more secure, reliable and trustworthy than previous identity solutions because it’s controlled by the user and immutable—protected by a combination of cryptology, digital networks and time stamping on a decentralized network not controlled by any single entity.

Blockchain-based digital ID brings identity into a single record—a persona—that is effectively pre-notarized and authenticated and usable almost anywhere. Individuals control their own ID, adding references and third-party endorsements to verify authenticity, so customers and banks can trust that the content is accurate and secure. It offers an extremely efficient way to capture, share and verify information, and establishes a reliable, secure but relatively easy way for individuals to open a bank account, set up utilities, pay taxes, buy a car—nearly anything requiring personal ID.

Benefits of Blockchain Digital ID
The trust breakthrough: Most customers have a rich online record of what they do, who they know, buying habits, credit—but banks and customers both need better reasons to trust the accuracy, completeness and security of identity data. With customers in control of identity data and a framework for rapid verification, blockchain enables an environment more conducive to mutual trust.

New opportunities: Blockchain provides entry into an ecosystem that increases in value as it expands, providing multiple points of ID verification while creating a more complete description of personal identity. This enables banks to “know” each customer better and offer tailored products that are valued and appreciated.

More loyal customers: Customers typically bear the brunt of inefficiencies, wasting time filling out forms, repeating conversations and gathering documentation. By increasing efficiency, security and accuracy of customer data, next generation digital ID helps make banks more attractive to existing and potential customers.

Improved regulatory compliance: Financial firms spend up to $500 million a year on Know Your Customer and Customer Due Diligence compliance. Next generation digital ID can reduce compliance costs by providing a universal, secure platform for consolidated data collection and records management.

Transparency and better controls: With users controlling their ID and every action an immutable record, you’re less likely to have problems with ID management, theft, security and inconsistency. You can also reduce risks of paper documentation left on desks or digital information with insufficient tracking and controls.

Blockchain-based digital ID fundamentally strengthens identity security and can help ease the burden of regulatory compliance. At the same time, it can improve the customer experience and establish a more solid basis for trust between banks and customers. It also transforms identity data into a rich description of a person, so banks can anticipate customer needs and offer solutions that actually make sense for each customer.

Through blockchain, digital ID is poised to completely change the way we think about and manage identity. It can solve old problems and open new opportunities for banks that are ready to embrace the change.

Taking a Chance on the Unbanked


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Financial inclusion is a hot topic in our community, and for good reason. The banking industry faces a real challenge serving those people who don’t have access to traditional banking services.

According to the Federal Deposit Insurance Corp.’s latest annual survey on underbanked and unbanked, 7 percent of Americans didn’t have access to banking services in 2015. That represents nine million U.S. households. The number gets even bigger when you consider underbanked households, which are defined as those that supplement their bank accounts with nonbank products such as prepaid debit cards.

Some banks look at this market and only see the risks; others deem it outside of their target audience demographic. In either instance, the outcome is avoidance. Fintech leaders, by contrast, see an emerging opportunity and are proactively developing innovative solutions to fill the gap. Which poses the question: Is it possible for banks to do the same?

Deciding to move forward with this type of initiative must start with the data. One of the areas that we pay close attention to is application approval rates. We’ve been opening accounts via our digital platform since 2009, and we were initially surprised by lower-than-anticipated account approval rates. Why was this happening? As the number of consumers who want to open a bank account online increases, there are inherent risks that must be mitigated. From what we’ve learned, identity verification and funding methods for new accounts, for example, pose heightened challenges in the anonymous world of digital banking. As such, we have stringent controls in place to protect the bank from increasingly sophisticated and aggressive fraud attempts. This is a good thing, as security is not something we are willing to compromise.

However, we realize that not everyone we decline is due to potential fraud, and that therein lies a major opportunity. A large portion of declinations we see are a result of poor prior banking history. Here’s the kind of story we see often, which may resonate with you as well: A consumer overdrew their bank account and for one reason or another didn’t fix the issue immediately, so they get hit with an overdraft fee. Before long those fees add up and the customer owes hundreds of dollars as a result of the oversight. Frustrated and confused, the customer walks away without repaying the fees. Perhaps unknowingly, the customer now has a “black mark” on their banking reports and may face challenges in opening a new account at another bank. Suddenly, they find themselves needing to turn to nonbank options.

I am not excusing the behavior of that customer: Consumers need to take responsibility for managing their finances. But, shouldn’t we banks be accountable for asking ourselves if we’re doing enough to help customers with their personal financial management? Shouldn’t we allow room for instances in which consumers deserve a “second chance,” so to speak?

At Radius we believe the answer to that question is “yes,” which brings us back to my earlier point around opportunity. Just a few weeks ago we released a new personal checking account, Radius Rebound, a virtual second chance checking account. We now have a way to provide a convenient, secure, FDIC-insured checking account to customers we used to have to turn down. In doing so, we’re able to provide banking services to a broader audience in the communities we serve across the country.

Because of the virtual nature of the account, I was particularly encouraged by the FDIC’s finding that online banking is on the rise among the underbanked, and that smartphone usage for banking related activities is rapidly increasing as well. Fintech companies are already utilizing the mobile platform to increase economic inclusion; we believe that Radius is on the forefront of banks doing the same, and look forward to helping consumers regain their footing with banks.

Let me be clear, providing solutions for the unbanked and underbanked is more than a “feel good” opportunity for a bank—it’s a strategic business opportunity. A takeaway from the FDIC report is that the majority of underbanked households think banks have no interest in serving them, and a large portion do not trust banks. It’s upon banks to address and overcome those issues. At the same time, nonbank alternatives are increasing in availability and adoption. Like anything worth pursuing, there are risks involved and they need to be properly scoped and mitigated. But while some banks still can’t see beyond the risks, I think ignoring this opportunity would be the biggest risk of all.

Can Watson Solve the Bank Regulatory Riddle?


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You have probably seen recent television commercials where “Watson,” IBM Corp.’s vaunted supercomputer, chats with Stephen King about novels and Bob Dylan about songwriting. And perhaps you remember a few years ago when Watson defeated two highly accomplished past winners of the game show Jeopardy! in a three-way competition. Well, IBM is now focusing Watson’s considerable talents on bank regulatory compliance.

In September, IBM announced that they were buying the consulting firm Promontory Financial Group, which is based In Washington, D.C., and was founded in 2001 by former Comptroller of the Currency Eugene Ludwig. Promontory is considered one of the leading firms providing banks with the information needed to navigate the increasingly intricate web of regulations at all levels of government. Over the years, Ludwig has hired many former regulatory officials, some of whom headed regulatory agencies and financial companies around the world. IBM is not just going to fold Promontory into its financial services practice, however. The company is thinking much bigger than that.

IBM is going to have Promontory’s 600-plus professionals turn Watson into the world’s foremost expert on financial institution regulatory compliance. Watson will then be able to expand its base of knowledge in real time as new regulations are created and studying various scenarios and situation that have developed in real world practice. Bridget van Kralingen, senior vice president, IBM Industry Platforms, described the company’s expectations for the project saying, “What Watson is doing to transform oncology by working with the world’s leading oncologists, we will now do for regulation, risk and compliance. Promontory’s experts are unsurpassed in this field. They will teach Watson and Watson, in turn, will extend and enhance their expertise.”

This can be a game changer if it works as expected. Regulatory compliance costs are growing, and there is no sign that this trend will ever reverse. In the press release announcing the acquisition, the two companies cited a report from global consulting firm McKenzie that found “More than 20,000 new regulatory requirements were created last year alone, and the complete catalog of regulations is projected to exceed 300 million pages by 2020, rapidly outstripping the capacity of humans to keep up. Today, the cost of managing the regulatory environment represents more than 10 percent of all operational spending of major banks, for a total of $270 billion per year.”

Regulatory compliance is a very hands-on process in its current form. Humans have to dig through the data, read the reports and figure out how the new information impacts their institution. If Watson can reduce the human element of compliance, then costs will come down. This could be a huge benefit to community banks as regulatory costs, which account for a disproportionally larger percentage of their overall costs than larger banks. Some of these smaller institutions have thrown in the towel and sold their bank to larger competitors rather than try and keep up with an ever-growing burden and costs of compliance.

Ludwig addressed the potential for the use of artificial intelligence combined with his firm’s existing broad level of knowledge to reduce costs for small banks. “For community and regional banks, this is a potential lifeline,” he said in an interview. “For many banks, it is an enormous burden just to keep up. Watson offers the opportunity to have a world-class partner.”

One of the keys to making this combination work is the fact that Watson is already a known entity that has had a lot of success since “going on” Jeopardy! in 2011. Watson is being used to improve clinical diagnosis and cancer treatment in the medical world, help track water usage in drought plagued parts of California and generate product suggestions for several retailers.

Those who worry that tech giants like IBM are not going to be nimble enough to keep up with the sexy, fast changing world of fintech simply do not understand the banking industry. Bankers don’t care about being on the cutting edge of technology as much as they do having technology and technology providers that are dependable. They want vendors with strong reputations that will have the staff and expertise to deal with problems that crop up at 2 a.m. on a Sunday. In banking, reputation is everything and protecting their reputation is much more important than having a sexy technology.

This combination offers them the chance to have both. Banks that might be reluctant to use compliance programs driven by artificial intelligence from a younger, more nimble fintech firm are going to find it much easier to accept the proven technology of Watson and the support provided by an industry giant like IBM. If the combination of Promontory’s in-depth knowledge basis and Watson’s artificial intelligence do in fact reduce the time used and money spent on regulatory compliance, this will be a tough combination to beat.

Plaid: Friend or Foe


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Whether customers are banking online with a big bank or trading stocks on sleek mobile platforms, their expectations for a smooth and seamless experience are constantly increasing. That’s why banks and fintech startups alike need to partner with the right companies on the back-end to make sure that their digital platforms can quickly and easily access the right data when they need to.

That’s where a company like Plaid steps in. Originally born out of a financial management and recommendation tool, Plaid eventually realized the need to provide fintech developers with an open Application Program Interface (API) that marries back-end bank data with front-end systems. In short, Plaid seamlessly connects applications with their users’ financial data housed in legacy banking systems. Without such technologies, accessing banking information within a third-party application would be nearly impossible.

Plaid has been so valuable to both banks and startups that the firm recently closed a new $44 million funding round led by Goldman Sachs to help grow the platform.

But is Plaid’s open API a boon to banks, or a threat to their survival? Let’s dive in and find out.

THE GOOD
Plaid’s platform and tools enable developers to interact with bank accounts to build financial applications. Plaid’s customers include fintech apps like Robinhood and Betterment, which rely on Plaid to give them access to back-end bank data. These applications can then access customer account data at their bank when providing mobile and web services like budgeting, investing and lending. Plaid also facilitates tokenized ACH transfers for payment processors like Stripe.

Plaid works in direct partnership with banks to make sure their customers can utilize apps like Betterment in conjunction with their accounts. However, Plaid is open (and interested) in broadening its footprint to work with banks of any shape and size in the future. And in so doing, banks that partner with Plaid give their own developers better tools to create apps that mimic the user experience of startups like Betterment and Venmo. That’s a win for banks since Plaid opens the door to developing apps in-house that could compete with fintech startups.

THE BAD
From its inception, Plaid has been focused on helping fintech startups connect their applications with banks to power their core businesses. Currently, Plaid works with thousands of U.S. banks, spanning the largest financial institutions to credit unions, whose customers want to use some of the popular apps powered by Plaid such as Venmo and Acorns.

The bottom line is that, while Plaid’s API is powerful and forward thinking, it needs to develop a track record of success with some of its larger partners in order to gain greater adoption. Plaid also needs to make a concerted effort to reach out to smaller banks and credit unions to draw those customers into the modern fintech ecosystem, with access to many of the newer apps we’ve discussed.

OUR VERDICT: FRIEND
Plaid is up against some stiff competition in the fintech API space, but its future in relation to big banks appears to be friendly. From what we’ve seen so far, Plaid is committed to working in tandem with big banks. By providing tools and resources for application developers and big banks, and expanding the number of institutions they partner with, Plaid is showing that it’s committed to a fintech future with banks still playing a huge role. Ultimately, it’s in banks’ best interests to better serve clients with better access to data, reduced online banking friction and internal innovation. And it looks like banks that work with Plaid in the future can achieve just that.

Joining the FinXTech.com Advisory Team


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Greetings from the United Kingdom. I’m part of the FinXTech Advisory Group and will be writing brief updates here from time to time. You may not know me and so you can find out what I get up to over here and on my blog. In case you don’t want to do that, one of the advisors to President Obama called me “the most authoritative voice” in fintech anywhere, which is why I guess the guys at FinXTech asked me to come on board.

Conversely, why have I joined the FinXTech Advisory Board?Mainly because its membership is comprised of many of the fintech leaders that I respect in the United States from the largest financial institutions, leading investment firms, technology companies, service providers and government entities. FinXTech is not just another media company—it’s a platform for connection via the FinXTech.com website, conferences for networking and interactive brainstorming sessions for real world application.

FinXTech’s mission is simple: to connect those who are truly shaping the future of financial services. The fintech ecosystem consists of five distinct groups:

  • The leaders of fintech companies who are producing, researching and creating new technological solutions.
  • Financial institutions that are embracing, adopting and/or seeking to implement cutting edge advancements.
  • Service providers, consultants, advisors and lawyers who are guiding the regulatory, compliance and implementation processes.
  • The investor and venture capital communities that determine who and what might be the next best thing for financial services.
  • And the government voices, be it from the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau or even the White House.

By establishing a group of advisors, FinXTech is able to set the course and agendas for their platform, based on the thoughts and feedback from some of the best and brightest in the industry—and me. So naturally, I joined, too—to be on the inside cutting edge, in addition to adding to it.

You probably already know a lot about fintech, although you may not know who is leading it. Is it Silicon Valley? Is it Wall Street? Is it London? Or maybe Singapore? In fact, financial technology is everywhere. During my travels—and I travel so much that when people ask me where I live, I usually say the British Airways executive lounge—I see every country with a financial focus creating a fintech focus. Oslo, Berlin, Zurich, Amsterdam, Tel Aviv, Dubai, Bangkok, Sydney, Shanghai, Hong Kong, Mexico City, S??o Paulo—fintech is happening in all of these places.

Why are so many billions of dollars being poured into these new technologies for finance?

The answer is that we are revolutionizing financial services through the Internet. For the past 50 years, bank technology has mostly been deployed for internal efficiencies and usage. Today, technology is creating external efficiencies, particularly through peer-to-peer networking. Apps, APIs, analytics, artificial intelligence, big data, blockchain, cloud, distributed ledgers, machine learning and the Internet of Things are changing everything. Everything is now networked and open sourced through marketplaces and connected platforms. This technological revolution has been bubbling for years, starting with the Amazons and Alibabas of the world, moving along to the Facebooks and Baidus, Tencents and Googles. Now we have the Ubers and Airbnbs, and everyone wants to know who will be the next PayPal or AliPay.

This is why fintech is so exciting, as we have major new players like Stripe and Square appearing almost overnight and gaining multi-billion valuations. There is no doubt that we’ve got it going on, and in my next few pieces here I’ll outline the key trends, players and developments.

For now, I wish you a big hearty British welcome to FinXTech. Glad you could make it and it’s good to be here.

To Buy or to Build: Why the Old Argument is Changing


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When it comes to better meeting the needs of their customers, employees and shareholders, many banks see an upgrade to their existing technology as a starting point. I meet with banks around the globe, and the key issue many of them are debating is whether to build the software themselves or buy an existing solution from a third party. Traditionally, in-house solutions have been the favored option for large banks due to the lack of presumed customization available from third-party providers. However, significant advancements in enterprise technology and security over the last several years have changed the norm.

Recently, I was speaking with a principal at KPMG LLP about this very topic. He said the evolution of more sophisticated software companies has helped turned the tide for many banks. “The maturity of these software platforms, particularly in the last eight to 10 years, around addressing workflow issues and responding to changing regulations in a very nimble way, has really helped move people away from building their own solutions.”

As an analogy, consider the home security business. Millions of people hire specialized home security companies to safeguard their residence each year, because they are the experts. The same holds true for the financial services industry. Whether it be storing and protecting a bank’s most valuable data assets, updating a major operating system or deploying new products and services with the customer’s experience in mind, software companies may bring a level of expertise, experience and readied technology that most banks cannot match on their own–at least not near term.

When faced with their next major tech decision, banks should closely evaluate buying versus building. Below are some key things to consider:

Cost Effectiveness: Most off-the-shelf third-party software systems follow a subscription model, where costs are determined by usage/volume or the number of purchased licenses, instead of paying significant amounts upfront. These systems may be easily configurable and require less extensive resources to implement or maintain, especially when hosted, or even partially hosted, by the provider. Beyond the initial investment with a custom-built solution, there can be significant ongoing maintenance costs. A report by consulting firm McKinsey & Company found that financial services firms spend more than half of their entire applications budgets to support, maintain and enhance custom built, in-house software solutions.

Speed to Market: When it comes to building solutions from the ground up, it’s not uncommon for development and implementation to take upwards of seven years. In some instances, the timeframe may not present any challenges. In a world where speed to market is extremely important, however, banks can usually purchase and implement a fully functional system in a fraction of that time. Depending on the size of the institution and scope of the project, the implementation of a ready-built solution can take as little as six months for community and regional banks, and still within 12 or 18 months for large national banks, reducing financial and opportunity costs, as well as human resource investment.

Long-Term Support: When building and maintaining a custom system, banks must have a thorough succession plan in place to ensure that the institutional knowledge of the system will survive employee turnover. Will the bank have the depth of talent and knowledge to sustain the system once the founding developers leave? For many banks, the answer may eventually become no. While ongoing system familiarity is necessary in any case, the support of a third-party software company can help ease those worries. Many banks appreciate knowing that an outside expert is primarily responsible for continuously driving system improvements, and can be available for training assistance and support if needed.

Efficiency Gains: Strategic applications of technology can revolutionize operations across the bank to improve efficiency by automating workflow, reducing errors and eliminating duplicate data entry. If banks don’t have to worry about intricate details of the system and process, work becomes easier for employees, prompting lower expenses and higher outputs. The largest measure of efficiency is generally how long it can take a bank to see tangible efficiencies from recent technology projects–and how quickly they can offset the cost of deployment.

Brand Consistency: Banks want software that conforms to their own branding strategies. In the past, that was difficult for third parties to achieve and usually resulted in a check in the “build” box. However, many of today’s third-party applications are designed with the ability to take on the same brand of the bank’s other digital and customer-facing applications, giving the bank flexibility and ensuring a consistent look and feel across the enterprise. Depending on the extent of customization made possible, the flexibility to shape an application’s outward identity may no longer be a barrier.

Banks today have options, where the pros and cons of buying or building may seemingly balance out. My greatest piece of advice is to recognize that today’s software landscape looks very different than in the past. Make your decision based on what will allow your team to focus most on core competencies, drive down costs and increase efficiency as much as possible– extending all the way to your customer.

Embracing Disruption: Why Banks and Fintechs Should Work Together in a Regulated Environment


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At first glance, financial technology companies and banks are competitors with similar products but different business models. Fintech companies need fast growth to survive. They must exercise quick marketing strategies and adaptive technologies. And they excel at reaching customers in new ways and providing more personalized customer service. Banks, on the other hand, rely on well-established customer networks, deep pockets and industry experience for their success. However, if they want to preserve their customer base and continue to grow, banks will have to adapt to what’s happening in the financial technology space.

Fintech companies and banks both face many unique challenges. Fintech companies must often decide how to allocate limited resources between marketing, intellectual property, compliance and cybersecurity concerns. Banks depend on legacy technology, lack market speed and must continue to keep pace with new banking regulations and technologies. Although both fintech companies and banks face significant legal barriers, they have different needs and strengths. Fintech companies need the deep regulatory experience that banks have developed over many decades. Banks need flexibility to adapt new technologies to changes in the compliance landscape. These differing but not incompatible needs present an opportune cross point for partnership.

The following laws and regulations exemplify a small portion of the regulatory challenges and business relationship opportunities for fintech companies and banks. Please be aware that all financial products—especially new financial technology products with uncharted regulatory profiles–may implicate many other laws not discussed below.

  • Money transmission laws: In order for a fintech company to transfer money between two individuals, it must be licensed under federal and state money transmission laws. State money transmitter laws vary greatly and this creates a considerable barrier to entering the market on a national scale. Banks are generally exempt from state money transmitter laws. Fintech companies can meet money transmitter compliance requirements by strategically structuring the flow of money with banks. Alternatively, fintech companies can act as an authorized agent of a licensed money transmitter service provider.
  • Lending and brokerage laws: State law may require a lender, buyer, servicer or loan broker to be licensed to engage in its respective activity. A fintech company may face severe consequences for unlicensed lending or brokerage practices. Banks in many cases are able to engage in these types of activities. Fintech companies and banks can structure a business relationship to ensure that appropriate legal precautions are in place. Even if a fintech company is licensed, it does not have the ability to use and apply the interest rates of its home state, a power that is afforded to national banks. Fintech companies may be stuck with interest rate limitations set by the state where the borrower lives. Thus, a strategically structured relationship between a bank and fintech company may provide other non-compliance advantages for lending and brokerage products.
  • UDAP/UDAAP laws: Unfair, deceptive or abusive acts or practices affecting commerce are prohibited by law. Both fintech companies and banks face exposure to penalties for engaging in unfair, deceptive or abusive acts. Taking advantage of fintech companies’ adaptive technologies may help banks minimize the risk of committing the prohibited practices. For example, fintech companies may help banks design software that utilizes pop up warnings on a customer’s phones before the customer makes an overdraft.
  • Financial data law: Financial data is a growing industry that has seen increasing regulatory oversight. Both fintech companies and banks collect enormous amounts of data and may use it for various legal purposes. Data is the core part of the fintech business; fintech companies collect data and rely on data. However, fintech startups do not have the legal and technical resources of traditional banks to resolve a variety of regulatory and cybersecurity concerns related to the use of data. Fintech companies can partner with banks, particularly with respect to cybersecurity issues. A bank offering products through or with a third party is responsible for assessing the cybersecurity risk related to that third party and mitigating it, and thus parties should consider some important questions upfront, including where the data is located, who owns it and how it is protected.

Despite the many issues and concerns that may arise from the partnership between fintech companies and banks, cooperation colors the future. Fintech companies can take advantage of the industry knowledge that bankers possess, certain regulatory advantages that banks enjoy and the industry’s cybersecurity infrastructure. Banks can take advantage of fintech companies’ ability to create new products, certain regulatory advantages and adaptability to regulations. With an understanding of the legal and regulatory framework of fintech companies and banks, their different business models can be used as an opportunity rather than a barrier to business.

Data Rich, Information Poor: Bank Leaders Want More Knowledge on Data


More than half of bank leaders want to know how to better use data, and they agree that it’s one of the top technology concerns for their institution, according to Bank Director’s 2014 Growth Strategy Survey. Large banks are more likely to use data to support growth, but all institutions can find benefits in data analytics.