In what may resemble a high-frequency trading floor, Formula One engineers and drivers employ an arsenal of computers, sensors, and technology to distribute data at rates of a fraction of a second, so crews can quickly assess both driver and racing car. But stringent regulations require frequent upgrades to the cars in order to meet safety and maintenance measures designed to avoid crashes and fatalities. Those upgrades propel the need for new technologies, and lead teams to evaluate and make changes that result in increased speed. In Formula One racing, new regulations foster innovation and result in more competitive races.

The challenge of abiding by regulation while transforming data into innovation is not unique to Formula One. The widespread effects of the General Data Protection Regulation (GDPR) were a reminder that data is a tool and a commodity, entrenched within nearly every aspect of modern life. Perhaps no industry is more aware of the prevalence and importance of data than social media, specifically Facebook, whose CEO Mark Zuckerberg faced questioning and scrutiny from US and European lawmakers after revelations that the company provided individuals’ data to political consultancy Cambridge Analytica, followed by a lawsuit filed in the state of California alleging that Facebook has “weaponized” data.

At the North American Financial Innovation Summit (NAFIS) in May, Stephen Harris, global head of data management strategy at Facebook, touched on the scandal, joking that the Facebook Messenger service “extends from personal to business, and it also gets you an invite to Capitol Hill,” but he is serious about regulation’s effects on innovation in financial services. Harris told delegates that although at times regulation is “absolutely relevant and required,” if there isn’t a balance, the burden of compliance can “disrupt continued innovation and growth.”

He said that tech giants such as Facebook, Amazon, and Google are ahead of the financial industry in their use of data analytics to innovate—something he says financial services firms must do if they want to grow their business.

However, some data experts take another view: they believe regulations that demand better data governance, such as BCBS 239, may actually foster innovation because they force firms to develop the tools for improved data management, which is a key first step in generating ideas that truly change the game.

“The perception that governance inhibits innovation is wrong. Innovation is achieved through trust and information—access to it, and the ability to apply it in the right manner,” says John Bottega, executive director at the EDM Council and former chief data officer at Bank of America and the Federal Reserve Bank of New York.

Governance Groundwork

As the former head of data enterprise and data strategy at Wells Fargo, Facebook’s Harris has extensive experience with the frequently frustrating realities of regulatory compliance. He argues that rules-based frameworks and regulations in the financial services industry can cripple data insights used to develop new business ideas.

“The ability to lean more towards controlling mechanisms, and not over-governing, will give you way more flexibility. If you weigh in on the governance, nine times out of 10 you’re going to slow down innovation, and I think we all understand and know that—and it’s what regulators need to hear,” he said at NAFIS.

However, regulations require firms to develop distinct strategies wherein they take ownership of their data and manage it well, so good governance and data management are critical components of compliance, according to Bottega. As a result, he says, compliance projects can be pivotal in reforming legacy systems and overhauling management practices across every business unit.

Beyond increasing the efficiency of data analytics, governance is cultivating an environment where risk is evaluated effectively in order to prevent another crisis, Bottega says. While finance executives are often eager to pursue data management initiatives, the key to leveraging data into innovation is zeroing in on a distinct data strategy and governance plan that enables the collective flow of information between every office within an organization.

“Without guidelines by which to identify the ownership and curation of data, without a process to access data in an effective way, and ensure that it is being used in an appropriate manner, then what is being created is not innovation—it’s incorrect results,” he says.

Problems with the Plan

BCBS 239 requires 14 principles for effective risk data aggregation and risk reporting (RDARR). Two and a half years past deadline, the Basel Committee on Banking Supervision and the European Central Bank both report that the industry is still struggling with implementation of the first two principles: data governance and data management.

Harris highlighted the slow, drawn-out adoption of data governance as a hindrance to growth opportunities. In his former role at Wells Fargo, he said, he noticed that Google and Facebook were able to move quickly when implementing data strategies, and wondered why the bank could not keep up the pace.

“Why do we [the financial services industry] need a third-party committee—the Basel Committee on Banking Supervision—to come out and introduce this principle-based regulation to help uncover and create transparency in the data? The point is, we [the industry] are talking about the data, so why is it so hard to have a fact-based data conversation with everyone sitting around the table, looking for a common set of definitions and to come out of the room with the same answers?” he said.

Bottega says the lack of common definitions is not limited to the fine details of the data itself. In some cases, it extends to data management at a senior level, as many top executives and data officials still grapple with how to define data governance for their firm.

A key obstacle is a lack of uniform, industry-wide methodologies, but having business lines across all levels of financial firms working together creates data ownership and accountability for data quality, said Rick Aiere, consultant and senior IT architect at AIG, during a panel discussion at NAFIS. He said that even if governance slows the pace of innovation, it reduces costs and the time it takes to evaluate “dirty” data, adding that it might not be the best model for financial companies to follow the example of tech companies.

“If Facebook was so good [at data governance], then you wouldn’t see Mark Zuckerberg answering all kinds of comments from Congress and governments today. Now you see the importance of governance, because they didn’t think of it. It’s not that they didn’t do anything—they probably did, they thought they had their bases covered—but now those things are coming to light in terms of not thinking about data and focusing only on technology and innovation, there’s a big pitfall, which is something we [the financial services industry] have learned over the last 20 years,” Aiere said.

Once an organization has defined governance for itself, the next step toward creating an innovation-friendly environment is to maximize the potential of its data professionals’ expertise to create and respond to new opportunities.

Aiere said that having the right people within an organization to understand datasets and take ownership over data sourcing is pivotal to ensuring correct context for information. “Knowing what your sources are provides a vantage point of consumption, which leads to more innovation because, for example, now you know exactly what the code for the data is and have all the data in one place.”

Harris also warned against underestimating the power of leveraging data professionals’ expertise: “Non-data professionals have a unique skillset as well, which is very much business-centric, and oftentimes embedded in core business processes, which can really drive the conversation when empowered with the right information. So lean on the data professionals in your organization to help you accomplish that, because the more you do that, the more insights you will glean from the data.”

Damian Sutcliffe, former Goldman Sachs CIO and advisor to Ipushpull, says the complexity of the market and the magnitude of the regulatory demand for capital has made it difficult, especially in the investment banking space, to be as disruptive as Google or Amazon, but the financial industry shouldn’t dismiss innovation by tech giants, either.

“Anybody who’s not worried about Amazon, Google, Apple, et cetera, in any industry, is potentially going to get called out. Those types of company are much more likely to disrupt the consumer end of the spectrum first, whether it is consumer banking or mutual fund-type investing,” Sutcliffe says.

How Banks Rank

In the decade since the 2008 financial crisis, regulations have placed greater emphasis on data quality and accuracy, and on how data is managed, stored, and disseminated for regulatory reporting and risk analysis. Although projects to comply with new regulations have commanded a greater share of budgets than other efforts, they have led to better data management techniques, which can, in turn, support data analytics breakthroughs and other forms of innovation.

“Regulation has not only created a framework for banks and buy-side firms to look at and manage their risk, it has also created a platform for banks and the buy side to differentiate themselves through their use of data. I don’t think regulation has massively hindered innovation,” says Bradley Foster, global head of enterprise data content at Bloomberg. “Regulation creates a great platform from which banks and buy-side firms can operate and use data as a means to generate alpha.”

Foster adds that post-crisis regulation has been paramount in producing greater market transparency and pushing firms to create standardized systems. He assigns the blame for the financial crisis to a lack of transparency and the inability of firms to sufficiently evaluate risk metrics due to inconsistent and poor-quality data that isn’t normalized. Working within that reality, banks may be better served if, rather than racing to keep up with tech giants, they partner with fintechs to bridge gaps in the industry.

“A bank might be trying to play catch-up, and if it’s in that position, leveraging those fintechs can really allow an acceleration of leapfrogging the competition,” Sutcliffe says, adding that fintechs may be a less expensive option for banks than fixing a problem internally. “It’s a matter of fintechs trying to survey the marketplace to see if there’s anything that can help achieve what’s missing, and then going to a bank with an idea they think is better.”

The explosion of fintech companies has fostered a “convergence between technology and financial services,” Foster says. Industry-wide initiatives such as regulatory sandboxes and fintech-bank partnerships are providing fintechs with tools to test their ideas and gain capital. “Banking is coming together with the technology sector to form fintech partnerships to look at technology as an enabler and data as an answer. Financial services relative to other industry sectors, in my experience, is front and center,” he says.

In fact, Foster argues that the financial industry might not be so far behind fintechs. “Look at how data is being used for simple things like marketplace lending, for example, which was largely the domain of banks providing capital to small and medium-sized businesses. It was built off of mined data—aggregating data, mining that data, writing proprietary algorithms, and essentially figuring out how to approve certain borrower credits,” he says.

The production of alternative datasets, the use of artificial intelligence to evaluate risks, and data aggregation for faster regulatory reporting all reveal the strides the industry is making toward generating alpha from data, according to Foster. Better data management—attributed to stringent data governance practices—is allowing firms to generate higher-quality data and manage it in a way it can be used for keener insights, he says.

EDM Council’s Bottega says it is unfair to compare the banking sector to the technology sector when it comes to using data for innovation, because companies such as Facebook are “in the business of innovation.” Although he believes banks are moving in the right direction, ultimately, he says, a bank’s job is to provide capital. So using technology to support that goal will help improve the underlying function of the bank, but it isn’t its sole purpose. 

“Banking executives are looking at Silicon Valley, and it’s the other way around, too. I think the concept of learning from peers and other verticals is an absolute, and I see the banks doing that,” Bottega says.