“Data is the new oil” – it’s a phrase you’re probably sick of hearing. But in an age where data is more important than ever, it’s also more important to manage it correctly, especially in a banking context. But what exactly is data governance in banking and why is it such a vital part of the industry?
Data governance is the process of creating rules to dictate how data is gathered, stored, used and disposed of. It’s critical to any organisation housing or processing customer data, which nowadays, is virtually all of them.
“Data governance is everything you do to ensure data is secure, private, accurate, available, and usable. It includes the actions people must take, the processes they must follow, and the technology that supports them throughout the data life cycle.” – Google Cloud
With more data than ever now available, complying with the latest data governance regulations is essential. Getting it right or wrong can be the difference between being sued by regulators and creating a successful company that uses data to augment its business operations.
Data governance allows a bank to use its customer data for everything from targeting of products to fighting fraud and ensuring customer funds are kept safe.
Let’s take a look at just why data governance is so important to the banking industry and how blockchain could upend how it’s managed.
Data Governance In Banking
Banks often have high-quality and accurate data on their customers and correct data governance procedures can make or break its relationship with them. They know how much they earn, how much they spend and where they spend it. Letting this sort of data fall into the wrong hands could be catastrophic, but good data governance practices can ensure that the information is secure and make managing operations much easier.
Image source: Alation
Separate to its business operations, regulators also demand that banks have effective data governance procedures in place to protect customers. It’s not uncommon for banks that fail to follow or update their data governance policies to be sued by regulators (or vice versa if the banks believe the rules are unfair).
In addition to this, if a bank’s systems have access to clean reliable data, it’s much easier to integrate it with new technologies, improve the customer experience and the bank’s understanding of its customers’ needs.
Some of the recent disruptions to traditional banking include the rise of neobanks and embedded finance. But in my opinion, arguably the biggest recent technological shift that could improve banking are blockchain applications. Let’s see just how blockchain might improve the data governance process in banking.
Blockchain And Data Governance In Banking
I’m sure you’ve heard of blockchain and have some idea of what it is, but here’s a simple one sentence summary from IBM for the uninitiated – “Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.”
Its potential applications range from supply chain management to real estate and medicine. But the financial sector, perhaps more so than others, is where its promise holds the greatest potential. Blockchain offers a novel approach to managing data and can improve a bank’s data governance protocols in many ways. Here are just a few.
KYC (Know Your Customer)
By recording the data on a publicly verifiable and immutable ledger, the KYC process can be greatly improved. I covered this more in depth in a previous article, but in brief, the data would be available to all members of the network to view and decide for themselves whether the user might pose an issue for the bank.
Fraud Prevention
Blockchain can also reduce the opportunities for fraud. Its immutability ensures that every transaction is recorded permanently and the fact that it’s publicly verifiable means that anyone can view and trust a previous transaction for themselves. It’s virtually impossible to manipulate the record of previous transactions.
Transaction Monitoring
Blockchain allows for real-time transaction monitoring and therefore the immediate detection of suspicious activities. This capability allows for quicker responses to potential threats and can improve anti-money laundering (AML) protections.
Blockchain In Investment Banking
Investopedia defines investment banking as “a type of banking that organizes large, complex financial transactions such as mergers or initial public offering (IPO) underwriting.” It’s been around for centuries and remains a pillar of the financial and business world, but still has problems that blockchain can help with.
Decentralising Control
Trust in centralised institutions, it’s widely acknowledged, is at an all time low. There are many reasons for this that are beyond the scope of this articles, but having to allow an institution you might not trust to access your personal data is obviously a worry.
“In a decentralized blockchain network, no one has to know or trust anyone else. Each member in the network has a copy of the exact same data in the form of a distributed ledger. If a member’s ledger is altered or corrupted in any way, it will be rejected by the majority of the members in the network.” – Amazon Web Services.
The rise of Web3 has brought with it the increasing use of decentralised autonomous organisations, more colloquially known as DAOs (thankfully). DAOs are an emerging form of governance whereby no single entity has a central governing body but stakeholders themselves make decisions directly on the governance of the community. Ironically for a new technology, they’re perhaps similar to the direct democracy of ancient Greece, where one person equals one vote, rather than the democracy by representation most countries are governed by today.
In a 2023 paper, the European Central Bank acknowledged that DAOs could play a useful role in global banking and data control but also said that institutions need to catch up with the technology first and decide how to regulate and oversee it.
Improved Processing Of Syndicated Loans
Loan syndication is a practice that allows a borrower to raise money from a number of lenders, as opposed to a bilateral loan – a loan agreed between just two parties. It’s important in investment banking as it spreads the risk for the borrower, rather than having all the money come from a single source. However, the process of coordinating these loans can be complicated.
Although less risky, it’s much harder to raise money and agree terms with multiple parties vs a single one. It means that the borrower has to trust and share data with many stakeholders, and that they in turn have to trust the borrower. However, there are new methods being developed to remove the need for this.
Self Sovereign Identity (SSI) is a new paradigm in the world of digital identity. It provides individuals with control over their own data by allowing them to secure that data in a mobile wallet, rather than relying on a third party to hold it. Decentralised Identifiers (DID), unique pseudonymous identifiers stored on a blockchain, are a key component of the SSI movement. Using DIDs, an individual can decide which information to share, with whom and how long it’s kept. To me, this is surely a much better process than the way that companies currently hoover up user data almost indiscriminately.
Making the pseudonymous ID and transaction data of the borrower and lenders publicly verifiable would vastly simplify the syndicated loan process. None of the parties would have to rely on audits; it would be possible to verify the data simply by examining the funds and historic reliability of the other parties on the blockchain. Auditing and reporting become much simpler and the data can be trusted by all involved.
Blockchain In Trade Finance
80% of global trade depends on some form of financing so making the process as trustworthy and efficient as possible has the potential to unlock huge benefits for those that rely on it. We’ve seen how blockchain can improve on one sector of trade finance before – supply chain finance. But how could it improve trust in the field?
Improving Trust
Arguably the biggest issue in trade finance at the moment is the issue of trust – how can two parties on opposite sides of the world, regulated by completely different bodies, have faith in each other? Blockchain’s immutability, open and decentralised nature mean that anyone can view previous transactions for themselves and see the flow of money around the world.
New technologies such as smart contracts which can be built on top of blockchain platforms also help improve trust and automation. Combine these with open-source blockchains like Quorum, developed by J.P. Morgan and purchased by Consensys in 2020, and you have a great platform for building secure, transparent and easily deployable software to enhance confidence in trade finance.
Implementing Blockchain-Based Data Governance In Banking
Although there are many advantages for banks to using blockchain within a data governance setting, challenges remain. As often with any new technology, one of the main ones is complying with evolving and opaque regulations.
Complying With Regulators
Brian Armstrong, CEO of Coinbase, the world’s largest cryptocurrency exchange, said in a recent interview with the Hoover Institute that one of the main issues with regulators at the moment is that they refuse to clearly outline guidelines. The rules are set by when and why the regulators decide to sue Coinbase, but Coinbase itself has no idea whether a new practice or process it creates might be a violation of the SEC’s rules or not.
This process, known as “regulation by enforcement”, has led to Coinbase going toe to toe with the SEC. This isn’t just a problem with data in the crypto world, but also poses an issue when it comes to other blockchain applications as well. How can anyone comply with regulations when they don’t know what the regulations are?
Thankfully, data governance is evolving. Regulations like the EU’s new Data Governance Act mean that data can be shared and re-used with confidence. But in my opinion, these regulations aren’t being created quick enough to keep up with the rapid pace of innovation in the new era of Web3.
Combining regulatory compliance and blockchain would mean that companies can easily view the most recent rules governing their data management requirements and could even update their practices automatically in real time. Thus, to some degree, cutting out perhaps one of the most tedious but important parts of anyone’s job – complying with regulations.
User Privacy And Data Ownership
One of the cornerstones of Blockchain applications, and Web3 as a whole is data ownership and sovereignty. In the banking industry at present, the data is almost always owned by the banks; as long as they comply with the regulators, they have control over where it goes and what it’s used for.
Startups like mintBlue however are changing this. They allow applications to be built on BSV, an extremely energy and cost efficient blockchain and give control of the data back to the individual ultimately creating it, the consumer.
“In our ‘data ownership-first’ approach, users have absolute control over where their data can be interfaced and used — but it is only their responsibility as long as it is also within their jurisdiction’s legislative framework.” – mintBlue Why does this matter? Unfortunately, once collected, central authorities don’t always use data in an ethical manner and it can be stolen or misused. The examples are countless and ever growing with social media companies and government bodies being some of the most notorious offenders. Banking is no exception.
Storing the data on a public blockchain makes it much more secure than the centralised systems it’s often stored on today. If it’s stored pseudonymously, then even if bad actors do get access to it it’s unlikely to be useful to them.
Hopes For The Future Of Blockchain And Data Governance
The banking sector, in times gone by, was viewed as a bastion of privacy and safety. But this is perhaps further from the truth than ever today. Data breaches, the hangover from the 2008 financial crisis and a general growing mistrust of institutions, mean that the reputation of the banking sector has fallen in the past 15 years. I think most would agree that a new approach to data governance within banking (and on the internet in general!) is needed.
Blockchain applications certainly aren’t perfect. Perhaps their main issue to wider adoption at the moment is the staining of blockchain’s reputation and general misunderstanding of it due to its association with cryptocurrency. However, its pseudonymous and secure nature, along with the technologies being built upon it such as smart contracts, provide a new approach to data governance and management.
Using blockchain to improve data governance is not merely about adhering to the stringent regulatory frameworks that dictate the handling of sensitive customer data. It’s also about leveraging new technologies to enhance operational efficiency and the customer experience.
If implemented correctly, banks will be positioned to offer more personalized and secure services and foster a deeper trust with their clientele while navigating global data protection regulations.
