Data Protection Laws vs. Competitiveness

June 15, 2022


The rise of digitization puts all organizations, from startups to multinational conglomerates, under pressure to be visible in the digital universe to operate profitably. For one, almost all potential buyers will always visit websites, smartphone apps, and social media before buying.

A survey by Salesforce, a U.S. cloud-based software company, found that 85% of consumers research a product online before buying. Almost 75% use company websites to learn more about products, while social media accounted for 38% of searches. “Consequently, businesses need to have an effective online strategy to increase brand awareness and grow,” Goran Paun, creative director of ArtVersion, a Chicago design consultancy, wrote in July 2020 in Forbes.

An essential element in developing an engaging online strategy is understanding the potential customer. That means accessing consumer data to identify their online habits, preferences, and resonating messages. “In today’s global economy, everything is driven by data,” Boris Bialek, global head of industry solutions at MongoDB, wrote in an April blog on Finextra, a fintech newswire. “More specifically, payment data and analytics [are] at the core of driving commerce modernization forward.”

That collected data could show how consumers behave at a bricks-and-mortar outlet or an online portal. That would ultimately allow a company to customize its products and services to entice its target audiences to buy more as products become more relevant to their needs. However, the risk is that some data-collection practices could violate those buyers’ right to keep their purchase habits private. That is particularly evident if a third party collects and sells that data to whoever wants to buy it.

American businesses are leading in data monetization as most digital products and platforms are developed in the country. Their challenge is finding ways to keep customer data collection legal. Despite those legal limitations, data monetization has been booming to the point of raising concerns by the U.S. Consumer Financial Protection Bureau (CFPB). The United States “is lurching toward a market structure where finance and commerce commingle, fueled by uncontrolled flows of consumer data,” said Rohit Chopra, the CFPB’s director, in April, during a Senate Banking Committee.

America’s payment system is becoming a “Chinese-style” market where tech conglomerates “developed … social scores that go beyond credit performance and relies on analyzing habits unrelated to credit and banking,” Chopra said. That could eventually infringe on “privacy, [resulting in] fraud and discrimination.”

Some of the companies Chopra cited operate in Egypt, including Amazon, Apple, Google, Meta, and PayPal. Given their global footprint, their data collection practices could conflict with the country’s data privacy law enacted in October 2020, which prohibits data monetization. That presents a significant hurdle since Egypt – the most populous, young, and tech-savvy Arab nation – is an important market for those tech companies.

Data monetization

Data monetization includes selling customer transaction details to third parties, who can then peddle them to “credit card companies, credit rating agencies, retailers, etc.,” wrote Bialek in April.

Companies can also use their data to improve their operations, likely using a third party to analyze what the information means.

An Allied Marketing report predicts the data monetization market will grow from $2.1 billion in 2020 to $15.4 billion by 2030, citing the increasing amount of data consumers generate online.

Data monetization is essential for digital platforms that depend on merchants to list products and services, such as e-commerce websites. “Traditionally, payment acceptance providers made money from fees charged to merchants for accepting payments from their customers,” Jan Sauerbry, associate director at EY-Parthenon Strategy, wrote in November 2020. “But in a sector transformed by digital solutions, this core business model is under threat … Merchants are now less willing to pay for services they see as commodities, and competition is increasing from software providers that have expanded into payments with flexible online solutions.”

Accordingly, many payment platforms moved into consumer finance to turn a profit, offering cash advances to merchants and developing business management solutions to help merchants go online. They became a go-to-destination, integrating all consumer needs on one platform. According to the Mckinsey 2021 Digital Payments Consumer Survey, published in October, just under 58% of digital payments were made via such channels.

As a result of all that data flow, a company’s commercial success online and in the real world relies on analyzing data and buying data from competitors and third parties. It is particularly vital if they plan to diversify into new products and services.

That transformation only increases those companies’ hunger for data, as becoming a go-to-destination gives digital platforms more data about consumers than ever. Sauerbry stressed that such data is a company’s “most valuable asset.”

The EY-Parthenon executive said collected transaction and customer data can generate descriptive analytics by “finding insights in historical data.” That includes finding why and when “customers abandon online checkout.” Aggregated data analytics could help rival platforms and merchants discover why they aren’t generating more sales. Companies could also “use past data to forecast events,” wrote Sauerbry. “These insights can help [platforms and] merchants choose the best locations for outlets, optimize staffing or make other decisions that depend on knowledge of customer flow or buyer demographics.”

Monetizing data also could allow cooperation among multiple partners, including vendors, merchants, and banks, to “enable the seamless provision of financing offerings,” noted Sauerbry. “Of course, these collaborations would need to be mutually beneficial and potentially include commercial sales partnerships.” That likely would require all partners to share customers’ data among themselves and even purchase outside consumer data.

According to a June 2021 report by Fintech Futures, a specialized think tank, 38% of surveyed banks said that “supporting payments data monetization initiatives is a clear objective of payment infrastructure investments.” An average of 79% of a bank’s corporate clients are “willing to pay” for data that would improve their business performance. “With many already embarking on payments data monetization strategies, few can afford to be left behind,” the report added.

Leading the world

According to the October Mckinsey survey, “more than four in five Americans used some form of digital payments in 2021.” That compares with 78% in 2020 and 72% five years ago.

It explained that U.S. consumers aged 18 to 54 have “converged to a greater extent than many might have expected” to digital payment platforms since the pandemic.

They used “browser-based or in-app online purchases, in-store checkout using a mobile phone and/or QR codes, and person-to-person payments,” the McKinsey report explained. However, not all U.S. consumers use payment cards. “Responses on cryptocurrency and ‘buy now, pay later,’ financing indicate these topics have moved further into the mainstream for the American consumer.”

In America, consumer transaction data is mainly collected and stored in banks and traditional payment networks, including Visa and Mastercard, because they are the most trusted channels to hold personal data, said the McKinsey report.

U.S. tech firms Apple, Amazon, and PayPal, are closing that trust gap. “New fintechs generally register lower consumer trust, perhaps because they have not gained name recognition and familiarity,” said the McKinsey report. “Regardless of providers, younger respondents consistently express higher trust in digital solutions.”

As a result, more U.S.-based tech companies will have more and increasingly diverse consumer data, opening the door for more monetization opportunities. According to Kieran Hines, senior analyst at the U.S. fintech research and advisory firm Celnet, digitizing the economy and more competition boost demand for data. “Faced with an increasingly complex operating environment [companies need] help [to] reduce costs and increase operational efficiency,” he noted in the company’s blog in September. “What is different in today’s market is the competitive intensity of the markets means clients have far more choices over the providers they work with.”

Research by Celnet found 79% of banks in North America said that “clients’ demand for data-led services is increasing.” Meanwhile, 83% of organizations have a “clear strategy to leverage payment data to support value services.”

From the company side, 71% said they would “consider moving some or all their … business to partners that can bring [the data they need].” Additionally, 33% ranked “real-time cash balances as one of the top three services they would pay to access.”

Digital barriers?

Almost all global platforms–including Google, the dominant search platform; Amazon, the world’s largest e-commerce platform; and virtually all social media platforms — will apply data monetization strategies in countries where they operate. According to Chopra of CFPB during the April Senate hearing, those companies rely on expanding their networks and collecting and monetizing data from their users. “Knowing what we spend our money [and time] on is a valuable source of data on consumer behavior,” Chopra said.

Such expansive data collection and monetization approaches might conflict with data protection laws, said Sauerbrey of EY-Parthenon. “Service providers must … keep privacy and data protection laws, such as the [European Union’s] General Data Protection Regulation (GDPR), at the front of their minds. A go-to-market strategy must consider privacy and data protection laws. Analyzing data at a transaction level … could have serious legal implications.”

Egypt is vital for digital platforms, given its large young population. However, its first-ever data privacy law makes data monetization difficult.

The country-based the law on the GDPR, which Clyde and Co., a legal office with branches in 50 countries, said is the “gold standard” of data protection laws.

It applies to Egyptian and non-Egyptian corporations collecting data from individuals inside the country, including data identifying a person, such as a name or ID number. “It also includes … data that could reveal an individual’s… economic status or cultural or social identity,” noted Clyde & Co. That would include payment details, shopping habits, or places they visited or researched. However, the law only covers digital platforms. “It applies to data that is processed either partially or entirely by electronic means by a ‘controller, processor or holder,'” said the law firm’s analysis.

As per the law, digital platforms such as PayPal, Amazon, Google, and others could legally use Egyptians’ consumer data if “the data subject consents.” The other condition is the platform must prove to the government the data is “necessary for the performance or a contractual obligation … the execution of an agreement for the benefit of the data subject,” Clyde & Co. explained.

The law firm warned that digital platforms would find it increasingly tricky to navigate Egypt’s law. “The law does not specify what constitutes valid consent. It refers to ‘explicit consent’ in Article 2, but this is not repeated elsewhere in the law,” it explained.

The other dimension that companies need to navigate while monetizing data is maintaining customer confidence. “While [data monetization] can bring revenue gains, there is an equally urgent need to invest in order to protect existing client relationships,” wrote Hines of Celnet. A company could achieve that through transparent data collection procedures, granting permission to monetize data, and giving customers control over what a company sells to third parties. Additionally, companies could request more data from their customers to improve services, negating the need for outside consumer data.

Overcoming those barriers will require a mindset change within companies. “As the payment landscape continues to evolve and regulations make more of an impact, having the right infrastructure to modernize, innovate and monetize is more important than ever,” said Bialek of MongoDB. “It shouldn’t be an afterthought or a technology-driven decision. It has to be a cultural change to embrace data, its power and flexibility.”