Data sharing: the key to a digital banking revolution?
Data-driven insights and analysis could be the key to effecting structural change in the FinTech world, but companies need to contend with increased customer demand for data security and privacy.
Over the past five years, the digital banking revolution has had a seismic impact on the relationship between customers and the institutions that handle their money. The rise of online banking – along with its accompanying wave of digital-only challenger banks – mobile payments and increasingly personalised money management tools have given birth to a FinTech industry expected to reach an estimated value of more than $305bn by 2023. The driving force behind this sweeping digital transformation is the exponential growth of big data which, when twinned with cutting-edge AI and machine learning analytics, has created actionable insights that are leading financial institutions down a road towards a customer-centric, hyper-personalised financial future.
That being said, while FinTech has enabled myriad new ways for us to buy stocks, deposit cheques and otherwise manage our money, some industry leaders think that the real revolution is still around the corner.
“I still find it pretty interesting that there’s been substantial technological change out there, but that the banking system we have is pretty similar to the one that was created by the Medici in the 13th century,” said Stephen Cecchetti, the Rosen Family Chair in International Finance at Brandeis International Business School, speaking at the FinTech and Digital Currency panel at Boston FinTech Week 2019. “It’s true that I can do things on my phone, but the things I do on my phone are not fundamentally different, they are just a little bit easier.” Cecchetti is confident that deep, structural change is coming to the sector, and that data analytics and insight gathering are going to be at the heart of the transformation.
The dangers of data mismanagement
However, in 2019, data is a sticky subject. The past decade been defined by high profile data breaches like the theft of personal information contained in some three billion accounts from Yahoo in 2016, which takes the trophy for ‘Biggest Invasion of Privacy in the History of Mankind’, and was a blunder that knocked an estimated $350mn off the company’s sale price. “The damages of these data breaches are not only reputational, but also financial. As a result of Equifax’s data breach, the organisation reached an agreement to pay at least $575mn and up to $700mn to compensate those whose personal data was exposed,” writes Simon Hill, Head of Legal & Compliance at encryption company Certes Networks. “In 2016 Tesco Bank was fined £16.4mn by the Financial Conduct Authority (FCA) over a ‘largely avoidable’ cyber-attack that saw criminals steal over £2mn from 34 accounts.” No matter the size of the breach, Hill notes, the penalties that companies can incur have the potential to be severe.
More than data theft, though, the public concern and conversation has turned in the last few years towards the misuse and unwanted distribution and sharing of personal data by vast corporations like Facebook, in order to generate revenue and – more importantly – the kind of actionable insights that are driving the digital transformation of the customer experience. This year, the fourth annual Brand Relevance Index by consultancy firm Prophet found that, although “61% of consumers cannot imagine living without it, just 2% trust it in the wake of various scandals, and only 9% agree with its values.” Regulatory initiatives like GDPR and Open Banking are working to ensure that individual data in handled with greater sensitivity and security, but the need for transparency into companies’ data policies is becoming more and more of a ‘must have’ for enterprises that wish to keep good faith and relationships with an increasingly powerful and discerning consumer class.
Today’s FinTech firms have a narrow line to walk then, between a raging ocean of data in which lies the insights that could allow them to create genuine market disruption, and a customer base demanding increased privacy, particularly regarding financial information. Things like GDPR compliance and participation in Open Banking are going to be an essential strategy for FinTech and banks that want to fully utilise customer data.
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Wells Fargo and Plaid: a partnership to pave the way?
In September, US banking giant Wells Fargo announced that it was entering into a deal with data driven FinTech startup Plaid, hot on the heels of the San Francisco-based company receiving new investment from Visa. The new partnership will allow Wells Fargo customers to conveniently and more securely share their financial data with the digital financial tools and services that Plaid supports, using an application-programming interface (API). According to a company press release, a large number of Wells Fargo customers access their financial data through Plaid to use apps that help them “lead healthier financial lives”. The partnership will reportedly give those customers more control over the bank account information they share with Plaid-supported apps, including the ability to turn on or off data sharing through Wells Fargo’s Control Tower application.
“It is critical that consumers have more secure and seamless access to their own financial data to power their modern financial lives,” said Sima Gandhi, Head of Business Development and Strategy at Plaid, “and our collaboration with Wells Fargo will ensure that our mutual customers can enjoy the best of fintech innovation for years to come. We’re particularly excited by Wells Fargo’s industry-leading approach to enhancing user control and transparency by ensuring compatibility between the Plaid platform and Wells Fargo’s Control Tower. Centred on trust and collaboration, the partnership between Plaid and Wells Fargo represents how traditional banking services and technology companies can innovate together.”
Going forward, data sharing agreements solve the problem of regulation, giving FinTechs and banks the ability to capitalise on the power of big data while ensuring that consumer privacy is maintained. If these two needs can be balanced and met, then the financial space five years from now could look drastically different from the one today.
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BIS and MAS publish blueprint for cross-border payment idea
The Bank for International Settlements and the Monetary Authority of Singapore (MAS) has published a proposed blueprint for the multilateral linking of domestic real-time payment systems across borders.
The blueprint, titled Project Nexus, outlines how countries can fully integrate their retail payment systems onto a single cross-border network, allowing customers to make cross-border transfers instantly and securely via their mobile phones or internet devices.
The Nexus blueprint was developed through consultation with multiple central banks and financial institutions across the globe. It builds on the bilateral linkage between Singapore's PayNow and Thailand's PromptPay, launched in April 2021, and benefits from the experience of the National Payments Corporation of India's (NPCI) development and operation of the Unified Payments Interface (UPI) system.
The Nexus blueprint comprises two main elements:
- Nexus Gateways, to be developed and implemented by the operators of participating countries' national payment systems, will serve to coordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. These gateways will be predicated on a common set of technical standards, functionalities and operational guidelines set out within the proposal.
- An overarching Nexus Scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to coordinate and effect cross-border payments through the network.
“To achieve significant cost-reduction in cross-border payment transfers, enhancements must be made on two fronts: direct connectivity between domestic faster payment systems, and frictionless foreign exchange on shared common wholesale settlement infrastructures. The BIS Innovation Hub Singapore Centre is working on both. The Nexus project maps out a much-needed set of standards to achieve seamless cross-border payment systems connectivity.” said Sopnendu Mohanty, Chief FinTech Officer, MAS.
How do cross-border payments work?
Cross-border payments are currency transactions between people or businesses that are in different countries. The sender will choose a front-end provider, such as a bank or a money transfer operator (e.g. Transferwise), to initiate the payment. The receiver then receives the payment via the medium specified by the sender. Traditionally, cross-border payments flow via the correspondent banking network (CBN) which most front-end providers use to settle the payment. But, in recent years, new back-end networks emerged to optimise cross-border payments and enable interoperability between payment methods and provide senders with more possibilities to reach the receiver.
The increased international mobility of goods, services, capital, and people have contributed to the growing economic importance of cross-border payments. The value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.