Open Finance: The future of data sharing
Data: What is it good for?
Although most of us probably don’t consider it as such, data could be regarded as one of the most recyclable commodities on Earth. Every day, consumers produce it, companies collect it, extract the value, transform it into actionable insights, and then create new products and services for the market. From here the cycle continues, and the results it’s produced for financial service institutions (FSIs) so far have been favourable.
Data sharing can be best understood as a consent-based agreement by which privacy is waived in a limited capacity for commercial purposes. Customers gain products that have higher relevance to their lives while FSIs reap enhanced marketing and development opportunities. In Deloitte’s article ‘’, the overall FSI benefits of data sharing are summarised into three categories:
- Inbound data-sharing (acquiring data from third parties) = enriched decision-making.
- Outbound data-sharing (sharing owned data with third parties) = enabling companies to draw on capabilities otherwise undeveloped within their own organisation.
- Collaborative data-sharing (inbound and outbound sharing of similar forms of data) = allowing companies to create richer, larger and more comprehensive datasets than siloed efforts could achieve. This is particularly important as forming ‘data lakes’ becomes more popular.
And yet, despite the mutual beneficiality of data sharing, there still exist several potential drawbacks and aversions to overcome. For customers, there is a persistent reluctance to share sensitive data - found that approximately 44.3% of US fintech app users experienced some degree of discomfort, whether related to account balances, loan history or investment information. Worse, a conducted on behalf of IBM found that only 20% of respondents “completely trust” organisations to properly maintain their data. With incidents of compromised security involving major companies like Capital One and Microsoft still making headlines, this is, perhaps, not unsurprising.
For institutions: better decision-making, access to third-party capabilities, greater scale of data
For regulators: support for innovation and competition, enables effective system oversight
For customers: access to higher quality and more efficient products
For institutions: competition hindered by lack of secrecy, could breach privacy regulations, could potentially alienate customers by appearing ‘omniscient’
For regulators: possible breach of customer privacy
For customers: personal data could be mishandled or misused
(Above from World Economic Forum)
Data sharing is also not without risks for FSIs themselves; creating such a forthcoming environment could erode competitivity by handing too much information to rivals, complex and evolving privacy regulations like GDPR and PSD2 could be breached by unforeseen tech developments, or companies could simply alienate clients by appearing too omniscient for comfort.
Among VC firms and investors data sharing is an important decision-making component, particularly during early-stage investment. Michael Conn, Chairman, CEO, and Co-Chief Investment Officer at Zilliqa Capital, explains, “It is important that the target investment team be open and willing to share the data reflecting their performance to date, the market opportunity and any other metrics that would help demonstrate why they are a better investment than another in the same space.” However, at the same time, Conn clarifies that the value of data today can sometimes be overemphasized; for Zilliqa Capital, the quality of a potential investment’s team is often more of a determining factor. “The fact is that most, if not all businesses, will at some point be forced to pivot away from their initial plans - see Amazon. It is just not possible for data analytics, at least as of now, to prove itself superior to gut instinct when evaluating the quality of an investment target’s team.”
If not fully utilisable as a resource for decision-making, then, what’s needed is a re-evaluation of data sharing, both in terms of its place within modern finance and the methods by which its present shortcomings can be overcome. Open Finance and API (application programming interface) technology could represent such an opportunity.
Open Finance’s value proposition
“Open Finance is all about empowering customers,” explains Jack Wilson, Head of Policy and Regulatory Affairs at TrueLayer. “It gives customers the ability and the right to re-use their financial data in new and innovative ways. It does this by giving a role to third-party providers, who securely retrieve data and put it to work for the customer.” These actors can do so in a variety of ways, such as:
- Consolidating multiple held accounts into a unified view
- Facilitating electronic data transmission that eliminates the need for physical documents when applying for financial products
- Using account data as a form of identity verification
These capabilities are utilised in one of Open Finance’s most widely discussed aspects: Open Banking. Defined by as “a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace,” Open Banking allows for a more direct consumer-bank relationship. The APIs themselves can be of three distinct models: public, partner and internal, each of which has specific functions and benefits. Regarding the latter, these include overall cost reductions, increased operational efficiency, enhanced innovation through collaboration with developer communities, and greater security.
“Consumers are increasingly demanding financial data aggregation services through APIs because it makes personal financial management much easier,” says Thomas J. Curry, Co-Chair of the Banking and Financial Services group at Nutter and former US Comptroller of the Currency. “Banks and fintechs each want to be the primary portal for financial services and they are competing to keep or obtain the customer relationship.”
Public: APIs used by external parties to develop new apps and products. These often facilitate innovative results as a consequence of broader community engagement.
Partner: These APIs create a more integrated connection between business partners, suppliers, etc. They offer better security, lower operating costs, and enable API monetisation opportunities.
Internal: Only used by developers within a single enterprise, internal APIs offer cost reduction, better efficiency and greater security. However, they also lack the potential with regards to integration and innovation.
(Above from McKinsey & Co)
“Open Finance, which broadens out the types of accounts accessed, could offer yet more benefits for both customers and companies,” adds Wilson. He cites the following:
- Aggregated savings and investment data, bringing more holistic financial oversight to consumers.
- Granting access to data that can bring value-added services, such as financial advice, “robo-advice”, better ID verification, and KYC.
- Empowering third parties to carry out fund transfers between customer accounts (savings, ISAs, investments, etc) and initiate account switching.
Security: The elephant in the room
Carried out in its most ideal form, then, Open Finance’s benefits for both customers and companies makes it an attractive proposition. However, there remains what McKinsey calls the topic’s “elephant in the room”, security. Data sharing in any capacity should be a central concern, with each dataset’s value accorded an appropriate level of protection, and customers need to understand how and why some data is used. “[I]nformed consent requires understanding the implications of sharing before approving —no small feat when the reflexive clicking of ‘I Agree’ on an unread set of terms and conditions is standard,” said McKinsey in ‘Data sharing and open banking’. Curry believes that cybersecurity and the protection of data form the major concerns for fintechs and banks regarding APIs’ functionality. “[In the US] Section 1033 of the Dodd Frank Act makes it clear that consumers have a right to their financial information. Some progress has been made in developing voluntary standards for APIs but regulatory clarity is needed. The Biden CFPB (Consumer Financial Protection Bureau) will likely develop a more concrete regulatory framework for APIs.”
Therefore, it seems clear that, in addition to general clarity regarding data sharing policies, what customers really need are examples that demonstrate why APIs are beneficial and what Open Finance can do for them.
A recent between TrueLayer and UK digital bank Monzo provided one such demonstration. With customers using Open Finance as a payment method for online gambling, Monzo needed a solution to protect its at-risk customers by blocking transactions to certain gaming sites. TrueLayer was brought on board to implement an enhanced API capable of notifying the bank whenever a customer with gambling restrictions on their account attempted to pay via Open Finance. TS Anil, Monzo’s CEO, praised the API and stated that it was “simple to build, proven to work, and will help protect hundreds of thousands of people.” The finance industry’s accumulation of such examples will be pivotal in convincing consumers that data sharing can be responsible and useful for safeguarding them.
Data sharing through Open Finance is ultimately a path towards greater convenience, better products and services, and significantly cheaper operations for FSIs. Making sure that customers are aware of these benefits, concludes Wilson, will be the aim of the game. “At the very least, dealing with physical paperwork and documentation in financial transactions will become a thing of the past."