At some point, financial institutions will need to start sharing customer information with fintechs. Here are three ways to make that happen.
Over the next few years, many more fintech-created programs and apps are going to come to market. According to Kenneth Research, global investments in financial technology companies will hit $153 billion by 2025, up from $40 billion in 2017. These programs will help companies improve all kinds of processes, including better payroll management, improved invoicing capabilities and an easier ability to open up bank accounts with any financial institution.
Imagine if a business owner could see all of their account information from any bank at once and even transact between those accounts. While that may spook an institution in the short-term, in the long run it could strengthen that client-bank relationship. That person wouldn’t need to go elsewhere to get a service they need, even if the bank doesn’t offer it itself.
Indeed, the banks that adopt these technological tools can offer business and personal banking clients a far greater breadth of services than their fintech-avoiding counterparts. According to an Ondot Systems survey, 64 percent of consumers – and 81 percent of millennials – would consider buying or applying for financial products from a technology company instead of from a traditional bank. Banks that partner with these fintechs, rather than compete with them, will be the ones that keep those clients around for the long term.
However, the only way for these kinds of partnerships to work is if banks share client data – such as such account information, credit details, purchasing habits – with these fintech companies, and, as of now, most institutions refuse to hand over this information that they’ve worked hard to collect.
At some point, though, data transparency – a term that refers to the open sharing of information – will be required. As part of the open banking movement, some governments, such as those in the U.K. and Australia, have told financial institutions that they must share data with other companies if that’s what their client wants. While that process has been slow going in these countries, it is starting to accelerate.
Sharing – and protecting – client data
Of course, banks aren’t just going to open the data taps and provide everything to whomever wants it. The main issue for banks is security, so for them, the big question is who is responsible if the data gets used in the wrong way? As of right now, there’s no standard way for institutions to verify whether the fintech is legitimate or if the client knows enough about what they’re doing to keep themselves safe.
However, some ideas are being discussed. Here are three potential ways for banks to offer more data transparency and ensure the safety of their institution and clients.
1. Create a trusted authentication system
Banks can create a verification system to ensure that the third-party company they’re sharing data with is legitimate. Many modern industries rely on the Oauth protocol. Perhaps the bank is sent a token from the fintech that indicates that it’s a trusted partner and verified to work with. However, for that to happen, banks and fintechs would need to agree on a set of standards and permissions that would meet everyone’s needs.
Another solution is to give users more control over how they share their own information. Consumers should be allowed to tell the bank that the fintech they want to work with is legitimate and that it’s fine for them to provide their personal data to the fintech. Banks would have to trust that their client understands that the company they’re working with will keep their information safe or not, and clients would have to indemnify banks from any potential fallout if data ends up in the wrong places.
3. Develop a market-based solution
Banks may be more motivated to share information if they’re compensated. Maybe the fintech or the user pays a fee in return for data, or perhaps there’s an exchange of customer information where the bank gets data from the fintech that they didn’t previously have.
While it’s still early days for data transparency, an issue discussed in more detail in FISPAN’s latest white paper, the day when sharing between institutions and fintechs is coming. Make sure your bank is prepared.