Financial data is one of the most valuable commodities in the world, and consumers have the right to control who gets access to it. Through customer-permissioned data sharing, central interfaces and the emergence of the consumer data right, consumers are the main beneficiaries of Open Banking.
With financial services being one of the most data-intensive industries, it’s essential for customers, businesses, banks and governments alike to stay informed. As a consumer or even a business, it can be concerning not knowing who has access to your financial information or accounts.
This is not a new sentiment; 87% of consumers believe data privacy is a basic human right, yet 68% say they don’t trust companies to ethically sell their personal data. Organizations have always vied for our trust and loyalty as consumers, but still, the bottom line is often put ahead of ethics. This is why consumer-permissioned access is so important in financial services.
Such access provides consumers with the choice to share their financial and account information with third parties, enabling access to personal data information on their behalf. The right to access and share your own financial data opens the door for consumers to use other financial services that their bank doesn’t currently offer, but banks tend to perceive this consumer control as a threat. Without the support of major financial institutions, consumers must rely on the enforcement of regulations.
That makes concepts like Open Banking interesting as the word ‘Open’ inaccurately implies less control or security around your data. Let’s debunk that.
The Benefits of Open Banking for Customers
Open Banking is a secure way for financial institutions to provide third parties, such as FinTech companies, access to consumer data and financial APIs. Through Open Banking, new apps, products and services will be developed to help banking customers customize their own contextual banking experience and enable customer-permissioned access.
A fundamental element of how Open Banking works is that it allows customers to share personal financial data, but in ways that are secure, reliable, and permissioned by the consumers themselves.
Source: What Open Banking Actually Means for Your Bank
Open Banking brings many benefits to financial institutions and FinTechs, but there are even more that can be seen by the consumer. With access to financial APIs and consumer data, new and improved digital banking experiences will emerge. For example, if you bank with more than one financial institution, you will be able to use a single, central interface to access and manage your financial data from multiple institutions.
The proliferation of new tools, features, and interfaces will lead to a more competitive range of products and services that the customer will be able to take advantage of. More Open Banking benefits to customers include:
- Access to alternative payment methods
- More efficient information reporting and reconciliation
- More convenient, faster, secure, and timely transactions
- Real-time visibility into your financial transactions
- Financial advice
- Automated processes
- Lower costs through increased competition
You might be thinking: this all sounds great, but Open Banking doesn’t negate risks. There are inherent risks associated with every new life decision, whether it be personal, business, or financial-related. Open Banking comes with risks, but no more than what currently exists in the financial industry. If your government has enacted or plans to enact an Open Banking framework, then the framework should proactively identify the risks and implement processes to mitigate them. You can’t have a flourishing Open Banking framework without secure methods and mechanisms in place.
As a consumer, with Open Banking, you WILL have more control over your data as you get a choice on how you would like to use it and what systems you wish to share it with.
What Consumer-Permissoned Data Means for Your Banking Experience
Over the last two decades, governments and regulators have been climbing up the regulation staircase to establish relevant data protection, but in this digital age, as soon as you think you’ve reached the next floor, the staircases move and you find yourself in a different place than you intended to be. Luckily, in the past five years, it’s as if an elevator appeared and regulators are reaching higher floors faster than ever.
In 2018, Europe set a new precedent for consumer privacy protections with the General Data Protection Regulation (GDPR), which expanded consumer control over data access and use, including the right to request personal data be destroyed by the agency collecting it. In the U.S., however, no standard similar to GDPR exists for regulating the collection and use of consumer data.
In 2017, the Australian government introduced the Consumer Data Right (CDR) and since July 2020, Australian consumers have had the right to give accredited third-parties access to their financial data. For the consumer, this gives greater access to and control of their data while providing them with a better opportunity to compare and switch between banking products and services. With empowered consumers comes greater competition between products and services which not only leads to better prices and experiences for customers but also more innovative products offerings overall. The CDR doesn’t just apply to the financial industry either, consumers will see more ease in switching services or adding new ones in sectors like telecommunications, energy and more.
While not individually caused by the introduction of CDR, but certainly influenced by it, KPMG found that the number of FinTech solving middle and back-office problems increased by 20% in 2021. This was driven by the increased demand for automated, embedded services from incumbents and innovators alike. With growing FinTech activity, Tata Consultancy found that more FinTech-bank partnerships are “creating a unique business ecosystem where the bank’s domain expertise combines with FinTechs’ innovative start-up mindset to develop new products and open new revenue channels.” For consumers, this means more opportunities to find solutions that streamline your treasury management processes, pay your bills or make important financial decisions.
Through Open Banking, CDR is giving traditional banks an opportunity to stay relevant and offer data-driven, customized banking services to their customers. In the same report, Tata Consultancy found that “while enabling responsible lending, CDR also provides a significant opportunity for FinTechs to assess the creditworthiness of prospective borrowers and helps in credit decisioning by acquiring the customer’s financial data (transaction history, mortgage details, etc.) from banks.”
Traditionally, banking services have always fallen short for small businesses, which are the most underserved segment in the United States’ banking industry. Banks today possess a wealth of opportunities to serve SMBs in the ways these businesses have now come to expect, yet 60% of small businesses have turned to a non-bank provider to meet at least one financial need that their bank cannot currently fulfill. FIS reports that one of the main reasons SMBs are switching banks is because of “being declined for a loan or line of credit and the inability to customize products or services.” However, banks can leverage the Open Banking API ecosystem to make the lending process easier for small businesses through AI-basede credit models. Our article, “Why Banks Should Prioritize Providing Integrated Solutions For Small Business Clients”, expands on this topic more.
Australia’s CDR has not only set a precedent around the world for consumer-permissioned data but attracted foreign companies to enter their market too such as Israeli Fintech and personal financial management (PFM) company Personetics. Personetics uses AI-driven software to help conventional banks operate more like data-driven neobanks, and has sold its platform to 80+ traditional banks including Santander, UOB, and Metro Bank. We have also seen one of the countries largest banks, Commonwealth Bank invest in Open Banking Fintech Payable, who uses CDR standards to automatically cross-check failed bill payments against account holders’ banking details. It is evident how CDR supports data-driven economic growth and encourages the development of new, innovative and integrated banking products.
How Open Banking Regulations like PSD2 Empower the Consumer
Countries like Brazil and Mexico have also drawn inspiration from Australia’s CDR while creating their own open banking regulations. In Brazil, Open Banking came into effect in 2020 and now has entered its final phase. Previous phases saw the integration of services like account balances and financial transactions but the final phase shifts into Open Finance where financial data like mortgages, pensions, insurance and credit can be shared with trusted third parties with consumer permission.
It is clear how Open Banking and customer-permissioned data go hand-in-hand and can accelerate the growth and innovation of the financial industry. Regulators, banks, & other players must raise end-user awareness about open banking and build consumers’ financial literacy, which will help improve adoption.
The European Union (EU) has been proactive on the “big data” front through the establishment of the Payment Services Directive 2 (PSD2) in 2018. PSD2 mandates banks to enable consumer-authorized data to third parties and has accelerated conversations surrounding Open Banking in the EU. Open Banking adoption in the UK has continued to rise with a 60% increase in new Open Banking customers from 2020 to 2021.
Approximately two-third of new Open Banking solutions are geared towards customers and explicitly empowers these account holders with the control to choose whom to share their data with, effectively removing their bank as gatekeeper.
There is another widely used term for consumer-permissioned data which is strong customer authentication (SCA). J.P. Morgan Chase defines SCA as the principle “to reduce payment fraud with minimal impact on the customer experience, i.e. without introducing too much friction into the payment process.”
For customers, there are many benefits of SCA and PSD2:
- Reduced fraud rates and increased banking security (through authentication)
- Greater information and transparency
- Innovation around two-factor authentication to make the process smoother
- More online banking and payment options for e-commerce consumers
- Centralized interfaces with all your banking information and access to banking products and tools
- Merchants can leverage new payment aggregators to increase their strategic information on consumers.
Despite the risks brought about by Open Banking, to which many countries and its banks are inching closer toward embracing, Open Banking can ultimately lead to increased control of financial data on part of both institutions and its consumers — benefiting the banking ecosystem overall. Customers across the globe should look forward to new banking solutions and control of their financial data that Open Banking brings, creating a better and customized customer experience.
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You can download one of our free white papers on Open Banking in the UK or US or check out our blog for more Open Banking content.