Just a few years ago, only a few people in the financial industry had access to an individual’s banking data. Data was ‘owned’ by a few major players such as large financial institutions, and all access had to go through these information gatekeepers. Limited sharing of data has resulted in a stagnated offering of banking products to customers that have not significantly changed in decades: people are paying too much for their overdrafts or money sits in current accounts earning little, or sometimes even no interest. To summarise, customers are not happy.
How will Open Banking democratise data?
In recent years, many innovators believe that the way banks share financial information should be changed, in a series of reforms called Open Banking. This means data such as customer spending patterns and payment information can be openly distributed with authorised third party companies and apps, provided the user has given their consent.
Image Credit: Rawpixel
Open Banking aims to bring data democratisation to financial services, by removing gatekeepers that create bottlenecks at the door of data. Proponents of Open Banking believe eliminating these bottlenecks will spark innovation and bring healthy competition to the industry to create better products for both providers and consumers.
In reality, Open Banking means that major financial institutions need to release huge swathes of data that was previously kept under lock and key, hopefully giving rise to a wave of new and innovative products.
Democratising data improving the customer experience
In the banking world, many changes have already begun to take place. Open Banking is largely synonymous with PSD2, a new regulation which came into force on Jan 13, 2018. With the consent of the consumer, PSD2 gives third-party providers access to a consumer’s bank account data to allow for new layers of protection for the customer. This area was not well regulated before the beginning of 2018, so the new regulation brings about some much-needed change in security measures.
In addition to API’s, the implementation of PSD2 allows for the access of bank data by Payment Initiation Service Providers (PISP) and Account Information Service Providers (AISP). Both PISP and AISP allow for a better experience for the consumer: PISPs can initiate a payment from a payer’s bank account and facilitate the transfer of funds to the recipient’s bank account; AISPs can provide an overview of all the payment accounts that a customer has to other APIs. Together, APIs, PISPs and AISPs can breathe new life into a sluggish industry.
Open banking opportunities & the current situation
Thanks to PSD2, much of the rich information collected by banks can now be shared securely with third parties and other banks. This has brought the arrival of many innovative API’s, aimed at providing better services for customers, resulting in new companies in the FinTech sphere.
Image Credit: Jed Villejo
The emergence of new FinTech players not only give consumers new types of current accounts but also allows them to analyse their spending behaviours, amongst other things. For example, the app called Yolt allows customers to make multiple transactions to and from different bank accounts, giving customers improved personal money management powers. Budgeting apps such as Mint provide similar tools for consumers, taking advantage of new rules for AISPs and PISPs.
In countries such as the UK, it’s no surprise that business is booming for many FinTechs. For example, the challenger bank Monzo is just one of many British FinTech companies that attracted $1.8 billion in venture capital investment in 2017, up more than 150% compared to 2016.
Greater innovation through regulation
PSD2 has already led to greater competitiveness in banking and finance. More demanding customers are pushing for more convenient services, meaning we’re seeing more and more innovative online financial service providers.
In the UK, FinTech is one of the fastest growing business sectors since the financial crisis, pushing for an increased number of regulations within the online banking sector. PSD2 and GDPR are just two of the recent regulations passed, but there will likely be many more.
The benefits of data democratisation for both individuals and businesses
With more transparent data sharing, both businesses and individuals can benefit. For individuals, data democratisation allows for easier money management and faster, more efficient payment options. It can even allow for better lending options: by providing an investor access to your last 12 months of spending and income history, loan providers can provide the most suitable products for your needs.
For businesses, open banking means that they can generate analytics to be used for better decision making, allowing business owners to increase revenues by understanding the full picture of their incomes and outgoings, leading to higher operating efficiency. Improved lending options through data sharing can also massively benefit SMEs to gain funding for their startups.
Image Credit: Grace Evans
FinTechs lead the way for future innovation
Better payments systems, improved money management and superior access to credit products are all massively in need of innovative in the banking industry. Particularly in the lending sector, companies such as Instantor are leading the way to change how individuals and organisations are getting credit products, by analysing bank information made available by new regulations and the consumer’s consent, of course. These options just weren’t available several years ago.
As a result, the rise of innovative APIs and the access of information through data democratisation gives rise to products that are better for lenders, organisations, banks and individuals, in an environment that is fairer and safer than before. Open Banking can be a win-win for everyone.
Democratising data doesn’t only improve the customer experience, it opens up a whole world of technological leapfrogging and an opportunity to improve the lives of some vulnerable social groups such as refugees through the adoption of alternative credit scoring.