If this sounds radical, it is. Next to health, financial data generally demands the highest level of security; a security that is guaranteed by heavy regulations. On the face of it, this is a good thing. No one wants their banking information freely available. But while the idea of open banking might seem contrary to conventional wisdom, it is a mistake to think of open banking as open season on your credit history. If done properly, open banking has the capacity to deliver increased security through enhanced Know Your Client capabilities and fraud detection.
Which might help explain why the banks are increasingly on board.
In order to understand why, it helps to think of open banking in the broader context of the trend towards consumer data right (CDR) and open innovation. In essence, CDR initiatives are designed to give customers greater control over their data, empowering them to share it with the recipients they choose and for the purposes they authorize. Open innovation, on the other hand, captures the élan of the information age: the departure from silo mentality and secrecy between organizations.
Account Information Service, according to the UK Financial Conduct Authority, is “an online service which provides consolidated information on payment accounts held by a payment service user with payment service providers.” What this means in real terms is that a customer could opt in to allow third party access to their banking information. At a high level, this means that you could use one application to view all your banking information, regardless of how many financial institutions you use.
But this also provides an opportunity for AI tooling and machine learning to offer you better rates and services based on your spending. Getting gouged by your cell-phone provider? An account information service can let you know exactly how much you’d save by getting the same plan from a competitor. Spending $200 a month on coffee? It can shoot you a notification that shows you what that money would look like after five years if you put it into an RRSP.
Ultimately, account information services can inject high power AI into your spending. Providers like Mint.com, Personal Capital, and YNAB have in the past few years become handy (and disruptive) applications for managing your personal finances.
Payment Initiation Services, on the other hand, are still very much a work in progress. The Financial Conduct Authority defines them collectively as “an online service which accesses a user’s payment account to initiate the transfer of funds on their behalf with the user’s consent and authentication.” The promised benefits for banking customers are lower fees by redirecting transactions to avoid the e-banking systems. In plain English, Payment Initiation providers are an e-commerce alternative to debit and credit cards. Lithuanian-based Paysera saves money for their subscribers by charging significantly lower fees for online financial transactions.
The catch, of course, is that digital intrusion into our financial lives still sets alarm bells ringing. In 2017 there were 477 healthcare breaches reported to the US Department of Health and Human Services, with over 5.5 million patient records compromised in the process. The Cambridge Analytica scandal, which collected the data from 87 million Facebook users, was a rude awakening for anyone who thought their digital presence was under lock and key.
The truth is that technological innovation is outpacing lawmakers, and we have not yet, as a society, established clear rules for personal data protection. (Although the establishment of the GDPR augurs well.) Banks will have to sort out the security angle – or provide the data through a service that has – in order to tap into the benefits. And they’d better do it quick. Open banking is happening now, and those that are doing it best, with ironclad security and a network of robust APIs, will corner the market.
When it comes to financial data, the risk simply feels higher. It’s our money, after all. But the fact of the matter is that no financial institution in their right mind would institute a practice that opened a window to fraud, no matter how attractive the benefits were on paper. Done right, open banking will actually provide an opportunity for banks to mitigate fraud, understand their clients better, and unlock an unprecedented level of competition and innovation. For their customers, it will inject AI into their daily lives.
With benefits like this on the table, getting that data from the bank to the innovator needs to be as streamlined as possible.
ThinkData Works is connecting to thousands of public data sources and is working with companies and financial organizations to turn data into actionable insights, helping regulate compliance, improve information gathering, and opening a door to new information. If you’d like to know more about how we’re gearing up for open banking, please contact us at firstname.lastname@example.org.
even with the infrastructure in place, benefiting from data isn’t as easy as flipping a…
"External data is one of the biggest blind spots in executive decision making today." We…