Data is crucial to every financial institution and a coveted asset for customer growth and innovation. The incentives of having and using data are well known and offer benefits to both financial institutions and consumers.
This is an excerpt from Future of Payments 2023.
There is the possibility for financial institutions to have greater collaboration in the sharing of their financial data and to better take advantage of the smart data solutions which are on offer.
However, with any topic related to financial data, there are often valid concerns raised by the industry and the customers over the safety of sharing this information. Yet, it seems that with the progress of open banking, the sharing of data is only more
likely to increase.
Therefore, it’s important to look at the benefits of sharing this data and what clever uses of data can offer, as well as the roles fintechs can play.
Data collaboration between financial institutions
The opportunities and possibilities for sharing data between financial institutions has grown significantly since the advent of open banking. However, for many the risks of this still outweighs the benefits.
Looking at some of the benefits, Alexandre Maymat, head of GTPS at Société Générale states that data is a crucial asset for all banks. They further argue that “collaboration between banks can make this data even more valuable as (i) it increases its volume
and hence its statistical accuracy and (ii) it diversifies the sources of those data and reduces the bias that one single bank can encounter on its unique set of clients.”
Increasing the accuracy of the data used by banks can be beneficial in creating more personalised services for individuals and flagging any issues across multiple data sets. Additionally, the diversification of data sources is essential in lowering bias
sets in their data, which is a continuing problem across data sources.
Contributors note that one of the main benefits of greater data sharing between financial institutions is the prevention of financial crimes like fraud and money laundering. Matt Cox, director of digital payments and cards at Nationwide Building Society argues:
“The biggest opportunity we see is in the smart sharing of data between providers to protect consumers payments and help in the fight against Fraudsters – possible the single biggest challenge the industry is facing.”
He continues: “The ‘Confirmation of Payee’ service has started this smart exchange of data but there is more we can do as an industry and this is an area we must collaborate on as a priority above all else. Given the data providers hold about the sending
and receiving individuals, imagine what we could do is we used this and shared it in real-time to check that it wasn’t at risk of going to fraudsters.”
Maymat agrees with this sentiment: “Fraud prevention is one possible use case that may be clearly enhanced by banks’ collaboration on data. For instance, it may help identify large transactions split in smaller amounts between many different banks to try
to hide it from AML authorities.”
Dangers of data sharing between financial institutions
Privacy and safety of customer data will always be one of the biggest battles and barriers when it comes to greater data sharing initiatives. The fear surrounding this not something missed by the financial community. Yet, this does not stop them from seeing
the potential which greater data sharing holds.
Yves Longchamp, head of research at SEBA Bank argues to this effect that “sharing data in a competitive environment is very difficult as all actors want to keep their own knowledge private. From a final user point of view, a world where all data is shared
should ultimately lead to better financial services.”
Maymat offers a specific example of an obstacle which data sharing presents to these institutions, “exchanges of data between banks face a clear hurdle: a prior anonymisation of those data. Many PET (Privacy Enhancement Technologies) already exist but without
any clear standard emerging. This standardisation of PET will be greatly facilitated by open banking and aggregation of those data by third parties like regulators or regulated fintech or startups.”
The standards for protection of data will continue to develop as open banking progresses. However, this does offer the opportunity for fintechs to fill this space and enable better services in this area.
Clever use of data: better customer experience
The benefits of data sharing are multitude. They can provide customers with a greater freedom in banking. However, it also gives banks the opportunity to create a better relationship with their customers through the specialisation of services. This can not
only be useful for financial institutions to provide products for their customers, but also for the individuals to know they are receiving the best financial outcome.
Longchamp argues for a more future perspective of what greater data sharing can provide: “Open finance applications can offer financial advantages to established financial institutions (so they don’t need to develop and maintain their own e-solutions) in
return for the application receiving the institutions’ data. This model would be similar in spirit to Web2.”
This offers one image of the way these institutions are able to build a greater web of their customer data. Longchamp continues: “Fintech companies play the third-party role of providing the services ‘for free’ and financing themselves with the provision
of metadata.”
However, Longchamp offers another vision of building wider data networks. “Another possibility could be the use of blockchain and DeFi applications as an open-source open finance, providing a service that is open to everyone, and whose data is available
via an explorer. With full transparency and an easy and cheap way to fork a smart contract, gradual improvement may emerge toward the sharing of information for society’s ultimate benefit.”
Ultimately, there seems to be a driver for greater data sharing between institutions. This can provide customers with the correct financial services they need. It is important that within this movement, customers data security and protections are respected.
However, it seems that many financial services companies are aware of these risks and working to create protections.