Data has never been more plentiful than it is today, and its value and usefulness continue to grow exponentially. For the financial services sector, though, data carries additional concerns related to privacy and security due to the sensitive nature of the data these organizations manage.
Finding the right balance between transparency and privacy can be a challenge, but open banking is a platform that could please financial institutions as well as their customers. According to Investopedia, open banking — also known as open bank data — “is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs).”
Under open banking, banks typically allow access of customer data to third-party service providers, with customer consent. Third-party providers’ APIs can then use the customer's shared data. “Uses might include comparing the customer's accounts and transaction history to a range of financial service options, aggregating data across participating financial institutions and customers to create marketing profiles or making new transactions and account changes on the customer's behalf,” according to Investopedia.
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How Financial Institutions Can Benefit from Open Banking Data
In a June 2021 report, McKinsey identifies four ways that financial services organizations can benefit directly form open banking. They include “increased operational efficiency, better fraud protection, improved workforce allocation and reduced friction in data intermediation.”
McKinsey notes that the boost in efficiency will result in cost reductions that enable the adoption of automated technologies. The result of such innovation: an improved customer experience that promotes faster and more transparent interactions with financial service providers.
Real-time access to customer data can support advanced techniques to reduce fraud-related costs. “Sharing data provides more evidence and clues with which to flag suspicious activity. This helps institutions build out their predictive modeling of fraud and catch cases earlier,” the McKinsey report states.
Open data can also be used by companies to assign staff to activities deemed to be of the highest value. As McKinsey points out, “This helps them better focus their calls on high-risk customers, reduce the time spent monitoring credit of low-risk customers, and ultimately recover more debt.”
Finally, open data can provide financial institutions with information on prospective customers; for example, in lead generation or loan origination. APIs are used for data intermediation, which reduces friction. Information such as credit and property valuation data can be costly to obtain, but open data for finance is making it more publicly available.
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Open Data Offers Benefits to Banking Customers
McKinsey’s research identifies three broad mechanisms that directly benefit customers: increased access to financial services, greater user convenience and improved product options.
Before the onset of open data, many customers might not have had access to certain financial services. “For example, where limited data from traditional documentary sources may disqualify consumers from accessing loans, open financial data can help assess the creditworthiness of borrowers by sourcing rent, phone, and utility bills,” according to McKinsey.
Customers also are able to save time when interacting with financial service providers thanks to the convenience of data sharing. Open access can allow consumers to apply for loans and mortgages with their applications already automatically prefilled, saving time and simplifying the process so that customers can benefit from the best rates.
The McKinsey report also points out the broader range of product options available to customers thanks to data sharing. “For example, an open-data ecosystem makes it easier to switch accounts from one institution to another, helping retail and MSME customers achieve the best yield,” the report states.
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How to Address Privacy and Security Issues Arising from Open Data
As previously mentioned, the degree of sensitivity around financial data raises additional concerns for the security of the information being shared via open banking. As a recent Forbes article put it, “Financial privacy and the security of consumers' finances are the main concerns for anyone involved in the open banking environment.”
Fortunately, the technology exists to protect the data and build the trust with customers necessary to make open banking effective. To defend against such threats as malicious third-party apps and data breaches, Forbes recommends artificial intelligence and multifactor authentication (MFA).
“Rigorous customer identification is the first step to preventing financial crime and money laundering,” Forbes notes. “AI, however, can do more. With open banking, AI becomes more knowledgeable and more powerful. It learns based on more data, develops a more accurate picture of a typical customer and their transactions.”
MFA is another important element in protecting customers’ financial and personal data. By requiring an additional step for access to an account — such as an extra question or a text sent to the account holder’s phone — MFA can provide greater security.