How open data can benefit financial institutions and their customers
Data has never been more plentiful and its value and usefulness continues to grow exponentially. However, for the financial services sector, data brings additional privacy and security concerns due to the sensitive nature of the data these organizations manage.
Finding the right balance between transparency and privacy can be challenging, but open banking is a platform that could please both financial institutions and their customers. Corresponding InvestopediaOpen Banking — also known as Open Bank Data — “is a banking practice that provides third-party financial service providers with free access to banking, transactions, and other financial data from banks and other financial institutions through the use of application programming interfaces (APIs).”
As part of open banking, banks usually allow third parties to access customer data with the customer’s consent. Third-party APIs can then use the customer’s shared data. “Uses may include comparing customer accounts and transaction history across a range of financial service options, collecting data about 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 financial services firms can benefit directly from open banking. These include “higher operational efficiencies, better fraud protection, improved staff allocation and reduced data intermediation friction.”
McKinsey notes that increased efficiencies will lead to cost reductions that will enable the adoption of automated technologies. The result of such innovation: an improved customer experience that drives 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 leads that can be used to flag suspicious activity. This helps institutions expand their fraud prediction models and detect cases earlier,” the McKinsey report states.
Open data can also be used by companies to allocate employees to jobs they consider most valuable. As McKinsey points out, “This helps them better focus their calls on high-risk customers, reduce the time it takes to monitor the creditworthiness of low-risk customers, and ultimately collect more debt.”
Finally, open data can provide financial institutions with information about potential customers; for example in lead generation or lending. APIs are used for data switching, reducing friction. Information like credit and home appraisal data can be costly to obtain, but open data for finance makes it more publicly available.
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Open data offers advantages to bank customers
McKinsey research identifies three broad mechanisms that directly benefit customers: improved access to financial services, greater user convenience, and improved product options.
Before the use of open data, many customers may not have had access to certain financial services. “For example, if limited data from traditional documentary sources can bar consumers from accessing credit, open financial data can help assess borrowers’ creditworthiness by procuring rent, phone, and utility bills,” McKinsey said.
Convenient data sharing also allows customers to save time interacting with financial service providers. Open access can allow consumers to apply for loans and mortgages with applications already pre-filled automatically, saving time and simplifying the process so customers can benefit from the best interest rates.
The McKinsey report also points to the wider 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 returns,” the report states.
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Dealing with privacy and security issues arising from open data
As previously mentioned, the level of sensitivity surrounding financial data raises additional concerns about the security of information shared through open banking. As recently forbes article put it this way: “Financial privacy and security of consumer finances are the main concerns for everyone involved in the open banking environment.”
Fortunately, the technology exists to protect the data and build customer trust necessary to make open banking effective. To defend against threats like malicious third-party apps and privacy breaches, forbes recommends artificial intelligence and multi-factor authentication (MFA).
“Consistent customer identification is the first step in preventing financial crime and money laundering”, forbes Remarks. “But AI can do even more. With Open Banking, AI will become more knowledgeable and powerful. It learns from more data and develops a more accurate picture of a typical customer and their transactions.”
MFA is another important element in protecting customers’ financial and personal information. By requiring an extra step to access an account—such as an additional question or an SMS sent to the account holder’s phone—MFA can add security.