Our world is changing, and data is the new currency. Large legacy financial institutions control most of the data in the financial world of a consumer or small business, and these organizations, as well as financial technology companies, want to leverage this data to solve customer problems and build innovative new offerings. There are a plethora of new solutions and apps emerging to solve specific use cases in the small business ecosystem, leveraging legacy financial data and, in many cases, banking rails.
Unfortunately, while those solutions are great at solving a point issue, they don’t always work together. Even in a world of heavy competition for traditional financial institutions and a proliferation of new financial startups, the consumer still ends up with products that are disjointed and add to the complexity of putting together a full financial picture. At the same time, concerns about the protection of financial data are also on the rise. While financial services have improved, there are still large, unmet needs in the marketplace.
Increasingly, consumers and small business owners’ expectations are rising, creating an interesting challenge: how to protect the customer’s data while still giving them control of it. Most agree that the customer owns their financial data and should be able to choose where it goes and how it’s used. The debate as to whether the public or private sector should set the standards for data portability is one that is raging right now. In the U.S., regulation in the banking sector has been relatively moderate, but our global counterparts may inform what ultimately happens here. So, what does the data access landscape look like overseas, and how can banks and technology companies partner to give customers the best of both worlds?
In the UK and Europe, legislature is now mandating an increase in customer choice, efficiency, and inexpensive payments and innovation through data sharing. The common denominator across all of these efforts around change in data portability being: customer centricity.
In Europe, the European Commission’s upcoming Payment Services Directive (PSD2) is informing change across the continent. The directive instructs banks to give third-party providers access to customer data so they can deliver innovation and improvement to financial management and payments for consumers and businesses through open application program interfaces (APIs).
In response to PSD2, the UK government is implementing wide-reaching reforms to ensure a more level playing field for new entrants to the banking sector. One of those initiatives is Open Banking, which gives consumers and small business owners the ability to share their data securely with other banks and financial services providers and compare products without the intermediary of their existing financial institution. The framework is already being built for UK consumers and small business owners to extract statement information and to initiate payments from their accounts. The challenge here is that the government is mandating the change, which creates massive compliance requirements for the banks and may, therefore, limit innovation over time and mandate who will get to play.
U.S. banks can look at what is happening around the globe from two angles. They can respond to and comply with the standards if and when similar legislation reaches our shores, or they can start driving innovation in this area now to set the standards for how financial institutions will put customers in control of their data and ensure that they can continue to innovate.
Late last year, the U.S. Consumer Financial Protection Bureau (CFPB) launched an inquiry into the "challenges consumers face in accessing, using, and securely sharing their financial records." The comments on the Request for Information (RFI) expose the industry dilemma over how to best provision customer control over data use while ensuring security and privacy in accordance with the current laws.
While the CFPB’s data access inquiry is still ongoing, many, including the Center for Financial Services Innovation (CFSI), believe the agency shouldn’t be the sole catalyst for industry-wide regulation.
“Further coordination among all of the stakeholders in [data sharing] -- financial institutions, data aggregators, fintech providers, regulators and consumers themselves -- will be critical to achieving a secure, inclusive and innovative financial data-sharing ecosystem that supports consumer financial health,” the CFSI’s Framework for Industry-Wide Collaboration report concluded.
Meanwhile, U.S. organizations are actively pushing for standardized data access that will improve data portability while driving best-in-class standards for security and authentication.
Some banks are already getting ahead of legislation, realizing that what’s good for consumers is also good for business. In the absence of an industry-wide framework, these financial institutions are forging ahead via bilateral agreements, signing deals leveraging APIs to manage how their data is distributed and used by third-party financial management software companies. They will likely set the new standards.
In the U.S., it’s inevitable that we will have to address open data and consumer choice. But the issues of how to manage that data and which components are most valuable to their customers should be top-of-mind for financial institutions. Solving this problem is best achieved by an industry-led effort at self-regulation, an absence of which will result in regulation informed only by the government. Government-mandated regulation, however well intentioned and well formulated, in the long run tends to have unintended consequences, primarily of stifling innovation.
The global landscape demonstrates that security, privacy and compliance requirements won’t go away. Bankers, financial service firms and technologists need to start strategizing on their data management strategies now and get ahead of the changing regulatory environment. By finding partner companies that are both leading the charge and aligning with their strategies, financial firms can innovate jointly and safely with the customer at the center.
