Data has never been more abundant than it is today, and its value and usefulness continue to grow exponentially. However, for the financial services industry, data brings additional privacy and security concerns due to the sensitive nature of the data handled by these organizations.
Finding the right balance between transparency and privacy can be a challenge, but open banking is a platform that could please both financial institutions and their customers. According InvestopediaOpen banking, also known as open banking data, “is a banking practice that provides third-party financial service providers with open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of apps programming. interface (API)”.
Under open banking, banks often allow access to customer data to third-party service providers, with the customer’s consent. Third-party provider APIs may use the customer’s shared data. “Uses may include comparing customer accounts and transaction history with a variety of financial services options, aggregating data across participating financial institutions and customers to create marketing profiles or make new transactions and account changes on behalf of of the customer,” according to Investopedia.
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How financial institutions can benefit from open banking data
In June 2021 report, McKinsey identifies four ways that financial services organizations can benefit directly from open banking. They include “increased operational efficiency, better fraud protection, better workforce allocation, and reduced friction in data brokering.”
McKinsey notes that increased efficiency will translate into cost reductions that will 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 their predictive fraud model and detect cases earlier,” the McKinsey report states.
Companies can also use open data to assign staff to activities that are considered to be of higher value. As McKinsey notes, “This helps them better focus their calls on high-risk customers, reduce the time spent checking credit for low-risk customers, and ultimately recover more debt.”
Finally, open data can provide financial institutions with information about potential customers; for example, in lead generation or loan origination. APIs are used for data brokering, which reduces friction. Information like credit and property valuation data can be expensive to obtain, but open data for finance is making it more publicly available.
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Open data offers benefits to bank customers
McKinsey research identifies three broad mechanisms that directly benefit customers: increased access to financial services, increased user convenience, and better product choices.
Before the start of open data, many customers may not have had access to certain financial services. “For example, where limited data from traditional documentary sources can disqualify consumers from accessing loans, open financial data can help assess the creditworthiness of borrowers when obtaining rent, phone, and utility bills,” according to McKinsey.
Customers can also 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 filled out automatically, saving time and simplifying the process so customers can benefit from the best rates.
The McKinsey report also highlights the broader range of product options available to customers thanks to data sharing. “For example, an open data ecosystem makes it easy to switch accounts from one institution to another, helping retail and MSME clients achieve the best performance,” the report states.
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How to address privacy and security issues arising from open data
As mentioned above, the degree of sensitivity around financial data raises additional concerns about the security of information that is shared through open banking. as recent Forbes Article In a nutshell, “financial privacy and the security of consumer finances are top concerns for anyone involved in the open banking environment.”
Fortunately, the technology exists to protect data and build the trust with customers necessary for open banking to be effective. To defend against threats such as malicious third party applications and data breaches, Forbes recommends artificial intelligence and multi-factor authentication (MFA).
“The rigorous identification of the client is the first step to prevent financial crimes and money laundering”, Forbes notes “AI, however, can do more. With open banking, the AI becomes more informed and powerful. Learn from more data, develop 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 extra step to access an account, such as an additional question or a text message sent to the account holder’s phone, MFA can provide added security.