The Story of Data – Part 1: Who Owns Financial Data?

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We’re bringing you The Story of Data, a series on financial data: who has access to it, where it flows, what is done with it. Those are key questions to understand the ongoing revolution in the financial services sector brought about by open banking. In this first instalment, we go straight to the center of it all: Who owns financial data?

The money in your bank account is your property. But your financial data — transaction history, balance, loan payments, etc. — well, that really depends where your bank is. In Canada, it’s not legally yours. Not yet anyway. As the debate over financial data gains in popularity, it is crucial to understand how open banking fundamentally changes how we should think about ownership.

 

Financial data: more than numbers

Once upon a time, your bank knew every milestone you crossed: first job, first car, first home. Today, consumers’ financial data is spread across multiple financial institutions and services. They arrange their mortgage with one bank, have their main checking account with another, while their retirement savings, joint account, or life insurance are with a third financial institution.

On average, according to a 2016 survey, Canadians own 5 different financial products. Close to one in two Millennials have their financial services spread between two or more institutions. This scattering of financial data is set to accelerate and extend with the growth of third-party financial services.

Open banking — the promise of access to data across platforms and institutions — and the rise of fintech has sparked interest, and even competition, over financial data. Whoever owns data controls both where it goes and how it can be used.

Or let’s put it this way: our data identifies and defines us. It traces the portrait of our financial lifestyle, which enables smarter decision-making to whoever has access to it. This is in part why financial data holds such incredible value: Imagine going to the bank to take a mortgage without any prior financial record to your name.

For consumers, that means getting a better understanding of their financial health, along with the ability to seek better products and more personalized services.

So who owns data? Consumers? Their financial institutions? Others?

In Canada this is still an open question, though there are signs showing a movement in the right direction — the AMF (Québec’s securities regulators) recently nominated our CEO to its Technological Innovation Advisory Committee.

 

Meet the players: Banks, Fintechs, big tech

Banks are still the bedrock of the financial services sector, from designing financial products to delivering them to customers, and ensuring data privacy and security in the process. They have made sizeable investments to bring their services online, where many of their customers are now. More than two-thirds of Canadians do most of their banking digitally — and, unsurprisingly, Millennials are reporting higher adoption rates.

Given their size and the variety of their products, banks’ IT infrastructure can lag behind new technological advancements. It is often the case that their business is conducted through a web of legacy systems and modern software. Far from being flexible, older systems pose a challenge to innovation and often negatively impact the customer’s experience.

Not only is this a problem when customers start looking at competitors for better deals or shiny new toys not yet offered by their financial institution; managing the data generated by different systems has become a pressing concern in itself. Indeed, unstructured or siloed information limit the banks’ ability to leverage the data they collect into better marketing and product design.

As is often the case, everything is not black and white, soon-to-be-exciting-dinosaurs making way for their evolutionary successors. Banks are catching up on the trends of innovation: they diversify, build partnerships, acquire new technologies or launch their own. Here’s a sign of keeping up with the times: you can now be hired on a senior position at National Bank with “open banking” in your job title.

The technological shift underlying open banking started in the early 2000s. New tools were developed to aggregate financial data from various sources, effectively creating the opportunity to put data in the hands of the consumers. This, in turn, contributed to the growth of fintechs — financial technology companies using data to provide new services to consumers.

Most fintechs are agile startups that rely heavily on access to data to reshape financial services such as payment, money transfer, borrowing, lending and investing. In a world of open banking, they don’t have to operate end-to-end processes, like banks typically do. They can instead work in a specialized niche in which they have a clear competitive advantage. Even just a year ago, fintechs were still seen as disruptors set to dismantle the banks.

This view is outdated. Of course, not all financial institutions are on board with granting access to their customers’ data — especially if that means losing those customers. Even when they are required by law to provide access, as is the case in the European Union, some institutions find ways to resist. It’s no surprise, then, that calls from fintech advocates still include making financial data “as free to transfer as your mobile phone number”. But the new norm is now collaboration between banks and fintechs; every large financial institution has entire teams dedicated to relationships with fintechs.

The real thorn in the side of fintechs might be consumers’ skepticism. Recent research in the U.S. suggests people aren’t yet comfortable with sharing their financial information with third-party financial services. Consumers report being concerned by data privacy and data sharing, which still proves to be a significant barrier to adoption — though, to be fair, adoption rates are growing in the general population and especially among Millennials. All in all, while fintechs have brought innovation and acceleration to financial products markets, they don’t have the disruptive impact some predicted.

Still, bank executives are keeping a close eye on what fintechs bring to the game. But they are also watching over their shoulder for big tech companies.

Like fintechs, big tech companies rely on agile software development processes to quickly adapt their systems to meet their users’ needs. Unlike smaller fintech startups, however, they are globally active and have gained the trust of their large customer base. Many act as third-party providers in the financial system when financial institutions and fintech companies require their services. Their entry into financial services would bring competition to a whole new level, as noted by the World Economic Forum: “Tech giants would be able to pick and choose their points of entry into financial services; maximizing their strengths like rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence on them”.

While no crystal ball — or the more modern predictive AI — can predict what exactly the impact of big tech companies in financial service market will be, it is widely assumed that it will be felt in the near future.

 

Government-led experiments in open banking

The dynamics of innovations brought about by open banking isn’t lost to legislators worldwide. Government-led change to turn the concept of open banking into reality is happening right now in the EU and the UK.The EU kicked off 2018 with the application of PSD2, which has banks release strict ownership of their customers’ financial data. The aim is to level the playing field to encourage new players to develop products in online payment and other services. Under this regulation, banks must enable their customers to share information through an API from their bank accounts to external entities — other banks, but also fintech and big tech companies with agile business models and subject to fewer compliance requirements. The UK has implemented a similar regulation.

But are consumers following? In the UK, the Open Banking Implementation Entity’s performance reports show that there have been nearly 14 million uses of open banking APIs in October, up from only 720,000 in May. But research shows a vast majority of consumers are not quite ready to share the data they now own. For one thing, surveys consistently show that about three-quarters of the population in the UK and EU don’t yet know what open banking is. And when they do, many express concerns about the security and privacy of their financial information.

The main takeaway here is that control over where data flows and what is done with it matters to consumers. As with any paradigm shift, they need an answer to the age-old question: Why should I change my ways? To move the needle, open banking supporters must make sure they create customer experiences that meet their data privacy expectations and focus on the plus-value their products deliver.

Canadian legislators have yet to position themselves and pass regulations that would identify the owner, or owners, of financial data. But here and abroad, there is a growing consensus among senior bankers and market leaders that data legitimately belongs to consumers. (This is something we’ve been saying over and over again — even in French on public television.) This de facto answer to “Who owns financial data?” is a welcomed shift that opens the door to a more relevant line of questioning:

• Who’s responsible to keep the data secured?

• How does the consumer authorize and deauthorize its use?

• What is the scope of data that can be used?

We explore how these questions will impact the financial service industry our upcoming Part 2: Why Data Should be the User’s Property