How data sharing is revolutionizing banking

A data revolution is rippling through the financial services industry (FSI), and providers must prepare for the inevitable shifts that will occur by 2019 and beyond. With Europe’s GDPR, the UK’s open banking regime, Australia’s proposed one, as well as the rapid rise of China’s audacious fintechs, it’s clear data sharing is impacting FSI across the globe.

But rather than raging against the transformation of the industry, FSI providers – particularly in Australia – have an opportunity to become market leaders in the emerging data economy.

Here’s a look at how data-sharing trends are fundamentally impacting financial services, and what it means for providers here and abroad. Find out how data sharing is revolutionizing banking.

Credit Reporting Evolves

There’s a lot happening in financial services in Australia currently, with a groundswell of support for an open banking initiative and a Royal Commission into banking misconduct. It’s clear that change is on the horizon, and Australian Treasurer Scott Morrison is adamant that certain steps must be taken – and accepted by providers and consumers alike – before open banking can be put into practice.

One of those steps is the enforcement of positive credit data sharing between banks and financial services providers, known as comprehensive credit reporting (CCR). Previously a voluntary practice, the major Australian banks will now be forced to give credit bureaus “more detailed data about their customers’ financial data.” The endgame, according to Mr. Morrison, is better deals on loans for consumers, and greater competition in the banking sector.1

Elsewhere, US multinational JPMorgan Chase announced a partnership deal with Finicity, a data aggregation platform. The deal, according to American Banker, will let “customers share their data with third-party financial apps – without disclosing their login credentials.” For consumers, this will mean greater security and privacy, with the data acting as a tool to make smarter financial decisions.2

And in China, the largest fintech firms are setting up their own credit measurements. Alibaba rolled out Sesame Credit in 2015 with the goal of creating a new form of credit reporting based solely on data sharing. According to Brookings, the firm “has direct access to data related to the more than 500 million consumers who use Alibaba’s Taobao and Tmall marketplaces” and also the “payment histories of the more than 400 million registered users on its mobile payment app Alipay.”3 With this data, Sesame Credit is able to assign users a score based on five criteria: credit history, online transactional habits, personal information, ability to honor an agreement, and social network affiliations.

Open Banking Promises Choices

Due an increasingly global fragmentation of the financial services industry, lean new players have emerged in the form of fintechs – and their growing influence shows no sign of slowing, with 82% of incumbents expected to increase fintech partnerships in the next three to five years, according to a PwC report.4  But the big players have also recognized growing consumer dissatisfaction, with two international giants – Amazon and Alibaba – diving into new industries in order to maintain their market dominance.5

These massive shifts come at a time when open banking is on everyone’s lips. In the UK, open banking launched in January this year with the hope it will bring “a new level of transparency and encourage competition, shaking up the industry and leveling the playing field for new challengers.”6  The reforms come after a 2016 investigation that revealed extensive barriers to entry for smaller FSI players, and the freer flow of information will ensure customers have greater control over their data and more choices of how they choose to bank.

Australia hopes to follow suit, despite being at least 12 months behind the UK. Approaching the broader policy of open data cautiously, Australia is treating changes to the banking sector as a “testing ground.” If successful, it will pave the way for other industries to restructure their frameworks to meet the requirements of a free-flowing data ecosystem.7

In this way, Australian consumers have an opportunity to seize back control of their data while decreasing what Treasurer Scott Morrison calls the major banks’ “stronghold” on data. With a new banking regime set to start from July 1 2019, the next 12 months will be extremely important for both FSI providers and consumers alike, as Australians prepare to retake control of their data and usher in a new age of fintech innovation.8

GDPR Protects

New regulations and privacy frameworks will impact the way organizations share data – and transparency will be key. On May 25, the General Data Protection Regulation (GDPR) came into effect across Europe. And we’re already seeing ripple-effect repercussions across the globe as companies adopt the tough GDPR standards as a default to manage customer data globally.

Penalties for failing to comply with the GDPR are severe, but it’s unsurprising given the intention of the framework is to eliminate “reckless” data sharing practices. Most companies have had adequate time to reassess their digital strategies to align with the GDPR, but those who ignore it may receive a rude awakening once the laws are in effect.9

This is the “other side of the coin,” and it’s intended to change the way banks use data by reducing rates of data abuse while protecting consumers. Like any new regulation, there are positives and negatives for all parties. While the GDPR will protect users, the added constraints around sourcing active consent from consumers has the potential to stagnate

innovation in financial services. Giving consumers more control and forcing FSI providers to be transparent in how they share and use data are both steps in the right direction – so long as they don’t inhibit productivity and growth.

Smart Players Incubate Innovation

The future of financial services relies on innovation, as we’re already seeing with banks trying to leapfrog fintechs. There’s currently a trend toward providers creating “sandbox” environments and consortiums where data is shared on secure technology like Data Republic’s Discovery Workspaces – which is unsurprising given that banks need to be smarter about how use their own data, and how they can combine it with other datasets. The current endgame is to create a place where they can test their new tools in secure environments, and build new partnerships that feed into greater innovation.

AI and machine learning techniques are also coming to the fore in FSI, with the goal of leveraging off data sharing and delivering monetary gains to providers. McKinsey reported on an instance of an American bank concerned that its private bankers were offering customers unnecessary discounts on certain products. After the bankers denied this, saying they only offered discounts to high-value clients, the bank utilized machine learning to combine and study reams of data on the nature of the discounts. The outcome? A clear pattern of unnecessary discounting was revealed. Changes were adopted, and the bank’s revenues rose 8% within just a few months.10

Across the Pacific, China is taking innovation to new heights. With an open, supportive regulatory environment, enormous demands for inclusive finance and a highly developed ‘native digital’ business market, China’s fintech sector has exploded over the past five years – and is now worth more than $1.8 trillion. The country’s digital payments account for half the global volume, while online peer-to-peer (P2P) lending account for three-quarters of the global total.11 But McKinsey predicts China’s digital finance players are on the verge of a “warring stage,” which will necessitate regulation changes and deliver more orderly growth.12

Now and into the future

Data sharing is fundamentally changing the way customers interact with banks, how banks and fintechs operate and innovate, and how consumers regain control of their data for greater choice and protection. So with emerging regulations and an increased focus on consumer rights, it’s critical that organizations get it right when it comes to how they use and – more importantly – share their data.

FSI providers stand at a cross-roads. For those that refuse to embrace the inevitable openness of a new data economy, it will likely lead to stagnation and, inevitably, the death of their outdated business model. The winners will be those that acknowledge the rapid transformation of financial services and use those major market shifts to innovate.

Here’s the reality: the cat is already out of the bag. Pandora’s box has been opened. The horse has bolted. And data disruption is here to stay.

By embracing the proposed regulations in open banking and fintech sectors, the most successful players to emerge will be those that use data sharing to their advantage, and carve out a niche as providers that place heavy importance on not only their security and governance systems, but ongoing innovation.

Data Republic works with leading banks and financial service providers to help them govern data sharing with confidence.  Get in touch with our team today to learn more about our Senate Platform solution for financial services.


Sources:

1. SMH

2. American Banker

3. Brookings

4. PwC

5. Market Watch

6. The Conversation

7. SMH

8. AFR

9. Security Round Table

10. McKinsey

11. Pwccn

12. McKinsey