How open financial data creates value for consumers and businesses

financial data

Open financial data implies the ability to share financial data across financial institutions through a digital ecosystem. It facilitates frictionless interactions between financial institutions and consumers, generating value for both sides.

Open financial data represents an opportunity for increased revenue and growth for financial services providers, and both startups and more traditional players respond with products to meet and shape demand.

Open data improves access to financial services, user convenience, and product and service options for consumers. A McKinsey survey of 3,000 consumers and MSMEs in the UK showed that the customers’ willingness to share data doubles when they get appealing products and services.

Key potential benefits from open financial data for consumers include the following:

Benefits for consumers

1. Increased access to financial services

Due to open data sharing, customers can buy and use financial services that they might not be able to get otherwise. Limited data in today’s traditional documentary setup can often get consumers disqualified from accessing loans and other services. Meanwhile, an open financial data ecosystem helps them assess the creditworthiness of borrowers by sourcing rent, phone, utility, and other bills.

In this way, individuals SMEs with thin files or no formal records can gain formal credit for the first time. Improved access to customer data residing with other credit providers can enable borrowers to access loans that consolidate their debt across multiple institutions and credit lines at lower average interest rates. Therefore, the economic benefits of open data can be significant for consumers.

A recent FICO research shows that, on average, each additional data type beyond traditional sources adds 5% more predictive power to credit underwriting. By combining traditional and alternative data, FICO created a predictive underwriting model for a personal loan originator that was significantly more accurate than a model using only traditional data.

2. Greater user convenience

Customers save time interacting with financial services providers when data is shared, especially during product purchase and exit. MSMEs, for example, can provide documentation more quickly during customer onboarding. Consumers can apply for loans without using mortgage brokers because they have open access to data on available mortgage products and automatically prefilled applications. This not only makes the process easier but also allows customers to take advantage of the best rates.

In the United Kingdom, where the Open Banking system was launched in 2018, startups use open-banking data to enable free mortgage applications to all participating mortgage providers instead of traditional mortgage brokers who charge arrangement fees. These startups also alert customers when it might be a good time to refinance and then make the process easier with the help of available data.

3. Improved product options

Customers can benefit from open financial data because it can expand and improve the range of product options available, saving them money. This is especially important during the financial services life cycle’s understanding and uses phases when customers choose products for the first time or switch to new ones. An open-data ecosystem, for example, makes it easier to switch accounts from one institution to another, allowing retail and MSME customers to get the best return. Some cash management startups alert users when their rates are less favorable than the market’s best and allow quick funds transfers. This may aid consumers in narrowing the gap between their current yield and the best yield available.

Benefits for financial institutions

Open data sharing can provide economic benefits for fintech companies and nontraditional financial services players in many ways. Traditional players, in particular, could reduce costs by being able to streamline and automate various operational processes that currently need data drawn from multiple, disjointed sources. These benefits flow mainly to financial institutions, although they may also be passed on to consumers through more competitive pricing and help improve customer experience.

1. Increased operational efficiency

Physical documents or disparate digitized sources still hold the majority of financial data today. By providing verified data digitally, open financial data could reduce costs and make it easier to adopt automation technologies, increasing efficiency. Customers’ experiences may be improved as a result of faster and more transparent interactions with providers. For retail and MSME customers, automated know-your-customer (KYC) processes can completely replace manual processes at a much lower cost.

In mortgage underwriting, sharing borrowers’ data, which for now are siloed and manually aggregated, allows standard mortgages to go through automated underwriting, reducing operating costs and speeding up the lending timeline. Based on open data, customer profiles can increase predictive analytics, artificial intelligence (AI), interactive voice responses, and call center operations. Open data reduces the time spent between account dormancy and closure by automating notifications to dependent institutions.

Financial data sharing also helps avoid multiple manual data handoffs, resulting in errors, rework, and inefficient results. In terms of customer acquisition, an open-data ecosystem can assist financial institutions in engaging in more targeted, data-driven marketing, resulting in higher conversion rates and more efficient marketing spending. Using open financial data to identify more targeted credit recovery strategies reduces credit costs significantly.

2. Better fraud prediction

According to the Association of Certified Fraud Examiners, the total financial services fraud (synthetic and traditional ID fraud, credit application fraud, and payments fraud) is estimated to be worth more than $4.5 trillion per year or about 5% of global corporate revenue. Advanced techniques for detecting and reducing costs associated with these and other types of fraud can benefit from real-time access to a complete set of customer data. Sharing fraud-specific data and other data types add to the evidence and clues that can be used to detect suspicious activity.

3. Improved workforce allocation

Companies can better allocate and target their workforce by utilizing open data and assigning employees to the highest-value activities. Companies can use external data sources, for example, to help collections staff focus their calls on high-risk customers, reduce the time spent monitoring low-risk customers, and recover more debt. Similarly, reducing the time spent sourcing data from vendors by pulling reliable data on customers from external sources increases the productivity of product researchers and designers.

4. Reduced friction in data intermediation

Data intermediation occurs due to siloed data at several stages of the customer journey, and the process can be time-consuming and costly. Open-data systems reduce friction by allowing direct access to data through the use of APIs. Financial institutions save money by reducing or eliminating the costs of obtaining data from third-party data providers and aggregators for lead generation, customer targeting, and mortgage underwriting.

An open-data ecosystem can function effectively only by achieving a level of well-founded trust among all participants. Without this, individual consumers or businesses may opt-out from the idea of open financial data, especially due to the rising concern of unauthorized use of personal data for economic gain. Financial data are particularly sensitive, and the long-term viability of data openness will depend on users’ trust in the data-sharing ecosystem and personal data protection. Therefore, data-sharing ecosystems require well-founded trust to encourage usage, protect users, and guard against other risks.