As the Information Age has advanced, we have come to appreciate the value of our own data, something our parents or grandparents may have taken for granted.
The information that institutions like banks have about our income, spending and financial status has been largely proprietary – in other words, there is information about us out there, but it’s owned by the banks (or credit unions or credit card providers, insurers or mortgage companies, etc.). A potential revolution is happening on this front, called Open Banking.
When banks, credit unions and other financial institutions own consumers’ information, it reduces competition and innovation and potentially leads to higher costs for financial services.
For example, if a consumer could easily share all the data that has been accumulated about his or her financial status (income, expenditures, assets and so forth), this person could offer it to competing institutions. Each institution would then be able to fight to give the consumer the best offer for items such as bank accounts, mortgages, investments, etc.
This, in a nutshell, is the beauty of Open Banking: Open Banking hands the information back into the control of the consumer.
Once the “ownership” of the data is repatriated, consumers can then opt to share their data, via trusted third parties like some exciting, emerging APIs, such as Flinks and it’s coming integration with Velocity (which is what I use) and then allow access to it on an as-needed basis to financial institutions. This would, hopefully, reduce or eliminate the need for the seemingly endless form-filling-out, paystub-piling, T4 and other tax form collecting and assorted pesky and time-consuming paperwork required for borrowers.
More than this: The data would allow lenders to gain a much deeper and nuanced look into a potential borrower’s spending habits, for instance, which might not be evident through something as one-dimensional as a credit score. Of course, there’s a trade-off. (Isn’t there always?) Not everyone wants a lender (or anyone else) to get a granular look at where every dollar and cent ends up. (“I see you spend an awful lot of money at Purdy’s Chocolates, Mr. Pinsky.”) But, at its root, Open Banking allows the consumer to make that choice: To share, how much to share, or not to share. The trade-off is that, by sharing, we may open ourselves up to greater competition for our business and, as a result, obtain beneficial borrowing rates and other benefits, such as easily moving money between accounts at different institutions or opening a new bank account.
Open Banking may be especially suited for those with limited traditional financial history, because it allows lenders access to more data than what a consumer can prove with what’s currently available. For freelancers or those in the gig economy, Open Banking can provide a fuller context for decision-makers.
Canada lags behind most of the Developed World on the issue of Open Banking, probably due to the outsized control the big banks have on policymakers. The European Union, Australia and the United Kingdom have already regulated banks to hand over data to other organizations at the request of the consumer. But Canada’s federal government is playing catch-up now. Earlier this year, the Department of Finance called for individuals and interested parties to submit their views on the subject. As is prudent, the government will likely assess challenges as well as opportunities with Open Banking.
As a report by Deloitte indicates, the advent of Open Banking raises a number of issues, such as how new entrants in this freer market will be governed, how data shared between different organizations and apps will be protected, how privacy will be insured, what recourse will be available for liabilities, and how phishing schemes could be used to perpetrate fraud.
On the flip side, the ease of access to the broadest swath of a borrower’s financial data will reduce fraud, according to proponents, by making it more difficult for borrowers to fake or otherwise mislead. Open Banking would allow lenders to make the most informed, well-rounded decisions while reducing employees’ workloads and therefore overhead. This better decision-making should reduce defaults and, in the long run, reduce costs and losses, which could and should be passed on to consumers. This would be especially true as Open Banking increases competition, making even the stodgiest institution streamline its operations and shine up their spiffiest consumer offerings.
All in all, it should speed up every aspect of the lending process from the applicant cobbling together the myriad slips of paper and filling out forms to the time it takes the institution to render a decision.
Open Banking has the potential to advance financial literacy and consumer education, as well, with financial institutions or advisors being able to see what goes in and out of the bank account and possibly provide far more insight into the financial affairs of the applicant. If the consumer wants to hear it, advisors may be able to demonstrate how conscious decision-making or different spending and saving choices can lead to improved credit scores and other outcomes.
Not everyone will want to jump on the Open Banking bandwagon. But that’s the point: The data belongs to the consumer, not the institution, and so the choice of who sees it should be in their hands. Your hands.