The global COVID-19 pandemic has shone a floodlight on financial vulnerabilities and the stress they cause for families. A recent survey shows that only 22% of Americans give themselves high scores on their own financial wellness. This is a failing grade for the financial services industry and a call to action: Providers must begin competing on customer outcomes.
Enter open finance, which is premised on a simple idea: making financial data accessible to everyone. In practice, open finance describes networks of secure connections, primarily application programming interfaces (APIs), that allow customer-permissioned data and services to flow between banks and third-party providers. People benefit from access, portability and optionality and the industry benefits, too.
Financial institutions that partner with fintechs and other third parties can access data and services across different verticals, which adds more value to customers. Fintechs and other nonbanks gain more secure and reliable access to consumer financial data. Both sides can leverage the capabilities of the other.
As we consider the future, regulators such as the Consumer Financial Protection Bureau play a critical role. Until now, access to consumer data, along with technical standards, disclosures and security processes tied to the data, have primarily been left up to the parties involved, including end users (often meaning fintech applications), data aggregators (such as MX) and data holders (often financial institutions). While this system has provided a groundwork for the innovations we’ve seen, the data-access ecosystem is at a critical juncture.
A clear, cross-agency regulatory framework is needed to move the industry forward in the face of three challenges: 1) integration with legacy systems that are incompatible with new innovation, 2) true data control and transparency for the consumer, including the ability to revoke data sharing consent, and 3) direct regulatory oversight for open finance standardization across the financial ecosystem.
A 2021 survey by Deloitte found that nearly 70% of consumers said financial institutions need to place a greater emphasis on data protection. What’s more, a recent survey we commissioned at MX showed 60% of people want to see advanced identity protection from their financial institutions.
The fact is that accessing and managing shareability of financial data via legacy technology can lead to security gaps, and methods each organization deployed in the past are no longer adequate.
This first challenge requires the infrastructure to support a new type of data sharing that is permissioned, tokenized and credential free. Modern connections (open APIs) are more reliable: They receive data 10 to 20 times faster — in most cases under five seconds — with a 99% success rate. It also creates a better account-holder experience by creating more reliable connections, reducing the number for account holders who may call in with an issue and lessening the impact on operations, call centers and IT resources.
Many people have accelerated their use of digital tools to manage their money; in fact, more than 80% of consumers in North America connect their bank accounts to fintech apps and 90% of consumers use online and mobile financial apps to manage their money. However, 80% are largely unaware that apps use third-party providers to gather their financial data.
While many consumers are asking their financial institutions for heightened security measures, we are still in the early stages of porting our data and consent. This is the second challenge to address. For example, consumers may be unaware that when authorizing a one-time transaction, third parties may store their information indefinitely and collect information unrelated to that transaction on an ongoing basis. We’re in the 101 stage of educating consumers that they can obtain their data in the first place, let alone share it with a third party indefinitely when getting a mortgage or setting up a budgeting app. Working to educate consumers is critical as we grow and improve financial resources for everyone.
Before open banking, data was housed only with financial institutions, but today, it’s being housed with fintechs and payment initiation service providers. In this digital age where credentials leave people’s hands and spread throughout the ecosystem, this is the third challenge: There needs to be a regulatory framework to determine parameters of access.
This can be spearheaded by the CFPB, which has a mandate under the Dodd-Frank Act to ensure that customers can access their financial data. To accomplish this, we propose thre
e things. First, the creation of a consumer data right that assigns clear ownership of financial data to the consumer. Second, minimum data standards defining data that companies must share upon permissioning, based on the Financial Data Exchange (FDX) standard, with clear guidelines on exceptions. And finally, regulatory oversight of data aggregators and intermediaries such as MX, to ensure consistency across the ecosystem.
Financial data connectivity has a massive surface area and aggregating many types of data for a variety of use cases is a challenge for fintechs. But this is an exciting time for all organizations to use financial data to grow their business. In a recent survey, 90% of people said it would be valuable to see their finances in one place; however, only 40% said they could currently do it. Open finance allows the entire ecosystem to deliver intelligent, automated and personalized experiences that drive positive outcomes for their customers.
People should have access to their data. Data permissioning brings choice. Choice for the customer to make informed decisions based on data they are choosing to share between their financial institutions and preferred fintechs. It will improve the customer experience and ensure that people own their data, have secure access and can make informed financial decisions.