The promise of open financial data

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From Australia and Brazil to Nigeria and the USA, countries are enacting new guidelines and regulations for the digital exchange of financial data.

The aim is to drive the creation of digital data ecosystems that will make interactions between financial institutions and their private and corporate customers run smoothly and quickly. However, the successful adoption of open financial data could also provide a greater boost to global GDP.

By enabling the smooth flow of customer data between financial institutions through application programming interfaces (APIs), open data systems reduce or eliminate the need for manual data processing.

Strong consumer confidence is essential for such a system. This can only be ensured by creating a protective cushion consisting of user consent, data protection and cybersecurity.

When safeguards are in place, the benefits can be significant. Individuals and small businesses can have improved access to financial services; Data showing that a customer with a thin credit file is reliable in paying for electricity, rental, and other bills, for example, can improve their chances of getting a loan, sometimes for the first time.

Further advantages for the consumer are greater convenience – there is no need to fill out all of these forms in triplicate – and a greater variety of products.

For many emerging economies, basic internet access, extensive smartphone penetration, and reliable power supply are also prerequisites for realizing the full economic value of an ecosystem for data sharing.

In the United Kingdom, where so-called open banking has been in operation since 2018, customers can easily switch from one institution to another for a higher deposit rate and compare mortgage rates from different providers without any fees. Charge broker.

In the United States, President Biden’s Executive Order of July 9, 2021 to promote competition in business specifically targeted increasing the sharing of financial data so that “consumers can more easily switch to financial institutions and take advantage of new, innovative financial products”.

Financial service providers also benefit. The introduction of open data improves their operational efficiency by providing them with verified data digitally and relieving them of the annoying tasks of manual entry or searching for information in data silos.

This will significantly reduce the costs associated with fixing faulty customer relationship management data, which is currently valued at 20% of the income of a typical financial institution, and allows service providers to automate their data operations more.

A deeper data exchange also means that banks can allocate their human resources to the most vulnerable customers and reduce the need for data brokering.

For example, in the United States, nearly half of all mortgage providers rely on third-party data to provide credit, but open financial data makes much of this information publicly available.

Finally, data sharing is a powerful anti-fraud tool as it provides more evidence and clues to spot suspicious activity and helps institutions strengthen their predictive fraud modeling.

Then come the macroeconomic gains. In a recent analysis of 24 financial data sharing initiatives in banking and payments, we found that the widespread adoption of open data systems can provide a significant economic boost. This could range from around 1-1.5% of GDP in 2030 in the European Union, the United Kingdom and the US to 4-5% in India (see chart).

In addition, all market participants – financial institutions; individual customers; and micro, small and medium-sized enterprises (MSMEs) – benefit, albeit to different degrees, depending on the financial depth and structure of the respective country and the characteristics of its open data system.

Currently, even countries that are at the forefront of adopting open data are only realizing a fraction of their potential value. We estimate that the UK is currently accessing 30-40% of the possible profits and the US and Europe only 10%.

Realizing its full value requires a level of data standardization and breadth of data sharing that few economies currently have.

Standardization refers to the extent to which there are standardized mechanisms for sharing data and the associated cost of access, while breadth refers to the number of different types of financial data shared.

In some cases, data sharing is relatively ad hoc. For example, in many countries consumers who want automated access to competitive mortgage loans must provide the same specific mortgage application data to multiple providers.

But to work at scale – and thereby unlock the greatest potential value – it requires that a wide range of financial data be easily obtained through standard APIs at minimal cost.

Different players, from traditional banking institutions to technology platforms to new fintech startups, could all play a significant role based on their strengths and competitive advantage.

Two other aspects are essential: a resilient digital financial infrastructure on which to build a data interchange system, and innovation to ensure it continues to thrive.

During the COVID-19 pandemic, countries with a well-developed digital financial infrastructure were able to make payments to businesses and individuals quickly and efficiently.

Such efforts rely heavily on digital payment channels along with highly secure digital identification systems that have broad population coverage and built-in consumer protection.

For many emerging economies, basic internet access, extensive smartphone penetration, and reliable power supply are also prerequisites for realizing the full economic value of an ecosystem for data sharing.

Innovation is the final frontier. The more value that is extracted from open financial data, the greater the potential for innovation, and probably in ways that we cannot imagine today.

Different players, from traditional banking institutions to technology platforms to new fintech startups, could all play a significant role based on their strengths and competitive advantage.

The establishment and expansion of open financial data ecosystems poses complex technical and regulatory challenges. However, secure and trustworthy systems also offer great potential for consumers, financial institutions and the economy.

(Olivia White is a partner in McKinsey & Company’s San Francisco office and Anu Madgavkar is a New Jersey-based partner at McKinsey Global Institute)

Copyright: Project Syndicate


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