Banks around the world are preparing themselves for open banking and the primary need to share customer data with accredited data recipient creates the need for protecting customer’s privacy and personal information security.
Open banking has its own opportunities and threats for both customers and banks.
For customers, allowing sharing of their personal data with third parties, and Fintechs will make it easier to do banking and allow access to more products, more choices, features and benefits, and better deals. More competition will lead to reduced rates across banking products i.e. deposits or credit cards, loans etc. Consumer advocates, community groups and government agencies’ expectations are nebulous around privacy, and industry standards are still to be finalised in some markets.
For consumers, allowing their personal and financial data to be shared with other financial institutions would mean more transparency by the lenders on customers’ financial situations, income, expenses, assets, liabilities. For banks, meeting the responsible lending obligations under the law may result in access to credit being reduced. Banks would move to risk-based pricing models for credit underwriting and true cost of loan or getting a credit would increase, for home loans LVR (Loan to Valuation Ratio) would increase resulting in higher deposits required from the borrower to obtain a loan.
Conversely data sharing also imposes threats to privacy and financial information. Hence information and cyber security risks will need to be considered further and managed better by banks participating in the digital ecosystem.
In Australia banks have recently faced Royal Commission for ethical practices, governance and misconduct in the financial services. There is an ongoing need to increase the importance of ethical use of data as more and more channels are used by the banking industry such as social media i.e. Facebook.
Privacy and Security
The key factor for open banking from consumer’s perspective is data security and banks will need to gain greater consumer confidence around data privacy and security.
In Australia, Consumer Data Rights Rules will enable open banking from July 2019. In New Zealand, Payments NZ in March 2019 released standards to allow banks opt-in to share consumers account information and payment initiation with accredited third parties. Both jurisdictions have factored security and privacy risk as paramount and the rules have been derived to provide security of consumer financial data and personal information. Banks have been progressively working towards ethical disclosures, sharing and use of customer data through open banking conduct provisions.
Access to banks’ customer data can only be provided and specific information shared with registered third parties, only if a customer has given consent under the open banking regime.
Banks will also need to ensure that their customers’ data is not compromised by unauthorised access or cyber-attacks.
Ethics and Evolution
The use and disclosure of customer data has business implications and requires an ethical model and practices to be considered for information security, privacy and data governance.
As we march towards digitisation, organisations participating in open banking will use more and more customer data through the use of APIs and Fintechs will evolve using AI and IOT, providing enhanced customer experience. This is likely to have an impact on direct marketing as banks would want to use customer information to cross-sell products. Banks will need to scrutinize how the customer data is used and disclosed and also enhance their information security and data controls for governance.
Digital economy will further evolve with open banking and will introduce new channels for product distribution, imposing a limit on use of certain data. Banks may also start distributing other services such as utilities (electricity/gas/internet). This evolution will potentially also introduce new global entrants providing banking and payments services such as Google, Amazon and banks acquiring Fintechs to use their algorithms to capitalise on their existing infrastructure and product distribution strategy.
The banks will need to implement ethical model and data governance framework regarding how data is ethically used across business operation, put limits on certain data sets and build data controls and principles that goes beyond information security and governance.
The revolution in different global markets has been guided by regulations and the emerging digital economy will further transform the way banking is done in the open banking world.