We’ve written a fair amount about open banking and the many changes it will bring to the financial services industry. By now, it should be apparent that nothing will stop this evolution in financial services. Even so, some institutions continue to resist it in a misplaced effort to protect their institutions from perceived threats.
While there are serious threats involved in the movement towards open banking, they can be managed and the benefits it brings far outweigh them. For instance, one of the byproducts of this evolution is the necessity for the financial institution to integrate and share data across disparate financial platforms. While this is complex work that must be undertaken with great care, it brings with it many advantages.
The Benefits Banks Get From Sharing
In regard to mitigating risk, we have written elsewhere (and will likely write more in the future) about this important topic. In this post, we will focus on what banks have to gain by sharing data.
In a recent report prepared in collaboration with the World Economic Forum, Deloitte explained the three kinds of data sharing and the benefits financial institutions could receive by engaging in them.
- Inbound data-sharing (acquiring data from third parties): allows institutions to enrich their decision-making systems with additional information, leading to higher-quality outputs and more accurate operations.
- Outbound data-sharing (sharing owned data with third parties): allows institutions to draw on capabilities (and offer customer benefits) that they may not own internally.
- Collaborative data-sharing (inbound and outbound sharing of similar forms of data): allows institutions to achieve a scale of data that they would not be able to reach on their own, unlocking a depth and breadth of insights that would otherwise not be possible.
Overall, sharing data across platforms allows the financial institution to be more competitive and profitable. Here are the top 4 benefits:
As Deloitte points out in its report, “For customers, sharing data allows them to receive specific benefits – whether in the form of higher-quality products or more efficient services. Customers are increasingly aware of the value of their personal data and seek to share it only when the benefits received in exchange are meaningful.”
Better Customer Retention
Once they have the customers, data sharing makes it easier for financial institutions to maintain and retain those relationships. Sharing data with third parties will allow the bank to bring in partners who offer the products and services their customers are demanding, thereby reducing the risk that they will take their accounts elsewhere. Many banks are pursuing open banking to achieve this and compete more effectively with fintech firms, who are bringing an impressive array of services to the bank’s existing customer base.
Stronger SME Partnerships
On the B2B side, banks that share data have the power to build stronger relationships. By accessing the SME financial information directly, banks will have a more accurate picture of the business’s fiscal position and better underwrite its loan and credit lines. This is also far more efficient than working down through piles of paperwork using human underwriters.
Systemwide Financial Stability
There is also evidence to suggest that data sharing allows monetary, macroprudential and microprudential analysis and policy to benefit not only from more data but also from more comprehensive, more detailed and more consistent data.
“The need to monitor and identify impairments in the transmission process of monetary policy has increased following the crisis. Information on individual banks’ profitability, adequacy of capital balance sheet quality and liquidity ratios allow for better insights on credit supply constraints that hamper transmission mechanisms. Data on large and cross-border exposures allow a better understanding of the distribution of risks and propagation within the banking system and the economy.”
Increasing financial stability concerns require a holistic analytical framework to capture the complex, multidimensional nature of financial activity. Data sharing makes that possible. In the process, it delivers benefits to banks, their customers and the regulators who watch over the system.