Identity, Trust, and Value(s): the future of Open Banking
On paper, open banking can leverage innovative information infrastructures to redefine how financial data are created, applied, and communicated. In practice, the contribution of open standards in financial services hinges on very human perceptions of value, trust and identity. For both the traditional banking institutions, as well the new entrants of FinTech, the ability to transform promising ideas into pertinent data practices requires looking beyond the programming interfaces to understand how human intelligence shapes the opportunities and challenges of new service scenarios.
Open Standards won’t transform data into value, people will. What exactly are the promises of Open Banking? How will Open Banking condition the institutional use of personal data? Will technical standards alone suffice to create the trust needed to engage new service propositions from traditional banks and new market entries? What is the link between financial value and human values(s). How can management ensure that their data practices will allow their organizations to reap the benefits of artificial intelligence today and in the near future?
The Promises of Open Banking
Open Banking is built upon open standards, of which Identity, Trust, and Value are the foundations upon which all standards are set. Open Banking promises to fundamentally change the way consumers interact with their banks and financial services. Fueled by the implementation of the EC’s revised Payment Services Directive (PSD2), as well as the Competition and Markets Authority (CMA) regulations in the UK, Open Banking frameworks promise to enhance competition between financial institutions, provide consumers with more personalized products, and increase service innovation. The call has resonated throughout Europe: FinTech startups in the top 10 European countries in 2018 alone accumulated €2.89 billion in venture capital in 477 separate deals. Open Banking has also echoed internationally, spurring innovation in markets as diverse as New Zealand, Mexico, Argentina, Nigeria, Hong Kong, Japan and Taiwan.[i]
Institutional banks have been traditionally been built around models of vertical integration, covering all aspects of the value chain from origination to servicing to risk and balance sheet management. Open Banking frameworks impose legal guidelines concerning third party access, informed consumer consent, data security and dispute resolution of personal financial data. From a regulatory point of view, these regulations require retail banks to share their current account data with authorized third parties through application programming interfaces. Technically, the implementation of these services will require information architectures based on application programming interfaces (APIs) to ensure end-to-end comparison services, automatic savings, and credit scoring. These architectures in turn have created a myriad of potential business opportunities both consumers and producers of financial data.
For government and society, Open Banking can be leveraged to nudge markets to privilege more responsible and more responsive investment and debt decisions. For retail banks, Open Banking will test traditional banking models and encourage them to find niche areas of expertise and develop their unique brands around “Banking as a Service” (BaaS). For new market entrants, open banking will facilitate the creation of innovative service propositions combining predictive analytics, artificial intelligence, and financing to reach diverse customer segments. Finally, consumers will benefit from the ability to more easily compare banking services from different providers inciting both better products and a wider choice.
The Primacy of Identity
Precisely identifying each transaction’s contractual parties has always been one of the foundations of financial institutions. The desire to ensure stringent identity standards has required that businesses and individuals provide physical documentation that confirms their identity. Onboarding customers for new services requires even more face-to-face interaction, leading to time-consuming, repetitive application processes for account enrollment, login, and payment authorizations. New regulatory requirements for transparency, including anti-money laundering (AML) and Know Your Customer (KYC) procedures, have complexified these processes further. As a result, financial institutions currently spend over US$1 billion a year on identity management solutions.[ii]
The vision of Open Banking promises to give consumers control over their data, and in the process facilitating their ability to take out loans, test out other financial products and buy a wider range of products online. This promise has been hindered by the persistence of incompatible and poorly documented legacy applications in banking information systems: there is a high level of manual effort and operational cost when verifying customer information during the on-boarding process. It has proven difficult to entice customers to switch or use services from multiple providers without a seamless product portfolio management platform. Finally, opening up legacy systems to third party operators carries its own risks, banks could well lose their status as privledged suppliers through propositions from third-party providers enabled by FinTech.
With the development of data science and analytics, the more an institution can understand about its customer’s beliefs, motivations, and behavior, the better it can tailor its services and transactions. Data Science is already been widely used in many of the bank’s core processes including cost and revenue allocation, customer outreach, fraud detection, marketing outreach, product development, and risk management. Internet banking, social media and mobile banking applications provide myriads of data that can help both financial institutions better understand their customers and their markets. Machine learning algorithms and data science techniques can significantly improve bank’s analytics strategy in facilitating customer segmentation based on either demographic or behavioral data, building recommendation engines that can influence consumer decision-making, and streamlining customer support.
Does the flood of data that inundates the market each day help the financial sector take better decisions? Algorithms haven’t yet been able to account for what separates an effective account manager from a machine: the notion of human agency, his or her capacity for empathy, the nature of human intelligence, and one’s capability to differentiate right from wrong. Bounded rationality justifies ethical questions of how organizations use data to understand the past, analyze the present, and predict the future. Implicit bias limits the pertinence of Data Science in portraying the realities of financial services: human attitudes and preconceptions taint our views of data, cognition, logic, and ethics. The managerial issues of digital transformation highlighted in repeated financial crises are worthy of consideration: to what extent do managers and organizations need to be held responsible for their data practices?
The Paradox of Trust
If Open Banking is about establishing standards for data exchange, trust is the foundation upon which all other standards lie. The intention of the new regulatory frameworks is to provide online information infrastructures that provide services that are as secure as the legacy systems of the institutional banks. The leitmotif of the legislation is to accompany the general trend towards digital transformation of the monetary system: 20% of all consumer transactions already happen online.[iii] From 2018 to 2021 the number of cashless transactions is predicted to grow by 12.7% each year.[iv] These numbers provide evidence of a shift in expectations, as well as the premise of consumer intentions in favor of a more open relationship between financial service providers and their customers.
This lecture of the data opens new opportunities for both the banks and FinTech to position themselves to become lifetime advisors to their customers. One of the fundamental goals of technology, from the invention of general ledgers to the conception of the blockchain, has long been to provide a single version of the truth, a record of evidence that serves as a trusted intermediary to facilitate the exchange of products and services. A recent nCipher Security survey indicates that consumers trust the financial sector in general, and their banks in particular, to protect their personal data more than any other industry.[v] Yet this trust can be quite fickle, just 36% of British consumers trust banks to work in their customers’ best interests, while in Germany (35%), Italy (30%), France (29%, and Japan (27%) the skepticism is higher still.[vi]
Data will never be worth more than the confidence consumers have in an organization’s data practices. Several hypotheses have been advanced to explain this paradox of trust. The Business models based on “People are the product” philosophies are increasingly contested by those who resent being categorized and then productized. The zero-sum experiences in which the corporation’s perceived need for data outweighs any concern for individual privacy have drawn widespread public condemnation. Data-hoarding practices based on “Big is better” are proving as pointless as they are potentially dangerous. Finally, the social mechanics of digital marketing distort the relationship between truth and trust even further, promoting psychological profiling as a house of mirrors reflecting contradictory versions of reality.
Data architectures need to go beyond satisfying the legal constraints of data authorities to breeding trusted relationships between organizations and their customers. We have argued elsewhere that the end goal of digital transformation goes beyond optimizing sales processes to provide insights that will help consumers take better economic and societal decisions.[vii] The pertinence of Open Banking depends less on the sophistication of its tools and techniques than on the extent to which consumers leverage financial applications to improve individual and collective well-being. Trust isn’t an attribute of the quantity of how much data you hold as much as a result of consumer perceptions of how that data is being used.
Which Values for Money?
“Value for money” almost seems like a pleonasm in the industry today, even if the issue of what values for money remains an open question. Open Banking creates multiple avenues to enhance customer perceptions of the value of financial services. Consumers can now interact directly with their financial products rather than going through each individual bank. The ability of merchants to use APIs to initiate payments on behalf of customers opens the door for new payment schemes. FinTech can leverage transactional and behavioral data to suggest and personalize products.
For the financial institutions themselves, Open Banking regulations may well nudge them to reconsider both their business models and value propositions in reengineering their partner ecosystems. Some institutions may well try to exploit the possibilities of open banking directly in controlling both the production and the distribution of products and services. Some may choose to invest in the development of new products and services that will be distributed by their business partners. Many may well focus on the distribution financial products and services created by the Fintech. Others still will concentrate on the platform by acting as a market intermediary that facilitates activity in their ecosystems.
Do the current performance metrics of Open Banking (concerning the processing times of Accounts, Transactions, Balances, Direct Debits, Standing Orders, Beneficiaries, Products) adequately capture the relationship between financial value and human values? Richard Thaler’s work on the economic principle of the “law of one price” demonstrated that consumer behavior most often defies rational thinking.[viii] Gerald Zaltman argues that as much as 95% of purchasing decisions are based on subconscious considerations.[ix] Consumers perceptions of values hinge on their feelings, intuition, and insights. Elaborating metrics based only on process efficiencies captures at best only part of the larger picture of what consumers value. Metrics capture what they were designed to measure, algorithms perform as they are taught, while financial decision-making is shaped by perceptions of value.
Under the acronym of Trust by Design, we have argued that the future of Open Banking depends less on APIs than on developing customer-centric data practices. Financial institutions need to grow their existing capabilities — particularly in data and analytics — to take advantage of new opportunities as they arise. Organizations would be wise focus investments that encourage the use of open data across the enterprise and ecosystem. In leveraging non-proprietary data, banks and FinTech need to address the issues of working with personal data. Finally, they need to develop meaningful conversations with their customers on how Open Banking can address the challenges and opportunities of the digital economy. Customer Value isn’t an attribute of the quantity of how much data you hold as much as a result of consumer perceptions of how that data is being used.
The future of Open Banking requires looking beyond the data to the foundations of Identity, Trust and Value. In this contribution for the upcoming Conisance Summit on Access Management and Open Banking in London Nov 14 and 15th, we have argued that
- Identity, Trust and Value are the foundations upon which the standards of Open Banking are set.
- Demographic and behavioral profiles haven’t yet been able to capture what separates an effective account manager from a machine
- Data will never be worth more than the confidence consumers have in an organization’s data practices.
- The issue of what values for money remains an open question
- Value isn’t an attribute of the quantity of how much data financial organizations hold as much as a result of consumer perceptions of how their data is being used.
Lee Schlenker is a Professor of Business Analytics and Community Management, and a Principal in the Business Analytics Institute http://baieurope.com. His LinkedIn profile can be viewed at www.linkedin.com/in/leeschlenker. You can follow the BAI on Twitter at https://twitter.com/DSign4Analytics
[i] Tobin, G. (2018), Open Banking Regimes Across the Globe [ii] Accenture (2013), The future of identity in banking [iii] Cochrane, M., (2019), Everything Investors Need to Know About the War on Cash [iv] Rolfe, A., (2018), World Payments Report 2018: digital payments booming [v] Help Net Security, (2019), Consumers trust banks most with their personal data [vi] Palenicek, J. (2018), Most Brits Trust Banks… [vii] Schlenker, Lee (2018), Trust by Design [viii] Thaler, Richard (2016), Misbehaving : The Making of Behavioral Economics, W. W. Norton & Company [ix] Zaltman, Gerald (2003), How Customers Think: Essential Insights into the Mind of the Market, Harvard Business Review Press