The financial services landscape is set to change drastically as open banking permeates and changes the way consumers view and use their financial information. As such, regulators, financial institutions and FinTechs have all been striving to create a mutually beneficial relationship surrounding the use of so-called consumer permissioned data (CPD), a trend that will test the limits of innovation, security, competition and more.
“There’s always a risk, and it’s never perfect, but it’s our job as an industry, [and for] regulators and lawmakers to ensure that we are always keeping the consumer at the middle,” Nick Thomas, chief product officer at Finicity told PYMNTS. “[As a consumer], it’s about your control over your data, whether it is being used for the purposes that you wanted it to be used for and your [permission] for that use.”
Quick Look into Data Aggregation
As Thomas recounted, data aggregation may seem trendy, but it has been around since the mid-1990s when the problem was being solved with a combination of data access through structured data and screen scraping.
Since then, financial innovators have begged for that data to be consistent and easily accessible, which drove the inclusion of Dodd-Frank Act Section 1033 and highlighted the need for consumers to control and access their data from the financial institutions. It clarified the concerns about data ownership and consumer rights, giving digital access to this data. The industry has since moved forward into standardization. Today, over 22 million consumers access their data through FDX (Financial Data Exchange) application programming interface (API)-enabled connections for open banking.
As with anything, there are several hurdles to face as the industry evolves, says Thomas. Data aggregation has enabled personal financial management (PFM) tools, business support of their finances by using their bank data and enabling ACH payments, and many more use cases.
Thomas said that Finicity considers itself at the forefront of one of the major use cases for open banking, credit decisioning and things that have come from cash flow underwriting and verification of income, assets and employment.
“These cool innovations with open banking and the number of use cases only continue to expand,” he said.
Consumer Permissioned Data Fueling Innovations in FinTech
For decades, banks have been using PDF statement data for underwriting in the lending process. The difference now is that it’s digital. “The simplification and ease of ingesting or delivering, or permissioning that data to flow into a lender has reduced the time to underwrite and close because of the digital availability [which improves accuracy, speed and the ability to more readily ingest and analyze the data,]” said Thomas.
One such example is Quicken Loans. The organization wanted to improve the customer experience and significantly reduce the time to underwrite and close to 10 days, a significantly [shorter] period than the industry average. Finicity’s opening banking platform has been a key component to condense the tedious and lengthy process of digital verifications moving it from days to minutes or seconds, said Thomas.
This change has also significantly reduced the error rates. Thomas explained that every time a piece of paper has to be translated into a computer, risks are introduced into the process. Finicity has reduced the failure rate and improved the efficiency by shortening the time for a lender to underwrite a loan, as the data given by the consumer is directly from the data source — usually a bank — and digitized.
The digital nature of the data also increases security. Thomas explained it is much more secure to get the data digitally as you’re authenticating the access by username, password, multifactor authentication, and abiding proof of the account owner. In contrast, legacy sharing of paper documents, emailing, etc., is inherently riskier.
“With the work of digitization across the entire ecosystem, it’s all about removing that friction,” said Thomas. “There are some processes that are still stuck in legacy mode, but those that are not stuck in legacy mode have been fully digitized, and the user experience is significantly better.”
Moving Toward Standardization
Finicity has been involved in creating the Financial Data Exchange, where the purpose has been to create an interoperable common standard for consumer permissioned data access to the banks and financial institutions. Thomas believes that API standards, consent management and consumer data rights are all pieces of the puzzle that will help the industry progress consumer control over how the data is used and that it is being used for permissioned purposes.
According to Thomas, there are two basic approaches to this concern. In many markets, this standardization is being driven by regulatory bodies. This has led to a quick resolution on adopted standards, as they’re mandated. However, industry-driven standardization, as is the current model in the U.S., allows the broader ecosystem to come together with diverse perspectives on addressing the opportunities and challenges of a secure data-sharing experience. On this front, FDX has tremendous momentum.
“Not only does it have the momentum to change and give consumers access to their data, but we have this amazing underlying industry-driven organization that is iterating. There are people working on it every single day, and that’s the power of industry collaboration around an interoperable standard,” said Thomas.
Open banking is the next iteration of data aggregation. In addition, four segments are all converging simultaneously — digital identity, consumer data rights, regulation around 1033 and blockchain technology.
Thomas believes we will see all four of these technical galaxies coming together in the broader realm of digitization within the next three years.
“The amount of innovation and inclusion that’s happening in just the U.S., let alone globally, is going to be mind-blowing and super exciting.”