Towards Personalized Financial Services with Open Banking and Shared Data

Open banking is getting very big very quickly. It was introduced in the just past few years, and is already dramatically changing financial services for many millions of people around the world. In Brazil, the open banking initiative is being led by the Central Bank of Brazil, with the aim to modernize and digitize the banking system, introduce new non-bank institutions, protect and add new products to the market, and ultimately increase financial education and financial inclusion. And Brazilians seem to be keen to take part in this new initiative, having among the highest sentiments for open banking in the world. 

The Basis: Shared Data 

So what is open banking? Open banking is essentially a shared network of consumer data, with consumers’ consent, that is accessible to participating financial institutions (FIs) via application programming interfaces (APIs). Accordingly, open banking allows consumers to share financial information about themselves that in the past was only known by their bank or specific service providers. This newly shared information may include bank account details, credit card transactions, money transfers, utility payments, salaries, and more. Until now, this information was owned by those companies, and now the ownership is moving to the consumer. 

In Brazil, as of August 2021, consumers can choose to share their financial information with participating FIs, who can in-turn offer them new services outside of their bank’s environment. As a result, these consumers will get visibility from multiple FIs and their competing services, such as reduced rates or increased credit limits. Moreover, this visibility will allow people with previously limited access to financial products to have much more options available, such as online payments and credit. 

Consumers’ experience with open banking will mostly be via online platforms. Indeed, open banking sits on digitized platforms that are developed by banks and fintechs, which can be accessed over the internet, without the need for in-person visits or branches. Nevertheless, the core value that underlies these platforms is really the shared data. 

The Key: Added Value and Trust 

Because opting-in to open banking and sharing one’s data is a voluntary and personal choice, a major challenge for participating FIs will be to create a value proposition to help customers realize that open banking can benefit them personally. Once that happens, it is likely that many will give their consent. According to recent survey evidence, for example, 70% of consumers are willing to provide personal information if it will lead to better credit decisions. In addition, many Brazilians are already accustomed to managing multiple accounts, with 1 in 4 Brazilians operating their finances by combining banking and fintech services. 

Another important factor for consumers to adopt open banking, will be trust that their personal data will be kept secure and protected. This is somewhat similar to a person allowing location services on their mobile phone, or letting Google or Facebook to track their internet activity in order to help create more personalized services. In this respect, it is interesting to note that Brazilians trust traditional banks with their personal data more than non-banks. Fintechs will therefore need to prove that they too can be trusted. The good news is that open banking is well regulated, and that all participating FIs must comply with data protection rules, and declare exactly what data will be used and for how long. 

The Benefit: Personalized Services 

Overall, for customers to really realize the value and trust in the open banking system, FIs will need to personalize the services that are offered, according to what the consumer really wants or needs. Until now, FIs have only really been able to provide very general segmentations of services for their customers, based on broad demographic variables or bureau scores, for example. Even after many years with the same bank, it is hard to imagine that they would know you well enough to offer you personalized services or foresee your needs. With a broader view of a customer’s financial situation, shared data in open banking allows not only a consumer’s bank do to this better, but other FIs as well. 

This can be achieved in part because much of the shared data describes a consumers’ financial behaviors, preferences, and even personal characteristics (i.e., “psychometric” data), above and beyond their financial situation. This can be learned from the customers themselves and the data they share, with the help of machine learning and artificial intelligence. For example, using shared behavioral data, FIs can help a person to better manage a customer’s financial situation, such as advising them to save for an impending debt payment, or offering them future credit for identified unexpected delayed income amounts or temporary increased expenses. In addition, FIs can help by providing personalized reminders, tips, warnings or suggestions to become more financially educated. 

In all of these cases, the consumer is empowered to decide what to do, with the FI giving them the tools and options to do so. From these decisions, the FI can learn their preferences, can know what messaging is most effective, what is the best way to be contacted, what services were preferred, etc. This knowledge is improved and learned faster, especially when data is shared across vendors, and can be applied proactively to other similar people as well. 

Since the process and foundation for data sharing has already begun, FIs now have the challenge to find ways to leverage this data, by developing new intelligent technologies, models and products that will improve and personalize services, and lead to increased financial inclusion and economic growth.

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