https://media.blubrry.com/paymentsjournal/paymentsjournal.com/wp-content/uploads/2023/07/GIACT-006-001-Final-Draft.mp3Podcast: Play in new window | Download Open banking holds significant promise for changing the financial system for the better. With the ability to access and share their own financial information, individuals gain greater control over their data while enabling more efficient and tailored financial services.

For banks, it has the potential to reduce security risks and open up new product ideas in the field of identity verification. During a recent PaymentsJournal podcast, Caitlin Sinclair, Director of Proposition Development in Financial Crime at GIACT, an LSEG Business and James Wester, Co-head of Payments at Javelin Strategy & Research, provided insights into the state of open banking, the challenges it faces, and the potential for self-sovereign identity to revolutionize data control. They also spoke about how businesses can use open-banking tools more effectively, as well as the new consumer products open banking is likely to enable. PaymentsJournalThe State of Open Banking: Empowering Individuals and Redefining Data ControlPaymentsJournal The State of Open Banking: Empowering Individuals and Redefining Data ControlPaymentsJournal The State of Open Banking Although open banking does not have a fixed definition within the industry, in simple terms it allows individuals to access and share their own information held by financial institutions. In some regions, government and regulatory bodies have played a large role in promoting open banking. The push for U.S.

open banking has mainly been driven by industry and commercial interests. Open banking in the United States involves a few key players. There are the traditional banks that hold the data that open banking enables consumers to share with third parties of their choice, such as fintech companies. There are also third parties such as smart budgeting apps, insurance providers, and neobanks.

And let’s not forget the connectivity provider, which facilitates the interaction among the third-party services, the bank account, and the account owner. “Open banking initially started with banks and international initiatives, like those in the UK, aimed to create a more level playing field and empower individuals to determine what they want to do with their banking data,” Sinclair said. “This has led to the emergence of useful tools such as smart budgeting apps and dynamic fintech apps that help individuals manage their finances more conveniently.” Open banking is a form of democratization in financial services, and it allows individuals to leverage the information held by banks without necessarily going through traditional banks for every interaction. Instead, they can benefit from tailored financial services provided by third-party companies that excel in user experiences. For consumers, the term “open banking” may not mean much, even though around 80% of consumers are likely to have used it. “Open banking is just a method or tool that allows consumers to access third-party services or verify payment details,” Sinclair said.

“What’s important for consumers to know is that open banking operates based on their consent. No one can access their data without their explicit permission. And consumers should have the ability to easily withdraw their consent if they feel it’s no longer necessary or applicable to the third parties involved.” The challenge lies in making customers aware of the risks associated with open banking, especially if they are not familiar with the concept.

Providing clear information about the workflow and purpose of data sharing can increase customer buy-in. “Education about potential risks is increasingly important in the U.S., where the development of open banking has been more industry-led rather than regulatory-led,” Sinclair said. “However, the Consumer Financial Protection Bureau is expected to introduce guidelines and parameters to inform users about data usage and consent control. “The success rate of connecting accounts and receiving information through open banking can vary greatly, with factors like understanding the rationale behind data connection playing a significant role. By designing workflows that help customers comprehend the reasons for sharing their data, we can build confidence and increase their willingness to participate.” Trends in Open Banking Although it seems likely that open banking will continue to flourish, some factors—including economic ones—could derail its progress. “Companies operating in the fintech space have realized the importance of having a solid business plan that generates revenue from customers and allows for long-term sustainability,” Wester said.

“This realization has been a wake-up call for some companies that initially relied heavily on funding without a viable profit-generating model.” Another factor could be regulatory changes or pushback, but according to Sinclair, as long as the major players offering open-banking capabilities have designed their products with data privacy in mind, they should be resilient. “Looking ahead, the emergence of concepts like self-sovereign or permissioned data sharing, associated with distributed or self-sovereign IDs, could also impact open banking,” Sinclair said. “However, permission-based information sharing is likely to become the norm in the medium term.” Sovereign Identity: Taking Control of Personal Data Open banking is just the beginning of a broader evolution where data is not siloed but shared responsibly. The fundamental principle behind open banking is that consumers take control of their own data and decide how and where it’s shared. “We are only scratching the surface of what’s possible with data sharing,” Wester said.

“Web 3 technologies allow us to share specific pieces of information, fueling new experiences in areas like virtual or augmented reality and transforming how we buy, rent, and access goods and services. The potential for new and exciting developments is vast.” Sinclair shares Wester’s optimism, particularly around the personal control of data that underlies open banking. One direction where this might lead is the concept of self-sovereign identity, where individuals have control over their own digital identities.

This identity could be customizable to the role the consumer is adopting.   “This means that you can have different personas or roles, like your work self, your parent self, or your regular self, each with associated data and information,” Sinclair said. “This allows for greater flexibility and personalized experiences across various sectors, not just banking. “Imagine being able to connect your social interactions or even healthcare information to your self-sovereign identity and being able to share specific data on a permission basis when needed.

It’s not just about banking or financial services, but about creating a broader ecosystem where this buildable identity can be utilized.” Another positive of self-sovereign identity is that individuals can potentially separate and share only the specific pieces of information that are necessary without revealing everything. “When you buy a beer, you don’t need to share your entire driver’s license with details like your weight or hair color,” Wester said. “You could provide just the relevant information, like your age, in a binary yes/no form. That way, you have more control over your identity and can tailor it to different contexts.” Protecting Digital Identities Personal data is often stored in multiple places by different companies, which can be risky.

If a single company holds everyone’s information and experiences a security breach, the consequences could be severe. Sovereign identity is different. Instead of one company having everyone’s data, different pieces of information can be held separately and accessed only with the owner’s permission through specific channels. This will be helpful to individuals in terms of controlling their data and reducing the administrative burden.

For customers, part of the selling point is a user experience that enables efficient and secure access to financial information, minimizing friction. “In the future, the hope is to move away from archaic methods like passwords and find more convenient and secure ways to authenticate and manage personal data,” Wester said. “This would eliminate the hassle of remembering multiple passwords and streamline user experiences.” The shift in data management has commercial benefits as well. “The current model of data silos and fragmented security measures is unsustainable,” Wester said. “Companies don’t want to bear the high liabilities associated with data breaches or mishandling customer information.

They will likely recognize the need for a more secure and responsible approach to data management.” The concept of self-sovereign identity holds promise, allowing individuals to customize their digital identities and share specific information on a permissioned basis. This shift toward responsible data management and enhanced user experiences will not only benefit consumers but also drive businesses to adopt more secure and responsible approaches to data protection. The future of open banking is poised to revolutionize the way we interact with financial services, laying the foundation for a more transparent, efficient, and personalized ecosystem. In a recent white paper, GIACT (an LSEG business) explores the current uses for open banking products and their impacts to date, explores future applications, and helps firms understand how they can use the emerging suite of open banking tools to improve outcomes—for their organization and customers.

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By PaymentsJournal
Jul 27, 2023 00:00
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