[Originally posted on LinkedIn on October 24, 2015]
Earlier this week, I wrote a post (Evolution of technology and future of FinTech) in which the first part of my thesis was open access to digitized data unlocks significant value and spurs new innovation. This enables new technologies and ways for people to augment the underlying raw data making it even more useful.
This week, The Economist published an article “Cracking the vault” about the weakening grip that retail banks have over their consumer’s data.
A FEW dollars spent at Starbucks, a monthly mortgage payment, a Netflix fee, Starbucks again: bank-account statements are not exactly exciting stuff. But there is gold hidden in this by-product of our financial lives, or so many budding technology firms believe. A host of startups crave access to the data and are pitching services, from budgeting apps to cheaper loans, to those who open their books to them. Yet banks worry that co-operating is the first step towards losing the lucrative grip they have on their customers.
Banks only have to look at the last decade in the competition amongst internet companies. Facebook, Twitter, Google, and many others, have found that letting consumers own and share their own data increases the value of the data and cements the position of these data providers in the ecosystem.
For example, the opening up of the valuable Facebook Social Graph has turned Facebook into THE defacto social network that all applications must use. This symbiotic relationship between the app developer and Facebook has made both properties more valuable.
Just take a look at Programmable Web for a directory of all of the services that open up their data to third party applications.
Making financial data useful
Despite the banks’ unwillingness to share financial data, financial data aggregators, like Plaid, Intuit, and Yodlee, have made these transaction data widely available.
Data are already seeping out of banks’ digital vaults […] This gives customers a comprehensive view of their finances. Because these firms have a startup’s focus on being easy and appealing to use, their apps make most banks’ mobile offerings look clunky.
Plenty of startups, like LevelMoney, Sweep, and Mint, are already mashing up and augmenting this data with sleek UIs, budgeting functionality, and analytics. (I’m a big fan of Level’s Spendable Meter). Many more of these apps and services are coming in the pipeline replacing the bank’s existing UIs.
Whether or not these banks want to share this data, the data is already out there.
Bank’s closed system worse for bank security
People guard their Facebook and Google passwords more closely than their passwords with their financial institution. This makes no rational sense, however, banks are complicit in this mindset.
With Google and Facebook, users are trained to NEVER share their credentials on third party sites. Most internet services have embraced OAuth as the mechanism to separate authentication from authorization. OAuth allows services to delegate access to third parties without sharing the actual credentials. This also enables users to have ultimate control in revoking access to third party apps. (Sidenote where I put on my former Googler hat: if you haven’t done so, take a look at your Google account security page and review all the apps/sites you’ve given access to. Also, turn on 2-Step Authentication for enhanced security)
Banks on the other hand, have not embraced OAuth or similar delegation protocols. To use a third-party service, like Mint, Personal Capital, Credit Karma, or Bill Guard, users are trained to enter share their bank login/password. This is bad for the bank, the consumer, and for all of the apps out there that connect to these financial aggregators. In addition, there is really no way for a bank customer to know which app or website has access to the bank account. (If you look at this Reddit thread, users are begging for banks to take this seriously.)
Change is coming
Policymakers in Europe have concluded that forcing banks to share data at consumers’ request will yield big benefits for the banking public. Earlier this month the European Union adopted a directive on payment services, which will in effect force banks to impart data to third parties in a convenient format. Customers will also be able to authorise fintech firms to make payments from their bank accounts.
It looks like change is afoot, if not lead by the industry itself, but from the regulators. The API-fication of Finance is going to unlock a lot of innovation, provide better security, and will be good for the overall industry.
Banks have a role to play in the future of finance and they should be out ahead leading that way rather than holding grasping at the past.
Follow me on Twitter @Johnie. I love to geek out on #FinTech
