Future of Finance


Open Data is a general purpose technology that is going to make or break your business – Article

Open Data is a general purpose technology that is going to make or break your business

The vision of Open Data is a compelling one. By giving consumers and smaller businesses (SMEs) the tools, the power and the confidence to access and use their data to demand more of their service providers.

By this means, Open Data will make markets work better, drive innovation, lift the rate of economic growth and create a healthier society free of the attention-seeking activities of Big Tech.

Open Data is not Utopian – it is happening now

Unlike most visions, Open Data is not Utopian. It is happening already. The Australian government has empowered its citizens with a Consumer Data Right they can exercise in banking today, with the energy and telecommunications sectors to follow.

In the United Kingdom, the Open Banking initiative has empowered users of banking services, gingered up competition for customers by attracting new entrants and encouraged innovation by rewarding new ideas.

Plans are also afoot in the United Kingdom to extend Open Data to savings and investment and insurance. Though the plans have not progressed as fast as their progenitors had hoped, legislation is promised for later in 2021.

Consumers and SMEs benefit from Open Data

Over time, the effects of Open Data on financial services are likely to be profound.

For example, by sharing data about their income and outgoings, their equity in their property and their existing loan-to-value, consumers could auction their mortgages continuously.

Continuous auctions of this kind would help borrowers (who can obtain the best mortgage rate they can every day) and lenders (who can adjust and diversify the risk and return of their mortgage portfolio every day as well). For both, transactions costs will effectively be zero.

If that sounds far-fetched, a version of it is happening already through yield-farming smart contracts in the Decentralised Finance (DeFi) market.

Likewise, data is already cutting the borrowing costs of SMEs. Large banks were able to suppress competition to lend to SMEs because they monopolised data on the financial performance (and collateral value) of the businesses that borrowed from them.

By opening access to that data, lenders were able to compete.

Five-year-old Funding Xchange, for example, has fostered meaningful competition to lend to SMEs. In the years since it opened for business, Funding Xchange has seen borrowing rates for SMEs tighten by 60 per cent and time to receipt of funds fall by 75 per cent.

Instead of taking weeks, loans are now sometimes advanced within 10 minutes. Relations between SMEs and their lenders have also improved, precisely because the lenders understand their borrowers better.

Financial services is the first sector to feel the impact of Open Data

But financial services are only the first sector which Open Data is transforming.

When the same technique of consumer ownership and control of their data is applied to other sectors, it will alter the balance of power between large corporations and individual consumers and small businesses.

The financial services industry will benefit indirectly from adaptations in other sectors, because banks and asset managers and insurers already provide services to these other industries, and they will be growing faster.
Even the FAANGs, as they are finding already, are likely to find their businesses under pressure to change.

This allays concerns that the success of the FAANGs in capturing customer data in exchange for “free” services rests on consumer apathy towards owning and controlling data about themselves.

Instead, there is growing confidence that consumers are alive to the value foregone – as well as the threats to their privacy – that lies in ceding control of their data to others.

It will take time to develop and market killer apps from Open Data

The main obstacle to popular support for Open Data is not apathy but novelty.

It takes time to design and implement meaningful applications, particularly when they depend on seamless access to data sets controlled by third parties.

Engineering problems persist too. The infrastructure of Application Programme Interfaces (APIs) needed to connect disparate data sets, for example, is still developing.

In short, the products and services emerging in response to the Open Data opportunity are not yet mature enough to put the growth of financial services driven by Open Data on to a J-curve trajectory.

This is perfectly normal. Contactless payment, to take a germane comparator, did not take off until the game-changing application of the technology became available.

This is why the Open Banking initiative in the United Kingdom, which now dates back to 2017, has made steady rather than spectacular progress.

Nevertheless, more than 300 FinTechs have joined the Open Banking network, with a view to making use of Open Data to provide services, and 3 million consumers and small businesses are using Open Banking APIs to access such services actively every month.

The long-term success of these development hinges on the seamlessness of the links between the apps and the bank account of the consumer or SME.

To minimise friction, the Open Banking Implementation Entity (OBIE) has adopted an app-to-app redirection methodology that allows a consumer to make the connections biometrically rather than via user-names and passwords.

Apps will encourage growth of Open Banking so long as they offer and develop tangible benefits.

Apps exist already that help consumers understand their financial position and populate their tax return and which give SMEs readier access to credit and enable faster payment of outstanding invoices.
But it will still take time for even the most valuable apps to build a market.

Consumer ownership and control of data is essential to progress in the long-term

Other obstacles to progress include resistance to sharing data, particularly from a vociferous class of consumers dismayed by the business model of the FAANGs that are antipathetic to sharing their data any third parties.

Finding a way for economies and societies to benefit from sharing data while safeguarding the privacy of consumers will clearly be essential to the long-term success of Open Data.

Making a reality of customer ownership and control of their data is a large part of the answer to such concerns.

Information must move only with the explicit consent of the consumer, and consumers must be able to revoke their consent as easily as they provide it.

Transparency (into who sees the data) and confidentiality (to protect any sensitive data) are also crucial.

Digital IDs will enable the Open Data revolution

Digital identity (digital ID) has emerged as a key enabler of the Open Data revolution too.

Self-sovereign identities (SSIs) that sit in smart contracts on blockchains are seen as an ideal future state which consumers are not yet ready to adopt.

So the likelier outcome is a “federated” model in which personal identification data is stored with trusted and regulated third party providers.

In the United Kingdom, where The Investing and Saving Alliance (TISA) is developing a digital ID scheme for financial services, consumers will store their identity data with a provider that they can then authorise to share the data with any third parties they choose.

Consumers have indicated a preference for using data intermediaries

Research has uncovered a distinct preference among United Kingdom consumers for assigning data storage and curation to specialist or trusted intermediaries, rather than relying on apps or doing the work themselves, whether those intermediaries hold the data in a centralized way or through a distributed network.

This is partly because consumers believe security is essential.

But it is also because consumers want some form of assistance if they lose the telephone on which the app is stored and some form of redress if a malefactor steals their identity and hacks into their bank account.

For such providers to be accountable to the consumer, they will have to charge consumers for their services.

It remains to be seen whether enough consumers are sufficiently reluctant to pay that it blunts the effectiveness of any Open Data initiative.

Legal rights offer an alternative model.

The Open Banking initiative in the United Kingdom, for example, proceeds by giving consumers the right to oblige providers that store their data to share it with any other authorised provider – there is that degree of regulatory protection – they choose.

In India, the government has taken a much firmer lead.

A government-sponsored entity, the Unique Identification Authority of India (UIDAI) issues unique 12-digit identity numbers (known as Aadhaar) to residents and passport holders of India, based on their biometric and demographic data.

Consumers in India are adopting and using them to avoid having to produce identity documents every time they, say, buy a mutual fund or open bank account.

Others contest the need for commercial or government-sponsored intermediaries to store and share consumer data, arguing for a distributed approach in which data is retrieved and assembled from multiple places to serve for particular purposes.

Some observers distrust governments on principle, while others believe centralized databases are too vulnerable to being hacked.

Giving consumers value for data is the most convincing path

Giving consumers value in return for their data – rather in the manner of the FAANGs, but without the attendant disadvantages – is the most convincing way forward.

Clearly, consumers will share data if the value exchange is worthwhile – for them personally, since every consumer will set the hurdle at a different level.

Straightforward payment is one option, though this is not yet happening.

However, additional services, better access to existing services and cheaper prices are being offered to consumers in exchange for data.

Another way that consumers (and corporates) can get paid for data is by sharing their data with platforms which can combine it with other data sets to create new services, such as event calendars, or databases of health information or public opinion or electricity consumption.

Contributors can be identified and validated digitally, as will their contributions, and they will share in the proceeds of sales.

Any platform must earn and retain the trust of consumers.

A mobile telephone used to store data in the Cloud is an example of a platform.

As long as consumers trust Apple or Google, for instance, they will be content to store data on their platforms.

However, the apps which run on the platforms also need to be trusted to be good stewards of consumers’ data.

It follows that any platform where consumers store and share data will have to abide by a set of rules that retain the trust of consumers.

Convenience is the ultimate key to the Open Data revolution

But in the end ease of use is what will determine whether consumers use Open Data to transform economies or not.

If consumers can change their bank, insurer, utility or broadband supplier, or access credit or insurance cover, without compromising their privacy and without enormous effort or lavish outlay – with the same facility, say, as they use the telephone – they can transform economies without even being aware of what Open Data is.

Research by TISA has found that, in the end, convenience trumps security.

In other words, the power of Open Data ultimately lies in its invisibility.

Consumers and SMEs do not want to engage with their data.

In fact, they do not see Open Data as an end but as a means. They do not want, for example, to make payments or borrow money or buy insurance; they want to do the things that payment, credit or insurance make possible.

Open Data will take off as soon as it properly aligned with the intent of the consumer or the SME and makes it possible to meet their expectations.

Collaborative ventures are inching Open Data forward

In the meantime, Open Data evangelists must pursue other means.

Groups of like-minded people are collaborating to enable access to data sets.

The Open Active initiative by Sport England, for example, has brought together more than 100 organizations to share data about their sporting events, with the aim of encouraging more popular participation in sport by making it easier to find opportunities.

The United Kingdom Biobank, to take another example, is an anonymised biomedical database whose trove of genetic and health information depends entirely on the contributions of blood, urine and saliva by half a million voluntary participants.

In financial services, TISA is bringing together the various parts of the United Kingdom financial services industry to agree on how to handle and store and the consumer data behind digital IDs.

TISA is also involved in the United Kingdom Pensions Dashboard programme, which aims to enable individuals to access all their pensions information online in one place, chiefly to help consumers save more and plan better for retirement.

The success of both initiatives depends on data sharing, data standards and digital IDs.

There is nevertheless a conviction on the part of some FinTechs that the Open Banking initiative in the United Kingdom is being retarded by the reluctance of incumbent banks to share data.

Education of consumers and businesses about Open Data is essential

It is possible that consumers and SMEs will never be comfortable with Open Data purely through experience of its benefits.

Instead, argue some Open Data enthusiasts, they must be educated about those benefits, starting in schools.

Certainly, business is not well-versed in the opportunities and threats that Open Data represents.

Indeed, there is concern is some quarters about the danger of proceeding too fast towards an Open Data economy.

Some businesses are uncomfortable about sharing client data, and their readiness to adapt their systems and processes.

Others fear that the drive to liberate new sources of data risks overwhelming existing projects before they have settled interpretations and business models.

They argue that excessive insight into the financial performance of counterparties in a crisis, for example, might actually make the crisis worse.

However, experience shows that open markets will always grow faster than closed ones.

Price transparency in securities markets, for example, was limited once. That enabled insiders to collect lavish margins on trades, but it also restricted the growth of the markets.

Securities markets have grown, and become more profitable at scale, as price transparency has increased.

Government has a role to play in educating citizens and businesses on the value of granting open access to data.

Government has a crucial role to play in the Open Data revolution

But some believe government needs to go further, and intervene with legislation too, primarily because the incumbent businesses will not cede control of customer data easily.

The Australian government has certainly made more rapid progress in multiple sectors as a result of changing the law and laying out a map of how it intends to progress, sector by sector.

The United Kingdom government has recently announced, as part of its Smartt Data initiative, that it will introduce primary legislation to empower regulators in other sectors (such as energy) to copy the example of the Open Banking Implementation Entity (OBIE).

Of course, law and regulation are not always helpful.

The General Data Protection Regulation (GDPR) of the European Union (EU), for example, is widely considered likely to retard the progress of the Open Data revolution.

A more positive view of GDPR holds that it enshrines principles important to Open Data, such as consumer consent and data portability, but even its advocates concede it is cumbersome and leads to perverse outcomes.

Yet a purely laissez-faire approach could easily be worse.

The large technology companies have already developed one version of the future, in which they own and control data, prevent others using it, and deploy it in ways that do not always benefit the consumer.
If Open Data is to deliver on its promise of a faster-growing, more innovative economy and a healthier society, governments need to ensure that Data remains truly Open.

Written by Dominic Hobson, Co-Founder at Future of Finance, March 2021