The banking landscape is about to change beyond all recognition. On the one hand, the industry is excited about the opportunity it provides to empower consumers, liberalise data, and digitise the customer experience. But it will inevitably throw up considerable market challenges too.
The regulatory environment will be more onerous as FCA requirements and GDPR take hold. Economically too, we’re in uncertain times: The increase in interest rates and impact of Brexit putting increased pressure on consumer and business finances. And as if that wasn’t enough, the social landscape will shift too, with more open data and increased digitisation leading to more scrutiny.
So how to navigate this?
Anecdotally we know (and Experian’s most recent research backs this up) customers will willingly share their data – when they see that it is valued by those who they share it with and that they receive something valuable back in return. This is called the value exchange. So your role is to show your customers that what they get in return for sharing data with you is indeed valuable.
For any service providers to make a success of new regulations they will need to understand the attitudes of their customers towards data sharing. Experian’s whitepaper, Delivering Value in the Digital Age, discovered four different groups within the general public and their appetites for sharing data to receive a service.
The largest group is The Accepting, who make up 41 per cent of the population. They see exchanging information for products and services as an inevitable trade off to get what they want, but they are hardly enthusiastic about the process. It’s fair to assume they will take up the opportunities of Open Banking, though they might initially be sceptical, so it’s important to guide them on the benefits of data sharing.
A further 28 per cent can be referred to as The Cautious, taking more care over their approach to the data exchange and making sure the companies which request their information are legitimate and trustworthy. Financial service providers will need to be transparent and build confidence slowly in offering them services.
But their reluctance to exchange information is nothing compared to the 9 per cent of the population who can be called The Incognito. This smaller group of people has figured out ways to avoid sharing information they don’t want to, steering clear of anything they perceive as ‘hassle’ or ‘intrusion’. However, with good communications and by building trust over time they can be persuaded to share information where there is value for them.
The remaining 22 per cent of the population fall into The Unaware category and are most likely to click ‘accept’ for services before they truly understand what they are doing. They have little engagement with how their data might be used. Financial service providers should make a special effort to ensure this group is informed of what the value exchange means in a clear and concise way.
The research also uncovered six motivations for people’s data sharing:
- Proximity of purpose: Sharing data is in keeping with the purpose of the app, e.g. taxi apps
- Day to day value: An everyday need for the service, e.g. payment tools
- Significant life stage: The perceived importance of the service is high, e.g. child care app
- Level of obligation: There is a need to share data to fulfil the service, e.g. mortgage provision
- Trust: Trust in the organisation with people’s data? E.g. banking apps
- Privacy: Privacy of the data shared will be protected, e.g. social media apps
So I think it’s important that we see Open Banking an opportunity to improve lending practices and give better insight into customer affordability. Being more open when it comes to data sharing means that current account can be utilised when assessing credit. This is set to cascade over time to also include credit card and savings account data.
When you then combine credit bureau and Open Banking data, you create opportunities to increase the accuracy of decision making. Also, improvements in data science, the application of machine learning especially, provides opportunities to reduce costs and increase operational efficiency.
No doubt the role of intermediaries in data collection and aggregation will be under more scrutiny, so the challenge for organisations is to win customer trust with regards to their privacy at all stages of the process.
A sensible response
The provision and analysis of an individual’s income and expenditure can be used to inform their affordability. Used in association with a credit score it provides organisations with an accurate understanding of an individual’s credit worthiness and ability to afford a loan.
For customers it means the real-time provision of income and expenditure data based on their:
- Bureau data - summarised Current Account Turnover (CATO) Office of National Statistics (ONS) estimates of expenditure) and/or
- Bank statement data sourced from Open Banking
This can be provided through screen-scraping and/or APIs and a data aggregation platform which should include the automated categorisation of bank transaction data. This should address the key FCA requirement to assess an individual’s credit worthiness – defined as credit risk (credit score) + affordability risk (an individual’s income & expenditure).
It can be applied across the customer lifecycle – during every stage of applying for, being approved for and subsequently paying off a loan.
If organisations can demonstrate the benefits to customers of using these methods then the advantages are clear. Shorter lead times should mean both a cost reduction and greater efficiency. For products such as mortgages, automotive loans or even property rental which this data is already shared in insecure, paper-based exchange the benefits are immediately obvious. Managing data exchange safely also offers an opportunity to build trust and gain greater insights into consumers.
So while Open Banking might be a scary prospect at first – for those who embrace it, and any similar principles of data openness and opportunity, the opportunities are exciting no matter what business you are in.
How the business establishes enough trust with their customers so that they willingly share more about themselves is the challenge to be overcome. When sufficient trust is in place, the relationship can move from being one of commercial exchange to become a genuine emotional connection. In the new world where customers are fickle and choice is everywhere, it is more important than ever for financial institutions to build deeper relationships with their customers and become more than a service provider. Gaining a better understanding about their customers’ attitudes towards sharing data is the first step to understanding what makes them tick.
Jon Roughley, Head of Innovation, Experian UK&I
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