The Bank of England has recently shared a Working Paper, focused on open banking, and it is attributed to several authors including Tania Babina, Saleem Bahaj, Greg Buchak, Filippo De Marco, Angus Foulis, Will Gornall, Francesco Mazzola and Tong Yu.
As noted in the paper released by the Bank of England, Open banking empowers bank customers to “share transaction data with fintechs and other banks.”
The Bank of England paper reveals that there are reportedly 49 countries that “have adopted open banking or OB policies.”
Consumer trust in fintechs “predicts OB policy adoption and adoption spurs investment in fintechs.”
UK microdata shows “that OB enables: i) consumers to access both financial advice and credit; and ii) small and medium‑sized enterprises to establish new fintech lending relationships.”
In a calibrated model, OB universally “improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits.”
As noted in the research paper, the increasing ease with which data “is collected, stored, and analyzed has made data a critical input in economic decision-making.”
The paper also mentioned that data’s growing economic importance has reportedly led to an active discussion “about who should control the data generated through private economic activity: A firm or its customers.”
As stated in the update, this issue is particularly salient in “the financial services sector, where banks’ provision of financial products inherently generates useful customer data. Periodic direct deposits, overdrafts, and late payments help predict a potential borrower’s riskiness. Account balances and transactions allow firms to learn about a customer’s needs and offer financial advice and other tailored products.”
A small business’s transaction data “could inform lenders about its health and help a fintech deliver financial management services. Historically, customer data has been under the bank’s exclusive control and gave banks a comparative advantage in pricing and customizing financial services.”
However, banks’ exclusive access “to their customers’ financial transaction data is being upended by a movement known as open banking (OB). OB is the trend of empowering bank customers to share their financial transactions data from their bank accounts with other financial service providers.”
For example, the paper explains that OB allows a bank customer “to use a phone application (app) to easily share her bank account history with a potential lender (which can analyze her income and spending habits to underwrite her credit) or with a financial management app (to help her manage her money).”