Open up: UBC study shows that open banking can benefit consumers and spur competition
Banks tightly control customers’ financial data, but a new UBC Sauder School of Business study shows that when consumers control their data, it leads to more options — and more innovation.
For decades banks have tightly controlled their clients’ private financial information, but a trend called “open banking” is quickly changing that — and a new study by UBC Sauder shows that when governments give it the green light, it can have big benefits for consumers and spur innovation in the financial sector.
According to UBC Sauder Assistant Professor and study co-author Will Gornall, Canada has one of the least competitive financial sectors in the developed world, with a small handful of institutions tightly holding the lion’s share of consumers’ transaction data, including records of deposits, withdrawals, loans and more.
That might be good for privacy, but bad when it comes to shopping for a loan, line of credit or other banking services, since only the consumer’s own bank can see their complete history and fully assess their credit risk.
Open banking, however, allows consumers to control their own banking data, and determine who gets to see their financial information.
“We’ve seen a growing number of big firms build up data fortresses that are adding a huge amount of value, but it’s not clear how consumers are faring in the consolidated data war,” he explains. “So we wanted to look at how changing ownership can change competition in the underlying market.”
For the study, researchers collected and analyzed data from 168 countries. They found that 49 had introduced open banking policies, and an additional 31 are in active talks about following suit. Europe is at the leading edge, with more than 80 per cent of EU nations having introduced government-driven open banking.
The authors then measured how the implementation of those open banking policies affected financial innovation by tracking venture capital deals in each country from 2010 to 2021. They also examined the banking sector adoption of open banking by using data from Platformable, which identifies banks that use the software necessary for open banking.
Titled Customer Data Access and Fintech Entry: Early Evidence from Open Banking, the study shows that in countries where open banking policies were put in place, digital financial businesses (or “fintech”) rush in, spurring competition and providing more options for consumers.
“We found a big increase in venture capital investment in financial start-ups around open banking, which suggests that investors are anticipating these changes will create new opportunities, or they see value in this data that's being freed up,” says Assistant Professor Gornall.
In fact the researchers found that, following the arrival of open banking, fintech venture capital investment increased by 50 per cent, with more comprehensive policies showing even larger effects. The practice isn’t yet available in Canada, but some countries have been especially quick to adopt open banking, with South Korea reporting 30 million users and 100 million accounts just two years after implementing the approach.
The way it works is that a consumer with credit card debt might see a banner ad for a fintech company that offers a better interest rate if they’re allowed to view the customer’s banking history. From there, the person might click to go to their bank site and authorize the fintech to securely access that history.
“Right now, you have all your data locked up in the bank's vault, and you can't share it easily. But fintech companies could innovate and compete with banks to offer loans or new services,” says Assistant Professor Gornall, who coauthored the study with Columbia Business School Professor Tania Babina and Stanford Graduate School of Business Professor Greg Buchak. “So there may be all sorts of great fintech options that we can't get because we're locking out start-ups.”
The shift isn’t good news for everyone, however. As more open sharing of data becomes common practice, customers who choose not to participate could find it harder to secure loans and other forms of credit. What’s more, people with poor credit histories could also have a tougher time, since their data could be examined by a wider range of companies, thereby reducing their options.
“There are little boxes you can put in your car to monitor your driving and get a discount on insurance. This is the same type of idea,” says Assistant Professor Gornall. “But eventually it won’t be about offering people discounts: they’ll be charging everyone who doesn’t put a box in their car. It might be a good thing for society and will save lives, but you can see why the idea makes people a bit queasy.”
Big banks could also feel the pinch, adds Gornall, which is why they haven’t been quick to jump on the open banking bandwagon. “Maybe your customers benefit, but they benefit by getting a better rate from someone else, which is not a benefit for you,” he explains. Those costs, in turn, could trickle down to consumers. “If you make it so that banks don’t own your chequing account information, they’re not going to want to give you a free chequing account.”
Assistant Professor Gornall says when it comes to open banking, there are still many kinks to be worked out, and societies will need to decide how much sharing is enough and how much is too much. But overall, the approach should prove beneficial to consumers.
“There are challenges that will have to be thought through, but these technologies could improve everything from financial advice to credit opportunities,” he says. “And more competition in the market is going to help most consumers.”
Interview languages: English