Banks have always held a wealth of interesting information about our money and spending habits. Over time, tech, fancy maths, behavioural science and an increasingly digital economy have made it a lot easier to collect that juicy data, move it about and make sense of it.
Following concerns about how the big banks will use the power of all this new knowledge, last weekend new rules were introduced that force them to help customers access and use their data. The changes come with the promise of greater choice and control, but they also accelerate the “data revolution” in finance, with significant implications for people’s pockets and power.
There are three questions we need to answer if we’re to avoid sleep walking into a situation where the tech that’s supposed to help us is harming us
The EU legislation, called PSD2, is bolstered by the UK’s Open Banking initiative and came into effect on 13 January (although several banks are behind schedule). It requires a range of financial institutions to “open up” both the data they hold on us and how we make payments.
With your consent and authorisation from the financial conduct regulator, new players – ranging from start-ups to big tech companies – can become privy to all the transactions you make from your current account to your credit card (as long as it’s one you manage online or via a smartphone app). Some will be able to make payments on your behalf too. The nine biggest banks also have to comply with a new set of standards, designed to make the transfer of data consistent and secure.
The changes, we’re told, mean you can expect an array of new services offering to help you manage your money. Imagine an app that illuminates where you’re sinking your income each month, encourages you to save, automatically moves money across different accounts to help you avoid any nasty overdraft charges and – if it doesn’t look like you’re getting the best deal – switches you to another service.
The first wave of solutions is already on offer. Around half a million people have been armed with one of Monzo’s neon coral-pink prepaid debit cards, which connects to an app that provides real-time spending updates and insights. You can “meet Cleo”, an app with algorithmic potential to boost your savings. Small businesses can receive automated financial assistance from Fractal Labs and compare loans with Capitalise.
This small sample of what’s available today is just an indication of what’s to come. If Google maps and GPS location data led to Uber, then imagine what people’s spending data could create! The full implications of the new rules are intentionally uncertain – industry and regulators want to leave it up to a more competitive market to decide.
Thankfully, some things aren’t left to the market’s free hand. Important discussions about how to overcome the technical challenges the new rules pose, and to design adequate consumer protections, are ongoing. But given the level of change anticipated, and that 90% of people have never even heard of Open Banking – have we done enough to ensure that the data revolution in finance is a positive thing?
At the Finance Innovation Lab, we support people with brilliant ideas to make our financial system more democratic, responsible and fair. Through our work with socially-motivated entrepreneurs and civil society, it’s become apparent to us that a broader conversation is needed. There are three questions we need to answer if we’re to avoid sleep walking into a situation where the tech that’s supposed to help us is harming us – and the world we live in:
do you really want a company that actively tests ways to make you addicted to its services involved with managing your money?
How can we ensure people share in the value of their data?
Our data is a potential treasure trove – the total value of European citizens’ personal data could be as much as €1 trillion per year by 2020! – and financial businesses will have their sights set on this.
When asked to give up your data in exchange for exciting, new services, you can expect the company to use it to figure out how to sell more stuff – including back to you! It’s no surprise that companies that are already very skilled at using big data to sell us things will increasingly step into the payments space.
It might feel a tad more convenient to send someone money while you’re messaging, for example, but remember that Facebook is primarily interested in what you’re buying so that it can make more from selling adverts. New players like Facebook also raises questions about the sorts of businesses we think should take part in finance: do you really want a company that actively tests ways to make you addicted to its services involved with managing your money?
We at least need businesses to be upfront about their business models and transparent about prices to help customers understand the value of their data. But that might not be enough if powerful companies can effectively force us into sharing our data. Already most of us are used to (if not fully conscious about) giving up our personal data for free wifi. What do we think about basic payments or access to an urgent loan being conditional on sharing our data? We need to discuss whether we even want our data commoditised, and new ideas about how to give people more control over their data must be considered.
How can we stop economic inequality and financial exclusion from increasing?
The data revolution relies on people using the internet and their phones to manage their finances. This obviously excludes people without such access, but it also puts pressure on the other services they tend to use, like bank branches, that are more expensive for banks to run. It doesn’t stop there.
New, unlocked data won’t just help customers understand themselves better. Businesses will use it too. It’ll contribute to market-wide insights they can then compare you to. They might even combine your financial data with other information, for example about the state of your health or your social media activity.
For many, this could well lead to more tailored services. It will be sold to us as “personalised finance” – and it has a dark side. Banks can use data about us to decide if they want our custom and fine tune the price of products to the highest we’ll accept.
Consider lending, one of the main ways banks make money. Using customer data analytics, banks will try to more accurately predict how able and likely people are to pay back. What remains to be seen is exactly what they do with that intelligence – but it would be rational for them to try and attract (or “cream-off”) the well-off, who generally have better credit risk assessments, with cheaper rates.
People struggling with their finances may find that they have to pay extra for the money they need more, or even that it’s no longer possible to borrow from the formal economy. If we think finance is about more than making money from money – if we think it should serve the wider economy and society, and fairly so – then, in the wake of the data revolution, we need to find ways to better align financial decisions with that.
a glitch user experience isn’t the most pressing problem the industry should be solving
How can our data help us transform finance to serve people and planet?
When we develop new technologies and implement innovation, it’s so important to ask: why? You’ll probably hear about the “better experience” on offer for customers in this new data dawn. While banking in a sleeker, quicker, more seamless way could be useful, a glitch user experience isn’t the most pressing problem the industry should be solving.
Something it really needs to look at is how it supports the real economy: today as little as 3% of lending goes to productive activity (as opposed to lending against existing assets or speculation). We also need to urgently plug the $87bn annual gap in renewable energy financing if we’re to help keep global temperatures to below two degrees warming.
The new products on offer may well be worse than an appealing distraction – and actually leading us further away from tackling the most important social and environmental challenges we face. The sorts of services we’re likely to see, like aggregator apps that help you oversee your finances and look for better offers, are basically fancy versions of the interest rate tables and comparison sites we have today. As we already know, many of those assume that the normal and most appropriate factor determining your financial decisions is price.
But there’s no other product we’d buy purely on the basis of price – we care about other things like quality of service and impact on our wellbeing. 46% of millennials want their bank, pension or savings provider to offer a fossil-free option. If the future of finance is to reflect our values and support the lives we want to lead, then the data revolution needs to involve data about what really matters to us.
In 2018, the Finance Innovation Lab will be advocating for a bigger social conversation about data and finance, including questions like these. We’ll be working with brilliant minds in academia, consumer research, inclusive policy and beyond to explore how we can harness the power of fintech for good, and we’ll be supporting innovators to develop new financial services that put people in control of their data. It’s time we all had a say on the future of fintech.
