By Marc R Gagné Senior Privacy and Data Advocate, Cyber Intelligence and Director @ Gagne Legal, Director
The Great Recession was in 2008. Ten years on, after the turmoil and the pain it caused on a global scale, we can finally begin to see some good to come of it. It’s been a long, arduous journey, and that journey is by no means over with yet, but the transformation of the financial industry has produced exciting results that seem to benefit everyone especially the consumer.
From the way we invest and trade, to the way we raise capital, lend, and send payments, consumers now have more choices, more access, and more freedom. Our experience is better.
And what has emerged to set this happy tone for the future of the financial industry? It’s artificial intelligence-driven upstarts who, together, form what’s called FinTech.
Fintech Companies Jump-Started the Transformation of the Financial Sector
In these ten short years, we’ve watched an industry transform in a very dramatic way. The financial giants — who’ve long thrived by making sure things in their industry change as little as possible — have awakened from their long, comfortable slumber to realize, just in time, that their business models are in need of changing.
And what woke them up? FinTechs. These new guys rose up fast and arrived with technology on their side.
Here’s how they managed to disrupt the financial sector and upend the way we bank, invest, and plan out our financial futures.
But the ending to this story isn’t what many would have guessed. It’s a kind of happy synergy, where everyone involved— banks, upstarts, and consumers — gets to reap the benefits. Here’s how it happened.
Fintech’s Roots Began Here— Banks that Were ‘Too Big to Fail’ Let People Down
Lehman Brothers. UBS. Ameriquest Mortgage. Merrill Lynch. Washington Mutual. Fannie Mae and Freddie Mac. HBOS plc in the UK. And Royal Bank of Scotland, which was for a brief moment the largest bank in the world.
All familiar names in banking. Most with footprints that spanned the globe. Together, they formed part of an industry ‘too big to fail’. Yet, each one of those banks fell victim to the 2008 collapse and as a result were either acquired or bankrupted in the ensuing economic crisis that followed.
‘Too big to fail’, as it turns out, was a lie.
Regulators used the phrase ‘too big to fail’ consistently to describe banks like Wachovia in the United States and other big players around the globe. If they went broke, the Federal Reserve or its equivalent would prop them up, hopefully forestalling a market meltdown.
Well, since then we’ve learned that phrase is dangerously false. Here’s why… The idea of a bank so large, so important, so interconnected, that governments won’t allow it to fail is a bad precedent to set. It’s unfair to smaller banks. It also removes incentives for banks to manage themselves wisely. After all, why be prudent when you’re insulated from failure?
Mismanagement. That’s exactly how traditional banks failed the public. And as a result, it’s why people stopped trusting them. Mismanagement in the banking industry led to a situation where you had banks that weren’t maintaining basic industry standards. They became over-leveraged, meaning they were completely unprepared for any upcoming crisis. Many did not have enough capital on hand to absorb their losses if the economy experienced a downturn… which of course it did.
They also failed to have proper safety nets in place, and there was no way for them to fail gracefully, without pulling down the whole system with them.
After the banking industry and its insufficient regulations caused consumers to feel let down, you had a scenario where the whole industry was ripe for disruption. People were not only disappointed, they were angry. People were reeling from financial turmoil. People were stressed out about their futures. They were also having a really hard time getting loans. They were ready for something completely different.
And that’s where Fintech startups gained their toe-hold.
Conditions Were Ripe for Fintech, the Great Disruptor
In politics, it’s easy to guess what happens when a system disappoints the people it’s supposed to be serving. It’s easy to guess that in the face of what feels like betrayal, people are primed and ready for an alternative. And when they’re feeling as though they were given the short stick, they’re ready for just about anything new… as long as it’s very different from what they had before. So when the status quo fails, the scene is ripe for revolution. For a lot of those angry, hurt people, if there’s a radical alternative, even better.
It’s a common theme in history. When people are demoralized, out of answers and full of despair, they’re ready for anything. Especially if it offers them dignity and the promise to regain their former positions in life. Downtrodden investors, the refugees from the economic crisis of 2008 wanted once more to be able to invest their money, borrow money, and maybe even lend money in a safe environment.
That’s how insurgents take root.
So, in rushed the disruptors…the fintech startups who promised a new world of banking. Striking at the heart of what mattered most to people at the time, lending and investing, they made their move.
The difference with the new class of insurgents, with this revolution, was that lots of good came out of it.
What is Different About Fintech Startups, That Banks Didn’t Have?
The world promised by fintech startups of the past decade has been one where the customer comes first. No longer willing to be trammeled by the big financial institutions, people relished this new attention on them.
They also needed it. After the bruising they’d received from the large, established financial institutions who took advantage of loose regulations around lending, they required a soft touch if they were to trust a financial company again.
The fintech startups that emerged had just that.
Theirs was a world that offered a customer-facing model, where individual needs came first. Rather than producing products and then convincing people they need them, as companies did in the old days, they instead looked to their customer base to see what people want. It takes a lot of research and lot of listening to the voice of the consumer, and then it takes a fast-moving, agile company to respond and deliver.
FinTechs also offered products and services that were easily deliverable on mobile apps. It was a world that offered access to services and opportunities that were previously only available to the elite. And more importantly, it was a world where borrowing, investing, saving, and generally getting along in life were all possible without the intervention of Big Banks. And the icing on the cake: this new world of FinTech offered streamlined processes that are accessible 24/7
Here’s Exactly How Fintechs Owned the Customer After the Great Recession
When Big Banking let the people down, those app-driven, people-first startups looked mighty friendly and appealing. They were everything the big old banks weren’t.
- More access
- More control
- More freedom
- Lower fees
How did they do it?
The disruption happened on two levels. It wasn’t just the customer-facing processes that changed. These new fintech startups weren’t simply old-school lenders, bankers, and insurance companies putting on a happy face. They weren’t merely upping their customer service game. Fintech isn’t just better customer service. The revolution that Fintech represents came about because these new companies completely changed the way they did business behind the scenes.
In short, they replaced the old system of statistical modelling, used for decades by financial institutions in their decision-making processes.
They replaced this system with Artificial Intelligence. Deep Learning. Big Data. Analytics.
And as a result, they were more easily and more efficiently able to produce client recommendations that far surpassed what was offered by the old system used by traditional banks.
These AI-driven client recommendations allowed the new crop of banking disruptors to excel in several key areas. Namely, AI allowed these Fintech startups to:
- increase sales of new products
- forestall defaults on loans and keep customers
- reduce turnover and keep talent
- overcome human bias in the hiring process
And because these new startups were better in these areas, their businesses were stronger. They were simply better than the traditional banks at staying agile and producing innovative products and getting them to the right consumers delivered in a way that matched their preferences. Plust,Plus, the products and services they offered were better.
In short, AI allows financial services companies to more closely match what consumers want in the 21st century. Here are a few examples. I’m going to zoom in a little and take a look at two different applications of AI in financial services. One is in lending and the other is in advising.
First Industry Focus: The AI-Driven Transformation of Lending
After 2008, giant banks made it pretty difficult to get a loan. A huge void was created, leaving consumers without many options for credit. It was a chance for smaller banks and community banks to step in but it was also a chance for a new kind of lender to step in: peer-to-peer lenders. And what technology drives P2P lending platforms? You guessed it: AI.
AI processes data and uses a smart algorithm to make better, faster lending decisions. Both the lender and the borrower benefit. The lender benefits because better lending decisions are made. Borrowers benefit because decisions are made not just based on the credit score but other factors as well.
Traditional method of making decisions about whether to underwrite a loan are made using only the credit score. But that gives an incomplete picture of the would-be borrower. Credit scores are derived using only a handful of data points such as :
- Payment history
- Amounts of past credit lines
- How long the person has had credit
But as you might guess, creditworthiness is a lot more complicated than those few factors. A complete picture would involve dozens, maybe hundreds of data points… very difficult to analyse manually.
Machine learning programs, which operate using Artificial Intelligence, have no trouble at all handling all the data points you can throw at them. Not only that, but as they learn, they can begin to identify patterns. Patterns that indicate whether someone is likely to default on their loan.
For example, people can lie on their loan applications. They can lie about how much money they make. An AI-driven system can compare their answers to millions of other loan applicants. It can look through their history and analyse their employment over the years, holding that up to the light and seeing how it compares with reams of data it has on similar applicants. If that history doesn’t support the income they’re claiming on their application, it may trigger that application as more risky.
Machine learning can compare thousands of data points, including those that are non-financial. Sleep patterns, education, web browser history, and where you are at different times during the day can all indicate creditworthiness, believe it or not. To a machine, that is.
Humans might not ever notice these patterns. And even if they did, they’d be hard-pressed to use them efficiently to improve their underwriting processes.
And AI can be used to detect fraud, as well. Again, it’s all about finding those hidden patterns and searching out the outliers.
The lenders aren’t the only group to benefit from better decision-making in this industry. Consumers benefit, too. No longer bound and constricted entirely by their credit scores, borrowers have a better shot at being approved. So if you’re not a traditionally ‘good bet’ for lenders, you may have a shot if it’s a machine that’s looking at your application.
And, after 2008, it became virtually impossible for anyone with bad credit score to get a loan. AI systems are able to probe deeper and see if there’s more to the story, whether someone may indeed be credit-worthy despite their terrible credit score. They do this by looking at those applicants who have low credit scores but whose behaviour is similar to people who have proven to be good risks. And that takes a lot of data points, plus the processing power to analyse them all.
Plus, there are other benefits for the consumer. For all these same reasons, the AI-driven lenders can offer lower interest rates to certain borrowers who might not qualify based solely on their credit scores. Win-Win.
There’s a third component to this: all the private investors who make the micro loans on the P2P platforms. They’re able to add another type of investment to their portfolio. So now it’s a Win-Win-Win. Three wins.
Actually, even brick and mortar banks may benefit. The same technology that runs P2P lending platforms and which underwrites those loans can help with their underwriting processes, too. And the many parts of the loan application process that can be automated because of AI: that can be put to use in brick-and-mortar banks and big banks, too. Four wins.
Second Industry Focus: The AI-Driven Transformation of Advising
The incredibly volatile markets that led up to the crash of 2008 left a lot of investors reeling. And for younger, newer investors who were just getting into the game, the risks of investing and the financial fallout they’d just witnessed posed formidable psychological obstacles.
But along came the so-called robo-advisors. These AI-powered virtual investment advisors come in Millennial-friendly packages: slick web design and user-friendly mobile apps that make investing seem approachable and easy. Millennials hopped on board early on because these robo advisors spoke their language. And because they offered assurances about helping their customers prevent common investing mistakes.
And it’s true: robo-advisor services do make investing approachable because they run on autopilot. And furthermore, investors get services that in the past were only offered to wealthy clients of traditional advisors.
For example, robo advisors can do all of the following for a low fee:
- Create an individualized portfolio based on personal information
- Provide tax-efficient strategies like harvesting tax losses
- Perform dollar-cost averaging
- Rebalance the portfolio
They cost less than traditional human advisers and they’re available to anyone, even people with small amounts of money to invest. That became a key selling point, one which differed radically from traditional investment advising services.
The idea is simple. Having a professionally-managed portfolio saves people from themselves during periods of high market volatility. It keeps them from changing their portfolio the minute they sustain a loss. It keeps them on track for the long run and stick to their investment plan.
Low fees and minimums attract younger investors, and the set-it-and-forget-it nature of the platform and its autopilot system spoke to busy young professionals who realize they’d never have the time or the inclination to do the homework required to pick funds.
Millennials and Robo Advisors, a match made in heaven. And was a great beginning for these startups.
But to thrive, robo advisory companies needed to attract older investors. They needed to expand beyond the first adopters and their Millennial base. And to do that, they found that they needed the help of the very institutions they were competing against: traditional banks.
And Great Timing: Along Comes the Customer-Centered Culture
So as you can see, AI is already making the world a better place for a lot of people. Robo-advisors bring investing advice to small investors for low fees. AI-driven lending platforms make loans possible to people who fall through the gaps in traditional lending environments. People who were experiencing financial obstacles after 2008, in other words.
But so far, I’ve only talked about how FinTech got a foothold in the marketplace as a result of the financial collapse of 2008.
There happens to be another series of events that made it very easy for FinTech startups to ingratiate the consumer. It also has to do with advances in technology, but on a whole different front.
What I’m talking about here is the rise of digitization. Faster internet connections, better hardware, and legions of app developers creating wonderfully ingenious software applications has, as we all know, completely changed the face of modern consumer culture. The rise of online enterprise and the global marketplace has brought about huge changes in the culture of buying and selling.
But this goes way beyond the move from brick and mortar retail to online retail stores. That’s old news.
This is about how the online stores sell, how they compete, and what expectations and demands today’s consumers have when they conduct just about any type of business online. From buying shirts to investing their savings, people have new expectations about how companies should behave toward them. It’s a changed world.
And I’m going to show how FinTech came along at just the right time to capitalize on these changes and on people’s preference for this new consumer-centered culture.
The New Differentiators are Service and Customer Experience
You see, with increased competition, companies who operate online can no longer compete just by offering great products. Someone else can sell those same products from anywhere in the world, to anyone in the world with an internet connection. And, as many online merchants have discovered, you can’t win simply by undercutting your competition with price. There will always be someone who can make it faster, sell it cheaper, and beat you.
The way companies differentiate themselves nowadays is by offering great service. Look at Zappos, who cornered the ultra-competitive online shoe market. How did they do this? By offering unheard-of customer service to their customers. We’re talking overnighting special shoes to the best man at a wedding who’s about to cry because UPS routed his shoes to the wrong person. Zappos made sure he got his shoes on time, going out of their way to please him. They also upgraded his account to VIP and gave him free overnight shipping for life.
It’s this kind of service that wins fans for life, and it’s how online retailers thrive. Nordstrom is another winner in this department. The U.S.-based retailer with stores in the United States and Canada is famous for its customer service but also famous for something else that ties into our story of FinTechs. Their website is amazing. It’s easy to use, simple, beautiful, and it makes online shopping incredibly pleasurable. In other words, when you shop at nordstrom.com, you’re going to have a great customer experience.
Customer experience, or CX for short, is the new differentiator— so important that many companies now hire people to ensure their Customer Experience is up to par. Right now on Indeed.com, a jobs listing website in the United States, there are 112,190 Customer Experience Specialist jobs available!
There’s also User Experience, or UX, a much more common term. It’s more often applied to the technical end of things, and UX specialists often work on software development teams. But UX and CX are based on the same principles:
Delight the customer in every which way you can in every way you interact with them online.
UX techniques span a lot of different components of a business: website design, customer relations, checkout process, and more. To rise to these new standards, companies have had to move mountains to ‘go digital’. We call this ‘digitization’.
All of this is important because it describes the culture into which FinTech made its debut.
It’s a customer-focused world. Consumers demand great service, mobile apps, fast responses, and easy solutions to their purchasing problems.
And why shouldn’t people begin to expect those standards from all the companies they do business with? Even banks aren’t immune to the competitive pressures that come about as a result of these consumer expectations. Right now, you can already see signs of change in the big old banks.
Here’s an example:
More and more traditional banks are offering mobile apps that actually work and do useful things. For example, mobile check deposit. Just a few years ago, very few banks offered this feature. And if they did, the software was temperamental and annoying to use. They’ve since learned that their mobile apps are key if they want to attract and retain customers. And those apps better have the right capabilities, too, like e-transfers that are fast and easy to use.
So this is the culture of expectations. Consumers expect a lot more, and not just from the places where they buy clothing. What Nordstrom started was another type of revolution: pleasing the customer no matter what. Giving them what they want.
Millennials Love Great UX But Is It Enough to Attract the Rest of the Population?
Competing on service as well as product isn’t easy for big, established, slow-moving companies like large financial institutions that have been around a long time. That’s where they need a lot of help, and it’s one of the reasons why FinTech startups were able to make their move and chip away at the marketplace, carving out pieces of it for themselves.
But these areas in which they carved out their share of the marketplace were pretty much limited to Millennials. Millennials in general love new technology, and they appreciate all the UX-based features that Fintech startups offered. Plus, lots of FinTechs like automated investing company Betterment marketed their services to Millennials, knowing that’s where they’d most easily carve out their niche. So FinTechs disrupted, but they never could have done it without a lot of help from Millennials.
Fintech Has Its Roots in Disruption But It’s Moving On
So, it’s all well and good, being the disruptor and attracting first adopters, Millennials, and techies. Fintech startups like Betterment cut their teeth on serving forward-thinking Millennials. They made a name for themselves. They got written up in the New York Times. They created brand love for themselves. They’re huge on social media.
But being the new kid on the block will only take you so far… it will only take you to the doorstep of what you really need: to appeal to the general population. Only the adventurous are going to explore what FinTech companies have to offer. Not even most Millennials are courageous enough to invest all their money with one fintech-based company. Sure, maybe some will put a few thousand into some sort of robo-advising account and see what happens… but are they willing to give up their trusty Vanguard accounts? Will they make the move and turn completely away from large, established financial institutions?
FinTechs aren’t waiting around to find out. They’re pursuing a broader sector of the population. And what they’ve all discovered is that in order to expand to more markets and grow, they need the Big Banks.
FinTechs Need to Move Forward (Bitcoin!)
One sign FinTechs can’t rest on their laurels is the emergence of the blockchain and cryptocurrencies like Bitcoin. While FinTechs have been focusing on offering alternatives to traditional banking products and services, other innovators have come up with a way to bypass the whole banking system entirely. You could say they’ve been out-innovated.
This occurred in the area of payments. While FinTechs have been working on new, innovative ways for consumers to pay their bills or pay each other via mobile apps, those cryptocurrency innovators came up with a way to make payments without involving any traditional bank at all.
Cryptocurrency payments are made possible by technology called ‘the blockchain’, something most brick-and-mortar banks have, for the most part, kept at arm’s length.
So, what is blockchain and how do cryptocurrencies threaten banks?
Earlier, I talked about how, after 2008, people felt the old-school banking system had let them down. Trust was broken. Well, one result of that general feeling of distrust was the emergence of cryptocurrency. But to understand cryptocurrencies, you have to understand blockchain.
Blockchain is described as a ‘distributed ledger’. It’s just a database that’s shared among everyone in a particular network. Each time a change is made, the database synchronizes itself and replicates across that network. It records any type of transaction, like the exchange of assets or the sharing of data.
When blockchain technology is being used for cryptocurrencies, the ‘exchange of assets’ we’re talking about is the transfer of something like Bitcoin from one party to another… a payment.
Each record (or transfer) gets a timestamp when it’s created. It also gets a unique digital signature that’s cryptographic, meaning it’s secure. That way, the signature can be verified by anyone on the network.
The result is a ledger that’s easily auditable and completely independent from any third-party mediator such as a bank. In other words, it’s a secure, verifiable way to exchange currency without the need for banks to intervene and make everyone trust the system. The trust is now in the blockchain technology.
Blockchain technology is also secure in the way it ‘stores’ the data. The databases aren’t stored on data center somewhere, where it can be hacked. The data in a decentralized ledger is, by definition, decentralized. It’s stored in bits and pieces on servers and even on hard drives all over the world.
That way, nobody has control or authority over a particular cryptocurrency and its transactions. Plus, cyberattacks will be fruitless, since nobody is individually responsible for the data. Nobody can be exploited because nobody has all the data.
Cryptocurrencies were developed in 2008, the year of the great global economic collapse. They were invented to solve several problems people had with the traditional banking system.
One problem is international payments. It takes forever for a cross-border payment to go through. On top of that, banks charge incredibly high fees for this service. International wire fees are still usually USD $40 to $50!
Well, Bitcoin and other cryptocurrencies solve that nicely by cutting the banks out.
The Discovery That Synergy is the Way Forward
If there’s one thing all fintechs have in common, it’s an insatiable need for data. The problem is, by definition, these startups lack the kinds of resources required by artificial intelligence systems. Machine learning doesn’t happen if it’s not fed large amounts of data. Plus, FinTechs need to test their systems before they go live on real customers.
All that requires data. This is the kind of data that established banks have in spades. They’ve been collecting data for years, in fact. They just haven’t been using the data to its full potential.
For example, they collect profile data on their lending customers.
- Who’s likely to default?
- Who’s likely to go for an upsell?
- What type of customer is prone to switching banks at the drop of a hat.
- What does it take to retain them or lure them away?
- At what point does it make sense to extend an incentive to existing customers?
This stuff is golden for data-hungry AI systems. They desperately need data in order to thrive, of course.
And what I’ve just described, well that’s only a tiny fraction of the FinTech universe. AI is improving just about every aspect of of the financial world.
- Credit Scoring, companies like CreditVidya in India, who use AI to come up with incredibly robust credit scoring
- P2P Lending, companies like Upstart who use AI to make better lending decisions, often doing business with underserved populations
- Personal finance apps that track financial health using AI-driven chatbots and assistants
- Asset Management, companies like Wealthfront who use AI-driven algorithms to guide trading and create investment strategies and tools
- Compliance and Fraud Detection, companies like SkyTree, ComplyAdvantage, and CheckRecipient that use AI to detect abnormal financial behaviour
- Insurance, companies like Zendrive and RiskGenius who use AI to create insurance quotes
- Debt Collection, companies like CollectAI, who use AI to improve communications with debtors for increased creditor collection
- Research, companies like Dataminr and Orbital Insight, who perform research and gauge market sentiment
- Business, companies like Zeitgold, who use AI for a wide range of purposes, natural language applications
- Predictive Marketing SmartZip, who use AI for predictive analytics
The Synergy Has Multiple Benefits for FinTech
That’s the underlying principle for new partnerships being forged between big banks and their Fintech upstarts. And that’s not all. As it turns out, Fintechs need a lot more than just data. Think about it: what do all startups need?
Capital. Something else the big banks have.
And it doesn’t stop there. Fintechs, if they’re going to operate in the financial arena with real customers and real money and real transactions, of course are going to need to be regulated. And in case you haven’t heard, regulatory demands are incredibly heavy these days…
Fintechs also need regulatory support, and established financial companies are perfectly poised to offer that support.
And finally, Fintechs have one more need: scale. If they ever hope to get their product or service off the ground, and if it proves to be viable, in other words, if it’s a good product or service, their issue will become, how do we scale as quickly as possible?. Well, big banks can help with that, too.
So there you have it. Established financial institutions have a lot to offer Fintech startups:
- regulatory support
So clearly, the Banks have a lot to offer. But what do they get out of these partnerships?
Plenty: Agility. Flexibility. New technology. Speed.
Here’s the Flipside: Here’s What Fintechs Have That Banks Want
I hinted at this a little earlier, but one thing that FinTechs do very well is stay agile. And of course they have their fingers on the pulse of the latest tech tools and usually their software development teams are the best in the business. Finally, they’re set up startups, so they’re all about taking risks.
All of these are areas where Big Banks face great challenges.
First of all, Big Banks have an aversion to risk. That means innovation has been pretty stagnant in these institutions for a long time.
Secondly, they’re so large, so entrenched in their processes and their business culture that change is achingly slow, if it ever comes about at all. Usually it doesn’t. There are still big financial institutions out there that rely on email for internal document sharing. Becoming agile institutions is a pipe dream for them. They still lack any real 24/7 services. Their processes are complicated and cumbersome. Their point-of-service locations are of little help, either.
Third, as far as cryptocurrency and blockchain go, forget about it, they’re nowhere near implementing any new processes involving this new technology. Cryptocurrency was invented to defy the old guard, in fact. Old school banks can only deal in old school currencies.
FinTechs offer solutions to all of these challenges. They offer:
- A glimpse at new tech
- Access to the latest tech tools
- The opportunity to try new applications easily and quickly
- The chance to implement new processes quickly and take advantage of industry trends in a timely manner
- Help with speeding up processes such as real-time money movement
- Inroads to using cryptocurrency
- Efficient ways to step up their game in a customer-focused environment
- Faster route to a customer-first mindset, changing company culture, freeing themselves from legacy constraints
Some FinTech companies seem to have sprouted solely for the purpose of partnering with Big Banks, in fact. One huge area of growth in partnerships between FinTechs and Big Banks is ESG. ESG stands for environmental, social, governance. Banks are more interested these days in sustainability, which means exploring socially conscious business models. And they need those agile FinTechs to help them do that.
Synergy/Sharing Brings up the Privacy Issue
Synergy between banks and startups makes sense but if you look at all this with privacy in mind, it gets a little complicated. In fact, you might say the consumer protection challenges are immense.
In the electrified environment between banks and startups, where data is brokered like a precious commodity, it’s easy to forget that there’s a third party involved in this relationship: the actual consumers. They need protection in this fast-paced, high stakes world of data brokering that fuels the increasingly digitized, AI-driven world.
So, obviously, banks have an obligation to protect their customers’ data. Depending on where you’re from, various governmental agencies are responsible for maintaining standards, setting guidelines, and enforcing regulations. And we all know there’s a wide range on the spectrum here… some countries are very progressive and consumer-minded when it comes to data protection and privacy matters while others… well let’s just say it’s a journey and they are just beginning. But at least they’ve begun.
In the U.S., the Consumer Financial Protection Bureau (CFPB) plays a major role in consumer data protection. Last October, they issued guidelines designed to broker the relationship between financial customers and data brokers. These third-party aggregators are like brokers who trade in data, bridging the gap between banks and fintechs. Data aggregators, they’re called, and the marketplace they’ve created is booming these days.
But the CFPB and agencies like it have their eye on these marketplaces. Last October’s guidelines are meant to protect consumers who authorize financial data sharing. but they’re also designed to facilitate the growing and much-needed relationships that are forming between the banks and the startups.
There are still lots of issues that need to be ironed out, of course. Like exactly what type of data is shared. Banks often don’t transmit personally identifiable information (PII) like customer email addresses and phone numbers. This is to the dismay of FinTechs, who say they need this information if their platforms are going to work.
Another issue that’s currently being debated: liability. There are a lot of questions about what happens when problems arise down the road. If there’s fraud, who’s liable?
So, What Can We Expect in the Near Future?
In the past year, we’ve seen a whole lot of activity around data-sharing agreements. I think is where we’ll continue to see lots of action in 2018.
Right now, big banks like Wells Fargo are signing data-sharing agreements with companies like Intuit, Xero, and PointServ. Essentially, these agreements point to increased communication between the banks and FinTechs as well as aggregators. Wells Fargo supplies their data to PointServ whenever a Wells Fargo customer applies for a loan using PointServ software. The bank delivers what they have on that applicant, greatly enhancing the speed and ease of the whole loan process for everyone involved.
Capital One has similar data-sharing with Intuit, Xero, Expensify, and Abacus. So now, when someone has a Capital One account, they can import their financial data from Intuit products like Mint and TurboTax without having to give their login credentials for those companies to Capital One.
All this is accomplished in a way that limits exposure for everyone involved. Capital One and Wells Fargo deliver their customer data via API. API stands for ‘application programming interface’. It’s how one type of software can talk to another without human intervention. It means the FinTechs that banks like Wells Fargo and Capital One work with won’t need customer usernames and passwords in order to receive the customer data they need.
So standardization is going to be increasingly important, too. FinTechs complain that each bank they work with has a different set of data-sharing standards. That’s going to change. Already in the U.K. banks have worked out a set of guide rails and standards for sharing customer data. That needs to happen everywhere.
To Wrap Things Up…
There’s a lot of work to be done for the financial world to finally be able to take advantage of Artificial Intelligence in ways that please their customers. But at least banks are finally realising that’s what they need to do: listen to the customer and please them.
True, banks move slowly. They have an aversion to risk that far surpasses most industries. And that has held them back when it comes to innovation. But now, with these synergies with FinTechs, now that they’re reaching out to their former competitors and forming these amazing partnerships, they’re on the right path. They know they have to innovate because their customers are demanding it. And now that they’ve got FinTechs on board, the future is bright.
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