By Rolands Mesters, CEO and co-founder of Nordigen
The potential value that could be created by open data for finance is huge. Not only will economies that adopt open data ecosystems see GDP growth of up to 5 percent by 2030, but all participants of such an ecosystem would reap the benefits. In Europe, 17% of this new value will be captured by individual participants through improved products and increased access to financial services, 45% of the value will be captured by financial institutions through increased operational efficiency and improved work allocation, and 37% of the value will be captured by SMEs through saved time and improved product offerings. SMEs happen to make up 99% of businesses in Europe, meaning that open financial data could completely transform how the European business market looks like today.
What is open banking?
Anybody who now has a bank account, a payment card, loans, online purchases, or investment products is leaving behind a trail of information. This information creates a detailed portrait of that individual and what their life looks like from an economic perspective.
At present, this information is disconnected and siloed between the various platforms and services where it is generated or processed. Although there is some connectivity, for example, between your spending online and your banking services, financial information remains in a very primitive state when it comes to connection and utilization.
Technology is only now coming to a point where all of the data points that comprise a person’s financial portrait can be collected and analyzed. We have within our grasp the means to collect and mobilize the financial fingerprint of the entire world. This new ability carries a tremendous potential for adding value to the global economy as well as giving millions of previously ignored people real status as citizens of the world of finance.
Today’s value is capped at just 10%
Despite its huge potential, the value of open financial data today is capped at just 10% of its potential. But what exactly is stranding in the way of unleashing the rest of this value?
Firstly, data access comes at a price. Although financial data access is free under PSD2, it does not end up being free at all for the final customer. Consequently, far fewer developers and businesses are able to build new fintech services that compete with large retail banks, and the benefits of accessing financial data cannot be maximized. The price barrier limits innovation. Keeping data costs close to zero is the key to unlocking many more use-cases.
Secondly, the data sharing mechanism has not yet been standardized. Although PSD2 stipulates that highly standardized APIs be used for data relating to payments, privacy data regulation restricts other forms of financial data to be accessed. As a result, only a low to moderate level of economic value is accessible with today’s data sharing mechanism. With APIs as the most secure way to access financial data, their standardization is the way to go to capture the full potential.
Thirdly, there is a limit to the types of data shared. PSD2 is restricted to just 4 data fields. The limited type of data shared also limits what can be created and in which ways the data is used. One solution is that banks could share even more data. Alternatively, these 4 data fields could be used in a more efficient way – having premium value-adding data insights services can help to maximize the value of what is currently available in terms of financial data.
What can the future look like?
In the same way that 10 years ago we could not have imagined that the majority of what we watch on TV would be streamed online through platforms like Netflix, we cannot know for sure what the future holds for open financial data. What is clear is that accessing new financial services will be as “normal” as logging into your favorite social media platforms and receiving car insurance or a mortgage loan will be as easy as signing up to any online platform, with the need to provide only a few pieces of personal information.
What’s more is that the future will involve more financial connectivity. We will be able to link our bank accounts to an endless number of apps and services with the option to leave the transactions on autopilot. The concept of auto-finance was discussed in 2019 by A16Z. With auto-investments and automatic-savings already in play at that time, it is easy to imagine a future of fully automated income integrations for taxes, automated detection of unusual and fraudulent transactions, automated switching between subscription providers, instant cashback on purchases, and more.
On a macro level, open banking will lead to stock market efficiency. Information that once was kept in silos will be available to hedge funds. They will be able to purchase aggregated banking data from apps, with user consent. Companies like Yodlee, Second Measure and Earnest Research have been selling aggregated data insights to hedge funds located in the United States for years, but this is yet to be actual in Europe, due to low open banking adoption. Open financial data has huge untapped potential and it is time to let it flow.
Rolands Mesters is the CEO and co-founder of Nordigen, the only freemium open banking data platform in Europe. Rolands is a sales and growth hacker who is passionate about fintech and alternative lending. Nordigen began as a data analytics company that builds solutions for categorizing and analyzing bank account data. In December 2020, the company launched Europe’s first free open banking account data API. Rolands has been featured in the Forbes Latvia 30 Under 30 list as well as being featured in TechCrunch, Sifted, and the Financial Times. Rolands regularly shares fintech insights and analysis on open banking at top international fintech events, and is considered one of the foremost experts on open banking worldwide.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.