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Brian Knight
Associate Director, Financial Policy, Center for Financial Markets
Banking and Business and Capital Access and Capital Markets and Finance and Financial Innovations and FinTech and Global Economy and Job Creation and Public Policy and Regulation and U.S. Economy
Brian Knight is an attorney with significant experience in new sources of capital, financial technology, and entrepreneurial issues. He is interested in the interplay between technological, regulatory, and market innovation and how best to improve access to capital for businesses of all sizes.
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Banks, Tech, and the Struggle for Customer Data

By: Brian Knight
January 06, 2016
   
   

At first blush, Peters’ argument sounds like a no-brainer. Why would banks oppose allowing customers to access their data via the services they wish? While Peters may ultimately be right (and I take no side in the debate), the logic isn’t quite as obvious as it may appear. Banks could have rational reasons to oppose making it easy for third-party services to access customer data, and how successful they are in limiting access, whether by regulation, competition, or plain stubbornness, may determine the role banks play in the technology-enabled future.

So, why would banks oppose tech companies taking their data and displaying it to the customer? Banks have both financial and risk-based reasons to be wary. First, if the bank becomes less visible to the customer because the customer interacts only with the third-party service, then the bank will lose the ability to sell to the customer directly. Yes, if the customer identifies an acute need for a new financial product, he or she may go to the bank, but it will be much harder for the bank to initiate the conversation. In fact, in a world where the third-party service can consolidate products and offers from multiple banks, the original bank may find itself displaced by lower-cost competition. The bank would find itself relegated to the role of a highly regulated, highly responsible, but low-margin, utility.

The regulatory risk for banks is that they find themselves responsible for customer losses (either financial or data) caused by the third-party service. This concern is a large part of what motivated the Clearing House to draft a white paper arguing that third-party payment services (or as they call them, “Alternative Payment Providers” or APPs) should be more closely regulated to both protect consumers and prevent banks from being forced to bear the cost of APP mistakes. Given these risks, it is understandable that banks would not be eager to export away their valuable data and relationships.

Of course, a deeper question is buried in this discussion, which is just who owns (or should own) the data anyway? Presumably third-party providers believe the customer owns the data. After all, it is the customer’s finances, right? If the customer wishes to consume his or her data via a third party rather than the bank, who is to say no? Of course, the banks likely feel differently. They may believe that the data reflect not just the customer’s money, but also the bank’s products and services. Add this to the risk banks take serving their customers, including credit and fraud risk, and they may argue that they have some ownership interest in the data.

Peters’ op-ed doesn’t reflect an all-out war between banks and tech companies—after all, there are plenty of examples of collaboration as well—but it does show an emerging fissure between the two, which will have implications for banks, tech firms, customers, and policymakers as the incursion of technology into finance continues.


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