The effects of data usage on the structure of the financial market
Digital opportunities, challenges and risks
The growth of the internet and the worldwide use of smart phones and digital services mean that users are leaving ever larger digital footprints. We leave our information on social media platforms, on the websites of webshops and the apps provided by banks and insurers offer us a high level of convenience.
The digital data that this generates are useful and of interest to all kinds of businesses, and can help them gain greater insight into consumer behaviour. The generation, processing and usage of data, the digital transformation, is being called the fourth industrial revolution. This presents opportunities for the sector and consumers, but it also entails risks.
Technological developments encourage data sharing
Technological developments have made it possible to store, analyse and then use huge amounts of data more widely. The rapidly modernising IT infrastructure is also making it possible to use the data of other parties by means of cloud services and Application Programming Interfaces, or APIs. These enable businesses to link each other’s data and discover new connections. Users can then be offered customised products and be helped more efficiently.
European regulation: from closed to open
Europe is assisting this development with its regulation, by making data openly available to multiple parties. This encourages innovation and competition. Businesses from outside the financial sector can also use data and come up with innovative new services. Platforms are already being constructed on which both financial and non-financial services are featured.
Some of the common terms appearing in reference to digitalisation and the opening of banking and other data are: Open Banking, Banking-as-a-Service and Platform Banking.
The role of bigtech companies
Big tech companies such as Google, Facebook, Apple and Alibaba are moving into financial services. The bigtechs have the advantage of large customer bases, as well as having the analytical tools and leading-edge technologies such as cloud computing and artificial intelligence. They are leaders in the processing of customer and transaction data, anticipating customer needs and influencing their behaviour.
Having our customer profile on record can be to our benefit, in the form of better assistance and the offering of products selected for us personally. The increasing availability of detailed information on customers and their behaviour is now making it possible for instance to set prices for financial products more accurately. This can be to the benefit of consumers.
The other side of the digital coin
Digitalisation can also lead only the situation in which financial services providers have insight into data on consumers who are already vulnerable. In the most extreme case, the assessment of risk for some consumers may mean that they are uninsurable. And while digitalisation can help to make services more accessible and more transparent, it can also help to conceal certain negative aspects of a product.
New ways may also be found to use technology to play on human weaknesses, such as a limited span of attention. Parties could use this for example when selling consumer loans. The targeted adjustment of a price can also be linked to perverse incentives, such as determining the maximum amount consumers are prepared to pay, which leads to an excessive price for the product to be purchased.
Cooperation in supervision
This mutual usage and exchange of data calls for good data protection. Companies must avoid a situation in which these data become available to malicious parties or left on the street. It is also important that privacy-sensitive data are treated correctly. It will not only be cooperation between businesses that increases as a result of digitalisation and the availability of data, the various supervisors will also have to work more closely together to understand and deal with the risks.