NEW YORK – For decades, banks in every country have owned a consumer’s transaction data. An individual’s record of deposits, withdrawals, loan payments, and overdrafts was proprietary, belonging only to the bank. With the arrival of new technology and data storage, including online banking, governments in every part of the world are recognizing the importance of empowering consumers to control their banking data – and passing government policies—known as open banking—to make it possible. In the face of a growing legislative focus on both financial innovation and large-firm market power, Columbia Business School Professor Tania Babina and her research partners have released the first empirical study to document open banking policies globally and analyze the impacts they have on financial sectors.
The researchers find that when open banking policies were enacted, fintech innovators rushed in, suggesting increased competition in the market that could benefit consumers. Specifically, in countries with open banking policies, investors doubled their investments in fintech startups. Open banking policies have increased in popularity over the past decade – with many European governments making an effort to break up monopolies of banks. The rise in popularity of these policies have many implications and this study develops a framework to gauge potential impacts. In the United States, section 1033 of the Dodd Frank Act protects American consumers rights over their own data, but open banking was never codified into regulation. Policymakers are beginning to recognize open banking policies as a better tool than anti-trust laws.
"The open banking movement is shifting us from a world where the bank owns the data we generate living our lives, earning and spending, to a world where we own that data and can decide what to do with it," said Professor Babina. "Until now, no one had documented the dramatic rise of these policies globally. We wanted to understand the outcomes they create for banks, consumers and fintech companies."
For the new study, Customer Data Access and Fintech Entry: Early Evidence from Open Banking, Babina and fellow researchers Stanford Graduate School of Business Professor Greg Buchak, and UBC Sauder School of Business Professor Will Gornall manually collected and analyzed data from 168 countries and found that 49 have implemented open banking policies and 31 are in active discussions to do so. The team used the data to develop a country-level "OB Strength Index," which captures the comprehensiveness of government-led open banking policies and can be used as a measure of policy treatment intensity. The researchers then measured how country-level implementation of open banking policies impacted financial innovation and banking sector adoption of open banking. They measured innovation using PitchBook data – tracking venture capital deals in each country from 2010 to the first half of 2021 and comparing it to policy adoption. To analyze banking sector adoption of open banking technology, the team used data from Platformable, which systematically identifies banks that use Application Programming Interface (APIs) – the technology that makes open banking possible.
Key Findings:
Open banking policies are prevalent around the world: As of October 2021, 87 of the 168 countries (52 percent) surveyed have at least a nascent open banking effort. Europe is leading the way, with 80 percent of the continent’s countries featuring government-driven open banking.
Financial innovation increases when countries adopt open banking policies: Open banking policies work to increase innovation by creating an opportunity for new financial institutions, like fintech startups, to access data to provide new or improved products and services to consumers.
Open banking policies may have unanticipated consequences: The research team argues that open banking could paradoxically increase the costs for some products and some people. First, making the lending market more competitive will lead banks to raise fees on other products such as checking accounts. Second, the normalization of data sharing will lead to discrimination against those who opt out of sharing data and those with less attractive characteristics to banks (e.g., those with higher default probabilities or more vulnerable employment arrangements).
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit gsb.columbia.edu.
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