Policymakers must ensure that client data is adequately protected by fintech technology (fintech) companies that aim to compete for banking clients, argues a report from the Institute of International Finance (IIF) published on Friday.
The report, Safeguarding customer data in the financial sector, focuses on data protection and data sharing in the financial services sector. It sets out specific principles, processes and measures that banks are using to keep customers’ data safe.
It also argues that, as other firms gain access to this data, they should be held to comparable standards.
“Where a customer is willing to share his financial information with a new service provider, this should not be translated as a lowering of expectations for the safety of their data,” the paper states.
Recently, policymakers in various parts of the world have adopted the concept of “open banking”, which aims to facilitate competition in the banking sector by enabling third-party firms, such as fintechs, to access client data in order to help them develop competing products and services. As fintechs gain access to client data, the IIF report maintains that these firms should be required to meet similar standards as the traditional banks when it comes protecting that data.
“In a dynamic environment with new players dealing with financial data, it is critical that all market participants can emulate the sound standards that banks already deliver and reach the high security standards that customers have come to enjoy,” the report states, and this is “particularly relevant” in the context of “open banking” initiatives.
“Open banking regimes can help facilitate innovation and competition in the financial sector, and promote new data-based solutions that empower customers to better manage their financial lives. While financial institutions welcome this added competition, the interests of the (common) customer and the integrity of the market must be safeguarded above all,” the report states. “Customers must be able to continue trusting that their data is handled soundly by all players engaged in this field, and market integrity and the reputation and stability of the financial system are not put at risk.”
To that end, the report argues it is “critical” that policymakers ensure that any firm that accesses and deals with clients’ financial data can “demonstrate that they actually implement sound governance, policies and procedures, comparable to financial institutions … While there may be an element of proportionality to some requirements, the fundamental principles for safeguarding customers’ data should nevertheless apply regardless of the size, scope or type of operation.”
“For a real open banking ecosystem to emerge where various players compete with innovative offerings for customers, sound and consistent data safeguards are paramount. If incumbents, newcomers and regulators actively and constructively cooperate to ensure customer data safety, this will help grow the open banking ecosystem, create more opportunities and ultimately benefit the customer,” the report states concludes.