• Milos Dunjic

Are Consumers Ready For Consumer Directed Finance?

In the recent couple of years there was the increased level of enthusiasm for (and the attention to) the concept of Consumer Directed Finance (CDF) in Canada. The basic premise of CDF is that it is the consumers who own their financial data and therefore they and nobody else should have the final decision, whom they want to share that data with.

That customer’s decision and desire to share their financial data with an authorized 3rd party service provider, is captured via explicit ‘customer consent’, which the current custodians of the data obtain from the customer, during the standardized set of set-up steps for the data sharing relationship.

Potential Benefits of CDF

Since there is already a great deal of articles and white papers written on the subject, I will just briefly mention some of the most prominent potential benefits that something like CDF can potentially enable.

Financial data aggregation, through the authorized 3rd party provider apps, can enable individual consumers to get access to potentially sophisticated set of budgeting or savings tools and / or help financially marginalized Canadians get access to low cost, automated and fully digital set of tools for managing their financial lives.

Going beyond the individual consumers, and into the world of small businesses, the automated financial tools, delivered on top of CDF framework, could potentially deliver more efficient and streamlined management of bills, invoices, payroll, collections, and taxes, and as such, result in greatly reduced processes for running a small business in general.

Of course, the creativity and imagination of financial product engineers is the only limit to the set of potential value-added services that could be built on top of the CDF framework.

Another clear benefit of CDF is improved security of financial data sharing. Some Canadians are already sharing their financial data with some of the 3rd parties, most of whom are currently using an insecure method called ‘screen scraping’ to acquire the data. The screen scraping creates security and liability risks to Canadians and their financial institutions, as it requires consumers to surrender their banking login credentials to the 3rd party service providers. That practice is clearly in violation of the customer’s banking Terms & Conditions, explicitly requiring customers to always protect their online/mobile login credentials and never share it with anyone.

Liability Should Travel With The Data

Although the industry in general agrees that the CDF will improve the overall security for data sharing, through authorized and controlled open API access, instead of wild-west style screen scraping method, let’s be very clear and honest - the CDF framework and open APIs would make ONLY ACT OF SHARING the financial data safer for the consumers, simply because they wouldn’t need to provide their digital banking login credentials to 3rd party anymore.

However, after the financial data is SECURELY DELIVERED to the 3rd party service provider application by the original financial data custodian, it really depends on the actual trustworthiness of the 3rd party, whether the acquired data is going to be protected well, i.e. not misused and/or not sold to other 3rd parties, etc. That’s why clear and transparent liability rules for data protection must be established as part of the future CDF framework. In practice, it should mean that if user provides their consent to the bank, for sharing their financial data with potentially unreliable or compromised 3rd party, their bank (i.e. the original data custodian) can’t and shouldn’t be held liable for financial harm that may potentially happen.

Would CDF Reduce Monopolies In Financial Services?

Another potential promise of CDF, very often emphasized in almost every article written, is that CDF can likely spark and accelerate competition and limit monopolization of the financial services market by few giant organizations. Sure, probably in theory, however, this may not play out in real life exactly like expected.

Why do I think like this? Well, simply because the most likely scenario, in my opinion, is that Big Tech (rather than smaller FinTech players) would rapidly evolve as the main 3rd party providers of value-added services on top of CDF and fully own the space - unless regulators prevent them from monopolizing the space somehow (which may be problematic and could be challenged by cash loaded BigTech).

Trust Of Consumers Is The Key

With already powerful BigTech’s ability for accumulating and aggregating more and more consumer raw financial data, potentially from multiple banks, their power will grow much beyond today. Can consumers, with all of the benefits of potential value added services, feel fully comfortable knowing that Google, Apple, Amazon and Meta would know everything about our financial lives and banking records?

Are we sure that those giant corporations won’t turn that newly acquired and extremely valuable knowledge of the customers’ sensitive financial data against them at some point? This potential for monopolization of the CDF value-added space by few sophisticated tech giants, is one of the key things to consider, when developing strategies for consumer adoption.

Unless there is trust by consumers and confidence that by sharing their financial data it won’t be abused by 3rd parties, the chance of success is small. Unfortunately, the rollout and adoption experiences from UK and EU seem to indicate that the majority of consumers may not be comfortable with sharing their financial data with either BigTech or FinTech 3rd parties … and that is clearly a formidable challenge to address in the years ahead.

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