Finicity CEO Sees Open Banking, Consumer Permission at Core of Lending’s Future

Two decades ago, consumer-permissioned data was in its nascent stages.

As Steve Smith, CEO of Finicity, a Mastercard company, told Karen Webster in an interview, back then, the data aggregator worked to help shape programs such as Microsoft Money (remember that one?) and digital versions of the personal finance offering Quicken.

In the process of innovating – and in getting permission to access accounts and construct portfolio-level, aggregated views of consumers’ financial states – Smith got a glimpse of just what could happen if firms and their users were in constant dialogue, simpatico (with transparency in the mix) about what data could be shared, and when and why.

The principles stretch across the decades, though the technology has finally caught up – and so has the regulatory environment.

As Smith told Webster, “Data tells a story, and that story is very compelling from several angles. ‘How do I manage my finances? What is my income? What does my cash flow look like?’ All sorts of analytics that can be driven from that, and it can be instantaneous.”

We’re entering an age in which – through open banking – consumers are increasingly comfortable sharing their personal financial data with third parties. And amid that “gold rush,” a slew of companies have popped up (mostly FinTechs), promising to upend financial services, though they tend to focus on segments of financial life – investing, let’s say, or mortgages, or high-yield savings accounts.

See also: Jack Henry, Finicity Team On Open Banking For Community FIs

But Smith, with decades of data aggregation under his proverbial belt – and with an eye on the standards that are taking shape among FinTechs, financial institutions (FIs) and others about collecting credentials, security, KYC and tokenization – said that lending/credit is among the greenest of greenfield opportunities, tied to all aspects of financial life.

Backward-looking credit scoring models (often known as tied to the credit bureaus) can be augmented by dynamic risk scoring based on real-time data, centered on cash flow – expanding access to credit in the meantime, as firms gain holistic insights into consumers.

With that fully fleshed-out view of the consumer in hand, the next generation of underwriting benefits all stakeholders in real time, as lenders make better decisions and consumers get expanded access to the credit they need (and, quite frankly, can handle).

The key to it all, said Smith, rests with a different approach to what data are collected, and why it matters. Cash flow, as they might say, is king – representing a marked shift in what credit scoring actually looks like, and how lenders gauge risk.

The Way It’s Always Been Done 

Traditional lending conduits require consumers to go through an application process and verify certain information step by step, manually inputting data where mandated. Of course, as Smith noted, that information can be far-ranging, spanning everything from income to assets to employment history, depending on the loans being sought.

The inefficiencies are not solely on the consumer’s side of the equation. As Smith pointed out, lenders have had to do their best to pull together whatever information they could glean from those disparate sources, cobbled together from data posted online. That data — inaccurate or accurate, new or stale — gets fed into a program to create a credit risk score.

The problem is that the data used by the credit bureaus to score a consumer has been backward-looking, limited to whatever debt one holds at the time or held in the past.

The FICO and Vantage scores, depending on what you’re looking at, “don’t really give a view of what an applicant’s capacity is today,” said Smith. Credit scoring done through processes that are decades-old is slow to react to changes in real-life situations, he added.

Breaking Down the Walls  

Branching out a bit and breaking down the barriers that amount to a “walled garden of data,” credit scoring becomes a lot more accurate, Smith said. Cash flow tells a lot about a borrower.

Breaking down those walls means gaining access to information. It’s been decades in the making, maintained Smith, as he (and, by extension, firms like Finicity) have shaped the platforms and methodologies that have given rise to permissioned data.

We’re a few miles along the permissioning journey, Smith noted, as open banking is taking root in Europe and here, too.

The Technology and the Standards … and the Trust

Three years ago, Finicity helped establish the Financial Data Exchange with 11 other banks and FinTechs. The roster at present includes hundreds of banks and FinTechs, with tens of millions of consumer accounts using its FDX API. As Smith explained, there are standards in place that allow FIs and third parties to safely and securely access and transfer that data. Banks can authenticate who someone is before data is passed to a permissioned third party.

“I’m actually getting a token from the bank and accessing that data through a back-end data store, which is inherently much more secure than collecting and housing credentials,” Smith said. For Finicity, about two-thirds of its overall data and traffic running across the ecosystem is covered by direct relationships with FIs using such integrations, said Smith — and that number could be as high as 80% by the end of the year.

Beyond simply having the technology available to give their permission, consumers have to trust the ecosystem players – and trust that the exchange of data is secure. Once trust is cemented, the use of new apps and services grows exponentially — just witness the growth of Venmo and other payment choices such as Cash App.

Trust on the part of the consumer — and better data access for the would-be lenders — benefits all parties involved, said Smith. With better insight into cash flow — and everything from transactions to deposits across accounts — lenders can be more confident of the decisions they have been making.

For would-be borrowers, “If I don’t have credit, then I can’t get credit,” Smith said. “This can be punitive, because it disenfranchises people.”

Liability is still being determined, but frameworks will emerge. Smith predicted that continued conversations between industry regulators and interested parties in the space will lead to an appropriate allocation of risk.

In places like Brazil, the instant payment system PIX has seen swift adoption; open banking and data sharing are gaining traction in Europe and Australia, too.

“I don’t think regulators want to step in and create unnecessary friction in the ecosystem, especially in the U.S.,” Smith noted, with a nod to the Biden administration’s ongoing push for data portability.

“You’re not going to slow down this innovation engine,” he predicted. “I look at what the next three to five years will bring … and I think it’s going to be difficult to look at any major kind of financial service that doesn’t have some degree of intersection with open finance and open banking.”

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