By Efayomi Carr
As we emerge from the pandemic, we are seeing several mutually reinforcing shifts in how the financial system functions.
First, the basic digital infrastructure for finance, accounts, payments and identity is getting an upgrade. Second, this evolving financial technology stack, driven by APIs, is getting baked into our digital experiences like ride-sharing and online shopping. Everything is fintech.
Because of how finances will show up behind the scenes in different apps, our direct relationship with banks will change and they are less likely to be the primary gateway to financial services. If this occurs, regulators will likely shift how they oversee these institutions to ensure consumer safety.
A key foundational and historic development happening now that will determine if we build systems with consumers at the centre and with the level playing field versus a winner-takes-all approach is open data for finance. According to the Open Data Institute, open data and open systems have the power to reduce friction in the economy and boost innovation and competition to help stimulate growth.
Open data allows access to and sharing consumer-approved financial data across financial organizations, creating a digital ecosystem for financial institutions and consumers. Once created, this digital ecosystem provides new opportunities for governments, businesses, and entrepreneurs to easily build new data-driven products for the benefit of consumers and small businesses.
Several studies have showcased the advantages of open data including a joint research effort conducted by my firm Flourish Ventures and McKinsey & Company on open data for finance over the next decade. The study looked at the potential value that could be created—and the key issues that need to be addressed—by the adoption of open data for finance. A key finding was that economies that embrace data standardisation and openness could see GDP gains between 1–6 per cent by 2030.
Of the four regions where this research was conducted, India had the most significant gains. India’s economy is in many ways similar to Kenya, where SMEs contribute over 30 per cent of value to their national GDP.
The potential benefits from the open sharing of financial data across financial institutions are massive. I’ll summarize the top four, which apply to financial institutions and small business owners.
The first potential gain would be an increase in individuals and businesses’ access to credit. Given that Kenya’s SMEs contribute over 30 per cent to the National GDP, employ over 30 per cent of Kenya’s youthful population (KNBS 2016), and account for 83.6 per cent of new jobs, according to KNBS 2019 Economic survey, increasing access to credit will have a significant impact on the financial health of these SMEs. This would trickle down to the staff employed by the SMEs and their families.
A second potential gain would be experienced by financial institutions, which would see better fraud protection. Increased availability and access to data on fraud trends would allow them to put together more patterns to help them more effectively combat fraud. The rapid digitisation occasioned by the covid-19 pandemic also brought with it an increase in instances of fraud and cybercrime.
This was experienced all over the globe and Kenya was not left behind as the institution of containment measures led to more and more people having to go online to access and perform services. The open sharing of fraud trends and patterns by players in the Kenyan financial ecosystem only stands to benefit them more as the larger pool of data will enable the institutions to come up with more effective solutions in their fight against fraud.
Third, user convenience and experience would be enhanced due to the amount of time saved through automated know-your-customer (KYC) processes enabled by the availability of data. This would result in millions of hours saved by both individuals SMS and financial institutions at large. Lastly, financial institutions will also experience a greater reduction in total advertising impression costs owing to the improved quality of consumer behaviour that open data provides. This would result in more effective targeting of communication campaigns to a more specific and niche audience.
The benefits of open data are currently being witnessed in Kenya’s microcredit industry. The credit reference bureau (CRB) provides data to a number of lenders within the country which helps them rate and create risk profiles for potential customers seeking their credit facilities services.
Despite there being a myriad of potential benefits towards the adoption of open data in finance, there are two key considerations that must be kept in mind. There must be an emphasis on the breadth of the data shared so that there are as many use cases as possible where data has been captured. There must also be high standardization of data, which would make a standardized open-source model more effective. These considerations, coupled with a structured systematic approach, will help Kenya capture the value created by open data.
The writer, Efayomi Carr (pictured) is the Principal of Flourish Ventures