Democratizing financial data
As the global shift towards open data builds momentum, two approaches to adoption are emerging: bottom-up and top-down.
The global shift towards open data has been building momentum ever since the global financial crisis in 2008 (read a detailed rundown of key events). The end goal is the democratization of financial (and eventually other) data — data historically held solely by financial institutions the world over. There are two approaches: bottom-up and top-down.
Each approach comes with pros and cons. Regardless of whichever triumphs in the long-term, it’s prudent for data enthusiasts to keep tabs on their respective progress.
The bottom-up approach to opening financial data
The bottom-up approach involves working on the problem of interoperability within financial institutions themselves. If a customer permissions access of their financial data to a third-party provider, how can they access it at the speed and cost that would support scale?
Previously, this involved contacting financial institutions individually and requesting the information. These processes can take weeks, and often the data is given in PDF format, if at all.
Companies such as Plaid and Tink are leading the charge to remedy this. Their selling proposition is unique; they enable third parties to connect to financial institutions in the US and Europe, respectively, via a single API. If a consumer or a business wants to provide a third party with permissioned access to their financial data, they can do so seamlessly and sans friction. An incredible contrast with the effort and expense required previously to obtain the same information interfacing from a financial institution.
The challenge with this bottom-up approach rests largely on integrating with legacy core systems that financial institutions run on. The majority of which have not been re-invented since the 1990s. Instead, what commonly happens is that different parts and modules are iteratively attached on top of the core system. Two or three decades later, you often find a Frankenstein's monster of a system that’s very different from even their closest competitors.
Given the inherent complexity and sheer cost to transition into more modern solutions, financial institutions have a real aversion against making changes to their core technologies, giving Plaid and others room to operate.
The top-down approach to opening financial data
A top-down approach to democratizing data is closely tied with the fate of blockchain technologies. Popularized by cryptocurrencies like Bitcoin and Ethereum, blockchains are a form of distributed ledger technologies. They are essentially decentralized databases housed among a group of participants (or the world) who contribute new records onto the ledger. An authentication process occurs to ensure each record is genuine and legitimate. Blockchain technology enables an immutable, verifiable, and auditable history of all information stored on a particular blockchain.
Instead of working within the incumbent financial system, a handful of visionaries — led initially by the pseudonymous Satoshi Nakamoto — have made inroads in decentralized finance. What if financial services are built atop blockchain technologies? That way, if the blockchain is configured appropriately, permissioned access of financial data to a third party won't require interfacing with a financial institution.
Suppose a small business wanted to apply for a business loan of $1 million. In that case, they can allow the chosen loan provider permissioned access to their financial records. Because the data lives on the blockchain, there are no intermediaries delaying progress. The time from application to securing the loan is streamlined. The same principles apply regardless of the flavor of financial service.
The challenge with this approach is more philosophical compared to the bottom-up approach. Slow, inefficient, and limiting as it may be, we know and are comfortable with the financial system we have today. Changing the perceptions, attitudes, and behaviors towards everyday use of a decentralized system will still take time. Like with anything new, we need to become comfortable transitioning and build enough trust in the new processes to take part.
Irrespective of which approach gains market dominance in the long-term, there's little doubt we will find ourselves in a world where financial data can quickly and easily be permissioned to third parties. It's not a matter of if we will get there, rather how and when? What impact will open data have on your business? Change is probably closer than we think and something to be considered sooner rather than later.