More and more companies are collecting data. Generating, processing and utilizing information provided by consumers is part of the business model of companies in various sectors. In the financial sector, too, this data is becoming an increasingly important production factor. While this can spur innovation and competition, it also carries risks. Further cooperation between financial and privacy regulators is therefore necessary.
So writes the Financial Markets Authority (AFM) in its report Trend Overview 2021. In it, the watchdog discusses the main trends in the financial sector and the associated risks.
Big data is big business is often said. Collecting and processing our data is bringing money to more and more companies. In addition to data from social media, smartphones and biometrics, financial data today is more sought after than ever. Consequently, in more and more industries, including finance, data collection has become a factor of production. "Both traditional financial players and industry outsiders are trying to make the increasing potential of data use core to their business processes to improve their service delivery and profitability," the AFM believes.
What should companies do with all this data? The answer to this question is simple: by collecting customer data, market participants want to gain more insight into consumer behavior and respond accordingly. This is also known as data capitalization. Consequently, organizations are doing everything they can to strengthen their data position. New technological developments such as web scraping software, European regulations (think of the data strategy of the European Commission: the Digital Finance Strategy) and the fact that we leave an ever larger digital footprint on the Internet are making things easier for technology companies.
Because of these trends, tech companies are increasingly emerging into financial service providers. Companies like Apple, Google, Samsung and LG not only make their money by selling consumer electronics, but each have their own payment service (Apple Pay, Google Pay, Samsung Pay and LG Pay). "Transaction data and other financial data [from consumers] are in high demand, because partly based on this data, behavioral patterns can be mapped and possibly predicted," the AFM report reads.
The influence of large tech companies on the Dutch financial market is small for now, but that could change overnight in the future, the AFM warns. These companies have established networks, reputation and trust, large customer bases, powerful brands, significant profits and unlimited access to capital. "For these reasons, bigtechs can pose a significant competitive threat to traditional players and can achieve scale in offering financial services very quickly," the AFM said.
This can work to the advantage of consumers. As an example, the AFM cites banking and insurance products where credit risk is better understood and therefore prices are lower.
The downside is that the increasing availability of detailed data from risk assessments can lead to uninsurability. Digitization can also help reveal certain negative features of a product, or exploit human characteristics such as a limited attention span. "Parties can capitalize on this when selling a consumer credit, for example. And price optimization also involves perverse incentives. Think of determining the maximum willingness to pay of consumers, leading to a disproportionate price with respect to the purchased product," the AFM warns. "While these themes are not new, they may be implemented more ingeniously in a digitizing world. This may make it more difficult for consumers and regulators to recognize this."
The AFM says it is following these developments closely and is looking, together with market participants, at how the interests of consumers can be served. This requires cooperation with parties such as the Autoriteit Persoonsgegevens AP), De Nederlandsche Bank (DNB) and European regulators.
