Open banking is expected to improve competition in credit markets by democratizing access to financial data: once lenders can reach a customer’s transaction data, they can compete for borrowers who were previously visible only to their account-holding bank.
This expectation is well founded, but it is only half the story. Payment data is not a free input. It is a byproduct of payment services, the pricing of which is influenced by expectations on the downstream benefits of generating payment data. In recent research, we show that mandating the sharing of payment data drives up the price of payment services, and that this repricing determines who actually gains from open banking.
Three conclusions stand out for policymakers. First, whether data sharing raises welfare at all depends on the cost of operating the sharing infrastructure and its incidence, an angle that is largely overlooked in the discussions surrounding policy design. Second, a sharing mandate can surprisingly benefit the mandated bank, and moreover hurt some of its clients, if the bank can convert its lending advantage into higher payment fees. Third, a market-wide mandate is never strictly necessary: a targeted mandate on banks alone is enough, because the standalone payment providers follow suit voluntarily whenever joining creates social value.
Transition from Portability to Interoperability
Data-sharing regimes grant access in two forms, and the difference is much more than a technicality. Data portability hands a third party a one-off snapshot of historical data at a largely negligible cost. That is enough to screen a loan applicant at origination. Data interoperability adds on to that by giving authorized third parties access to a live, continuous feed, enabling them to monitor borrowers’ cash flows over the life of a loan. For small, informationally opaque firms, this watching function is the essence of intermediated lending: a lender that observes account activity in real time can catch trouble early and keep the borrower’s incentives aligned; one that cannot will simply refuse to finance firms with thin capital cushions. Live access is what turns transaction data into credit for the marginal borrower. While most of the academic and policy attention has gone to the screening use of shared data, our work supplies the missing analysis for precisely this marginal contribution of interoperability over portability.
Interoperability, however, comes at a cost. The data holder must …
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