Sunday, 3 June 2018

Is Big Data harmful to our financial well-being?

On the 15 of March a Joint Committee of the European Supervisory Authorities - ESAs (consisting of the European Banking Authority-EBA, the European Securities and Markets Authority- ESMA and the European Insurance and Occupational Pensions Authority-EIOPA) published their final report on the impact of Big Data on our financial well-being. The overall conclusion of the report is that the potential benefits outweigh the risks posed by Big Data.

Big Data is a flow of data from our daily online activities that is collected and processed with highly sophisticated IT tools. This may include information from our social media presence, internet browsing history, smart phone signals or data generated by using a payment card. Connecting information from various sources enables financial firms to offer tailored financial products and services to  us, their customers. 

Financial firms are increasingly reliant on Big Data. This this is like to increase in the future with the fast developing Fintech sector that developed exactly with the aim to compete with traditional firms  by providing better suited products to consumers. Fintech is likely to develop faster in the future due to regulatory initiatives such as Open Banking in the UK (see our report here) that mandates banks to share their customer information with Fintech firms upon the consumer's request.

The advantages of Big Data are undeniable. First and foremost, Big Data enables firms to personalized financial products to meet the needs of their customers. Big Data opened the door for innovative, tailored financial products that would not be previously available from mainstream financial providers. This is largely because Big Data enables financial firms to connect non-financial information derived e.g. from our Facebook activity with financial information about our savings to create a better picture about our savings and investment habits, and than to tailor their offer in line with our habits. Secondly, Big Data also enables firms to design their provision of information in a way that can be useful to consumers. For example, the insurance company is able to provide the consumers with a warning that the insurance policy does not cover a parachute jump, which the person recently announced on social media. Finally, the use of Big Data can result in cheaper products for consumers. For example, inexperienced drivers could benefit from lower insurance premiums if they are able to prove that they are driving responsibly. This can be done by installing a telematics device in their cars that will enable insurance companies to check and analyse their driving habits.

The use of Big Data also carries risks. The primary risk is that Big Data is misinterpreted. For example, movements of a doctor that works night shifts could be interpreted as a indication of an unhealthy lifestyle, and as a result a consumer may be denied access to financial services for example a loan. Secondly, consumers may be overloaded with information about various, highly specific products that are difficult to compare and they may end up with a product that is not the best match to their needs. Thirdly, consumers may be also overwhelmed with targeted offers and may end up buying a product that they do not really need. Finally, as every data, Big Data is also vulnerable to cyber attacks.

Given the risks and benefits, the impact of Big Data on our financial well-being is largely dependent on us, on our digital footprint. Firstly on what sort of digital medium we are present, and secondly, what conscious steps we take in making decisions on the information we share. The ESAs warn us that  firms are obliged to inform us on what sort of data they collect about us and how they store it, and that we need to make sure that we understand how our data may be used. However, the recent application of the new GDPR (see our report here) and the many privacy notices we received in recent days reminded us on just how many spaces we are present, and just how many companies store our personal information, many of which we do not even remember signing up for. We were also asked to review our privacy settings, seemingly placing us in driving seat in deciding on the information we are willing to share. But how can we decide on ticking one box rather than the other without knowing the full implications of our decision? For example, a doctor doing frequent night shift may never find out that his/her loan was refused because of misinterpreted information, even is he/she does, he/she might be unaware on just how many occasions he/she agreed to share his/her location, and where he/she needs to go now to turn these settings off. Is control over our Big Data illusionary? Will Big Date be harmful to our financial well-being without this control? What do you think?

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