In order to better address both the opportunities and risks associated with the innovative use of consumer data by financial institutions, the European Banking Authority (EBA) released a discussion paper last week seeking public comments on the subject.

The EBA notes in the paper that the increasing digitalization of the economy and the adoption of computing technology that is able to draw inferences from seemingly unrelated sets of data “is generating a new wave of opportunity for economic and societal value creation.” By using “big data,” financial institutions are able to offer cost-effective targeted advertising, more accurate credit-worthiness assessments, and better financial advice to their consumers. Consumers benefit from lower costs, enjoy precise insight into their financial situation, and are potentially better protected from fraud. As an example of fraud protection, the EBA points out that a financial institution which knows where a consumer lives, where she normally shops, what she typically buys, and the amounts she routinely spends is better able to spot a fraudulent transaction, protecting the consumer against financial loss.

However, the innovative use of consumer data by financial institutions also presents new risks. The EBA notes that the potential for data theft and identity fraud is ever present as financial institutions continue to gather more and more specific consumer data. Consumers may also be harmed when financial institutions sell data to third parties or rely on inaccurate data to make financial decisions. Even absent any malicious misuse of data, “consumers may be hindered from choosing a different provider for the provision of financial services” if financial institutions do not allow for the portability of consumer data, resulting in consumers being “locked-in” to their relationship with their financial institution.

The EBA notes a number of additional opportunities and risks presented by the innovative use of consumer data by financial institutions. The full discussion paper is available here.

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