Firms that make 'questionable use' of your data will pay... with their reputations

SIlly us - thought Euro banking authority meant with fines

There is a reputational risk to firms if they make "questionable use" of consumer data, the European Banking Authority (EBA) has warned.

The regulator highlighted the risk in a new discussion paper on the innovative uses of consumer data by financial institutions (29-page/292KB PDF).

"Financial institutions might use data in a way that results in questionable decisions about consumers if, for instance, they do not take into account relevant details contained in the data they possess; do not possess enough data to make a decision; or interpret data in a wrong way, because the tool used to process it is flawed," the EBA said. "In any of these situations, financial institutions can face reputational risk if they then offer particular products to a consumer that are not tailored to his/her specific needs."

"Additional reputational risk may arise if a financial institution makes a decision that is correct from a business point of view (e.g. the rejection of a loan application), but is made using data that the consumer would not expect to be used by financial institutions (e.g. data from social networks)," it said.

"Even if the consumer has authorised for the data to be used and/or if the data is publicly available, this kind of decision may be seen by the consumer as questionable and subject to repudiation. This risk can be made worse if financial institutions make decisions based solely on the processing and interpretation of data (‘automatic decision’), and/or if financial institutions do not offer their consumers the possibility to challenge the decision made," it said.

The EBA also highlighted the risk of "information asymmetries" which it said can negatively impact on consumers' privacy rights. It said consumers "may not always be properly informed of the usage of their personal data" or "understand information that is provided to them regarding the use of their data".

"Unlike financial institutions, consumers may not always have an in-depth knowledge about the legal framework applicable to the usage of their personal and financial data," the EBA said. "This information asymmetry may be especially relevant in cross-border transactions, where the applicability of legal requirements is not always clear."

"Additionally, financial institutions may have in place automatic rules based on the information given by consumers that result in the usage of consumer data in a way that may be non-transparent and somewhat arbitrary, notably because consumers may not be aware of the factors that led to the decision (e.g. non-approval of credit application because of automatic credit scoring based on consumer data). As a result … consumers may experience detriment in the form of breaches to their privacy," it said.

The EBA also said that consumers can feel "locked in" to using firms if their data cannot be made accessible to rival companies. The risk of data misuse and of what can happen if firms use inaccurate data about customers was also highlighted in the report.

However, the EBA did outline a number of potential benefits that both firms and consumers can derive from the greater use of consumer data by businesses in the financial services sector.

It said making more use of the consumer data can help firms raise new sources of revenue. Firms can "generate new revenue" from using consumer data to deliver tailor-made products, personalised offers and better advice to consumers, for example, it said. New revenue opportunities can also arise by using consumer data to "anticipate consumer behaviour and problems", it said.

"Real-time insight into consumer behaviour (e.g. through analysis of payment data or geolocation) may enable financial institutions to anticipate consumer behaviour and problems," the EBA said. "This could help them to pro-actively service their consumers when their current portfolio of products no longer matches their needs (e.g. insurance coverage) or financial capabilities (e.g. increasing risk of arrears). This may, in turn, increase financial institutions’ sales, because consumers would feel more prone to purchasing products and services that are tailored to their needs and habits."

Firms can also benefit financially by either selling the consumer data they have to other businesses to enable targeted advertising or by taking a "percentage share of the trading partners’ earnings when the advertised product is sold to the consumer", the EBA said.

The EBA said that greater use of consumer data by firms can also benefit consumers. It said examples of benefits to consumers including more accurate assessments of their creditworthiness, more personalised products and services, better advice, reduced fraud and helping consumers obtain a better insight into and control over their own financial situation.

The EBA said that feedback it gets on its paper will help it decide "which, if any, further actions may be required to mitigate the risks arising from this innovation". The deadline for responding to the paper is 4 August.

"Financial institutions understand the increasing level of scrutiny they are under as to how best to create value for their customers through the use of data," financial technology law expert Luke Scanlon of Pinsent Masons, the law firm behind, said. "The European open data agenda which has come to the fore through the finalisation of the Payment Services Directive 2 and the UK’s open banking API initiative has resulted in a real need to think through how best to maximise value from data effectively. The EBA’s views therefore need to be given close attention."

Copyright © 2016, is part of international law firm Pinsent Masons.

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